[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
LEGISLATIVE PROPOSALS TO HELP
FUEL CAPITAL AND GROWTH ON MAIN STREET
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS,
SECURITIES, AND INVESTMENT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
MAY 23, 2018
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-95
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
31-459 PDF WASHINGTON : 2018
HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Shannon McGahn, Staff Director
Subcommittee on Capital Markets, Securities, and Investment
BILL HUIZENGA, Michigan, Chairman
RANDY HULTGREN, Illinois, Vice CAROLYN B. MALONEY, New York,
Chairman Ranking Member
PETER T. KING, New York BRAD SHERMAN, California
PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
ANN WAGNER, Missouri KEITH ELLISON, Minnesota
LUKE MESSER, Indiana BILL FOSTER, Illinois
BRUCE POLIQUIN, Maine GREGORY W. MEEKS, New York
FRENCH HILL, Arkansas KYRSTEN SINEMA, Arizona
TOM EMMER, Minnesota JUAN VARGAS, California
ALEXANDER X. MOONEY, West Virginia JOSH GOTTHEIMER, New Jersey
THOMAS MacARTHUR, New Jersey VICENTE GONZALEZ, Texas
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
TREY HOLLINGSWORTH, Indiana
C O N T E N T S
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Page
Hearing held on:
May 23, 2018................................................. 1
Appendix:
May 23, 2018................................................. 41
WITNESSES
Wednesday, May 23, 2018
Coffee, Jr., John C., Adolf A. Berle Professor of Law, Columbia
University Law School.......................................... 8
Eggers, Barry, Founding Partner, Lightspeed Venture Partners, on
behalf of the National Venture Capital Association............. 12
Gellasch, Tyler, Executive Director, Healthy Markets Association. 14
Hahn, Brian, Chief Financial Officer, GlycoMimetics, Inc., on
behalf of the Biotechnology Innovation Organization............ 10
Knight, Edward S., Executive Vice President, Global Chief Legal
and Policy Officer, Nasdaq, Inc................................ 7
Paschke, Brett, Managing Director, Head of Capital Markets,
William Blair, on behalf of the Securities Industry and
Financial Markets Association.................................. 5
Quaadman, Thomas, Vice President, Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce...................... 16
APPENDIX
Prepared statements:
Coffee, Jr., John C.......................................... 42
Eggers, Barry................................................ 63
Gellasch, Tyler.............................................. 67
Hahn, Brian.................................................. 88
Knight, Edward S............................................. 94
Paschke, Brett............................................... 102
Quaadman, Thomas............................................. 112
Additional Material Submitted for the Record
Huizenga, Hon. Bill:
Written statement from California Public Employees'
Retirement System (CalPERS)................................ 125
Written statement from Equity Dealers of America (EDA)....... 129
Maloney, Hon. Carolyn B.:
Written statement from Council of Institutional Investors.... 131
Written statement from Morningstar........................... 142
Written statement from OTC Markets Group, Inc................ 144
Written statement from Service Employees International Union
(SEIU)..................................................... 180
Written statement from XBRL US............................... 182
LEGISLATIVE PROPOSALS
TO HELP FUEL CAPITAL
AND GROWTH ON MAIN STREET
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Wednesday, May 23, 2018
U.S. House of Representatives,
Subcommittee on Capital Markets,
Securities, and Investment,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Bill Huizenga
[chairman of the subcommittee] presiding.
Present: Representatives Huizenga, Hultgren, Wagner,
Poliquin, Hill, Emmer, Mooney, MacArthur, Davidson, Budd,
Hollingsworth, Maloney, Sherman, Scott, Himes, Ellison, Foster,
Sinema, Vargas, Gottheimer, and Gonzalez.
Also present: Representative Hensarling.
Chairman Huizenga. The committee will come to order. The
Chair is authorized to declare a recess of the committee at any
time. This hearing is entitled, ``Legislative Proposals to Help
Fuel Capital and Growth on Main Street.'' And I now recognize
myself for 4 minutes to give an opening statement.
We all know that small businesses are what drive the
American economy. These innovators, entrepreneurs, and risk-
takers are critical to our country's economic prosperity. Small
businesses helped create more than 60 percent of the Nation's
new jobs over the past 2 decades. So if our Nation is going to
have an opportunity that provides opportunities for every
American, then we must promote and encourage the success and
growth of our small businesses and startups.
In order to succeed, these companies need capital and
credit, the lifeblood for growth, expansion, and job creation,
yet the Government continues to construct arbitrary walls that
cut them off from central financing, the smaller companies are
caught up in red tape created for the largest public companies
that have the financial means to hire lawyers, accountants,
managers, and consultants to guide them through the sheer size,
volume, and complexity of the Federal securities laws.
Since becoming Chairman of this subcommittee, one of my
biggest concerns is the declining number of public companies,
which has led to fewer investment opportunities for Main Street
investors. IPOs, or initial public offerings, have historically
been one of the most meaningful steps in the lifestyle of a--
lifecycle of a company. Going public not only affords companies
many benefits, including access to capital markets, but IPOs
are also important to the investing public.
However, over the past 2 decades, our Nation has
experienced a 37 percent decline in the number of U.S. listed
companies. Equally troubling in my eyes, we have seen the
number of public companies fall to around 5,700. These
statistics are concerning because they are similar to the data
that we saw in the 1980's when our economy was less than half
of its current size.
These statistics demonstrate that regulatory costs
associated with going public is deterring new and emerging
companies from making the decision to go public, thus
preventing our capital markets from reaching their full
potential.
However, Congress has made strides in tailoring the
regulatory environment for smaller companies, most notably when
we passed, with strong bipartisan support, the Jumpstart Our
Business Startups, or JOBS Act, in 2012. Signed into law on
April 5 of 2012, the JOBS Act, which consisted of six bills
that originated here in the House Financial Services Committee,
was designed to help small companies gain access to capital
markets by lifting burdensome securities regulation. By helping
small companies obtain funding, the JOBS Act has facilitated
economic growth and job creation.
Even President Obama called the law a game changer for
entrepreneurs and capital formation. To further quote the words
of former President Obama, the first JOBS Act was, quote, one
useful and important step along the journey of removing
barriers that were preventing aspiring entrepreneurs from
getting funding. I completely agree.
Unfortunately, we need capital--much needed capital is
unnecessarily left be--left on the sidelines right now. These
small businesses make up 99 percent of all enterprises in
America and employ about half of the American workforce, but
they are being left behind as our economy continues to recover.
The big are getting bigger, the small are getting smaller, and
fewer small businesses are actually forming in the first place.
Regulatory tape is preventing small businesses from
realizing their full potential. While small and middle market
business optimism hover around record levels, burdensome red
tape still is their ability--hampers their ability to obtain
important capital to grow and thrive. Small businesses depend
on access to financing to get off the ground, sustain
operations, manage cash, make payroll, and create jobs, the
very financing that all too often doesn't come through.
Implementation of the JOBS Act has demonstrated that while
today's capital formation framework is better than it was 6
years ago, those 6 years have made clear that the JOBS Act was
not just some magic formula. Aspects of the JOBS act, as well
as JOBS 2.0, can and should be improved and other reforms
should be implemented to further unleash innovation.
Our hearing today will examine several legislative
proposals that will help fuel capital and economic growth on
Main Street. Many of those proposals were outlined in the
Expanding the On-Ramp report that was released last month by
the U.S. Chamber of Commerce for capital markets
competitiveness, BIO (Biotechnology Innovation Organization),
SIFMA (Securities Industry and Financial Markets Association),
Nasdaq, National Venture Capital Association, American
Securities Association, dealer--Equity Dealers of America, and
TechNet.
It is time for Congress to advance a broader capital
formation agenda. Let us continue to build upon the success of
the bipartisan JOBS Act by further modernizing our Nation's
securities regulatory structure to ensure a free flow of
capital, job creation, and economic growth. It is time to get
the Federal Government working to support innovation, reward
hard-working Americans, and lay the groundwork for tomorrow's
economy.
And with that, the Chair now recognizes the Ranking Member
of the subcommittee, the gentlelady from New York, Mrs.
Maloney, for 5 minutes.
Mrs. Maloney. I thank the Chairman for calling this
important meeting, and welcome to all of our panelists. This
hearing will consider 11 different bills designed to increase
capital formation. Some of these bills have been considered by
this committee before, while others are new proposals that we
are seeing for the first time.
One bill in particular, H.R. 5054, which is the XBRL bill,
is something I have expressed strong opposition to, and I
continue to believe this proposal will harm, not help, capital
formation, especially for small companies. Structured data like
XBRL has enormous potential to improve our financial markets.
It is the wave of the future, to make them more efficient, more
transparent, and more accessible to ordinary investors.
Structured data puts all public companies, large and small,
on a level playing field by making it easy for investors and
analysts to quickly download standardized financial statements
for an entire industry, and immediately start making cross-
company comparisons to identify the best performers. This will
enable investors to more easily identify those small companies
with innovative business models that are true diamonds in the
rough.
Ultimately, this makes our markets more efficient and our
economy more productive, and helps small businesses. So I am
still very concerned about a proposal that would completely
exempt over 50 percent of all public companies from the
requirement to file their financial statements using the
efficient XBRL model.
Another bill, H.R. 5756, would make it more difficult for
shareholders to influence the management of the companies that
they own. Currently, the shareholders can re-file a proposal,
which will get voted on at the company's annual meeting. If it
received at least 3 percent of the vote the first time it was
submitted, 6 percent the second time, 10 percent the third,
H.R. 5756 would make it more difficult for shareholders to re-
file proposals by raising this threshold to 6, 15, and 30
percent.
Oftentimes these proposals that the shareholders put
forward help the companies grow, they are innovative ideas.
According to a letter from the Council of Institutional
Investors, and I quote, ``It often takes several years for a
proposal regarding an emerging issue to gain enough traction
with investors to achieve double-digit votes,'' end quote. But
they go on to note that, ``In many cases, these proposals
eventually receive substantial support, leading to widespread
adoption by companies,'' end quote.
So cutting off these shareholder proposals on emerging
issues could prevent positive long-term changes from being
adopted.
Finally, H.R. 5877, introduced by Mr. Emmer, would allow
for a new type of exchange specifically for small companies, a
so-called venture exchange. I am certainly not opposed to the
concept of a venture exchange, but I--I think it is important
to get the details right. In particular, the bill would exempt
any stocks traded on a venture exchange from State securities
laws, which has historically only been allowed for larger, more
mature companies that trade on full national securities
exchanges.
I will be interested to hear from our witnesses on whether
this State preemption is truly necessary for venture exchanges
to be successful, or if there are alternatives that could
achieve the same goal without State preemption, which is always
contentious.
As I noted earlier, many of these are new proposals that
this subcommittee has not considered before, so I am very eager
to hear the testimony today.
And before I yield back, I would like to place in the
record several letters that industry representatives have asked
me to put in the record, one from the Council of Institutional
Investors, one from Morningstar, one from OTC Markets, and XBRL
US. I ask unanimous consent.
Chairman Huizenga. Without objection.
Mrs. Maloney. And I thank very much the Chairman. I look
forward to the testimony, and I yield back. Thank you.
Chairman Huizenga. The gentlelady yields back. We too are
looking forward to this testimony.
With that, I would like to recognize the gentleman from
Illinois, the Vice Chairman of this subcommittee, Mr. Hultgren,
for 5 minutes.
Mr. Hultgren. Thank you. Thank you, Chairman Huizenga, for
convening this hearing. Access to capital markets in job
creation is incredibly important in my district, and this
subcommittee has the key responsibility of making sure the U.S.
capital markets remain competitive.
I believe that it is extremely important for us to continue
this work. I would also like to thank our witnesses for their
work on the recent report Expanding the On-Ramp recommendations
to help more companies go and stay public. The experts we have
before us today will be important partners as we craft more
legislation in the spirit of the JOBS Act.
I know the JOBS Act has made a meaningful impact in
Illinois, and I am eager to hear how Congress can do more to
spur capital formation. The Encouraging Employee Ownership Act,
which I sponsored with John Delaney here in the House, will
soon be on its way to the President's desk for a signature, and
I am hopeful to work on new legislation to help with job growth
in Illinois.
And as has already been stated, and I know will be stated
multiple times, we can't lose sight of the fact that the number
of public companies today is about half what it was 20 years
ago. We went from about 8,000 public companies in 1996 to some
4,400 public companies today. We need to learn more why this
is, and how Congress can help change the trajectory.
Thank you, and I yield back.
Chairman Huizenga. Gentleman yields back. Today we welcome
the testimony of a large panel, but we think--we wanted to get
a cross-section on a number of things to--and issues to--to
deal with today.
First and foremost, we have Mr. Brett Paschke, the Managing
Director and head of capital markets for William Blair, on
behalf of the Securities Industry and Financial Markets
Association, or SIFMA.
Next we have Mr. Edward Knight, Executive Vice President
and General Counsel for Nasdaq OMX.
Next we have Mr. John C. Coffee, Jr., who is the Adolf A.
Berle Professor of Law at Columbia Law University--or, Law
School.
Next we have Mr. Barry Hahn, Chief Financial Officer of
GlycoMimetics, Inc., on behalf of the Biotechnology Innovation
Organization, or BIO, organization.
Next, we have Mr. Barry Eggers, a Founding Partner of
Lightspeed Venture Partners on behalf of the National Venture
Capital Association.
Tyler Gellasch is next, who is the Executive Director of
the Healthy Markets Association.
And last but not least, Mr. Tom Quaadman who is the Vice
President of the Center for Capital Markets Competitiveness for
the U.S. Chamber of Commerce.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony. Simple math says we have
35 minutes of testimony in front of us here, so feel free, if
you have the ability to shorten that up, so we can get to
questions, that is--that is fine, but it is your 5 minutes.
And with that, Mr. Paschke, you are recognized for 5
minutes.
STATEMENT OF BRETT PASCHKE
Mr. Paschke. Thank you. Chairman Huizenga, Ranking Member
Maloney, and members of the subcommittee, thank you for the
opportunity to testify today on the importance of preserving
the vibrancy of our public capital markets. My name is Brett
Paschke, and I am the Head of Equity Capital Markets at William
Blair testifying today on behalf of SIFMA.
I joined this industry because I wanted to help business
founders raise capital to build companies, invent products,
solve problems, cure diseases, create jobs, and provide wealth
creation opportunities for the investing public. All these
years and many deals later, I am still motivated and inspired
by the opportunity to help our clients achieve their missions.
On the Capital Markets side of William Blair's business,
for which I am responsible, we are best known for serving the
needs of small and mid-cap growth companies, including many
innovative leaders in technology, health care, and life
sciences. Over the last 10 years, we have been an underwriter
on approximately 20 percent of all U.S.-listed IPOs. I will do
my best to bring these perspectives and experiences to the
subcommittee today, as I did in serving on the task force that
put together the recommendations that ultimately created the
JOBS Act.
I still believe, as I believed then, that no single policy
change will reverse the decline in public listed companies or
unlock the IPO market. The authors of the JOBS Act understood
this, and wisely took a holistic approach to improving capital
formation. Policymakers today should take on our present
challenges with a similar mindset.
It is difficult to overstate the changes that have occurred
in U.S. public capital markets over the last 20 years. An
explosion in private funding, the rise of index and passive
investing, electronic trading, hedge funds, consolidation, and
regulation have all played a role in reshaping our markets.
Unfortunately, not all of these changes have been positive.
As has been noted often, the number of publicly listed
companies in the U.S. has fallen by almost 50 percent since
1996. The explosion of private capital markets has allowed
companies to grow their businesses and valuations without ever
tapping public markets.
It is worth discussing why this evolution matters. One
important implication is that many startup companies are being
built to be sold as opposed to being built to be independent
public companies. This often does not lead to the same level of
expansion and job growth with a long life as an independent
public company does.
Another important implication is that access to the private
markets is limited to a much smaller group of high net worth
individuals and institutions, effectively excluding retail
investors from the value creation that occurs within these
opportunities. Our public markets provide much greater access
to wealth creation, from direct retail investing to the mutual
funds that manage money on behalf of individuals, retirement
plans, pension funds, and endowments. Indeed, the need to
support our public capital markets is why SIFMA and a broad
coalition of stakeholders joined together recently to produce a
report on these topics.
We also support many of the draft bills that have been
released alongside this hearing, and, in particular, the draft
legislation which would extend the EGC (emerging growth
company) on-ramp from 5 to 10 years.
The JOBS Act's on-ramp of tailored financial reporting
requirements and auditing and accounting standards greatly ease
the burden for smaller companies going public. Providing a
longer runway for companies to scale up to the full reporting
requirements should incentivize more issuers to go and stay
public. We also have the benefit now of having seen companies
operate under these rules and investors react to them for 5
years, which can inform that extension.
Another critical topic to explore is the provisioning of
research on publicly traded companies, which I believe is one
of the most important and least understood facets of our public
capital markets. At William Blair, we provide sell side
research for over 600 public companies, with a focus on small
and mid-cap stocks.
SEC (U.S. Securities and Exchange Commission) Rule 139
provides a safe harbor for research produced by broker-dealers
participating in distribution if the issuer is a large
reporting company under the `34 Act. We feel that this safe
harbor should be extended to smaller issuers as well.
In conclusion, I would flag that policymakers certainly
have a challenge before them, in improving the vibrancy of our
public capital markets and balancing investor protections. But
the U.S. capital markets are the envy of the world and worth
the effort to preserve. SIFMA and its members stand ready to
assist the committee and the SEC in this important endeavor,
and I look forward to your questions.
[The prepared statement of Mr. Paschke can be found on page
102 of the Appendix.]
Chairman Huizenga. Thank you very much for your testimony.
With that, Mr. Knight, welcome back and you are recognized for
5 minutes. And if you can make sure that microphone is on and
close to you. Thanks.
STATEMENT OF EDWARD KNIGHT
Mr. Knight. Yes. Thank you, Mr. Chairman and Ranking Member
Maloney. I am Ed Knight, I am the Chief Legal and Policy
Officer at Nasdaq. And the question before you today is: How
can we ensure the continued success of the U.S. public company
model? When we think about that at Nasdaq, we go back to the
beginning of our history in 1971, where we were the first in
the world to have an all-electronic market with enhanced
transparency through technology to protect investors.
Many thought we would fail. Many were against it, but the
laws in the United States and regulations were flexible enough
to allow it. We did succeed, and today we have 2,977 highly
innovative entrepreneurial companies creating jobs and growing
the economy every day. Among those companies are the five
largest operating companies on the globe.
But at the core of our DNA is working every day to make a
market for early stage companies, high-growth companies that
will be the future Amazons, Googles, and Microsofts.
A little over a year ago, we looked at the question of the
vibrancy of our markets and found that they were not very
attractive to entrepreneurs, and very importantly, they did not
meet the needs of individual investors who were often locked
out of investing in these early stage, high-growth companies.
We looked at what were the possible solutions, we consulted
experts from around the country, and we put together a number
of proposals that we are proud to say are embedded in some of
the legislation before you today.
This legislation does not represent radical change. We are
not suggesting that you defund the SEC. We like the SEC, we
want you to fund the SEC. We are not suggesting that we depart
from the materiality disclosure standard that is embedded in
U.S. law. These are largely technical changes. Some of these
changes have been proposed by the SEC or adopted by the SEC
through regulation. Some of them are extensions of the JOBS
Act.
And frankly, we do not believe these are partisan issues.
The JOBS Act was signed in a Rose Garden ceremony by President
Obama. I served 7 years in the Clinton Administration Treasury
Department. Such considerations are not relevant to this
debate, in my view.
The changes that are being proposed are part of the natural
process of updating rules based upon experience with
regulation. We work with these rules every day. They directly
regulate our economy. In some cases, we have worked with them
for decades. We know what works and what doesn't. The economy
evolves rapidly and our regulations should also evolve with it.
If these changes are merely technical, why do we care? Why
do you have this coalition that supports it so strongly? Is
there some hidden agenda here? I would submit that by moving
forward with these ideas, all that Congress is doing is
signaling a willingness to work alongside entrepreneurs to make
the markets stronger while preserving investor protection. This
builds business confidence, which is the cheapest form of
economic stimulus.
I want to just highlight a couple of elements of the bills
with--before you. The venture exchange legislation addresses an
issue that everyone recognizes that works with the markets, and
that is they are designed to help large companies trade their
securities. They are not designed to help small companies do
it.
The market structure that applies today fragments liquidity
across 50 or more venues. The venture legislation would allow a
company, not a stock exchange, not a broker-dealer, but the
company to elect to have all that liquidity trade at one place
so we would have deeper liquidity and these markets would work
better for smaller companies.
The 10-Q optionality bill, I would submit, would enhance
disclosure by putting before investors an enhanced financial
disclosure. At this moment, we have a two-part disclosure
regime in which companies file an 8-K with their financial
results, and a few weeks later a 10-Q that no one reads.
Give them the option, as under the venture legislation--the
company the option to consolidate the material changes since
their last quarter along with their financial disclosures,
instead of making them file a 10-Q--which most people do not
read--what moves the market is the 8-K, not the 10-Q.
The selling disclosure legislation would also enhance
disclosure. We have disclosure about long holdings, but not
short holdings.
Much of the other legislation, as I said, is--are
extensions of ideas that the SEC has proposed in the Obama
Administration that have been part of regulations that had been
adopted by the SEC and would codify those.
We think they are modest.
Chairman Huizenga. Sorry--sorry, Mr. Knight, your--
Mr. Knight. Thank you.
[The prepared statement of Mr. Knight can be found on page
94 of the Appendix.]
Chairman Huizenga. Your time has expired. I am going to try
and keep a tight rein on that for this. And with that, Mr.
Coffee you are--you are afforded 5 minutes.
STATEMENT OF JOHN COFFEE
Mr. Coffee. OK. Thank you Mr. Chairman, Ranking Member
Maloney, and fellow members of the committee.
We have essentially been asked to comment on 11 proposals.
On overview, I think these proposals range the gamut from
promising ideas and useful studies that should be conducted to
ideas that are irredeemably bad and would degrade our
disclosure system.
But all of these 11 ideas come from one common source: This
Expanding the On-Ramps study. And it in turn, in connection
with the JOBS Act, is based on the same idea that moved the
JOBS Act. That somehow the SEC discourages IPOs because of
overregulation and very costly rules.
I think the vast majority of professors who study this
area, of law professors and finance professors, think that is
very overstated and borders on a myth. It is a myth that gets
perpetually--continually asserted, and I think we should
understand what reality looks like.
The world changed dramatically in 2001, when the high hot
issue bubble crashed. We have never approached that level of
IPOs since. It was like the falling off of a cliff. And what
caused this? Well, we should remember that underregulation can
be even more dangerous than overregulation. Underregulation
caused investors to flee the new issue market, and we have
never gotten many of them back.
The JOBS Act didn't really cure this problem at all. IPO
volume continued to fall, and in 2015 and 2016 it was lower
than in years before the JOBS Act. Although there has been some
comeback this year in high-tech offerings, the smaller offering
continues to approach extinction. Small offerings are both few
and generally unprofitable.
Now, if all this were caused by high regulatory costs and
SEC overregulation, then the decline in IPOs would be a
uniquely American problem caused by American overregulation.
But it is not an American problem. It is a worldwide problem.
IPO volume has declined even more dramatically in Canada, and
the decline in Europe and Japan is as great as the decline in
the U.S. of IPOs by number of offerings.
And because Canada has no national securities regulator,
there was no overregulating national adviser. There are 11
different provinces and IPOs are virtually extinct in Canada
currently.
Something else is causing the problem. What else is there?
I will give you two principal causes, although there are
others. They would be, first, private companies find it easier,
quicker, and cheaper to raise capital in robust private markets
where litigation risk is much, much lower, private firms can
raise capital in these markets in weeks, not months, and with
much less diversion of executive time. That is reason one.
Two, IPOs for smaller firms have been consistently
unsuccessful for a sustained period. Jay Ritter, a prominent
finance economist, in his latest study finds that about 80 to
90 percent of these small offerings are characterized by
negative earnings-per-share in subsequent years.
In short, small issuers remain unprofitable, and as a
result analysts and underwriters are coming to shun these
deals. Academic research suggests that the relative
disappearance of small IPOs is probably because these smaller
issuers cannot gain the economies of scale and scope that are
increasingly necessary to compete in a globalizing market.
Is there a crisis? I suggest not. A company can get capital
easily in the venture capital market, and the smaller firms,
although I wish they could find a way to do an IPO, can get
successful exit strategies through the merger market. Frankly,
the smaller firm gets a much higher price in the merger market
than in the IPO market, and thus it will go in that direction.
Given these problems, I don't think we should relax
disclosure and Government standards to encourage more small
IPOs that are already losing money.
In my last half minute, let me give you my nominations for
the best and worst ideas among these 11. I think one truly
promising idea is venture exchanges, but it has a very flawed
execution here. The way this bill is drafted, it looks like a
fly by-night group could set up its own venture exchange
tomorrow, and the SEC would be in the position of an overworked
fireman racing from fire to fire to put out the various crises.
And if you think that is not possible, you should look at
what is going on in the cryptocurrencies exchanges, where we
see some very disreputable people working behind exchanges. The
idea that I think is most problematic--and I will stop here--is
the idea of substituting a press release for the form 10-Q.
That would really end our disclosure system as we know it
today.
Thank you.
[The prepared statement of Mr. Coffee can be found on page
42 of the Appendix.]
Chairman Huizenga. Thank you, the gentleman's time has
expired. And with that, I owe Mr. Brian Hahn an apology. I was
going to my list, and Barry Eggers and Brian Hahn sitting next
to each other. So with that, Mr. Brian Hahn, you have 5
minutes.
STATEMENT OF BRIAN HAHN
Mr. Hahn. Good morning, Chairman Huizenga, Ranking Member
Maloney, and members of the Capital Markets, Securities, and
Investments Subcommittee.
My name is Brian Hahn, and I am the Chief Financial Officer
of GlycoMimetics, a 48-employee public company based in
Rockville, Maryland. I am happy to be here today to discuss
proposals to help fuel capital and growth, and how they will
help GlycoMimetics and other early stage biotechnology
companies in our pursuit to fund the next generation of
treatments.
The ability of growing business to access the public
markets is of paramount importance to biotechnology innovation,
because investment capital is the lifeblood of scientific
advancement. It can cost over a billion dollars to develop a
single treatment, and most companies spend more than a decade
in the lab before their first therapy is approved.
During this long development process, virtually every
dollar spent by an emerging biotech company comes directly from
investors. To that end, the JOBS Act has been an unqualified
success, enhancing capital formation and allowing 260
biotechnology companies to focus on science. It certainly
helped pave the way for GlycoMimetics' IPO in January 2014, and
has helped us nearly double our employee headcount and move
three new drug candidates into human clinical trials.
Given the long development timelines and substantial costs,
legislation being considered today that would extend the JOBS
Act on-ramp and provide other relief for emerging innovators
would be extremely beneficial for growing companies like mine.
When GlycoMimetics rolls off its EGC status in a few short
months, we will lose the key JOBS Act exemption and will be
subject to the erroneous and expensive disclosure burdens as
mandated by Sarbanes-Oxley Section 404(b).
While a private company, our audit fees were just $40,000 a
year. After our IPO, our audit fees increased by roughly
$500,000 due to the existing regulatory environment from public
companies. Absent additional exemption, we expect our SOX
404(b) compliance obligations to alone more than double our
cost to as much as $1.2 million annually starting in January
2019, when our 5-year exemption ends.
I would like to thank Representatives Kyrsten Sinema and
Trey Hollingsworth in this subcommittee for their efforts in
drafting H.R. 1645, the Fostering Innovation Act. This bill
recognizes that a company that maintains the characteristics of
an EGC is very much still an emerging company, even if it has
been public for longer than 5 years. I am hopeful that the
Senate will also recognize the importance of the Fostering
Innovation act in a timely manner before any more companies are
rolled off the JOBS Act provision and subject to the rules of--
burdens.
In addition, draft legislation being considered by the
committee today that expands the SEC's definition of non-
accelerated filer would also help small business innovators
avoid the burdens of Section 404(b). Under current SEC rules,
companies qualify both as an SRC and a non-accelerated filer if
their public float falls below 75 million. SRCs benefit from
scaled obligation under regulation SK and regulation SX, while
non-accelerated filers are exempt from Section 404(b).
Increasing the public float cap and adding an annual revenue
test would be tremendous benefit to small business innovators.
Another issue of concern for small public companies is
proxy advisory firms. I want to thank Congressmen Sean Duffy
and Gregory Meeks for their bill, H.R. 4015, the Corporate
Governance Reform and Transparency Act, which passed the House
last December on a bipartisan basis.
The role of proxy advisory firms has grown to have an
outsized influence in the decisionmaking processes of emerging
biotechs and their shareholders. When a proxy firm issues a
recommendation that is not applicable to an emerging biotech
and remains unwilling to consider alternative approaches or
methodologies, it can harm a company's relationship with its
shareholders, and distract management from the core business of
the company.
I would also like to thank Representative Duffy for H.R.
5756, which would adjust certain resubmission thresholds for
redundant shareholder proposals that burden many small
biotechs.
I would like to take a moment to discuss the problem of
manipulative short-selling and express my support for a
disclosure regime for short sellers. The unique business model
for groundbreaking innovation leaves emerging biotechs
particularly vulnerable to stock manipulation.
BIO acknowledges that appropriate shorting can support the
stable, liquid markets that fuel the growth of emerging biotech
innovators, however, we strongly believe that current lack of
transparency related to short positions is enabling trading
behaviors that unfairly harm growing companies, long-term
investors, and most importantly, patients.
Finally, I would like to mention XBRL compliance, an issue
that seems technical but can have significant costs for small
companies like mine. The Extensible Business Reporting Language
is an attempt to make it easier for investors to compare
financial data, but with--as with many of the issues I have
discussed today, it disproportionately affects small issuers
due to its one-size-fits-all approach.
Cost of compliance can be significant. GlycoMimetics is
forced to spend $50,000 to $60,000 every year on XBRL and
without much benefit to investors. Biotech investors are less
concerned with the reporting metrics that XBRL compares and
more concerned with the actual science of the company and their
path forward toward FDA (Food and Drug Administration)
approval, and ultimately getting the drug to the market.
BIO appreciates, therefore, Congressman David Kustoff's
legislation, H.R. 5054, the Small Company Disclosure
Simplification Act that exempts EGCs from XBRL reporting
requirements and provides temporary XBRL exemptions for
companies with revenues below $250 million.
I would like to thank the subcommittee for considering
further initiatives for small business innovators, and I look
forward to answering any questions that you may have.
[The prepared statement of Mr. Hahn can be found on page 88
of the Appendix.]
Chairman Huizenga. Thank you for that. Mr. Eggers, you have
5 minutes.
STATEMENT OF BARRY EGGERS
Mr. Eggers. Chairman Huizenga and Ranking Member Maloney,
thank you for the opportunity to testify here today on the
important subject of capital markets reform and encouraging
more U.S. public companies.
My name is Barry Eggers, and I am a founding Partner at
Lightspeed Venture Partners, a venture capital firm that
invests in and works closely with cutting-edge technology
startups. We invest in areas such as information technology,
big data, cloud computing, networking, eCommerce, and consumer
marketplaces. I am here in my capacity as a board member of the
National Venture Capital Association.
Let me begin by explaining why venture capitalists care
about policy issues pertaining to our public capital markets.
There are three main ways that venture capitalists exit an
investment. Number one, a merger or acquisition; number two, an
initial public offering, or IPO; or number three, a business
failure.
While the vast majority of venture capital investments are
in private emerging growth companies, or EGCs, recent research
has shown that nearly half of all companies that have gone
public since 1979 have been backed by venture capital. In other
words, VCs build the product for the IPO pipeline.
To provide a little background on venture capital, we are
investors in the Nation's startups. At Lightspeed, for
instance, we invest early in a company's life, often when there
are a few founders trying to build out a new concept.
We work with these entrepreneurs to grow the company into a
successful enterprise, including providing mentorship and
strategic advice, helping them hire new employees, introducing
them to potential customers, and providing additional rounds of
financing to fuel continued growth. This work typically takes a
lot of patience over a long time horizon. At Lightspeed, the
average time to IPO from first investment is roughly 8 years.
I have been a venture capitalist for over 2 decades, and in
the technology ecosystem for over 30 years. When I first got
started in the business, the goal of most entrepreneurs was an
IPO, and many companies were successful in that endeavor, such
as Maker Communications, a company I invested in that went
public in 1999. Maker had quarterly revenue of $3 million prior
to their IPO, and went public at a valuation of $230 million.
Twenty years later, many entrepreneurs now view the public
markets as hostile to small-cap companies and would rather have
the certainty of a trade sale than deal with the challenges,
complexities, and costs of running a public company.
And for those that do go public, they often do so when they
have grown to a size that can better bear the burdens that come
with being public, such as Nimble Storage, another company I
invested in which went public in December 2013, and is
representative of the first batch of EGCs to go public under
the 2012 JOBS Act. Nimble had quarterly revenue of $33 million
prior to their IPO, which valued them at $1.5 billion; over 10
times larger in revenue and six times more valuable than Maker.
My firm, Lightspeed, has one of the strongest track records
of IPOs since 2016. We have had seven portfolio companies go
public over the last 2-1/2 years. That is still less than 5
percent of the 145 active companies in our portfolio.
Avoiding the public markets has unfortunately become the
prevalent view among many EGC executives. The issues that
discourage EGCs from going public can be grouped into three
broad categories. Number one, the increased cost and complexity
of running a company; number two, the collapse of market-making
infrastructure, including research coverage; and number three,
the challenges presented by a culture of short-termism.
In each category, since the turn of the millennium, policy
changes and industry trends have conspired to increase the
headwinds facing small public companies. I believe there are
two significant consequences arising from the lack of IPOs and
the decline in U.S. public companies; less job creation, and
loss of investment opportunities for retail investors.
Research indicates that the lack of IPOs has cost the
economy on average about 2 million new jobs a year. From what I
have seen, many of these jobs can be the type that support
middle-class families and don't necessarily require college
degrees. Thinking, for instance, about human resources or
administration jobs, which often disappear after a merger.
A lack of IPOs has also had an impact on middle-class
retirement savings and retail investment portfolios. Think
about Amazon, Genentech, Microsoft, or Intel as examples of
companies that created exponentially more wealth in the public
markets than private markets.
The joint report endorsed by NVCA, Expanding the On-Ramp,
offers a blueprint for building off the success of the JOBS Act
and making it more attractive to be a public company. The
report considers a breadth of perspectives from company
operators, people whose job it is to facilitate public
offerings, exchanges, and investors.
While I note several policy proposals in my written
testimony, I did want to take time to reference one now. I
strongly support the proposal to allow any investment in an EGC
to be qualifying for purposes of the VC exemption definition
from the RIA regulatory regime.
Congress created both the EGC definition and the VC
exemption for similar purposes; namely, a favorable capital
formation regulatory environment for growing companies. That
secondary share purchases of EGCs are currently nonqualifying
is becoming an increasing challenge for VC funds that are
forced to choose between supporting their company's growth
while risking the significant expense and difficulty of
registration, or passing on further capital formation
opportunities for certain portfolio companies. Happy to answer
any questions.
[The prepared statement of Mr. Eggers can be found on page
63 of the Appendix.]
Chairman Huizenga. Thank you, Mr. Eggers. Mr. Gellasch, you
have 5 minutes.
STATEMENT OF TYLER GELLASCH
Mr. Gellasch. Thank you. Chairman Huizenga, Ranking Member
Maloney, and members of the subcommittee. Thank you for holding
the hearing today and for offering us the opportunity to
appear.
I am the Executive Director of Healthy Markets Association,
and our members are the pension funds and investment advisors
that folks here seem to be concerned with in the public
markets.
And today, we are here to discuss a least 11 legislative
proposals, so just let me cut to the chase: Not one of these
proposals is likely to measurably increase the investment in
public capital markets or improve the economy for Main Street,
and several of the proposals are likely to have the opposite
effect.
The reason is simple. They either ignore or affirmatively
harm investors in the public markets. From the vantage point of
an investor in the public markets, these proposals reduce the
quantity, quality, or utility of information available to them.
They increase the riskiness of a company's financials, such
as by removing required audits of internal controls. They
increase the valuation risks of the company. They increase the
costs of trading those securities. They divert investment
opportunities from the public markets by further easing limits
on private securities such as through the ventures exchange.
And they decrease corporate accountability to shareholders by
restricting shareholder proposals, by reducing access to proxy
advisors, or other reforms.
The proposals aren't offering any reason for investors to
want to put more money into the public capital markets, and so
I will argue that they will likely have the effect. I
appreciate the Chairman's focus, and many of the folks here, on
the public markets, but of course they matter. Public
securities are often accompanied by more robust accounting and
financial business disclosure practices, and that is a given.
But they are also--information about public companies,
including third-party research, is more readily available and
fairly distributed. Public securities are far more easily and
reliably valued, and really importantly from an investor's
perspective, liquidity is significantly greater. Trading costs
are significantly lower.
If we are talking about fractions of a penny a share, or a
penny a share, or maybe a few pennies a share in the public
markets, we are talking orders of magnitude greater cost for
investors in the private markets.
And frankly, that is a transaction cost. That is lost
returns for investors. Public securities are much more easily
benchmarked, such as against the S&P 500. These factors play an
important role for pension funds and investment advisors who
are fiduciaries to their beneficiaries to minimize costs and
minimize risks.
Unfortunately for them, as many have noted here, the public
markets have dwindled. The vast majority of the decrease in
public companies, 2,800 of the lost companies, were lost before
2003. That is well before Sarbanes-Oxley, and well before the
Dodd-Frank Act and its CEO pay ratio disclosures, and it was
after proposals and--that were implemented in the 1990's to
curtail private litigation.
So if those things didn't cause the decline, what did? Well
a lot of things, but most importantly, the SEC and Congress,
frankly, at the urging of many of the folks I sit on the panel
here with today, spent years digging trenches to drain capital
and companies out of the public markets, usually in the name of
promoting access to capital for small companies.
So put simply, many companies don't go public anymore
because they can do things like raising money. We talked about
the explosion of private capital; that is it. We made it so
that you can do a private offering with a Super Bowl halftime
commercial. You can do it over an internet radio ad. That was
never allowed before.
Policymakers' and regulators' obsession with IPOs is also
somewhat misplaced. Do we really think it is a good idea to
return to the 1990's, when a sock puppet can raise millions of
dollars in an IPO? Could it be that as--as Mr. Coffee alluded
to, that perhaps public investors are concerned with IPOs
because they have chronically underperformed the markets, and
that a lot of the IPOs that do come to market these days are
exits from folks like venture capital firms and--and
executives?
Do we really think that undercutting the reliability of a
company's financial reports or a company's accountability to
shareholders is going to make investors more interested? We
don't. So we offer three alternatives.
First, we share the concerns with many about the lack of
good research into small cap companies, but rather than forcing
investors to pay more for trading, as the failed Tick Pilot
suggested, how about we let investors separately shop for
research in a transparent market? To do that, we encourage you
to direct the SEC to empower investors to be able to separately
shop for the research they want and the trading services they
need.
Second, we encourage you to reduce the exemptions and
exceptions from the Federal securities laws. We should stop
digging trenches out of the public capital markets. It is time
to put down the shovels.
Third, we urge you to think about rules that promote
industry consolidation. The difference between large and small
cap companies in raising capital has a lot of reasons, and I--
thank you--I--for the opportunity speak before you, and I look
forward to questions.
[The prepared statement of Mr. Gellasch can be found on
page 67 of the Appendix.]
Chairman Huizenga. I appreciate that, and Mr. Quaadman, you
have 5 minutes.
STATEMENT OF THOMAS QUAADMAN
Mr. Quaadman. Thank you, Chairman Huizenga, Ranking Member
Maloney, and members of this subcommittee. We appreciate this
subcommittee's continued focus on issues related to business
creation and growth.
The atmosphere for business creation and the path for
growth is not what it should be. Systems that have supported
the ability of businesses to start and then grow from small to
large have not kept pace with the times or international
competition.
We have seen 10 years after the financial crisis continued
depressed business creation rates, and we continue to be
hundreds of thousands of businesses short from where we should
be, historically. We have also seen a 20-year decline in the
number of public companies and an anemic IPO market over the
same period of time. Indeed, we have seen a calcification of
entrepreneurship, where 50 percent of all business startups in
the United States are concentrated in 20 counties.
Action is needed. There are several reasons for these
problems and much needs to be done to address the situation,
and indeed some things have already been done. The JOBS Act and
the JOBS Act 2.0 measures in the Highway Bill have arrested the
decline of public companies and we have seen a modest increase
in IPOs in the 6 years since the JOBS Act passed.
S. 2155, which was passed by the House yesterday and should
be signed soon by the President, helps to restore community and
regional banks to being a Main Street business liquidity
providers. However, it is important to remember that 75 percent
of all business financing and development happens in the non-
bank financial markets.
More needs to be done and we need to reverse this
situation. That is why the Chamber and seven other trade
associations, under the leadership of Brian O'Shea, last month
issued a report on expanding the IPO on-ramp. That report
includes 22 recommendations which are centered around JOBS Act
enhancements, increased research, corporate governance and
disclosure improvements, financial reporting issues, and equity
market structure reforms.
These ideas, and many of the bills already passed by the
House, can form a core of a JOBS Act 3.0. Indeed, the bills
that we are discussing today are a good step forward. These
bills will increase liquidity, extend JOBS Act protections,
address the resubmission thresholds issue, reduce redundant
disclosures, establish venture exchanges, and generally remove
obstacles to growth.
Indeed, last month we also released a poll which shows
widespread support for these measures. Indeed, over 90 percent
of Americans agree that there needs to be a level playing field
for IPOs, and also agree that the rules of regulators should
promote growth and that all investors should benefit from them.
Additionally, over 75 percent of Americans believe that
regulators should simplify the IPO process, and they also agree
that Government policy should be geared for growth; that
support cuts across all ideological, generational, and economic
lines.
And we also can't wait because of international
competition. The China 2025 and 2050 plans are specifically
geared to make China, not the United States, the innovation
center moving forward. Also the EU, with its capital markets
union proposal--they are also looking to build out their non-
bank financial system; in fact, copying many of the things we
do here in the United States.
However, many of the Brexit-related proposals are also
specifically designed to keep American financial firms out.
Indeed, the EU also sees itself as a global regulator. Their
MiFID (markets in financial instruments directive) specifically
impacts research here in the United States, and in fact will
make it more difficult for Congress to incentivize research for
smaller IPOs.
Indeed, some things are also positive. The SEC, unlike in
2013, is a willing partner to work on these issues. But it is
important to remember that it is Congress that sets the public
policy parameters, and it is Congress that ultimately will lead
us down the road that then the regulators can help fill in the
blanks.
We look forward to working with this subcommittee on these
issues, and thank you, happy to take any questions you may
have.
[The prepared statement of Mr. Quaadman can be found on
page 112 of the Appendix.]
Chairman Huizenga. Well, ``A'' on turning in 50 seconds.
Thank you, Mr. Quaadman.
Now I--at this time, I will recognize myself for--for 5
minutes for some questioning, and clearly we heard some
contradictory things here. Mr. Hahn, Mr. Eggers, you had both
talked about--I think Mr. Eggers talked about an EGC that had
gone public, Mr. Hahn, you were talking about some of the other
biotech.
Professor Coffee had said that there really isn't a
problem, and that the JOBS Act--I--I got it down here--didn't
address the issue of IPOs and the lack of IPOs at all, and so I
am curious. Is this worth pursuing?
We are--we are looking at a--we have done a non-
legislative--but a package, but a JOBS 2.0 previously, we are
working on a JOBS 3.0, for lack of a better working title at
this point--but did we have a problem and did the JOBS Act and
these types of reforms actually address the problem?
Mr. Hahn, Mr. Eggers?
Mr. Hahn. I think the JOBS Act did--did help address these
problems. What--I am sitting here today talking about--what I
would like to see is the extension of the 5-year on-ramp,
especially for us with 404(b).
We do a third-party audit of our internal control that gets
reported directly to the audit committee. That costs us less
than $50,000 a year. To have--and I have a proposal, since next
we are going to roll off of that from our audit firm, $650,000
a year for our audit firm to audit those results. And the third
party will go from $50,000 up to $150,000 a year.
And 98 percent of our balance sheet is still cash. We have
no revenues yet, we still only cut 125 checks a month, we still
only have two check signers. So for that additional $650,000 to
$800,000 in added expense, it doesn't add any more safety to
investors. We have good controls, we have been audited. So,
from my standpoint it is the extension of the EGC until we
are--we are producing revenue.
Chairman Huizenga. OK, Mr. Eggers? Can you make sure you
hit your mic?
Mr. Eggers. I do believe it has helped. I have seen it
first-hand. I mentioned Nimble Storage, which was one of the
first companies to go out under the JOBS Act in December 2013.
They filed confidentially, they were able to work under EGC
status.
One of the problems, though, is that an EGC status doesn't
last very long, potentially because you can become a large
accelerated filer very quickly at the $700 million threshold.
When these companies go public, they are very volatile. I
looked at the last seven companies that we have taken public
since 2016, and in the first 6 months of trading the difference
between the high price and the low price was on average 68
percent. So many of those lost their EGC status.
Chairman Huizenga. OK. And I think it was Mr. Paschke who--
you had talked a little bit about providing a longer runway? Is
that correct? Is that relative to what Mr. Eggers was talking
about?
Mr. Paschke. Yes, so there are two things I would say.
First, why do investors care? One is IPOs have actually
outperformed the S&P 500 in 2015, 2016, 2017, and 2018 year to
date. So I did want to get it out there that IPOs in--are in
fact working and a good vehicle for wealth creation.
Extending the on-ramp, to me--and as I mentioned in my
opening statement, I was part of the initial set of
recommenders on the task force--there is a timeframe on them to
see how it worked. To see if the market reacted, if there was
pushback from investors. If some of the disclosure allowances
led to problems or information issues. As we sit here now, 5
years later, there really haven't been issues. Virtually every
company that has been eligible has taken advantage of those
allowances and there has been really no pushback or valuation
differential afforded them by the market.
So it feels like the extension is appropriate for existing
public companies who already became public, but also helps
incentivize others to--
Chairman Huizenga. Real quickly because I think this is one
of the things that Professor Coffee brought up. He basically
said that there is enough money out there. We don't need the
IPOs, venture--is there enough cash out there? What is the--
what is the purpose for accessing it?
Mr. Paschke. I think that is actually one of the most
important points. There is a lot of money out there, it is
privately funded. It is being invested by high-net-worth
individuals in venture capital firms, so all the value creation
is accruing to very few people.
So in an era where income inequality and wealth equality is
such a topic, I think we need to be encouraging greater access
to that wealth creation and there is just no question that the
public markets, through all its vehicles, is the number one way
to do that.
Chairman Huizenga. Well, it is interesting you say that.
I--literally, I will read verbatim what I had written down: How
do common investors, non-high-net-worth investors access the
upside of market growth? That in my mind is one of the major
elements in this--in this entire thing. My time is up and I--
and I am going to be a little generous here with the
questioning since we have a few people up here. Because I real
quickly--I would like Mr. Knight to address 5756.
Is there an issue or a problem? And what do you hear from
those public companies who work with or are on the--on Nasdaq
with some of those activist shareholders and some of their--
some of their proposals?
Mr. Knight. Well, yes. Shareholder activism is a major
factor in the public markets. It is a reason why some
entrepreneurs choose not to go public. Shareholders should be
active. Shareholders should be engaged. But it is the short-
term focus, often of activists, that distorts the market. And
that is why we support legislation that would provide more
transparency about shorting the market.
We think that would be healthy. And--but activism is a
major factor in the market today and it--it is something many
are concerned about.
Chairman Huizenga. So appropriate for it to be addressed?
Mr. Knight. Yes. Yes, sir.
Chairman Huizenga. All right, my time is well-exposed--
expired. With that, the Ranking Member. Or the--
Mrs. Maloney. Thank you. I would like to welcome John
Coffee back to the--to the panel. And I would like to ask you
about the venture exchange bill which you called promising. As
I mentioned in my opening statement, I am not opposed to this
concept, but I have some concerns about preempting State
securities laws. And is there a way to make the venture
exchange model work without exempting State laws, or preempting
State laws?
Mr. Coffee. Right now, the alternative to a venture
exchange is the alternative trader, ATS system, which has a
number of companies trading over the market. Venture exchanges
may prove to be a more interesting, more novel, more creative
alternative. We don't know until we try. But we have seen that
under regulation ATS, we have small companies trading in the
over-the-counter market without a preemption of State blue sky.
So it is possible to have entrepreneurs trade over-the-
counter small companies even though they are subject to State
blue sky regulation. And frankly, this is the key point about
this, when you have a venture exchange, you are going to have a
thin market. Thin markets invite pump and dump schemes. You
need resources to monitor those pump and dump schemes, and the
SEC tends to focus on bigger issues, bigger higher-profile
cases. And we need the States which are very familiar with some
of these smaller companies, and I think are better monitors for
them.
That is the problem about preemption. The other problem I
was pointing to was that the way this statute is written, the
SEC has to shut you down. You can start trading as a venture
exchange until the SEC comes in and says you must stop. I think
that puts the SEC under undue pressure. They have to run like a
fireman from fire to fire and I think you will get fly-by-night
operators under that kind of structure.
But the idea I still think is promising.
Mrs. Maloney. Would anyone else like to comment on it?
Just--
Mr. Gellasch. Thank you--thank you, Congresswoman, I would.
I think that there is actually a reason why pension funds and
investment advisors aren't beating down the door for more IPOs
and pulling companies into public markets. And frankly, I think
the venture exchange is likely to just make it easier for the
existing investors and executives of those companies to exit.
But it is not going to be the thing that pulls public pension
funds or investment advisors or fiduciaries into those markets.
So it is not actually going to have that effect. It is not
going to be able to overcome the costs or risks associated with
those private securities.
Mrs. Maloney. Anyone else?
Mr. Knight. Yes--
Mr. Quaadman. Yes, Ms. Maloney. I am sorry, Ms. Maloney, we
are supportive of it, and I think one thing to remember here is
that the small investor's been shut out. The retail investor's
been shut out. This is a platform where the SEC can put very
robust rules in place for oversight, allow for concentration
liquidity, allow for smaller investors to participate in this,
and it is just another way and another venue of trying to drive
liquidity to smaller public companies.
Mrs. Maloney. Anybody else? Comments?
Mr. Knight. Yes, I would just point out the SEC has 6
months to license these exchanges. They have been licensing new
exchanges quite rapidly. We now have 13 of them in the United
States, no other country has that many. With regard to Nasdaq
and the venture legislation, we would be able to trade these
securities because our listing standards are already blue sky-
exempt by statute and regulation.
So this would encourage more competitors to Nasdaq which I
don't think is a bad idea, we are not against competition.
And--but I think there is a way to do it. Professor Coffee
definitely has a point that State securities regulation plays
an important role. But with regard to the New York Stock
Exchange and Nasdaq, right now we are exempt.
Mrs. Maloney. OK, I would like to also ask about the XBRL
bill. And I would like to ask Mr. Gellasch here, your
organization represents investors and I believe that it is the
investors who benefit the most from a structured data like
XBRL. Do you think that exempting over 50 percent of public
companies from the requirement to use XBRL will harm investors
and ultimately transparency? And I would also like to ask Mr.
Coffee and anyone else, Mr. Quaadman and others, to respond.
Mr. Gellasch. Thank you for the question. I think I am
struck by the dichotomy of two--of different proposals here. On
the one hand, we are saying that we want to encourage research
into small companies and the utility of that research into
small companies. On the other hand, we are actually going to
make that research less useful for the people who read it. XBRL
is common and it is something that folks need to have to
compare investment opportunities.
And so one of the things that is really interesting here
is, we are saying on the one hand, we need to do things to
promote research into small companies. And on the other hand,
there is a proposal to expressly go in the opposite direction.
Mrs. Maloney. Mr. Coffee?
Mr. Coffee. Just one sentence. XBRL is a tool, a cost-
saving tool. We want analysts to study the smaller company.
They are not doing it now because the costs of benefits don't
work out for them. If you reduce the cost, you might get more
analyst attention to smaller companies. So, I think it will
encourage analysts to look at smaller companies.
Mrs. Maloney. Yes, Mr. Quaadman?
Mr. Quaadman. Yes, thank you Ms. Maloney for that question.
First off, we support use of interactive data like this for
investors. However, XBRL, from studies I have seen, only 11
percent of investors actually use it extensively. That is a CFA
study. So, this would actually allow for companies to have the
option to deal with this--to deal with the cost and the like.
But I think we also have to understand, too, XBRL is a 1998
platform, as we are increasingly going into a block chain
world. So, if we can go into a block chain world where you have
a common electronic ledger where everybody is connected with,
that is much more transparent and easier to use in an XBRL
system. So, I think we also need to be very open to other
innovative ways of disseminating data.
Mrs. Maloney. My time is expired. Thank you. I thank all of
the panelists. It was very interesting, thank you.
Chairman Huizenga. With that, our Chair of the Oversight
and Investigations Subcommittee, the gentlelady from Missouri,
Mrs. Wagner, for 5 minutes.
Mrs. Wagner. Thank you, Chairman Huizenga and I think my
friend, the gentleman from Arkansas for yielding me the
opportunity to move ahead of him.
Mr. Quaadman, welcome back. In your testimony, you noted a
2011 report of the IPO task force found that 92 percent of
public company CEOs said that the administrative burden of
public reporting was a significant challenge to completing an
IPO and becoming a public company. How does my draft
legislation on 10-Q reporting help to alleviate that burden?
Mr. Quaadman. Yes, so, first off, let us remember your bill
doesn't hide any information. That information is already put
out there publicly. It allows companies to do it in a different
way. So, I think if you take your bill, you take some of the
legislation here, in terms of shelf registration--
Mrs. Wagner. Right.
Mr. Quaadman. Other things such as company file, which we
have proposed in the past. It allows for information to be put
out there for investors without being done in a redundant
fashion, and then avoiding those costs. So, this isn't hiding
the ball for anybody.
Mrs. Wagner. Thank you. Mr. Knight, your colleague, Tom
Whitman, testified before this committee, last year. And noted,
the Nasdaq believes it is long past time to move away from a
one-size-fits-all approach to corporate disclosure.
In fact, Mr. Whitman suggested eliminating the archaic 10-Q
form altogether because it was duplicative and bureaucratic.
Can you quickly walk committee members through some of the
duplicative standards that exist between the current Form 10-Q
and company earning releases?
Mr. Knight. Well, the--the premise behind this is, I would
quote a famous technology pioneer, Grace Hopper, who was an
Admiral in the Navy who said, ``The most dangerous phrase in
the English language is, we have always done it this way.'' And
there is a redundancy to disclosure in our system today.
But it is undergirded by a principle of materiality, and we
think what you have proposed would preserve that materiality,
while also the key financial disclosures that are required
under Reg S-K and that come out in an 8-K and which is what
really moves the market. When you look at the Nasdaq market, on
any day, where there are substantial movements is where someone
has had an earnings release and put out their 8-K with their
full financial disclosure.
Now, full--a few weeks later, they make a--a 10-Q filing.
That filing has a number of things in it, some of it redundant
to the K, but any material change since the last disclosure
would be in that, we would combine that through your
legislation in one disclosure.
It would be at the option of the company and I think that
is important that several pieces of legislation before the
subcommittee restore some role for the listed company in how it
is regulated and give them some choice.
Mrs. Wagner. What--what are the costs and resource burdens
on companies that are required to file 10-Q forms with the SEC?
Mr. Knight. Well, I--when you are talking about cost, there
is a dollar cost, but then there is, what I referred to in my
testimony and my statement, the signaling that goes on through
regulation to the economy, to the business community, about the
attitude of regulators in Congress toward what they are doing
on a day to day basis.
When they see things that don't make sense--when they see
redundancy and they think about going public and that--that is
a very long-term commitment they are making. Do they want to be
part of that system? When you signal that you are making the
system and the technical aspects more rational, they get more
confidence about jumping into that.
So, it is more than just the--the cost in dollar terms. It
is rather, the system is being run in a rational way that
reflects the fact that these are the companies that are
creating the jobs and the growth in this country.
Mrs. Wagner. Are press releases sufficient for investors to
obtain the information they need to make form--informed
investment decisions?
Mr. Knight. No, no. It needs to be prescribed, but the
current system, I would argue, is redundant. And the Qs are
really not studied in the same way the K is. So, why not use
that disclosure to put everything in it, again, at the
company's option.
Mrs. Wagner. Great, thank you. I yield back the remainder
of my time.
Chairman Huizenga. The gentlelady yields back. With that,
the gentleman from Georgia, Mr. Scott, is recognized for 5
minutes.
Mr. Scott. Chairman, I am sitting here listening to all of
you and you have such great knowledge and each of your
testimonies has been very informative, but there is some cross-
section going on here on one side or the other.
And it fits it with some of the concerns that I have. And I
want to start by saying that--I want to emphasize that, both
the Republicans and Democrats, on this committee are willing to
work together to make it easier to fuel capital growth in our
markets.
As a matter of fact, I am usually the first to jump onboard
to proposals like that. However, listening to you and just my
own research, I am beginning to get a little worried about--we
are getting to a point where we may be placing too much value
on capital growth.
And maybe we need more evidence and assurances that this
actually needs to be done and that we are not compromising the
integrity of many of our U.S. firms in our marketplace, which
makes our U.S. firms so attractive. So, I am not singling out
any bill here, but let me call your attention to the discussion
draft that has to do with requiring the SEC to revise the
definition of a qualifying portfolio company to include
emerging growth companies. And I couldn't help but think, is--
is this really necessary. My staff also tells me that in
February 2017, the social media company Snapchat filed for an
initial public offering, claiming EGC status.
And I am pretty sure that the IPO was overprescribed with
many investors clamoring to buy up its shares. Now, the same
thing happened in March with Dropbox when they went public in
an oversubscribing offering, claiming EGC status. So a lot of
these discussion drafts and bills amount to a drip, drip
erosion of our security laws.
And I am somewhat worried we may be ignoring the needs of
investors and marketplace transparency. And so I am--this
subject of Expanding the On-ramp reports that many of your--our
witnesses have worked on. But a common trend that I have
noticed in these proposals is that there is only one direction
we go when we balance investor protections versus expanding
access to capital. And that direction is always weakening of
our disclosure requirements.
Now, Mr. Gellasch--is it Gellasch? I am sorry. Gellasch. I
really was intrigued in your testimony because you stressed the
importance of considering the impact of these proposals on
investors who are contributing to the capital. So could you
describe how expanding regulatory accommodations for users
might affect the attractiveness of U.S. companies to investors?
Mr. Gellasch. Yes. Thank you for the question. I certainly
appreciate it. So as we have talked about the explosion of
private capital and--and Professor Coffee agreed that--he said,
gee, there may not be all of this need for capital formation.
It is just not--
Mr. Scott. Yes.
Mr. Gellasch. In the public markets anymore. We have to
think that when we talk about some of the proposals before us,
we are trying to make--give--make those investment
opportunities more accessible for retail investors. Well,
pension funds and big mutual funds are how the predominant
number of actual retail investors invest. And the people who
have the fiduciary duties to them are saying these private
markets are too costly, generally, and too risky, generally,
for us.
And so when we talk about expanding the private markets and
making them more accessible to folks, we are not actually going
to get those people more involved. At the same time, when you
are looking at the public markets and focusing on the burdens
and costs and risks of issuers and the folks that are trying to
sell their securities, we are saying, hey, you, the investors
in those public securities, we have a great deal for you. It is
less.
You are going to have less transparency, higher costs, and
higher risks.
Mr. Scott. And Mr. Coffee, you agree with Mr. Gellasch on
this--my concerns?
Mr. Coffee. I agree mainly with your point that--that the
hope for more IPOs, we shouldn't eliminate, abolish, and
downsize all of the protections that give shareholders some
right to comment on and criticize corporate behavior. Earlier
it was mentioned that there is a shareholder proposal rule. And
that would be downsized by a resubmission provision. I have to
tell you that empirically, there is a study that shows since
2000, 50.1 percent of shareholder proposals have gotten less
than the 30 percent level at which they would be cut off--
Chairman Huizenga. Gentleman's time is expired.
Mr. Scott. Thank you, Mr. Coffee. I appreciate the extra
minute, too, Mr. Chairman. Thank you.
Chairman Huizenga. Gentleman's time is expired. I now
recognize myself for 5 minutes. I want to first address my
initial questions to Mr. Knight, if I may. And I know this is
slightly off topic for the hearing today, but since you are
here, I would value your testimony on legislation that I have
introduced to amend the risk- and leverage-based capital rules
for banks in order to improve liquidity for listed options.
I have several questions I am going to go through, and then
if I could get your response. One, I wondered if you could
discuss how improved liquidity decreases spreads and makes it
less costly for investors to make use of listed options. And if
you also discuss the importance of liquidity in options markets
when there is volatility for the underlying assets.
For example, how important is it to have the ability to
manage risk through options when there is volatility in equity
markets. And then is it fair to say that this is a timely issue
that the Federal Reserve and other banking regulators should
address as soon as possible, and do you share the concern that
the timeline for implementation of this standardized approach
for counterparty credit risk, which proposes to amend the
treatment of options and capital rules, is too far off? They
are saying maybe a couple years away.
So several questions there, but wondered if you could
respond to that, Mr. Knight.
Mr. Knight. Certainly. The options market is critical to
the management of risk in the underlying cash equities market.
It is a market that is populated mainly by professional
traders, by market makers on behalf of financial institutions
and investors who are laying off risk through the investment in
options.
It is a critical market to our economy. Central clearing of
those instruments provides stability to the economy and
something that is encouraged across markets. The rules that
apply there don't necessarily recognize the capital structure
and the investment policies of some of the midsized firms that
are populating that market and may cause a reduction in their
participation in those markets.
There are alternative, more modern capital markets, capital
requirement markets for the central clearing houses that the
Fed could consider that would preserve the participation of
those mid-level market makers, which would provide more price
discovery participation and that would narrow the spreads and
narrow the cost to the investing public.
Chairman Huizenga. Thanks, Mr. Knight. I appreciate that. I
am going to move to Mr. Paschke if I could. I am interested in
the part of your testimony that discusses the diversified fund
limits under the Investment Company Act. I don't believe this
is something we have spent much time discussing here on our
committee. I wondered if you could discuss the history of the
10 percent limit on mutual fund positions.
Why does it matter if a mutual fund owns 10 percent or even
50 percent of certain company as long as the overall fund
remains diversified? And why do you believe it would be
appropriate to increase this limit to 15 percent for
diversified funds?
Mr. Paschke. So the--the point of the rule itself is just
for clarity to who you are investing with and alongside and
particularly it is relevant now with the activist rules and
activist campaigns. Why moving the 10 percent up to 15 percent
as relevant to today's conversation has been one of the--the
shining lights of the JOBS Act passage has been the
proliferation of life sciences companies.
I think the statistic that came out earlier is 260 life
sciences companies have gone public since the JOBS Act. Those
companies by and large tend to be very small. They are taking
drugs through the FDA process. They haven't built out a full
staff. They also have a specialized group of investors who
invest in portfolio theory across those 260 in many cases
because some are going to hit and some are going to miss.
So to limit those specialist funds' ability to invest into
those funds to help fuel that drug discovery, lead them through
the FDA process to get them to a point where they are able to
commercialize. I think this really expands the opportunity for
them to get the funding they need from high quality specialist
funds. Ten percent limit on a company that may come public at a
$75 million or $100 million market gap, there is only $7.5
million or $10 million. It is often insufficient in order to
move the drugs to the FDA.
Chairman Huizenga. Thanks. Mr. Hahn, I am wondering, do you
agree that mutual funds are needlessly restrained in their
ability to invest in startup companies because of this 10
percent limitation in the Investment Company Act? And what will
increasing this limit mean for the ability of startups to
access the capital they need to grow?
Mr. Hahn. When GlycoMimetics was private, we raised about
65 million. It took us over a year to raise that last 38
million. One of the main reasons we went public in 2014 was
access to capital markets and the quick ability to raise funds.
Since we have gone public, we have raised over 300 million in
the public markets, so access to larger investments, we would
welcome that. We raise money with this. It is a large anchor
investor we are looking for. As I was saying, more than--we are
looking for a $20 million to $30 million investment from any
quarter, not just $5 million to $10 million.
Chairman Huizenga. Thank you, Mr. Hahn. My time has
expired. Next, I will recognize the gentleman from Connecticut,
Mr. Himes, for 5 minutes.
Mr. Himes. Thank you, Mr. Chairman and thank you gentlemen
for--for really interesting presentations. I was there when we
were doing this in the original JOBS Act and participated in
its formation and ultimately, despite a few reservations out
was happy with its passage.
This conversation actually allows me to resurrect a not
entirely dead horse to beat a little bit, because I was always
struck, though I was a supporter of the JOBS Act, the best
estimates I could get at the time was that the Sarbanes-Oxley
and other compliance regimes probably imposed in the
neighborhood of $1 million to $3 million a year of compliance
costs, which is real money, but as a guy who used to do IPOs, I
was always struck by the fact that I couldn't get anybody to
focus on the other area or another area in which there is a lot
of money out the door, which of course is the gross spread paid
by companies going public.
So I did some studies and lo and behold, there are studies
out there that show an absolutely remarkable consistency in
pricing of IPOs of 7 percent. It almost never changes for
midsized IPOs. I have been crying in the wilderness. I have had
a hard time getting, FINRA (Financial Industry Regulatory
Authority) and SEC, and I have letters here promising studies
and monitoring.
And the SEC told me that it is hard to establish the cost
incurred by underwriters, it is not. I have done it. And I just
haven't gotten any traction until recently when SEC
Commissioner Rob Jackson came out with a speech in April that
called the history of the gross spread pricing a middle-market
IPO tax.
So I get to beat this hopefully not dead horse. Mr. Eggers,
I am going to start with you. Does perfectly consistent 7
percent gross spread IPO pricing and the cost that imposes
which, as you know is $14 million to $20 million, does that--
this comes out of your pocket, issuers' pockets and IPO
investors' pockets. This--does--does the seven--perfect
consistency of 7 percent gross spreads in this country and not
anywhere else in the world, does that feel to you like a
competitive market?
Mr. Eggers. No, it doesn't. Remember in the late 1990's, we
had the Four Horsemen which were a midmarket group of bankers
that would take companies public. Those--all those companies
are gone, so we have fewer bankers that generally take
companies public. Most the time, our best companies want to be
taken public by someone like Morgan Stanley, Goldman Sachs, or
J.P. Morgan, so there is less competition than there used to
be, to answer your question.
Mr. Himes. So I have had a hard time, in addition to
getting FINRA and SEC interested in this until Commissioner
Jackson gave his speech, I have certainly had a hard time
getting the venture capital community, which I know well,
interested in pushing on this. Why is that?
Mr. Eggers. I--I would be happy to push on this.
Mr. Himes. OK.
Mr. Eggers. I think it is an important--
Mr. Himes. Mr. Hahn, you went--thank you, Mr. Eggers. Mr.
Hahn, you went public. Do you agree with Mr. Eggers that this
doesn't feel like a competitive market?
Mr. Hahn. Bankers are helpful in accessing the capital
markets.
Mr. Himes. I know, I was one. I am just asking whether the
fees they charge are emerging from a truly competitive market.
Mr. Hahn. You know, it is always been set at 7 percent, so
it is something we really just didn't question. So now I think
it should be looked at.
Mr. Himes. OK. Mr. Knight, Rob Cook responded to my request
for a study--because look, I have looked at the academic
literature and it is pretty clear, but I don't know everything.
Rob Cook is a good friend, by the way. We were in college
together and despite that, I have not been able to extort him
into--into doing this study. FINRA in January 2017, his letter
said that you support a comprehensive assessment of the IPO
market and gross spreads attendant. Have you actually
undertaken that comprehensive assessment?
Mr. Knight. Of the IPO market?
Mr. Himes. Of gross spreads in the IPO market?
Mr. Knight. Well, we study all aspects of the market. I
have to tell you, I am not familiar with what our chief
economist has there, but we may have. And if we do, I will
supply it to you.
Mr. Himes. So I am in a little stronger position than I was
when we had this correspondence. Mr. Eggers, who knows the
venture capital community pretty well and Mr. Hahn, who had the
experience of this have both agreed that this doesn't feel like
a competitive market. The numbers we are talking about here
dwarf the compliance costs that if we have a perfectly
calibrated JOBS Act, they dwarf the numbers that we are talking
about.
So now I have finally gotten SEC commissioner in some
fairly public statements on this, will FINRA undertake this
study with the SEC to determine whether gross spread pricing
for midmarket IPOs is truly competitive, or whether there is
some oligopolistic behavior?
Mr. Knight. I am not with FINRA. Nasdaq is independent of--
Mr. Himes. I am sorry. I apologize for that, I misread
your--
Mr. Knight. I was at one time, but we are not--
Mr. Himes. OK. OK, I apologize. I don't mean to put you on
the spot.
Mr. Knight. No, frankly, what we see is a lot of
competition amongst the banks to take companies public, the
pricing issue is a separate issue. but they are certainly
competing out there to get those assignments and we have not
seen signs of a lack of competition. Of course, Spotify
recently took a different model and avoided that. So there is
competition and models that are--that is emerging. And as
technology changes here, I think you are going to see more
innovation.
Mr. Himes. Thank you, I yield back.
Chairman Huizenga. The gentleman's time has expired. With
that, the gentleman from Maine, Mr. Poliquin is recognized for
5 minutes.
Mr. Poliquin. Thank you, Mr. Chairman very much. Gentlemen,
thank you all for being here today, I really appreciate it. Now
I know you have very stressful jobs, very stressful jobs, and I
have some great news for you--
Chairman Huizenga. If you will allow the Chairman to
interject.
Mr. Poliquin. Yes.
Chairman Huizenga. There will not be additional time for
the PSA for Maine tourism.
Mr. Poliquin. Well, Mr. Chairman. on Maine's license plate,
it says Vacationland. I want to make sure all these wonderful
people in this room know that as you are planning your summer
vacation, we don't even need air conditioning up there, we have
moose walking around, all kinds of other critters, lobster,
blueberry pie. You need to go to Maine where you belong, with
these stressful jobs. And--and I think your families will thank
you for that, and if you can put another 35 seconds back on the
clock, I would be very grateful, Mr. Chairman.
Chairman Huizenga. Motion denied.
Mr. Poliquin. Now, there seems to be all this bad news that
circulates in this town. I am not used to that. I represent the
rural part of Maine. And we have a great problem to have up in
Maine. We can't find workers. I know the national unemployment
rate is about 3.9 percent. We are at 2.7 percent. And I don't
care if you want to have folks working on the docks or picking
apples or working in precision machinery, we can't find those
bodies.
Business confidence is through the roof, consumer
confidence is high, we have seven million job openings across
this country and it is all because--we know what it is. It is
because regulations now are more predictable and there are
fewer regulations. And the equity market is a forward-looking
animal and they are looking at that and they are discounting
it. On top of that is that we have lower taxes, so our families
can keep more of their own money and spend it the way they want
to spend it.
And our businesses are growing. And they are investing. And
Maine's second district is an economy of small businesses. Now,
one of the things that keeps me up at night is how do we make
sure there is access to capital so our businesses can grow--all
sizes. And some folks borrow money from banks and that is all
great--or credit unions. Some folks have access to capital
markets.
It is critically important to make sure we keep these
reforms going. I--I am going to tell you what you folks already
know. If we start raising taxes, if we start layering more and
more regulations like we have been the last 10 years, we are
going to be growing at half what we are growing at now. And
when the economy grows, it is great for everybody. So one of
the issues is how do we make sure these reforms continue.
Now we all know what the stats are the last 5 or 10 years,
the number of companies that have gone public have about cut in
half, roughly. I would like to know, Mr. Paschke, when you talk
to folks in the board room--Mr. Knight probably another good
person to ask--what are they telling you? Are they telling you
what we heard from Mr. Coffee a short time ago?
What are their concerns and why are they choosing to stay
private instead of going public? And second, a follow up
question. We now have a new SEC. You folks, for the most part,
deal with the SEC on a regular basis. Do you see a change over
there where these folks want to be helpful and not layer on and
make it more difficult for you folks?
Tell me what you see out there so we are apprised of what
needs to be done.
Mr. Paschke. So answer two things very quickly--
Mr. Poliquin. And speak right up, sir. Get right in that
microphone.
Mr. Paschke. So answer two things very quickly. One, we
just had a very productive working session with the SEC about 3
weeks ago, a group that SIFMA had organized. Very constructive,
very roll up your sleeves, very specific--
Mr. Poliquin. Was Mr. Clayton in the room?
Mr. Paschke. He was not but he then circled back with
feedback on--he had heard it was a very constructive--
Mr. Poliquin. Good.
Mr. Paschke. So early returns feel quite good in that
regard, and constructive. The second thing you talk about, what
do they say about why they want to stay private. One is you can
structure those investments however you want. But the other
part of this whole discussion that hasn't been talked about in
terms of why didn't we see a huge jump in IPOs right after the
JOBS Act, we have been operating in a near 0 percent interest
rate environment.
Mr. Poliquin. Right.
Mr. Paschke. There has been so much access to alternative
forms of investment.
Mr. Poliquin. Right.
Mr. Paschke. You know, direct private investment on the
equity side or very cheap debt on the debt side, that has had a
major impact. As you see rising rates, what you are seeing
actually is an increase in equity offerings from existing
public companies. There is too much of an on-ramp for the IPOs
to have caught up to the changing environment.
But that is going to change. And I am going to highlight--
the one thing I keep highlighting here is for your district in
Maine, the other way for those people to get wealth is to be
able to invest in the public markets. They do not participate
in the wealth creation that occurs in the private markets.
Mr. Poliquin. I worry about our small investors in Maine,
folks that are working on the docks or working in the woods or
pulling traps or--or growing potatoes and these folks are
saving as much as they can every week to go into a retirement
nest egg or to save for their kids' education. And a lot of
those investments--not all but a lot of them, as you mentioned
earlier--I am not sure if you did, Mr. Quaadman, mention this--
through retirement funds.
I guess it was Mr. Gellasch--through State and other
private employee benefit funds. So there are a lot of folks in
this country, a lot of folks in our district who are owners of
corporate America and it is really important to make sure these
regulations are helpful to them so they have a better
opportunity to live better lives and more freedom. With that,
are you going to award me, Mr. Chairman, another 35 seconds
that I rightly deserve?
Chairman Huizenga. The fine folks at PureMichigan.com have
asked me to evoke your time. So the--but with that, the
gentleman's time has expired.
Mr. Poliquin. Thank you very much.
Chairman Huizenga. All right. That would be
PureMichigan.com. And with that, the gentleman from Ohio, Mr.
Davidson, is recognized for 5 minutes.
Mr. Davidson. Thank you, Chairman. And I really want to
thank our witnesses. Thanks for the time you have committed to
be here today and for the work you do to advance capital
formation, particularly with our small companies.
And Mr. Eggers, I wanted to talk about venture for a bit
and just the important role that venture plays in helping so
many Americans realize their version of the American dream.
Starting and growing a company in America is trending in
the right way. For a long time, we were seeing more companies
go out of business than launch. We have seen challenges in
companies scaling. And I guess I am curious as you think about
companies that want to access public markets, to go from a
privately traded founder capital to maybe a round of venture
funding.
One of the keys to getting scale is that next round of
capital. It is one of the keys where the venture folks get paid
for the risks that they have taken. How have you seen the
impact of the JOBS Act or other small capital formation
initiatives on the space and particularly with information
coverage, the research coverage for small companies? Could you
address that?
Mr. Eggers. Yes, thank you for the question. I think the
JOBS Act has been effective in certain areas. And I mentioned
the confidential disclosures and ability for a company to test
the waters, so to speak, before they file, reduced reporting
requirements, although when they get to a certain level, those
go away. But there are other fundamental issues that also
factor in to the problem of less IPOs.
There is the uncertainty in the market once they are
trading, the--the culture of short-term-ism, whole bunch of
stuff like that. Let me--let me tell you a story about one of
our companies, AppDynamics. Was one of our really fastest
growing companies in the private area and raised a lot of
venture capital and wanted to go public. Went, hired bankers,
paid--paid that 7 percent. Or they were going to pay that 7
percent.
They went through their road show successfully and they
were going to price the next morning and they decided instead
to get acquired by Cisco Systems. Obviously for a premium on
how they would price, but it makes you wonder why a company
like that, a very good company, high-growth company that has
created a lot of jobs would take the certainty of an
acquisition over the uncertainty of the public markets.
Mr. Davidson. Yes. Thanks. Good--good explanation. Mr.
Quaadman, how--do you see provision of the JOBS Act--have you
seen it boost coverage in pre-IPO, particularly for EGCs?
Mr. Quaadman. It has been mixed. I think the testing the
water provisions certainly have helped, but I think in terms of
research, it is been mixed. We still see a dearth of research
for smaller issuers. So I think the--the draft legislation
here, I think is going to be an important way to help
incentivize some more of that research, which that research
will then also help drive liquidity investors to those
companies.
Mr. Davidson. Thank you. And maybe for the group, I am
working on an ICO bill, so when you look at companies that
choose to raise capital through an initial coin offering--we
are trying to get our arms around how early formation is
different. It seems that a lot of the things in--in the JOBS
Act, in--in--perhaps even in EGC designation, or Reg A+ could
help. Have any of you spent time thinking about this with
respect to ICOs?
Mr. Quaadman. Mr. Davidson, this is something where we have
put together a group of companies to look at this, and we have
actually had some meetings with Treasury, some meetings on the
Hill as well, and we are trying to determine if that is a way
of helping with capital formation, but we also have concerns
about investor protection as well. So I think that is something
we would like to have a further dialog with you on.
Mr. Davidson. Thank you.
Mr. Gellasch. If I may, Mr. Davidson, on the investor side,
I would like to echo those remarks. Obviously, coin offerings
have exploded themselves, and there are a lot of interesting
issues related to that. Are they securities, for example, is a
really basic question that the regulators are wrestling with.
One of the things I--I think--and you mentioned
alternatives there, thinking about do we put these things in
the registered public space, the traditional public space, some
scaled-back version of that? Do we go even further into a Reg
A+ type of model?
I would encourage you to think about those things very
carefully, because the Reg A+ experience is remarkably
different than the ECG experience. So as you think about
alternatives, I would encourage significant caution.
Mr. Davidson. Yes, thank you for that, and clearly some
would--would still qualify as commodities, as CFTC has tried to
make clear. So talking secure--where does that line exist--and
my time is expired. Mr. Chairman, I yield.
Chairman Huizenga. The gentleman's time has expired. I am
not seeing--no further speaker--questioners on the--on the
Democrat side at this point. The gentleman from North Carolina,
Mr. Budd, is recognized.
Mr. Budd. Thank you, Mr. Chairman, and again, thank you all
for coming today and for your time and your input and your
insight.
So this is an important hearing, and one that is timely
considering that Chairman Huizenga is negotiating a package of
bills with the Senate that will focus on, yet again, capital
formation. These bills would include some that have already
passed the House, including my own bill, H.R. 3903, which is
encouraging public offerings, and possibly some proposals
before the subcommittee today.
I want to go back again, to continue on with what Mr.
Davidson was asking about the JOBS Act, and Mr. Quaadman, can
you please explain some of the regulatory requirements that
emerging growth companies are exempt from under the JOBS Act in
their on-ramp provisions?
Mr. Quaadman. Sure. There are certain executive
compensation disclosures that they are exempt from. There are
certain--there is the potential for certain exemptions from new
audit or accounting standards as well.
And generally, it provides for disclosures, but done in a
slimmed-down version that allow for investors in those
companies to get the information that they need. And it also
allows for some of the more costly disclosures, such as--let us
say, conflict minerals or others that they are exempt from
also.
So it is a way of allowing companies to grow into the
existing public company system, and to eventually ramp up.
Because one of the problems at Sarbanes-Oxley was that internal
controls and all are extremely important. It was trying to make
some of the costs scalable, and effectively what the JOBS Act
tried to do in a very broad way was to make it scalable and
ensure that their investors are receiving the information that
they need, as well as have the protections in place.
Mr. Budd. Very good. So why are--and you answered some of
this next part, but why are the exemptions provided in Title I
so necessary for emerging growth companies? If you care to
elaborate any more on that, maybe some other reasons?
Mr. Quaadman. Yes, it is their investor base is more
interested in some of the things that the company is doing
rather than what its sales are at that time. So it is--
investors are much more forward-looking there.
It--it also--as I said, it allows for an ability for a
company to gradually work its way into a public company model,
because regardless of some of the discussion we have had here
this morning, we have built in a lot of inefficiencies into the
public capital markets. And what--effectively, what the JOBS
Act tries to do is tries to shield those emerging growth
companies from some of those inefficiencies to--until a point
where they can deal with it.
So we actually view the extension from 5 to 10 years--will
actually allow for existing EGCs a little more time, and will
also continue to make EGC--the EGC model a more attractive one.
Mr. Budd. So why are things like the say-on-pay
provisions--why are they not appropriate for these small EGCs?
Mr. Quaadman. Well, first off, say-on-pay passes with 95,
90 percent with large public companies. And we have also had an
issue--we don't have--necessarily have an issue with say-on-pay
itself. Investors should have a dialog with companies about
executive compensation. But what has happened with the proxy
advisory firms is that they have required a year by year vote,
whereas Congress said, investors can decide what the frequency
is.
So rather than have an entity or a duopoly like the proxy
advisory firms place a very costly provision on EGCs, Congress
is actually somewhat going back to the intent of Dodd-Frank
with say-on-pay to actually allow companies some breathing room
with that.
So that is one where I think, again, it is something where
you have a founder-type system with EGCs, which you probably
primarily have; investors are as invested in that founder as
they are with the company itself. So, say-on-pay is a less
relevant tool than it is for, let us say, a more mature
company.
Mr. Budd. That makes sense. Thank you, Mr. Quaadman. Mr.
Hahn, since the enactment of the JOBS Act, about 265 biotech
companies have used provisions in the act to go public. A lot
of those are working on research that is ultimately going to
save lives. Can you discuss with us in the partial minute that
we have left how the on-ramp provisions have helped these
companies better allocate their resources?
Mr. Hahn. I think the biggest provision that helped us was
test-the-waters. So, we have complex science, and getting
investors up to speed to understand the science and to want to
invest in the company in the traditional 2-week timespan of a
roadshow, we would have lost a lot of investors with that. So
test-the-waters gave us the ability to bring those investors up
to speed.
And also with the 404(b) exemption we talked about, that
helps us save money--divert money into the science instead of a
one-size-fits-all regulatory burden.
Mr. Budd. I appreciate that. I think my time is expired.
Again, thank you all.
Chairman Huizenga. Amazing self-discipline. A gentleman's
time is always ready to expire, so with that, the gentleman
from California is recognized for 5 minutes.
Mr. Sherman. Thank you. We have a bunch of bills that are
designed to help small companies get capital one way or the
other. And then included in discussion for this hearing is a
bill designed to prevent shareholders from being able to put
forward questions for a vote and be included in the proxy
statement.
Mr. Coffee, are you aware of any small startup in a garage
that has ever had a second presentation of the same shareholder
question in their proxy statement?
Mr. Coffee. That small startup is the subject of the proxy
rules, in most cases, so it is going to be totally
inapplicable. But I think you are right in pointing out that
unrelated to the IPO concerns of raising capital, there are
provisions in here that downsize the shareholder voice in
challenging corporate conduct.
And there are other provisions in here that give major
exemptions to what are called well-known season issuers, our
largest companies, and allow them directly to sell before
filing a disclosure document. It has nothing to do with small
firms. That is our largest top quarter firms, and it is just a
wish list of various deregulatory proposals various people on
this committee agree to.
So I don't think there is a clear, rationalized coherence
to all of this. But on to your first point--
Mr. Sherman. Yes, and I am aware of the social benefit put
forward by making these issues come to light, and I think it
taints the rest of the bills that we are discussing to throw in
here something that has nothing to do with raising capital for
small or big companies, and everything to do with suppressing
discussion of important issues that face corporations in their
operation.
The next point I want to make is a number of the issues
come in, how much money will we, as a society, spend on
investor protection? And some would say, well, as a society as
a whole we are spending a billion dollars on this aspect of
investor protection, and maybe we are avoiding a billion
dollars of fraud, so that balances out.
No it doesn't, it is a good thing for society, because a
billion dollar fraud loss--it doesn't just affect the people
who lose their money, it dampens public interest, foreign
interest, retail interest in investing in stocks. And having
the game be fair is worth every penny that is necessary to
achieve that.
Mr. Gellasch, there is this proposal here to slash 404(b)
audits, to increase by double or triple the various floors, and
in effect say we will save a lot of money on worrying about
internal control, and we will maybe only have one or two Enrons
a decade as a result, probably a smaller company or smaller
examples of that.
What do you think of the need for attestation of internal
control and reports on internal control?
Mr. Gellasch. Well, I think we have seen examples, both--
not just Enron, but also in the--in the private company space,
like Aranos, where the need for robust internal controls and
financials is important, and some of the smartest guys in the
room in the private space have proven ineffective at being able
to do those things themselves in their own due diligence.
So one of the things that is really important for the
public capital markets, as you alluded to earlier, is ensuring
that you have investor confidence and you don't lose it. And
the accuracy of financial statements is critically important to
investors. And so when we think about what the costs are
associated with that--and I certainly appreciate and respect
those may not be trivial. That is fair.
I think--but that is also--
Mr. Sherman. And I could sneak in, it is not just important
to investors. You may have some division of a company, or
what--where they are having signing parties forging documents
for mortgages, et cetera, where you are hurting consumers. How
is internal control important for those other than investors?
Mr. Gellasch. Exactly right. It is a corporate governance
issue that is far beyond just an investor protection measure.
And one of the things I think we tend to focus on is just the
cost associated with that. I would say what is also really
important is focusing on that aspect. These are improving the
quality of the offerings, including the quality of the
companies and how they are governed.
Mr. Sherman. I yield back.
Chairman Huizenga. The gentleman's time has expired. With
that, the gentleman from New Jersey, Mr. MacArthur, is
recognized for 5 minutes.
Mr. MacArthur. Thank you, Chairman. Good morning. I
appreciate all of you being here.
I am proudly wearing this pin--you probably can't see it
from back there, but it is a--Foster Youth Shadow Day, and
Rishawn, stand up. Stand up. This is Rishawn from my district.
Young man--very interesting young man. Very--yes, give him a--
give him a hand.
He has an entrepreneurial spirit, I can tell you that just
from our conversations this morning. He is doing all kinds of
things, and very interested in both philanthropy and in growing
a business.
We all know it takes more than hopes and aspirations and
dreams and ideas. It takes money and it takes a path that is
not completely cluttered with obstacles. I know, because that
is the life I lived for 30 years growing a business.
So I am listening this morning--first, I am impressed that
he is awake, because some of this stuff could make anyone's
eyes glaze over when you--when you listen to this. But--but
this translates into real people's lives that want to do
things.
And I had--as we do in this business, I had to step in and
out this morning, and so I have missed a lot of things, but I
was here for the opening remarks. And Mr. Coffee, I was really
struck by yours.
It is a great name, by the way, if you weren't a professor,
it would be a great name for a business. Mr. Coffee.
That has been done. It took money for them to grow that
business. I used to handle their insurance many decades ago. It
takes money to grow a business. And I listened to you--I am not
meaning to poke fun, I am just--I just was struck by your
remarks, and you said that the reason companies don't really
need the public markets--it is not because of regulatory
overreach or overzealous attorneys general who criminalize
management mistakes.
It is none--it is none of that, it is just that companies
can get money from the venture world, or the private equity--I
think you said the venture world, but I think that may include
other--
Mr. Coffee. Private equity firms also, I said.
Mr. MacArthur. Well, sure. Well let me tell you--let me
tell you the decision I had to make when we got to a State
where my business was big enough that I thought I could go
public, and there would be enough float to actually make that
viable. We had gone from a hundred-odd people to thousands. We
could have done that. Why did I choose something other than
private equity?
I just left a meeting--one of the meetings I had to step
out for was with a person that works with the exchanges. And I
asked her the question, Why don't companies go public? She said
the number one reason I hear is they are deathly afraid of
overzealous regulators and State attorneys general. That is
their number one reason.
And then I think about your remark that, well, it is not
that. Underregulation is--is far less dangerous than--or far
more dangerous than overregulation.
Mr. Coffee. Equally dangerous, I meant.
Mr. MacArthur. Here is--here is the problem with that. If
you really get practical. This doesn't--this doesn't play out--
no disrespect intended, but this stuff doesn't play out in a
classroom. It plays out in the real world with real pressures
coming from all sides. Venture capital, private equity capital,
all of it is the most expensive form of capital for a business
person to access.
By far the most expensive. More expensive than the public
markets. More expensive then debt capital or any of the
alternatives around that. It comes with the greatest amount of
outside control. Because private equity funds--private equity
funds, venture funds, this is what they do every day. And they
don't give their money without exacting a price, without
getting certain controls, without getting certain investment
thresholds.
It is the longest liquidity possible outcome. You take
capital from those sources and you are going to wait 5, 6, 7
years or more. So why would a rational business person choose
that anyway? Most costly, most control lost, longest liquidity
event. Sir, with respect, it is not because it is just easy
money and it has nothing to do with the state of the public
markets.
I am telling you from personal experience, it has to do
with the fact that the public markets are frightening to
business people who don't want to get squeezed and attacked and
have a management mistake criminalized and all of the other
stuff that comes with it. And I don't usually make speeches
with my 5 minutes, I usually ask questions but my speech has
lasted 5 minutes and so with that, I yield back, Mr. Chairman.
Chairman Huizenga. Gentleman yields back. Gentleman from
Arkansas, Mr. Hill, is recognized for 5 minutes.
Mr. Hill. Thank the Chairman. I want to thank my friend
from New Jersey because of his 5 minute speech, I may--I have
more time for questions because I enjoyed it, I associate
myself with it and it reflects the experience I have had for 35
years and in corporate finance. So I appreciate my friend Mr.
MacArthur and his perspective on the public and private
markets.
It has been--it has been said that we want more public
companies--all of you agree with that universally--to give more
opportunities for our pension funds, our 401(k) plans, our IRA
accounts and that there is absolutely no reason to say that is
not the primary objective. We want that opportunity because it
shares the prosperity of America.
So then it gets down to, well how do we accomplish that.
And one is in sales and trading and research and bringing that
company out. That is a key component that we are talking about
today. And then the other is the cost of maintaining that
public enterprise. And so we have bills on both sides of those
issues. And I was with a company a couple of weeks ago--it is a
publicly traded company, $2 billion market cap.
One division has 5,000 suppliers. That is a lot. And you
can imagine they have a lot of things that they sell to have
5,000 suppliers. But one of the most costly things they have in
this public company--long-time public company, $2 billion
market cap--is trying to comply with the conflict minerals
rule. It just--it just takes over their whole process, trying
to prove that they have done that in case they are sued. Which
they of course fully expect to be, because it is not possible
to comply with it with 5,000 suppliers in just one division
that--in a globally sourced enterprise.
And so that is an example of what we are talking about, I
think, today on the second piece, the cost of maintaining that
public enterprise in a competitive--in a competitive way.
Mr. Quaadman, there was a lot of discussion today about
studying research coverage for small issuers before they had an
IPO. I would love for your perspective on maintaining coverage
of a small cap issuer after they are public and then I will ask
Mr. Paschke to comment as well.
Mr. Quaadman. No, I think--no, that is a great question
because we have actually seen some problems with that, where
there has actually been a retrenchment of research at times as
well. And the reason why I raise MiFID with my opening remarks
is that EU rule is actually going to impact research here and
is going to impact costs. So it is a matter of--it is a supply
and demand issue, right? What are the costs of the research,
what are the--how is it priced out?
And it is unfortunate that--I think the JOBS Act tried to
address some of that but we actually need to do more of that
and we are going to have to try and also determine with the SEC
how we also deal with this in terms of MiFID as well.
Mr. Hill. Yes. Thank you. Mr. Paschke, what is your view on
that in the marketplace?
Mr. Paschke. It is an absolutely major issue. And I
mentioned, we cover 600 companies in research with a focus on
small and mid cap. And the data shows that for companies with a
$500 million market cap and below, they have an average of
about three research analysts covering them. Larger cap often
will have 25-plus. So it is very important in those voices that
cover them are the voice to the market.
MiFID was an appropriate thing to bring up because most
market estimates say that the cost that the buy side is willing
to pay for sell side research is going to come down by about a
third through unbundling. So if you are a small cap name and
there are two or three research analysts covering you today and
the research budget just went down by a third, you may lose one
to two of them.
Mr. Hill. Yes. I think it is super important and I think
this $500 million number is a reasonable number. The company I
referenced, $2 billion market cap has six regular research
firms covering them. I was surprised by that and delighted. And
some have longstanding--it is a mix of regional firms and Wall
Street firms. In the time I have remaining I just want to bring
up one other issue for you representing SIFMA.
Just like we talk about community banks needing relief from
regulations, I think the same is true for privately held non-
bank broker-dealers. And one of the ways to do that is I have a
bill that is going to permanently exempt of the peekaboo
standard, the audit standard for small private broker-dealers.
And I would hope that SIFMA would look at that issue and be
supportive of a permanent waiver, effectively, for the peekaboo
standard on audit for a small broker-dealer--because it is
introducing--not holding customer funds.
Mr. Paschke. Yes. It is my understanding that that was
definitionally caught up in Dodd-Frank and that some brokers
who probably weren't appropriate the privately held non-
custodial brokers, were caught up in some of the regulations,
which would seem to us would make sense.
Mr. Hill. Good. I look forward to working with you on that.
Thank you, Mr. Chairman.
Chairman Huizenga. Gentleman's time is expired with that.
The gentleman from Minnesota, Mr. Emmer, is recognized for 5
minutes.
Mr. Emmer. Thank you, Mr. Chair and thanks for the
committee--or the witnesses being here today before this
committee and your patience. The Treasury--and Paschke, I will
start with you. I am going to read you a statement from--an
October 2017 Treasury Department report. This I think goes to
something that you started to talk about a few questioners
before and that frankly, Chairman Huizenga brought up at the
very beginning of this hearing today.
The quote is this. Or the Treasury report noted that,
quote, ``to the extent that companies not to go public due to
anticipated regulatory burdens, regulatory policy may be
unintentionally exacerbating wealth inequality in the United
States by restricting certain investment opportunities to high
income and high net worth investors.''
And isn't that what we are talking about here today with
these--this isn't just pro-growth, but of the 11 bills, much of
it is addressing the fact that you have to be too big to play
in this country today. And the thing used to distinguish us
from every other country on the face of planet is that any
rank-and-file member of our society who wanted to participate
in the marketplace, to grow his or her wealth and help grow the
wealth of this great Nation, that has been restricted over the
last many years and isn't that exactly what you were trying to
get to earlier?
Mr. Paschke. I think it is absolutely one of the most
fundamental issues that is going on, is who can participate in
the wealth creation. You know, for sure, the small individual
retail investor who has no access or idea about the
opportunities and is excluded.
It is even gotten to the point where the mutual fund,
active fund managers who are often managing money on behalf of
a lot of small individuals or pension funds or police unions,
whatever it may be, they are complaining that because companies
are going public either later or never at all, that they are
missing out on the entire wealth creation that occurs with an
Uber or a Spotify or wherever it may be. These companies have
achieved huge valuations all through private capital.
So it is not just mom-and-pop retailers, it's active money
management funds who don't have access to the private
investment either who are one more where away from the
individual.
Mr. Gellasch. If I may for a moment, is to--one thing I
think that is important though, is they all actually have--
those investment advisors and pension funds actually are likely
to be able to physically have access to those markets. The
reason why they are not accessing them right now is because of
the risks and costs associated with a lot of those investments.
Every mutual fund or investment advisor.
Mr. Emmer. So you disagree with the Treasury's statement?
Mr. Gellasch. No, I actually wholly agree. I think that we
have to recognize that one, when you bifurcate the retail
investor of ma and pa with an Etrade account from the mutual
fund investor or the pension funds, which are in fact, the
majority of how Americans actually invest in these companies,
and those folks who are the fiduciaries, who are in charge of
those, are actually saying, look, we actually do not want to
and have investment guidelines that say we are not going to get
involved, or we are to a very small extent in these private
offerings; we are in venture investments in large part because
of the costs and risks associated.
Mr. Paschke. Which is exactly the point that was made by
the previous speaker, about it is the most expensive capital
out there. So to say that the private companies ought to be
going there instead of public--
Mr. Emmer. And that is what we are trying to address. That
is exactly what we are trying to address.
Mr. Knight, I have the venture exchange bill and I
appreciate in his remarks, his opening remarks, Professor
Coffee likes the concept but has some issues with how it is
drafted. Can you--I know you are familiar with this set
provision, can you give us just a picture of what it would look
like if an entity was going to apply to become a venture
exchange? What would they do? What is the timeline with the
SEC?
Mr. Knight. The SEC would have 6 months to determine
whether they meet the qualifications to become the venture
exchange. On our market, we would already be qualified, and the
issue would be whether the company would choose that market
structure, that the optionality that is in your legislation,
that it would allow the aggregation of trading interest in--in
one market.
Right now, it is split amongst 50 with work--which works
well when you are trading Amazon, but it tends to drain the
liquidity away from the price discovery process. We tend to be
very focused in the United States on competition between
marketplaces and don't focus enough on having the competition
or price discovery between orders and quotes, and that needs to
be aggregated, particularly for small companies if you are
going to have a liquidity thickness that you need so that
people can sell securities by securities on an orderly basis.
Mr. Emmer. Thank you. I see my time has expired.
Chairman Huizenga. The gentleman's time has expired, but
this has been fascinating, very helpful. And I would like to
thank our witnesses today for their testimony. Without
objection, I would like to submit the following statements for
the record from the Equity Dealers of America. My Ranking
Member, Mrs. Maloney, had taken care of a couple others
earlier.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
[Whereupon, at 12:05 p.m., the subcommittee was adjourned.]
A P P E N D I X
May 23, 2018
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