[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
LEGISLATIVE PROPOSALS TO ENHANCE
CAPITAL FORMATION FOR
SMALL AND EMERGING GROWTH
COMPANIES, PART II
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
MAY 1, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-77
______
U.S. GOVERNMENT PRINTING OFFICE
88-539 WASHINGTON : 2014
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia RUBEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota AL GREEN, Texas
KEVIN McCARTHY, California EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin
BILL POSEY, Florida KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK, ED PERLMUTTER, Colorado
Pennsylvania JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin BILL FOSTER, Illinois
ROBERT HURT, Virginia DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Capital Markets and Government Sponsored Enterprises
SCOTT GARRETT, New Jersey, Chairman
ROBERT HURT, Virginia, Vice CAROLYN B. MALONEY, New York,
Chairman Ranking Member
SPENCER BACHUS, Alabama BRAD SHERMAN, California
PETER T. KING, New York RUBEN HINOJOSA, Texas
EDWARD R. ROYCE, California STEPHEN F. LYNCH, Massachusetts
FRANK D. LUCAS, Oklahoma GWEN MOORE, Wisconsin
RANDY NEUGEBAUER, Texas ED PERLMUTTER, Colorado
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan KEITH ELLISON, Minnesota
STEVE STIVERS, Ohio BILL FOSTER, Illinois
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MICK MULVANEY, South Carolina TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ANN WAGNER, Missouri
C O N T E N T S
----------
Page
Hearing held on:
May 1, 2014.................................................. 1
Appendix:
May 1, 2014.................................................. 31
WITNESSES
Thursday, May 1, 2014
Beatty, William, Director of Securities, Securities Division,
Washington State Department of Financial Institutions, and
President-Elect, the North American Securities Administrators
Association, Inc............................................... 11
Lynn, Jeff, Chief Executive Officer, Seedrs Limited.............. 13
Miller, Benjamin, Cofounder, Fundrise, Rise Companies Corporation 7
Tierney, Annemarie, Executive Vice President--Legal and
Regulatory, and General Counsel, SecondMarket Holdings, Inc.... 9
APPENDIX
Prepared statements:
Beatty, William.............................................. 32
Lynn, Jeff................................................... 59
Miller, Benjamin............................................. 66
Tierney, Annemarie........................................... 69
LEGISLATIVE PROPOSALS TO ENHANCE
CAPITAL FORMATION FOR SMALL
AND EMERGING GROWTH COMPANIES,
PART II
----------
Thursday, May 1, 2014
U.S. House of Representatives,
Subcommittee on Capital Markets and
Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 9:35 a.m., in
room 2128, Rayburn House Office Building, Hon. Scott Garrett
[chairman of the subcommittee] presiding.
Members present: Representatives Garrett, Hurt, Neugebauer,
Fincher, Mulvaney, Hultgren; Maloney, Scott, Carney, and
Kildee.
Also present: Representatives McHenry and Heck.
Chairman Garrett. Good morning, all. The Subcommittee on
Capital Markets and Government Sponsored Enterprises is called
to order. Today's hearing is entitled, ``Legislative Proposals
to Enhance Capital Formation for Small and Emerging Growth
Companies, Part II.''
We welcome all of the panelists. We will now go to opening
statements. I yield myself 6 minutes for an opening statement.
So, good morning, once again, and welcome to today's
hearing. Thanks in large part to the JOBS Act, 2013 was the
best year for initial public offerings (IPOs) since 2000, with
more than 175 IPOs raising more than $40 billion in much-needed
growth capital, and at least 80 percent of these companies
qualify as emerging growth companies (EGCs) under the JOBS Act.
And while this is a very positive development, we believe that
more work needs to be done.
For example, according to one small business survey,
government regulation red tape remains at the very top of the
list of the most important problems facing American job
creators. Another survey shows that small business demand for
private capital continued to outpace access in 2013, while at
least 60 percent of the respondents found it difficult to raise
new external financing.
And so, building on the early success of the JOBS Act, this
hearing--the 5th hearing we have had during this Congress--
represents another opportunity to explore ways to further
reduce unnecessary regulatory burdens and to enhance access to
capital for small American businesses.
While the bills we have considered during this Congress
address a variety of capital formation issues, they are
designed to target regulatory problems in three overarching
areas. Let me go through them.
First, some of the bills continue to help small businesses
access capital by going public. We call that pre-IPO. Second,
some of the bills improve the ability of small companies to
access capital and compete after they have gone public. We call
them post-IPO. And third, some of the bills help small
businesses attract more investment in the private market. We
just call them no-IPO.
These three legislative proposals we will be discussing
today fit within the third category I just talked about. And
the gentleman from North Carolina down at the end here, Mr.
McHenry, he has circulated a discussion draft to fix the
Senate's burdensome statutory missteps in the crowdfunding
title of the JOBS Act by restoring a bipartisan policy authored
in this committee last Congress.
Mr. McHenry has also offered a discussion draft to
modernize the regulation A section for small companies by
updating issuing caps, while striking the right balance between
preserving State enforcement and lifting burdensome regulation
requirements.
The discussion draft also codifies language that
effectively and efficiently facilitates liquidity in the
secondary trading of what is called the ``restricted
securities'' among sophisticated investors. So I thank Mr.
McHenry for his hard work and thoughtful proposals to make the
crowdfunding and Reg A provisions of the JOBS Act more cost-
effective and efficient options for issuers and the investors
alike.
Finally, I have circulated a discussion draft to ensure
that issuers and investors in certain private offerings under
Reg D do not face overly complex and burdensome regulatory
obstacles. As you all know, last year the SEC adopted a rule
lifting the ban on general solicitation and advertising of
private offerings under Rule 506 of Reg D, as mandated by Title
II of the JOBS Act. Unfortunately, the SEC didn't stop there.
Instead of simply removing the ban and opening up this market
to new potential investors, the SEC decided to issue a separate
rule proposal, not called for by this Congress, that would
impose a number of new burdensome regulatory requirements on
issuers seeking to use Rule 506, the exemption.
The SEC's selective judgment in deciding when and how to
follow clear congressional directives and when not to is, of
course, disturbing and disconcerting to me. When members of
this committee, outside stakeholders, and even other SEC
Commissioners pleaded with the Commission to issue a more
pragmatic rule regarding conflict minerals, the Commission
refused, stating, ``Well, if Congress had intended that a
mandate be limited further, we think Congress would have done
so explicitly.''
Unfortunately, the Commission did not apply this same
rationale in a consistent manner when it came to the removal of
the ban on general solicitation. As one comment put it, ``The
JOBS Act on its face does not authorize the Commission to
attach new and additional conditions to the use of the
exemption. It is not for the Commission to rely on its general
rulemaking authority to bring Congress and the President back
into line by adding conditions that it believes may enhance
investor protection.''
However, that is exactly what the Commission did. That the
SEC believes it has the authority to alter a clear mandate in
the JOBS Act, but not in the Dodd-Frank Act, certainly
suggests, as SEC Commissioner Dan Gallagher said, ``In the face
of a statutory mandate, the SEC only thinks outside the box and
uses its expertise when it means adding regulations, no matter
the cost.''
Indeed, I believe that many of the additional requirements
in the SEC's Reg D proposal will, if ultimately adopted, make
Rule 506 a less attractive avenue for small business capital
formation and, at the same time, harm investors' choice. And
this, of course, is clearly at odds with the goals, let alone
the text of the JOBS Act.
And so my discussion draft would address some of the more
burdensome red tape portions contained in the SEC rule
proposal, including, certainly, costly filing requirements and
disqualification provisions.
Before I conclude, I want to be clear on a few points
regarding what this discussion draft would not do. It would not
remove the SEC's existing Form D filing requirements. It would
not remove the SEC's existing requirement that issuers take
reasonable steps to verify that investors in Rule 506 offerings
are accredited. It would not reduce the SEC's existing rules
requiring disclosure to investors. And it would not limit the
SEC's existing authority to prevent and punish fraud and other
misconduct under the Federal securities laws.
I believe this discussion draft will ultimately strike the
right balance between helping America's job creators raise
much-needed capital and protecting Americans who invest their
hard-earned money in these companies at the same time.
I thank you very much for your attention. And at this
point, I recognize the ranking member of the subcommittee, Mrs.
Maloney from New York, for 4 minutes for her opening statement.
Mrs. Maloney. Thank you, Mr. Chairman. And welcome to all
of the witnesses. I would like to particularly welcome Ms.
Tierney, who is from the great State of New York, and I have
the privilege of representing you. Thank you for being here
today.
The U.S. capital markets are the envy of the world. They
offer investors liquidity, transparency, and flexibility. And
they offer companies access to capital in the form of a deep
pool of investors who stand ready and willing to invest in
promising businesses.
In short, the United States is where companies come to
raise money. While the system of securities laws in the United
States is complex, the central tension underlying our
securities law is very simple: Investors want as much
information as possible on the companies they are investing in,
as quickly and as accurately as possible.
Often the issuing companies, on the other hand, want to
keep as much information as possible about their business
practices confidential. Companies also want to spend as little
time as possible preparing the disclosures that their investors
crave. It is the job of public policy to strike the right
balance between these competing desires.
But public policy does not run on autopilot. In the
securities market, we often entrust the job of properly
balancing these competing goals to the regulator, the U.S.
Securities and Exchange Commission. I would like to say that in
the securities market especially, we need an active and
informed regulator to write, enforce, and when appropriate,
change the regulations to keep pace with innovation and the
market.
Of course, the SEC isn't the only securities regulator in
the United States, nor should they be. The State securities
regulators play a very important role, as well. And we have one
of those State regulators on our panel today, Mr. Bill Beatty
from Washington State. Welcome.
State securities regulators are in the best position to
provide on-the-ground protection for retail investors who are
investing in securities offerings and are too small to merit
the SEC's attention, especially given the SEC's lack of
resources. The State regulators are also well-positioned to
provide investor's education to mom-and-pop retail investors
who don't have a fortune to invest, who never worked on Wall
Street, and who are most vulnerable to fraud.
Sometimes, of course, Congress has decided that it is
necessary to preempt State securities laws in order to reduce
the compliance burden for companies seeking to raise capital.
But I think that those decisions should be made on a case-by-
case basis. Sometimes it will be appropriate to preempt State
law, and sometimes it will not.
I hope that we can use this opportunity to have a robust
discussion about the proper role of State securities regulators
so that we can inform our own thinking about how to maintain
and improve our country's capital markets.
I look forward to the hearing today, and thank you very
much, Mr. Chairman.
Chairman Garrett. Thank you, gentlelady. And the gentlelady
yields back. We now turn to the vice chairman of the
subcommittee, Mr. Hurt from Virginia.
Mr. Hurt. Thank you, Mr. Chairman.
Mr. Chairman, thank you for holding today's hearing on
these three legislative proposals to further enhance capital
formation. I also want to thank our witnesses for being here
today.
While we have witnessed the successes of the JOBS Act in
the 2 years since it was enacted, more still needs to be done,
starting with the SEC completing implementation of the JOBS
Act. Additionally, Congress and the SEC must expand on those
successes and find practical solutions to increase access to
capital for small businesses without sacrificing key investor
protections.
Our securities laws are riddled with outdated and
burdensome regulations that are hindering small businesses in
Virginia's Fifth District, my district, from accessing the
capital they need to grow. As our markets and the needs of the
participants continue to evolve, it is necessary for our
regulatory structure to reflect those new realities.
Chairmen Garrett and McHenry's bills will provide important
modifications to key sections of the JOBS Act that enhance the
ability of small businesses and start-ups to raise capital. For
many of the companies that would take advantage of these
improvements, the public markets are not a viable option, and
they would otherwise face increased costs and complexity to
meet their goals.
I appreciate this committee's continued focus on ensuring
that our small businesses and start-ups have the ability to
access the necessary capital in order to innovate, expand, and
create the jobs that we need.
I look forward to working with my colleagues to advance
these proposals and others that will provide growth and
opportunity for our constituents in our communities. I look
forward to your testimony, and I thank you for your appearance.
And thank you, Mr. Chairman. I yield back the balance of my
time.
Chairman Garrett. The gentleman yields back.
Mr. Scott is recognized for 4 minutes.
Mr. Scott. Thank you, Mr. Chairman.
First of all, let me say that I agree with both Chairman
Garrett's and Ranking Member Maloney's very thoughtful opening
statements. However, we have to look at the big picture. First,
we do have to reduce the barriers to capital formation. But
most importantly, we have to really identify exactly what these
barriers are, be very truthful as to what these barriers are.
Then, we have to increase opportunities to raise that
capital. And then, yes, we must address any regulatory
impediments or burdens that make it difficult to raise
additional capital.
As we know, the Securities and Exchange Commission has a
three-part mission: to protect investors; to maintain fair,
orderly, and efficient markets; and to facilitate capital
formation. And nowhere is that needed more than our small
businesses. Small businesses are still the heart and the soul
of our economy. They produce most of the jobs, especially new
jobs.
Recently, the Securities and Exchange Commission's Advisory
Committee on Small and Emerging Companies put forth a series of
recommendations that we, and ultimately the Securities and
Exchange Commission, should provide due consideration, and I
believe that this committee will, jointly with the SEC.
Now, whether it is allowing for larger size of increments
and bids, or tick sizes, for smaller companies, an option that
is currently under consideration by the Securities and Exchange
Commission, or more controversial options some of us may not
initially care for, but we have to look at the big picture and
recognize that we must be open for debate, like, for example,
increasing the size of companies exempted from Sarbanes-Oxley's
auditor attestment requirements or, another, exempting smaller
companies from shareholder advisory votes, yes, on executive
pay and compensation, if we have that clear evidence that these
are impediments to capital formation. Capital formation must be
first. And, of course, we first have to look at it with a very
jaundiced eye.
We must also ascertain what significant evidence on small
business capital formation exists measuring the impact of the
JOBS Act. The JOBS Act is successful. It was signed into law
just a little more than a year ago. The fundamental first
question is, are we moving too soon? Have we in Congress been
given enough to fully implement and evaluate the effects of the
JOBS Act before pushing for additional, experimental small
business capital formation proposals?
That is the big picture to me. I think we need to look at
that. This is a very serious issue. And our small business
community certainly deserves that.
And with that, I yield back the balance of my time.
Chairman Garrett. The gentleman yields back.
Mr. McHenry for 3 minutes.
Mr. McHenry. I want to thank the chairman for holding this
hearing, and for his leadership on improving our capital
markets.
And 3 years ago, this committee undertook a bipartisan,
committed effort to update our outdated securities laws. It
created new partnerships on this committee and resulted in
significant bipartisan votes. With a little luck, our
committee's solidarity led to the advancement and passage of
the JOBS Act, which President Obama signed into law just over 2
years ago. The Act was arguably the most significant piece of
legislation in the last Congress.
Congresswoman Maloney and I authored Title III of the Jobs
Act, also known as the equity crowdfunding title. What
motivated us was a pledge to cut red tape, as well as
strengthen and ensure investor protections and allow start-ups
to employ the Internet as a means to solicit small equity
investors from everyday investors without triggering costly SEC
registration.
Our original bill, passed by voice vote in this committee
and by over 400 votes on the House Floor, was the only title
within the JOBS Act to get the full and public endorsement from
President Obama. That is significant.
But then, the Senate happened. An ill-advised and 11th-hour
move resulted in the Senate striking a broadly supported title
of the JOBS Act that Congresswoman Maloney and I authored, and
hastily substituting an arduous amendment that neutered the
promise of equity crowdfunding.
After patiently waiting for the Commission to reveal a
crowdfunding rule proposal, and academics and market leaders
submitting hundreds of comments, it is now clear that the
current statute has failed.
But that does not mean that equity crowdfunding is destined
for failure. Today's equity crowdfunding discussion draft not
only restores what Carolyn Maloney and I started 3 years ago,
this committee's commission to democratizing capital is front-
and-center in that. But it also incorporates thoughtful
suggestions by commenters who aspire to strengthen the vitality
of equity crowdfunding.
Separately, the discussion draft on Regulation A in the
resale of restricted securities simply codifies the spirited
intent of Title IV of the JOBS Act, reviving the exemption to
connect small enterprises and everyday investors. Furthermore,
the draft amendment to the 1933 Act also codifies policy that
efficiently cultivates liquidity in secondary trading of
restricted securities among sophisticated investors. So, we do
a lot for both the everyday investor and the more sophisticated
investors.
I believe democratizing finance and extending access to
America's start-ups are not partisan ideas. In fact, they are
anything but. But what motivates each member of this committee
is to ensure that we have a bipartisan achievement that helps
entrepreneurs and everyday investors. That is what this is all
about.
Thank you, Mr. Chairman.
Chairman Garrett. I thank the gentleman, and I thank the
gentleman for his work on these bills. The gentleman yields
back.
And for the last word, Mr. Heck is recognized for 2
minutes.
Mr. Heck. Thank you, Mr. Chairman, and Ranking Member
Maloney.
It is my privilege, while not a member of this
subcommittee, to welcome on its behalf Mr. Bill Beatty from
Washington State, who is a constituent of mine. Mr. Beatty is,
in fact, the securities administrator for the Washington State
Department of Financial Institutions. More importantly, for
purposes of today's discussion, he is the president of the
North American Securities Administrators Association, and we
are so very, very pleased, honored, and grateful that you would
come all the way across the country, a trip I know well, to
share your insights.
Mr. Beatty is a graduate of the University of Puget Sound
and Seattle University's School of Law. There probably is
literally nobody in the United States with more expertise in
securities law. And I am looking forward to receiving
information from him about how it is State securities
administrators can play a role in protecting investors, while
at the same time helping capital markets perform as efficiently
as is possible.
Thank you very much for allowing me to stop by, Mr.
Chairman. Mr. Beatty, welcome to Washington, D.C.
Chairman Garrett. Okay. Thank you. The gentleman yields
back.
And now, we will turn to the panel. Again, we thank all the
members of the panel, regardless of how far across the country
they have flown, for being with us, and we thank you for flying
so far. And so we will--for those of you who have not testified
before this committee, just a few simple reminders. The little
machine in front of you shows your time: green means you have 5
minutes; yellow means you are supposed to be summing up; and
red means you are supposed to be done.
Also, we always remind you to pull the microphone closer
than it looks like now for each one of you, because it doesn't
pick up that well. So when you do speak, pull it close.
You are going to be recognized for 5 minutes to give a
summation of your remarks. And without objection, your entire
written statements will be made a part of the record.
So with that said, we turn to our first witness, Mr.
Miller, cofounder of Fundrise. Mr. Miller, welcome. And you are
recognized for 5 minutes.
STATEMENT OF BENJAMIN MILLER, CO-FOUNDER, FUNDRISE, RISE
COMPANIES CORPORATION
Mr. Miller. Chairman Garrett, Ranking Member Maloney, and
members of the subcommittee, my name is Ben Miller, and I am
the cofounder of Rise Companies Corporation, which owns and
operates Fundrise, a real estate crowdfunding platform based
here in Washington, D.C. I am honored to be here to testify on
my experience using Regulation A to crowdfund the development
of local real estate here in the District of Columbia.
Let me spend a moment on my background so you understand
how I came to run Fundrise, one of the only companies in the
country currently raising equity online from the public, both
from accredited and unaccredited investors, in Washington,
D.C., Maryland, and Virginia, prior to implementation of Title
III of the JOBS Act.
Before starting Fundrise, I ran a real estate company. In
that capacity, I led the acquisition and development of more
than 2 million square feet of property, such as Gallery Place
on 7th and H Streets, NW, a 750,000-square-foot mixed-use
development.
As a real estate entrepreneur, I have partnered with some
of the largest institutional investment companies in the
country, such as MassMutual; Angelo, Gordon, & Co.; and the
AFL-CIO. So I understand what it means to raise debt and equity
in the capital markets.
But one day, we asked ourselves, why are we raising money
from institutions which have no real relationship with the
places in which we are investing? What if we raised the money
from the people who live there, who care, who are part of the
neighborhood? So that is what we are doing and it explains why
I am sitting here. We have been raising real investment in
increments as affordable as $100 per share from the people who
live near our real estate projects.
Since the JOBS Act did not exist when we started our
endeavor, we had to work within the existing regulatory
framework. Thanks to our outstanding and expensive legal team,
we found a way through Regulation A. Our initial Regulation A
filings with the Securities and Exchange Commission totaled
more than 350 pages, but eventually allowed us to sell equity
online at $100 per share to the local public.
To my knowledge, over the past 2 years we are the only ones
who have successfully qualified more than one Regulation A
offering, having climbed the regulatory mountain associated
with Regulation A no less than 3 times. Each Regulation A
offering was a serious undertaking, one that did not generally
get easier over time.
For example, despite many similarities among our prior
offerings, our third regulation offering took us more than 6
months to get through the regulators, which included hundreds
of pounds of physical paper--actually, approximately 25 pounds
per filing, 8 separate attorneys, more than $50,000 in legal
fees, and 2 sets of reviewed accounting and financial
statements, all of this to raise $350,000 from the residents of
only 3 States.
Yet, we view ourselves as fortunate. Our local regulators
in D.C., Virginia, and Maryland understood that we were working
to build local places and create a new capital source for local
job development and knew that less inclined regulators could
have and potentially would have made it impossible for us to
move forward.
In our experience, the likelihood that a Regulation A
offering becomes effective is primarily dependent upon the
jurisdictions in which the offering has to be registered. Given
the great uncertainty that places upon an endeavor that
requires tens of thousands of dollars and many months to begin,
without regard to whether the issuer will actually be
successful in its Regulation A offering, we support any
proposal that lessens the regulatory burden of Regulation A
offerings while simultaneously increasing the regulatory
certainty faced by small businesses seeking to raise capital.
In addition, like many in the industry, we have reviewed
the proposed Regulation A+, and we support the exclusion of
investors in Regulation A+ offerings from the number of holders
of record counted under Section 12(g) of the Exchange Act. We
do not believe that, given the ongoing reporting requirements
already proposed in Regulation A+, requiring small issuers to
become subject to the onerous and expensive reporting
requirements of the Exchange Act serves either investors or the
small business community.
However, we would note that we found the wording contained
in the draft bill to be slightly confusing and ask the
subcommittee to consider whether there are clearer and simpler
ways to accomplish the goal.
We at Fundrise take very seriously our ongoing mission to
open up real estate investment to the general population beyond
institutional and accredited investors that have predominantly
held sway in the market. We believe that the proposals
contained in these bills provide substantial, positive steps
towards democratizing real estate investment, and we encourage
the subcommittee to consider each of these proposals seriously.
I am happy to take any questions that you may have at this
time.
[The prepared statement of Mr. Miller can be found on page
66 of the appendix.]
Chairman Garrett. And I thank you, Mr. Miller.
Next, Ms. Tierney, executive VP and general counsel of
SecondMarket. Welcome. And you are recognized for 5 minutes.
STATEMENT OF ANNEMARIE TIERNEY, EXECUTIVE VICE PRESIDENT--LEGAL
AND REGULATORY, AND GENERAL COUNSEL, SECONDMARKET HOLDINGS,
INC.
Ms. Tierney. Good morning, Chairman Garrett, Ranking Member
Maloney, and members of the subcommittee. My name is Annemarie
Tierney, and I am the general counsel of SecondMarket. I am
very grateful to be able to testify this morning.
I have been in the securities industry for almost 25 years
and have worked in a number of legal roles, including at the
SEC, the law firm of Skadden Arps, and NYSE Euronext, before
joining SecondMarket in 2010. For those of you not familiar
with our company, SecondMarket was founded in New York City in
2004. We are a registered broker-dealer and the leading
provider of services to facilitate transactions at private
company stock. We have also advocated for regulatory change to
help private companies raise capital and facilitate job
creation, including changes to the 500-shareholder threshold
and the elimination of the ban on general solicitation and
advertising included in the JOBS Act.
Today, I would like to express our support for the adoption
of proposed Section 4(a)(7) set out in Section 5 of the draft
bill to amend securities laws to improve the small business
capital formation provisions. I will also share insights on how
the current regulatory framework for resales of private company
shares imposes significant and unnecessary challenges to
private company capital formation and job growth.
Under current laws, the only federally codified safe harbor
for resales of private shares is Rule 144. The safe harbor,
however, is only available to shareholders who are not
affiliates of the company and who have held their common and
preferred stock for at least 12 months. This means that Rule
144 is not available to private company founders, many angel
investors, and officers and directors. It is also unavailable
to employees who own equity in the form of stock options.
Instead, resales by these types of shareholders occur in
reliance on a longstanding legal construct referred to as
4(a)(1-1/2), which is a mouthful, and are subject to State blue
sky regulations that must be satisfied in every State where
potential buyers are located. I would like to provide two
examples of the challenges that this legal framework poses for
private companies.
In 2012, SecondMarket expanded our business to include
private community banks. These banks were looking to provide
liquidity to their employees and shareholders. The benefits of
that were obvious: Providing community bank shareholders a
clear path to liquidity once or twice a year made it easier for
the bank to raise capital and attract talented employees. And
greater access to capital meant more loans to community and job
creation.
The reality, however, is that almost every State other than
New York State prohibits broker-dealers from reaching out to
their accredited investor clients to identify potential
interest in private company stock, a prohibition inconsistent
with SEC and FINRA rules which allow broker-dealers to discuss
opportunities with clients if there is a preexisting
relationship. This restriction ultimately made it impossible
for us to create successful liquidity events for these
important businesses.
In addition, the other exemptions that are available for
resales in the State level are interpreted inconsistently
across the States and create a patchwork of regulation that is
almost impossible to navigate, even for a registered broker-
dealer. It is almost as though you are trying to put together a
Rubik's Cube and you are missing one piece. It is almost
impossible to make it work across multiple States.
This inconsistent legal framework also creates significant
challenges for private company employees seeking to exercise
their options and monetize a significant component of equity
compensation. Every option has an exercise price that must be
paid by the employee in order to convert the option of common
stock. In addition, option exercise creates an income tax event
for the employee.
Since most rank-and-file employees of private companies
don't have sufficient funds to pay these costs out-of-pocket,
they often need to simultaneously sell a portion of the common
stock underlying their options to cover these costs, so they
can't satisfy any hold period, much less a 12-month hold
period.
As in the case of community banks, State law restrictions
make it extremely difficult for employees or broker-dealers
acting on their behalf to find buyers for these shares. As a
result, a significant amount of equity of employee options
expires every year, resulting in a real economic loss of
private company employees.
In my view, proposed Section 4(a)(7) merely codifies a
longstanding Federal construct applicable to resales of private
company securities by shareholders who cannot rely on Rule 144.
In addition, I would note that all of the securities eligible
to be resold under proposed Section 4(a)(7) are securities that
were originally issued to shareholders in transactions that
were themselves exempt from Federal and State registration such
as Rule 506 and Rule 701, which provides an exemption for
shares issued under certain equity compensation plans.
I would like to note that the proposed legislation also
includes important protections, such as that the shares may
only be resold to accredited investors and remain restricted
after the resale. The proposed legislation also requires
verification of accreditation if general solicitation or
advertisement is utilized.
Under the current outdated and inconsistent regulatory
regime, founders, large angel investors, officers, and a large
percentage of start-up employees are put at a legal and
economic disadvantage in the post-JOBS Act world. In light of
the fact that start-ups are estimated to create an average of 3
million new jobs annually, it is essential that the Federal and
State regulatory framework continue to evolve to create an
environment in which start-ups can flourish. And providing
founders and angel investors greater facility to sell their
shares means that more capital will become available to start
new companies and create more jobs.
I would also like to note that we agree strongly with
Chairman Garrett and support the goals of the draft on the
proposed Reg D changes. And in summary, I would like to state
that it is absolutely critical that we continue to address
regulatory impediments around capital formation and job
creation, such as those addressed by the proposed legislation.
Thank you again for the opportunity to participate this
morning. I would be happy to answer any questions.
[The prepared statement of Ms. Tierney can be found on page
69 of the appendix.]
Chairman Garrett. And I thank the gentlelady.
Next, Mr. Beatty from the State of Washington, who was
already introduced by Mr. Heck. Welcome, and you are recognized
for 5 minutes. Thank you.
STATEMENT OF WILLIAM BEATTY, DIRECTOR OF SECURITIES, SECURITIES
DIVISION, WASHINGTON STATE DEPARTMENT OF FINANCIAL
INSTITUTIONS, AND PRESIDENT-ELECT, THE NORTH AMERICAN
SECURITIES ADMINISTRATORS ASSOCIATION, INC.
Mr. Beatty. Thank you, Mr. Chairman.
Good morning, Chairman Garrett, Ranking Member Maloney, and
members of the subcommittee. My name is Bill Beatty. I am the
director of the Washington State Securities Division, and for
the past 28 years have served as an attorney in the Division. I
am also president-elect of the North American Securities
Administrators Association (NASAA), the Association of State
Securities Regulators. I have also served as chairman of
NASAA's corporation finance section and as a member of the
Special Committee on Small Business Capital Formation.
I am honored to testify to you today about proposals to
enhance capital formation for small and emerging growth
companies. NASAA has two mandates: promoting grassroots
investor protection; and promoting efficient capital formation.
In fact, promoting capital formation is also a core mission of
my securities department in Washington. We regularly meet with
and assist small businesses to help them raise capital in our
State.
NASAA shares Congress' goal to improve the economy by
encouraging investment in small business. However, we believe
this is best achieved through restoring investor confidence in
the market. We want to bring investors back to the market, and
we want to work with Congress to do so.
My written testimony discusses how States protect retail
investors, assist local businesses to raise capital, and
oversee small offerings. At the outset today, I want to address
an apparent theme running through many of the bills we will
discuss today. This is the myth that Federal preemption of
State law is the most efficient and quickest way to promote
capital formation.
As many of you may recall, on September 13, 2011, NASAA
testified that States should play a leading role in
establishing a new crowdfunding marketplace. Congress
disagreed, and in April 2012 enacted a crowdfunding bill that
broadly preempted State authority. At the time, NASAA was
already developing a model crowdfunding exemption. This model
rule would have been adopted by the third quarter of 2012.
When Congress preempted our authority in this area, our
work on this model rule was deferred. Nevertheless, as I appear
before you today, seven States have adopted intrastate
crowdfunding exemptions, including my own State, and more than
a dozen other States are considering similar exemptions. These
actions decisively demonstrate that had Congress allowed the
States to proceed, there could be a vibrant functioning
crowdfunding market today.
Today, we are discussing a draft bill that may once again
preempt States from playing a key role in another emerging area
that encourages capital formation for small local businesses:
Regulation A+. During the JOBS Act debate, we urged Congress to
preserve our role as the primary regulator of regulation
offerings. Congress agreed, and NASAA supported a GAO study of
the factors that affected the use of Regulation A. We committed
to address any factor that dealt with State blue sky laws.
Consistent with our goal of capital formation and our
pledge to Congress, we undertook a thorough self-assessment of
our Regulation A processes and examined blue sky concerns
addressed by the GAO. We also solicited public comments and
consulted numerous stakeholders, including the American Bar
Association.
The culmination of this effort is the NASAA coordinated
review protocol, a modernized, efficient system for Regulation
A review. Filings are made with one program coordinator and
distributed to the other participating States. Only lead
examiners communicate with the applicant. Our process is
complete 21 business days after the initial filing, assuming no
deficiencies in the application and any delay in clearing an
application is directly tied to the issuers' response time.
Once lead examiners clear the application, the decision is
binding on the other States. Our membership approved the new
protocol, and as of today, 49 of 53 jurisdictions have
implemented it by signing a memorandum of understanding.
We are excited about its potential to help small businesses
in our communities. In short, the States are ready to go with
Regulation A, provided Congress and the SEC don't short-circuit
our efforts through preemption.
You requested that we comment on three draft bills. We are
concerned about the overarching deregulatory nature of these
bills. As I said, we wholeheartedly share your goal of
assisting small businesses and spurring economic growth, but we
believe that many of these bills move the goals in the opposite
direction. Overregulation did not cause the collapse of our
financial markets. America's capital markets are viewed as the
gold standard because they are free, transparent, and
responsibly regulated. This is the formula for economic growth
and job creation.
My detailed comments on these bills are included in my
written testimony, along with suggestions for how they might be
improved. Some members of this committee requested our comments
on related bills discussed in an April 9th hearing, and my
written testimony offers brief comments on those, as well.
In conclusion, State securities regulators share your
goals, and we appreciate your interest in our perspective. My
hope, and NASAA's hope, is to work with Congress to pursue
policy reforms that reflect smart regulation.
Thank you. I will be happy to answer any questions you may
have.
[The prepared statement of Mr. Beatty can be found on page
32 of the appendix.]
Chairman Garrett. Thank you very much.
Finally, last but not least, Mr. Lynn, CEO of Seedrs
Limited. Good morning. Welcome. And you are recognized for 5
minutes.
STATEMENT OF JEFF LYNN, CHIEF EXECUTIVE OFFICER, SEEDRS LIMITED
Mr. Lynn. Good morning, Chairman Garrett, Ranking Member
Maloney, and honorable members of this subcommittee. My name is
Jeff Lynn, and I am the chief executive officer and cofounder
of Seedrs.
I want to thank you for inviting me to testify today in
connection with the discussion draft of the Equity Crowdfunding
Improvement Act of 2014, which I will refer to as the
``Improvement Act.''
By way of background, Seedrs is one of the leading equity
crowdfunding platforms in Europe. We launched in the United
Kingdom in July 2012, and we opened to investors and
entrepreneurs across Europe in November 2013. Since our launch,
we have completed 92 financing rounds, with a total of
approximately 8.4 million pounds, or $14.1 million, invested.
We have financed businesses ranging from mobile app developers
to theater productions to traditional manufacturers to
financial services firms to a cheesemaker.
Seedrs is authorized and regulated by the U.K. Financial
Conduct Authority. When we received our authorization 2 years
ago, to our knowledge, we were the first equity crowdfunding
platform anywhere in the world to obtain regulatory approval.
My own background is as a U.S. securities and corporate
lawyer. I practiced with the international law firm of Sullivan
and Cromwell in New York and London before founding Seedrs.
Seedrs conducts its activities under the laws of the United
Kingdom. I have detailed in my written testimony how U.K. law
applies to equity crowdfunding. And in the interest of time, I
will say here simply that there is general consensus that the
British approach represents a reasonable and workable balance
between investor protection and commercial viability and that
it is probably the best equity crowdfunding regime in the world
today.
Turning to the United States, Title III of the JOBS Act
provides the legislative framework for an equity crowdfunding
regime here. I have come before you today because I believe,
based on the extensive experience I have gained in the equity
crowdfunding space, that Title III as enacted is an unworkable
law that will stifle equity crowdfunding in the United States
before it ever begins.
At the time the legislation which turned into Title III was
first being discussed and introduced by Congressman McHenry and
Congresswoman Maloney, my team and I actively considered
bringing Seedrs into the U.S. market. As Title III emerged into
its final form in the Senate, however, we decided not to enter
the United States because we did not think it would be possible
to conduct a viable equity crowdfunding business under the
regime.
We would very much like to provide American entrepreneurs
and investors with the opportunity to participate in this
important and effective new form of finance, but we simply
cannot do so under Title III as it now stands.
There are I believe five core problems with Title III, and
the Improvement Act goes a long way toward addressing each of
them. I do not have time to address all five of these issues in
detail here, and for my views on the fundraising caps, the
financial statement requirements, the maximum amounts that
investors can invest, and curation, I would respectfully ask
you to refer to my written testimony.
However, I do want to take this opportunity to address the
final issue, which I believe is the most profound. Title III
provides an exemption from the registration requirements of
Section 5 of the Securities Act of 1933, but it does not
address the equivalent provisions of the Investment Company Act
of 1940. This means that while a platform may facilitate the
direct issuance of shares by an issuer to investors under Title
III, there is no scope for the platform to aggregate those
investors into a special purpose vehicle or nominee structure.
While this may seem a technical point at first glance, it
is actually one of the most important issues in equity
crowdfunding. If a small, growing company issues shares
directly to hundreds of individual shareholders, that poses
significant risks both for the issuer and for investors. Such a
structure can kill a company by preventing it from raising
additional capital or being sold and it can deprive investors
of the entirety of the appreciation to which they are entitled
due to lack of critical contractual protections.
The solution to this problem is the use of aggregation,
allowing all investors to be grouped together in one SPV or
nominee structure. The Improvement Act proposes to include
aggregation structures used for crowdfunding under the list of
exemptions in Section 3(c) of the Investment Company Act. I
believe this is a hugely important provision and is essential
to making equity crowdfunding work.
To conclude, Mr. Chairman, equity crowdfunding has the
potential to be a transformative tool for small businesses and
for investors. If implemented correctly, it can create some of
the most productive flows of capital an economy can ever see,
bringing willing investors together to finance the businesses
that will create the most jobs, wealth, and productivity.
However, this cannot happen if the regulatory regime is not
fit for the purpose, which Title III simply is not. The
Improvement Act makes significant strides in addressing the
problems with Title III, and I believe that if this legislation
is enacted in the form proposed, there is a substantially
greater likelihood that equity crowdfunding will be able to
flourish in the United States.
Mr. Chairman and members of the subcommittee, thank you for
the opportunity to appear before you today, and I would welcome
the chance to respond to your questions or to amplify or
clarify these statements at any time.
[The prepared statement of Mr. Lynn can be found on page 59
of the appendix.]
Chairman Garrett. I thank you, Mr. Lynn. And I thank the
entire panel. We will now turn to questioning, so I recognize
myself for 5 minutes.
I guess I will start with Ms. Tierney. Some of you folks
got into this a little bit, but maybe you can dig a little bit
deeper for me. Reg D, can you run down, however you want to
explain it, some of the most troublesome, some of the most
burdensome aspects of complying with the additional reg
requirements that SEC is proposing with regard to Reg D?
Ms. Tierney. Of course. SecondMarket, as I noted at the
beginning of my comments, is very active in the private company
space. And we actually support a significant number of private
companies raising capital under 506(b) and 506(c).
We know from our own experience as an issuer of an
investment trust that is utilizing 506(c) that the facility to
generally solicit has made it much simpler for us to get access
to investors to whom we would not otherwise have access. So we
think that the rules as currently in place work really well,
but the proposed rules--I can tell you from experience--have
created a real overhang on the market for other companies that
want to utilize 506(c). And I think the most significant issues
with the proposed rules, in my mind, are the multiple
requirements to file Form Ds, an advanced Form D, the current
Form D, and a final Form D.
An advanced Form D, as proposed currently 15 days in
advance of filing, is completely unworkable for private
companies. We raise money on a continuous basis. There is no
start or stop. I think the proposed rules were really drafted
for a Wall Street investment opportunity model, not the way
that private companies in Silicon Valley--
Chairman Garrett. Isn't there a--there has to be a start
period, right, when you start doing it?
Ms. Tierney. My CEO, when we were a start-up, was
constantly raising capital. He could be at a cocktail party--
and I am sure you know this, as well--you are at a conference,
you are anywhere and needing every single day looking for
investors in your offering.
Chairman Garrett. Okay.
Ms. Tierney. So it is continuous. To have to stop that for
15 full days and potentially trip it up is just unworkable. And
I know that NASAA wrote a very good comment letter to the SEC,
noting--I think, Bill, you didn't support the 15-day advanced
filing. I think you came out at, if I recall, 2 to 3 days in
advance. Is that right? But I know that the idea of any stop in
capital raising is problematic for private companies.
I think also the concept of having to file a final Form D,
whether or not you have raised capital, can be a death knell
for private companies. Nobody wants to go out and tell people
that they failed to raise capital. That is not a good message
to send if you are a start-up.
And Form Ds are difficult to file. You have to file one
with the SEC, and you have to file one in every State where you
actually sell securities. And I know the States are working
very hard to get a uniform Form D filing system in place, but
that doesn't exist right now. And every State has a different
approach to Form D.
Chairman Garrett. Can you just go on to what Mr. Beatty was
talking about as far as what they are trying to do in this
area? Is that a solution to the problem or is the legislation a
solution to the problem? Why is one better than the other, if
it is, in your opinion?
Ms. Tierney. I think that a concept of filing one Form D in
a consistent manner that would apply to every State in which
you sell would be a massive step forward for Reg D filings. But
having to do three of those--
Chairman Garrett. Yes, I get that.
Ms. Tierney. --and having to file, I would assume, if the
SEC adopts the proposed rules, that the States will follow and
require that those additional forms be filed in every State, as
well. So that is expensive. We have to pay our outside counsel
to file these Form Ds for us--
Chairman Garrett. So, in other words, even if the States do
what Mr. Beatty was talking about and come up with a, sort of
like a common multi-State arrangement is what you were
suggesting there, that doesn't solve the problem, is what you
are saying?
Ms. Tierney. I think it makes--it lessens the impact of the
problem, but I think that my proposal and SecondMarket's
proposal would be one Form D filing at the time that you
commence capital-raising--
Chairman Garrett. Okay.
Ms. Tierney. --not the form--not the 15-day after, not a
final--
Chairman Garrett. Got you.
Ms. Tierney. --so we would support one filing. I would
support a filing that had to be done at the State level if it
is consistent and a one-stop shop kind of approach.
Chairman Garrett. We took all this time on this one
question. So what about the 1-year suspension that--I will let
you start, and then we will get--
Ms. Tierney. I think that is a death knell for private
companies.
Chairman Garrett. Why is that?
Ms. Tierney. Because people make mistakes. So if the rules
were adopted as proposed, say you have a cease conversation for
15 days, but maybe your CEO says something by accident, and now
you haven't filed your Form D 15 days in advance or you forget
to file your final--there is a lot of--these are small
companies. They don't have expensive outside legal counsel.
They are trying to do this themselves, and people make
mistakes.
The current requirements for Form D filings specifically
state that the failure to file a Form D does not preclude you
from relying on the exemption. To go from a structure where
that is not a necessary item in order to comply with the
requirement to you are out of the market for 12 months if you
fail to file seems--I just don't understand how that is
justifiable or how that helps the market.
Chairman Garrett. Got it. My time has expired, but thank
you for answering those couple of questions.
The gentlelady from New York is recognized for 5 minutes.
Mrs. Maloney. Thank you to all of the panelists for your
statements today.
Mr. Beatty, during the time that we debated the passage of
the JOBS Act, there was a great deal of debate over the State
securities laws, and should they be exempted for offerings
under Regulation A? Some people argued that the burdens of
complying with State regulations was one of the reasons why
companies didn't use Regulation A anymore. And as many of us
recall, we reached a deal on the Floor to remove most of the
State preemption, although we allowed it in some circumstances.
Can you describe the work that the State securities
regulators have done since the JOBS Act was passed to
streamline their compliance for Reg A+ offerings?
Mr. Beatty. Thank you, Congresswoman Maloney. Yes, we have
done a fair deal of work--as some of it was highlighted in my
oral comments--what we have done--we recognized, I think, that
with the GAO study that we could be better at doing these types
of offerings. We could be more consistent, we could be more
timely.
We put in place a coordinated review system that, as I
said, would result in the initial determination of clearance or
need for additional work within 21 business days. This is
something that we have signed an MOU on. We are committed to
this. We believe this provides excellent service to the
companies in our State and other States that want to raise
capital.
I think that what has been described here by Mr. Miller and
the fact that he had jurisdictions that understood what he was
trying to do is an important concept. We understand what
companies are trying to do when they raise capital in our
States. We want them to succeed. We think it is very important.
The days of a regulator trying to find a way to deny
offerings are over. We don't do that. We need these companies
in our State. The system that we propose is very timely, it is
a one-stop filing, and it is a filing that will be made via e-
mail with our State initially. Eventually, it will go up on our
electronic filing system that we are developing and will be
available for Form D filings in November of this year.
This is something that, given the timelines--and I would
note that at the back of my written testimony, we have the
timeline laid out in a table that I think is pretty easily
understandable. But quick decisions, decisions that are based
on one set of guidelines, this results in certainty, I think,
for the filers and is a good thing for the filers and is a good
thing for the States.
Mrs. Maloney. Can you discuss the areas where you think
State security regulators can play a role that the SEC can't
play? Is it mostly protecting the mom-and-pop retail investors
or regulating small securities offerings?
Mr. Beatty. I think we do both.
Mrs. Maloney. What do you think you offer that the SEC does
not offer?
Mr. Beatty. I think we do--as the initial question--I think
we do both. As I said, the mandate that I think most States
have is to protect investors and foster capital formation in
our States. I think the role that we can play that the SEC
doesn't play is that we are local and we are available.
We understand that if somebody has a problem with an
offering in our State, an investor, that the call was going to
come to us, whether it is a Federal offering or a State
offering, it is not going to Washington, D.C. We also
understand that from the standpoint of an issuer, if there is a
problem and we are deemed to be intransigent or otherwise not
responsive to an issuer, that we are going to hear about it not
only from the issuer, but probably from our governor, as well.
So we are very responsive, and we understand the needs of these
small companies.
Mrs. Maloney. Okay. Ms. Tierney, could you talk about your
company's experience in verifying that investors are, in fact,
accredited investors? There was a lot of debate over accredited
investors when we debated this earlier. And do you think it is
important to require verification that an investor is
sophisticated or an accredited investor before selling them an
unregistered security?
Ms. Tierney. I apologize to Chairman Garrett for having to
disagree on this point, but we do this for a business, so I
have to be objective--or not objective. We have done a
verification, I think, on about 1,200 to 1,500 investors,
mostly in the context of angel companies raising company
through 506(c) offerings.
There are some points of friction in the existing rules
that create problems. For example, they are drafted for U.S.
investors and don't anticipate foreign investors who can't
provide a credit report. So there are some frictions that the
securities bar is working through right now.
But I can tell you, from our experience, people have been
generally willing to provide the information. We try to be
rational and reasonable. We are a registered broker-dealer, so
people know that their information is going to be safe.
Mrs. Maloney. Very quickly, do you find that investors
claim to be accredited investors when they are not? Do you have
examples like that--
Ms. Tierney. We have found that, Representative Maloney. We
have found that people--not a large percentage, I would say a
very small percentage of angel investors who had done multiple
angel investments based on checking a box on their
accreditation questionnaire, when having to provide actual
documentation weren't able to show that they had made $200,000.
They weren't far off, but they weren't over the requisite
threshold.
But I would say that the vast majority easily satisfy the
rules. We have very few investors who come through who make
$201,000 a year, so it is--but I know that a lot of investors
that we are not seeing are saying that it is problematic for
them to provide confidential personal information. So I think
there are arguments on both sides.
Chairman Garrett. Thank you.
Mr. Hurt, the vice chairman of the subcommittee, is
recognized for 5 minutes.
Mr. Hurt. Thank you, Mr. Chairman. Thank you all again for
your appearance and testimony today.
My question is for Mr. Miller and for Mr. Beatty. In
talking about Reg A, I think the evidence is clear that
historically only a limited number of issuers have taken
advantage of the Reg A exemption for public offering stacks,
that is public markets.
Mr. Miller, and then Mr. Beatty, why do you think it is
that issuers have avoided using the Reg A exemption in the
past? And do you believe--what do you think the effect would be
of raising the exemption proffering from $5 million to $10
million? What benefit would that give to small companies
looking to raise capital? And then from Mr. Beatty's
standpoint, what are the investor protection concerns that are
posed, if any?
Mr. Miller. I think that the primary challenge with
Regulation A is actually the speed. The first offering we did
took us 9 months, and I had O'Melveny & Myers, former General
Counsel of the SEC, actually leading the process with us. And
that is--partly as a result of the fact that it is not
frequently used, it is a very human process. People--the
regulators aren't familiar with Regulation A. The regulators
aren't familiar with real estate investment. And so, you have a
learning curve.
And I do think that when you think about the process, the
SEC spent 6 months, 9 months, 8 months in each one of our
offerings, and I do sometimes wonder--the SEC obviously is
sophisticated, knows what they are doing, has to do it multiple
times. We did it basically 4 times, because each State is
sovereign, although coordinated, and so there is a question of
what does the additional--sort of basically repeating of the
process--how does that benefit the investor? It doesn't
necessarily benefit the fundraiser, even though the States are
sophisticated in many cases.
The other issue is that we--it is not just--everybody
focuses on preemption, but there are other requirements State
by State. In Maryland, we had to file as an exempt broker-
dealer. Each State has--there are a lot of rules beyond the
ones we are focused on that each State requires. And so it is a
patchwork quilt. It is very--and the Internet now makes it
possible to raise nationally--so there is an efficiency that is
possible nationally in order to get to scale that--I can
imagine interfacing with--we had hundreds, we had hundreds of
questions from the States, hundreds, about our offering, and if
I were potentially getting questions from 50 State regulators,
I can only imagine we would get more.
So I think that the question is, is the SEC, as a
sophisticated body, not sufficient? Why would I need to do it
twice, essentially? That is the question that I think needs to
be addressed in this Regulation A preemption issue.
Mr. Hurt. Thank you. Mr. Beatty?
Mr. Beatty. I think, to answer your first question about
why it wasn't--while Reg A was not used widely, I think it had
to do partially with the offering amount. I think it had to do
with--as Mr. Miller said--the speed associated or lack of speed
associated with the review of the offering, particularly at the
Federal level. I think that it was not used widely, at least in
our area, in multi-State offerings, again, because it was not
that large.
Also, at least in our area with our local bar, there was a
perception essentially that perhaps because it wasn't used
widely, that good companies didn't use Regulation A. And so
they were reluctant to try and do a Regulation A offering. I
don't know if that is pervasive throughout the country, but
that is what our local bar told me when I asked them about it.
As far as the--I would note that the system that we have
put in place would address many of the concerns addressed by
Mr. Miller in terms of inconsistent State comments and those
types of things. As far as the investor protection element, I
think what States bring to the table is that, particularly for
local companies, we know these people, we know what the issues
are going to be, we are familiar with these companies, and we
are better able to, perhaps, address some of the questions.
I see my time is running out, so I will conclude my remarks
there. Thank you.
Mr. Hurt. And then I guess my question--just going back to
Mr. Miller for a second, so the JOBS Act, of course, increases
the cumulative Reg A offerings by an issuer from $5 million to
$50 million. Do you have a sense of what an appropriate
threshold would be? And how--would increasing that further,
would that aid a small business?
Chairman Garrett. Very briefly.
Mr. Miller. Yes, absolutely. I think that you will see
small, regional investment banks actually enter the space of
Regulation A where--and also start seeing real institutional
block sales, if Regulation A becomes available at larger
amounts.
Mr. Hurt. Thank you. Thank you, Mr. Chairman.
Chairman Garrett. I now recognize Mr. Scott.
Mr. Scott. Thank you very much. Thank you very much, Mr.
Chairman.
I said in my opening statement that we need to look at the
big picture of this, and where there are regulatory
impediments, we need to really examine it. And, Ms. Tierney, I
really think you have hit on something here with the 506(c) and
the Form D. And I do notice, Mr. Chairman, on our memo, we do
have a mention of that, but we don't have any sponsorship on
it. I don't know if that could be incorporated in that.
But if so, I would be delighted to work with you on that,
because, Ms. Tierney, I would like for you to go into a little
more detail of exactly what we need to do, because I agree with
you. If one form can do, and if these repeat forms of Form D is
causing very difficult--a difficult obstacle to capital
formation, then obviously we certainly need to address that.
Mr. Chairman, I would like to work with you on that.
And with that, Ms. Tierney, can you just share with the
committee what you actually would like to see us do,
succinctly?
Ms. Tierney. I think that the absolute best outcome, in my
mind, would be that every private company that is raising
capital under 506 would file one Form D at the commencement of
the offering to put the States on notice on which--whether they
are using B or C, so that the States have the information they
need to regulate fraudulent activity. Those forms will be filed
one time, be available across all 50 States, say how much the
intent was to raise, and potentially what the use of--the
expected use of proceeds will be, but that would be it. And
they would file that at the commencement of the offering. And
then the States and the Federal Government would have the
information they need.
Right now, you have to file a Form D at the point in time
that you sell your first--from the first time you have somebody
invest, you have to file a Form D 15 days after the sale with
the Federal Government, with the SEC. Then you have to file a
Form D in every single State where you sell. So you may sell
one week to somebody in Utah and the next week to somebody in
Washington State, so you have to file a form in every single
State the first time you sell. That doesn't seem sensible to
me. I don't understand why that is beneficial to the States,
the SEC, or to investors.
Mr. Scott. And what does that cost the small business? What
is the hardship there? Is there a cost?
Ms. Tierney. It is the cost of preparation. Not every
State--it is a patchwork, as Ben and I have been saying. And I
know the States are working hard to address that, but under the
current regime, there are States that allow you to file a Form
D electronically. There are States that require you to file in
hard copy. There are States that require a fee that is
significant. There are States with a minor fee. There is a fee
in every State, I would note, so this is a cash-generating
business for the State.
Mr. Scott. Could you share with us what that fee might be,
if you have that knowledge?
Ms. Tierney. I am so sorry, Representative. I don't know
off the top of my head.
Mr. Scott. Okay.
Ms. Tierney. I think it is as high as $2,000 in some States
and as low as $100 in others, but you have to have--you really
have to have either a registered broker-dealer or a law firm do
this for you, or else you are going to get it wrong.
And the implications for doing it wrong under the proposed
rules are that you can't rely on Reg D 506 for an entire 12-
month period, which for a start-up means you are going to shut
your doors and lay off all of your employees. That is just the
reality of it.
Mr. Scott. That is something very reasonable I think that
we could really look at, Mr. Chairman. The other point I wanted
to raise with you, Ms. Tierney, in your testimony, you
mentioned safe harbor. Could you share with us what--I was
trying to follow you on that, but you were going very rapidly
there. Tell us about the safe harbor.
Ms. Tierney. Of course. And I'm sorry I talk so rapidly,
but I only get 5 minutes and I was watching the clock.
Mr. Scott. No, it is fine. It is more my not being able to
keep up with you.
Ms. Tierney. Okay, thank you. So the way that the
securities laws work around resales of private company stock
under the current regime are there is a clear safe harbor under
Section 41 of the 1933 Act, if you have held your common stock
for 12 months. At the end of the 12-month period, you can sell
into the market, you can sell to anyone, you can generally
solicit. There are no restrictions whatsoever.
That exemption, however, is only available to shareholders
who have held the stock for 12 months, and it is not available
to offices or directors, founders, or large angel investors who
have made sizable investments in the company, so more than a 10
percent ownership stake.
Then, you have publicly registered securities where people
can sell as they will on the NYSE or on Nasdaq. So you have, in
between those two events, this delta of shareholders and
employees. Most of us working for private companies get a
significant amount of our compensation in the form of options.
Mr. Scott. And so, tell us, how would you like to see
this--what would be the best way of seeing this exemption
applied?
Ms. Tierney. I think it would be a transaction exemption
for resales of securities or founders, angel investors,
employees who hold options. When we were working with the
community banks, it is the officers and directors of community
banks. They are middle-income Americans who just happen to work
for a private company. They couldn't sell their securities
without worrying about the State law.
And we have been working with NASAA on this issue. They are
very well aware of our position. And I think we all have the
goal of making capital formation and job creation simpler, and
I think having to deal with the patchwork of blue sky law every
time you go to sell securities in this delta shareholder group
makes it extremely unworkable.
Mr. Scott. Thank you.
Ms. Tierney. And the implications are significant for
private company shareholders.
Mr. Scott. Thank you very much.
Chairman Garrett. Thank you. The gentleman yields back.
Mr. Mulvaney?
Mr. Mulvaney. With the permission of the Chair, I would
like to yield my time to the gentleman from North Carolina.
Mr. McHenry. I certainly appreciate my colleague yielding.
And, Mr. Lynn, I wanted to talk to you about crowdfunding.
As I stated in my opening statement, Carolyn Maloney and I
worked diligently to make sure we had investor protection and
the ability of folks to raise equity online.
You said that before the regulations were written, you
viewed the law as ``unworkable.'' Is that correct?
Mr. Lynn. That is absolutely correct.
Mr. McHenry. Okay, so describe to me how crowdfunding
leaders around the world view the American crowdfunding equity
law?
Mr. Lynn. I think that my view represents the consensus
view, both outside the United States and inside, that Title
III, no matter how it had been implemented by the SEC, simply
wasn't going to work. I know many of my colleagues in Europe
have made the same decision that we have not to look at the
U.S. market as a result of it, and I know that many platforms
in the United States that have relied solely on 506(c) or other
forms of accredited investor only rules had initially
considered using Title III, but upon seeing its final form,
decided not to do so.
Mr. McHenry. Okay. So you mention also about the need for a
special purpose vehicle. Explain how that actually lessens
crowdfunding remorse, if you will, with investors and issuers.
Mr. Lynn. Absolutely. So one of the often misunderstood,
but absolutely essential aspects of investing in a private
company as opposed to a fully publicly traded company is that
there are complexities around minority shareholder protections
and other issues that get addressed by contract.
So when an angel or a venture capitalist invests in a
start-up, they uniformly enter what is called either a
shareholders' agreement or a subscription agreement, which sets
out a series of protections for investors. That works perfectly
fine when there are 2, 3, 5, or even 10 investors. When you
have hundreds, though, the whole process falls apart, and you
wind up with essentially the following scenario: No contract is
entered into, the result of which is investors have effectively
no protection against the various things that can happen to a
minority shareholder in a privately held company, while at the
same time the company is forced to deal with the administrative
overhead and the liabilities that come from having hundreds of
direct shareholders, making it significantly less likely that
later, State investors will want to deal with them.
Mr. McHenry. Okay. So this idea of a special purpose
vehicle is for investor protection?
Mr. Lynn. It is absolutely for investor protection.
Mr. McHenry. Okay. Now, the ability--the other question is
for portals--the question of liability, sound liability
provisions. I saw hundreds of comments about this with the SEC.
Can you address that?
Mr. Lynn. I think that there are a number of issues around
liability, the most important of which is that there needs to
be a very, very clear delineation of where liability sits as
between an issuer and a portal. One of the very frank aspects
that makes working in European markets advantageous over the
United States in many aspects of securities law is the lack of
strike suits and the lack of frivolous litigation. When you are
dealing with very small businesses, that becomes even more
profound. That can be minimized significantly by making very,
very clear what actions and what omissions a platform or an
issuer can be liable for--
Mr. McHenry. But this is twofold. So the portal--if they
remove someone because they believe they are fraudsters, would
they be subjected to liability under the current law?
Mr. Lynn. Yes, sorry. That is right.
Mr. McHenry. Okay, so if they remove someone, they perhaps
could be sued, right?
Mr. Lynn. Yes, sir.
Mr. McHenry. So it is a twofold, those coming and going,
the liability provisions, right?
Mr. Lynn. It is. And that particular issue, which I have
called curation, is one that comes up under the fact that
portals are not allowed under the current law to provide
investment advice, but that can very easily be construed and
has been construed as preventing them from taking down
businesses or refusing to deal with businesses that they feel
may be fraudsters or otherwise inappropriate for their
platforms.
Mr. McHenry. Thank you for your comments. Mr. Miller, we
view you as the lone wolf of Reg A offerings in the United
States. How many Reg A offerings were there in the United
States in the year 2010?
Mr. Miller. 2010?
Mr. McHenry. How about 2011?
Mr. Miller. I think that over the last 3 years, there have
been approximately 19.
Mr. McHenry. And how many of those are you responsible for?
Mr. Miller. Three of them, approximately 20 percent.
Mr. McHenry. Okay. And what year were you the only Reg A
offering in the United States?
Mr. Miller. I believe in 2012, we were--
Mr. McHenry. 2012, okay. So prior to--it has been basically
viewed as a dead letter of the law. Is that correct?
Mr. Miller. Effectively.
Mr. McHenry. Okay. So thank you for mentioning that, but I
do want to mention that in our view, you are the lone wolf in
terms of your boldness for this. So, thank you, Mr. Chairman.
And thank you.
Mr. Mulvaney. I yield back the balance of my time.
Chairman Garrett. Thank you.
Mr. Carney is recognized for 5 minutes.
Mr. Carney. Thank you, Mr. Chairman, and thank you to each
of the witnesses for coming today.
I just have a couple of really quick questions. Just
following up on Mr. Scott's line of questioning about the need
to file in multiple States, Mr. Beatty, I thought there was an
effort going on by the North American Securities Administrators
Association to develop kind of a one-stop filing process. Is
that not accurate?
Mr. Beatty. That is completely accurate, Congressman. The
States have been working diligently to establish what we call
an electronic Form D filing system. It is in development right
now. It is scheduled to go live in November of this year. It
will allow one-stop filing. It will allow the payment of fees
at one place. So I think the question about--or the concern
about having to send paper filings to all 50 States will soon
be a thing of the past.
I would also note that the Form D itself, it is an eight-
page form. I think it has like 16 items on it. It is not a big
form. I think--I heard Annemarie say that one filing as the
commencement of the offering and why the States maybe need to
see the filing. These forms are incredibly important for us to
see early on, because we are the ones who get the questions
from potential investors such as, ``I got pitched this
offering, and what do you know about it?''
And if we don't get the filing shortly before the offering
starts, as we proposed in our comment letter, then what happens
is, we are forced to say something like, we don't have any
record of this filing. You should be careful and ask a lot of
questions.
We don't know, quite frankly, whether the offering is a
legitimate exercise by a company to try and raise capital
privately or, God forbid, some scam artist out there trying to
take somebody's money. So it is an incredibly important piece
of information. It is a relatively small form. And we certainly
would appreciate the opportunity to do that.
Mr. Carney. Do you have any sense of what--in this world we
live in, it is kind of amazing that we wouldn't have that now.
Do you have a sense as to what the timing of that is?
Mr. Beatty. I am not sure I completely follow you, but--
Mr. Carney. The timing of the development of the one-stop--
when will it happen?
Mr. Beatty. Oh, in November of this year, it goes live. We
have been working on it for a while, but in November of this
year, it is scheduled to go live. It is on schedule to go live.
Mr. Carney. Okay. Let me use the remainder of my time to
get any feedback from any of you. As you may know, I worked
with Mr. Fincher, who was here a few minutes ago--he has since
left--on the IPO onramp part of the JOBS Act. And I don't know
if any of you have had any experience with that, but I would be
interested in any comments that you might have about how the
IPO onramp has worked in practice, whether you are aware of any
intended or unintended consequences.
We know that the data shows that IPOs are up quite a bit.
Now, Mr. Fincher and I are taking full credit for that, and
everybody else who supported it, of course. Whether that is the
reason, I am sure there are lots of different reasons, but just
any thoughts that anybody might have on that?
And I guess, Mr. Beatty, if you think there are problems
with that from your perspective. Ms. Tierney, I know you have
some Blue Hen connections, so why don't we start with you?
Ms. Tierney. I am a proud Blue Hen. We are not a public
company, but we work with a lot of private companies that go
public. And almost every single one of them is utilizing the
IPO onramp bill in order to facilitate becoming a public
company.
Mr. Carney. Any feedback about which provision in
particular has been most helpful?
Ms. Tierney. Again, not out of my own experience, but I
think the ability to file confidentially is a huge benefit to
private companies.
Mr. Carney. I have heard that from a lot of people.
Ms. Tierney. Yes--
Mr. Carney. There was a lot of--and, by the way, there was
a lot of difference of opinion on that particular aspect of it,
but that is the one thing that keeps coming back that has been
really helpful.
Mr. Miller, you are shaking your head. Would you like to
share some thoughts, as well?
Mr. Miller. There is no doubt that is true. I have heard
that from--I work with some public real estate companies and
small public real estate investment trusts. And across-the-
board, to be able to file confidentially, you can withdraw
without basically having a punitive result in the market, it is
very, very material to the consideration of going to the public
markets.
Mr. Carney. Great. Mr. Beatty, any comments from the other
side?
Mr. Beatty. I think I would agree with my co-panelists
about the feature, the confidentiality feature. It is the one
that I hear about the most, as well. I think from a regulatory
standpoint, we have some concerns, not just with that
particular feature, but the trend for less transparency in the
markets. We believe that--as mentioned in my opening remarks--
the transparency is an important feature for our public markets
and it is just one of the several things that we have seen that
have kind of decreased that transparency.
How that will play out--we certainly haven't gotten any
complaints about it or anything like that, but how that will
play out long term does give me some concern.
Mr. Carney. All right. Thank you all very much for what you
do. And thanks for being here today.
Chairman Garrett. The gentleman yields back.
The gentleman from Texas, Mr. Neugebauer, is recognized.
Mr. Neugebauer. Thank you, Mr. Chairman, for holding this
important hearing.
Mr. Lynn, what I heard you saying is that basically, with
Title III the way it is now, the crowdfunding is difficult. And
I think you used the word ``impossible.''
Mr. Lynn. ``Impossible'' is the word I would use, sir.
Mr. Neugebauer. And so the question is--a lot of times, we
have good ideas that we get, really, from the private sector,
and we massage them up here, and we try to codify them, and
then we send them over to the Executive Branch and the
Executive Branch massages them. And then when they come out the
other end, they don't always end up being like we thought they
were going to be.
So I think one of the questions I wanted to ask you is,
when it comes to that section, was the structure of the law
flawed? Or are the rules the problem? Or is it a little of
both?
Mr. Lynn. I believe it was primarily the structure of the
law in the form adopted by the Senate. While the version
adopted initially by the House I think has been improved upon
by Congressman McHenry's proposed draft, the core structure was
there. By the time it came out of the Senate and went to
committee, I think that was where the main failure was--the SEC
rules could not have been saved, no matter what they said.
Mr. Neugebauer. And so, basically what you think is that it
is going to take a legislative fix and not necessarily an
administrative fix?
Mr. Lynn. I think that is absolutely the case, and I can
tell you, sir, that I have spoken with a number of staff
members at the SEC who have, on an off-the-record or
nonattribution basis, at least, acknowledged that they felt
that their hands were tied in trying to address many of the
concerns, because the legislation was written the way it was.
Mr. Neugebauer. What would you say are the one or two most
burdensome pieces of it, that really would have an impact?
Mr. Lynn. I think if I can identify the three top ones, it
is the levels--the thresholds for financial statements.
Financial statements are something of a red herring when you
are dealing with very early-stage businesses. They don't say
anything, because the company hasn't done anything yet. And
requiring an audit or even an accountant review for very, very
small businesses is hugely disproportionate and simply makes it
impossible or virtually impossible for businesses to rely on.
I think the issue I addressed in Mr. McHenry's question
regarding curation and the inability to select which businesses
go on the platform in a subjective way is a huge flaw. And the
points around the lack of ability to use an SPV or nominee
structure is the third.
Mr. Neugebauer. One of the things that I understand in the
proposed rule is that, for example, if you own 20 percent of
the company, you are subject to a look-back of 3 years of your
personal tax returns. Is that necessary? And if I am part of a
start-up, does that keep me from participating?
Mr. Lynn. I think it is one of a number of perhaps
secondary-level burdens that is unnecessary. I think it is an
example of the type of rule that was designed with much larger
publicly traded companies in mind that simply does not apply or
does not have a whole lot of utility when you are dealing with
a ``two man in a garage'' start-up.
Mr. Neugebauer. And, Mr. Miller, I was amused by your
comment about the legal fees that small businesses are having
to pay in order to come into compliance. Is that just because
there is so much risk out there of--if you don't comply with
all of the--if you don't check all of the boxes, is it the
complexity? Or what do you think is driving most of that?
Mr. Miller. I think it is primarily driven by complexity.
You can be a software engineer or a bioscientist, but the
regulatory knowledge to make sure that you maintain
compliance--and in particular, if you want to grow--the
compliance is critical to your next round, right? If you raised
$500,000 and you violated securities law, your business is
dead, even if it is successful in the underlying merits.
So the complexity is outside the knowledge base of a normal
entrepreneur, and so you have to rely on legal counsel, and
that basically--the complexity of the law and the number of
regulators involved drives the amount of legal fees.
Mr. Neugebauer. One of the things we hear from people all
across the broad spectrum now about--in their businesses is the
term regulatory risk, that--whether it is compliance or other
areas of government--one of the things that is really stifling
a lot of businesses is regulatory risk that is out there and
how to price it into your product. Does anybody disagree that
there are regulatory risks that have increased over the last
few years?
Ms. Tierney. I would completely agree. For a long period of
my career, I was involved in taking companies public in the
United States. This is the first job I have had where I worked
for a private company and worked with private companies. And in
the time that I have been a securities lawyer, the scales have
tipped. There are not a lot of good reasons to be a public
company in the United States of America right now when you do a
cost-benefit analysis around the risk, the costs, and the
burdens of being a public company.
There are a lot of good reasons to go public that will
always be there, but I think for a lot of private companies,
with the facility now offered with the 2,000 registration
threshold and the ability to more easily raise capital under
Reg D, under 506, they are really going to be deferring those
IPOs for a very long time. And I think that is the right
regime, but it is sad to me as a former SEC attorney and an
NYSE attorney just to see companies not want to go public.
Chairman Garrett. We are going to have to--
Mr. Neugebauer. Thank you.
Chairman Garrett. We are going to have to cut it there. And
we will have, I think, our last word on it. Mr. Kildee, you are
recognized for 5 minutes.
Mr. Kildee. Thank you, Mr. Chairman.
I will be brief. I was talking to Mr. Carney, and I just
want to say, I don't know what a Blue Hen is, except that I
know that I have never been served one. I assume that they are
very good.
Ms. Tierney. You are missing out.
Mr. Kildee. I will just have one question. If it is
redundant, if it has already been asked, I apologize for that.
But I would just like to follow up on some of the comments that
I made in part I one of this hearing that was held earlier this
month, that while these proposals ostensibly are intended to
increase capital formation for small and emerging companies, we
have yet to fully realize the impact of the JOBS Act. Trends in
the future may prove that there are some shortcomings in the
JOBS Act, for which a cohesive legislative fix might be
required, but now the House would have to address this with a
legislative solution.
Specifically, though, I am interested in the area of
capital formation. It seems like to me, anyway, the mortgage
market, in ensuring that people have the ability to purchase a
home, might be a better place to start this conversation. And
if we are looking to have additional sources of capital for
small and emerging companies, we might focus on reauthorization
of the Ex-Im Bank, which I know in my State has been a really
significant player in helping to get small companies moving and
to reach additional markets.
But my main concern with these proposals and the ones from
today and earlier this month is that they specifically, in some
cases, preempt State regulator oversight. And specifically,
just the other day, we had SEC Chair White here and we had, I
think, a good exchange. But one of the questions that I posed
to her and that I am concerned about is that we have the SEC
that is already fairly thinly stretched.
And with increasing obligations continuing, we could have a
debate about whether those obligations are appropriate, and we
have had a substantial debate on that subject, but I don't
think we should try to dial back on whether the regulations in
place should be enforced by limiting the resources. But I am
concerned about the sort of combined effect of reducing State
regulatory responsibility or roles in this particular space
while we have an SEC that seems already challenged in meeting
its obligations.
Starting with Mr. Beatty, I would certainly like to get
your observations, but if the rest of you could also make a
comment, I would certainly appreciate it. And that would be the
only question I would have today.
Mr. Beatty. I share similar concerns. I note that there was
a recent BNA article that talked about Regulation A+, and it
noted that the--I am sure I have the number wrong--but the
average review time for a Reg A offering before the SEC was
something in the--over 100 days, anyway.
We are proposing with our Reg A coordinated review proposal
to have an initial decision back to the issuer within 21
business days. So I think we share your concern about
diminishing resources. A strong and healthy SEC is important,
but we also think that we have something to bring to the table,
and that this is not the time to take regulators off the table
in terms of providing services.
Mr. Miller. We have proposed to the SEC that for the
offerings below $5 million, they actually would leave it to the
States, rather than requiring the SEC and the States for an
offering that is less than $5 million under Regulation A. And
as a proposal, it would lessen the burdens on the SEC, while
giving the States a purview to succeed inside, I think, what
would be more likely a smaller local offering of less than $5
million.
Mr. Lynn. I think--if I could just take a slightly
different view, I have no doubt that in many ways individual
State regulators may be more efficient or more effective than
the SEC. The problem is that a majority of offerings,
particularly--I appreciate real estate may be a bit different--
for small and growing businesses, the fact that they are small
does not correlate with them being local. They tend to have
Internet-based offerings, supporters, and people who want to
invest in them from across the country, and often
internationally.
And I think that the more barriers you put up and the more
differentials you put up across borders, the more difficult
that becomes. Whether the locus of regulation sits in one or
the other, I think, is less of an important question than
whether we are dealing with potentially 50 different, slightly
altered regulatory regimes versus a unified one, and I think
that if we get into that situation, that is the real problem.
Chairman Garrett. And having had the last word, Mr. Lynn, I
thank you, and I thank the entire panel for all your very good
testimony. It was very helpful, both your written testimony and
the testimony today. And I thank the members of the
subcommittee.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
With that, again, I thank the panel and wish you a good
day. And this hearing is adjourned.
[Whereupon, at 11:05 a.m., the hearing was adjourned.]
A P P E N D I X
May 1, 2014
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