▶ 0:14:28e for
▶ 0:15:21light up
▶ 0:16:57e e
▶ 0:17:36all right good morning the subcommittee on Capital markets will come to order without objection the chair is authorized to declare recess of the committee at any time this hearing is titled the future of American Capital strengthening public and private markets by increasing investor access and facilitating Capital formation that objection I'll members will have five legislative days with within which to submit extraneous materials to the chair for inclusion in the record
▶ 0:18:06chairman I now recognize myself as chairman uh for four minutes uh for an opening statement morning and Welcome to our very first Capital Market subcommittee hearing I want to thank you all for joining us today we're going to be discussing ways to strengthen both public and private markets by expanding investment opportunities and reducing regulatory barriers to Capital formation securing funding is essential for small businesses yet
▶ 0:18:36many entrepreneurs face roadblocks while the bipartisan jobs Act of 2012 was a landmark step in making Capital more accessible significant regulatory barriers remain if we fail to act we risk stifling Innovation and economic expansion one of the most pressing challenges is the restrictive definition of a accredited investor current regulations primarily allow only High net worth individuals to invest in
▶ 0:19:06private markets shutting out many Financial financially knowledgeable Americans who have the expertise but perhaps not the wealth to participate in these opportunities expanding investment opportunities Beyond The Limited few who qualify under this narrow definition will unlock new sources of capital benefiting both businesses and investors small businesses also face growing obstacles when seeking funding Traditional Bank Loan Approval
▶ 0:19:36rates have dropped significantly leaving many entrepreneurs with limited options no business should be forced to rely solely on financial institutions when alternative sources of capital are available expanding investor access to private markets and streamlining regulatory requirements for raising private Capital will create more opportunities for businesses to secure funding and for investors to participate in economic growth these challenges are not
▶ 0:20:07just theoretical this is the reality faced by American entrepreneurs my constituent Andrew Barnell who is here today and his sister Erica are perfect examples of why access to Capital matters their entrepreneurial Journey demonstrates the power of an American innovation but they like too many Founders especially those in communities outside traditional Financial hubs have faced barriers that limit their ability
▶ 0:20:37to expand and create jobs across the country countless small businesses and entrepreneurs uh face similar roadblocks preventing great ideas from becoming successful job creating Enterprises as act acting secretary chair uida recently said and I quote we should be encouraging not restricting the ability of companies to raise Capital regulations should protect investors but they should not suffocate Market access or drive
▶ 0:21:07companies overseas we must ensure both public and private markets remain viable funding options giving businesses the flexibility to grow in the way that that best suits them the reforms that we discussed today build upon the foundation by the jobs act and by reducing regulatory barriers increasing access to Capital and safely expanding investor access we can ensure that Innovation and economic growth continue to flourish to ensure that we get this right after today's hearing the committee
▶ 0:21:37will be requesting feedback from stakeholders on legislative proposals aimed at at strengthening our Capital markets and we want to hear directly from investors and entrepreneurs small businesses and all Market participants about how we can improve access to Capital without sacrificing investor protection after this hearing we'll put out a a a press release that's going to be requesting feedback via um this press release and a list of prompts on the financial services
▶ 0:22:08Committee website so go to financial services uh house uh Financial Services Ser yeah services. house.gov um access to Capital is not partisan issue it's about ensuring that businesses and investors and workers have the tools that they need to succeed I want to thank you all I look forward to today's discussion the chair now recognizes the ranking member of the subcommittee the gentleman from California Mr Sherman for four minutes for an opening statement the SEC oversees our
▶ 0:22:38Capital markets which is the nerve center of global capitalism virtually all of the most powerful companies in America and really the world have functioned with one goal increase the value of their company Securities in our Capital markets our Capital markets are the Envy of the world and the Securities traded there are worth over a hundred trillion so I don't think it's a good idea to let Big Balls just take a whack at it um
▶ 0:23:09whether it's crime in the streets or crime in the suits we should not defund the police the SEC more than pays for itself it's got A2 billion budget it secured over 8.2 billion do in fines last year and returned 3.2 billion to invest to investors um and one thing I'm concerned about is insider trading we saw this when for one week everybody knew when Trump got elected crypto
▶ 0:23:39would go up a bit and Bitcoin went up 22% in that first week but Dogecoin went up 135% during that week there were only a couple of people who knew that this commission would get this weird name designed to advertise one crypto cryptocoin I don't know who knew that but I do know that Elon Musk is more powerful than any one member of Congress I'm humble enough to say that
▶ 0:24:09but musk does not file any of the financial reports that we have to file the um uh we will see a couple years from now whether we see $8.2 billion a year return by the new SEC uh in in fines and a 3.2 billion to investors if not it will not because be because uh there are no crooks on Wall Street it will the Wolves of Wall Street are not going to become Lambs it will be because the SEC was defanged and or defunded
▶ 0:24:40business needs Capital particularly small and mediumsized business traditionally that was Banks but we've told all the banks they can't even make any prime plus three prime plus4 loans we need to focus on Bank regulation we need to allow Credit Unions to make more business loans we need to allow the bdcs uh to play their role in developing businesses uh that's why I've got the access to small uh business investor Capital act
▶ 0:25:10which I introduced in the 116th 117th and 118th Congress I will be reintroducing it in the 119th Congress and look for as many co-sponsors as possible finally our banking system discriminates against business loans by saying that if the banks instead deploy their money into marketable Securities they don't have to mark to Market their losses particularly those Securities they list as being uh ones they plan to hold to uh uh maturity
▶ 0:25:40uh as to the accredited definition accreditor in investor definition it needs work but not just expansion but also contraction the idea that somebody is high income because they have $200,000 keep in mind members of Congress if they get reimbursed for their living expenses here uh in Washington are listed as having incomes of $200,000 and not a single one of my colleagues has has said that the Congressional uh pay
▶ 0:26:11package represents High income and a million dollar does not make you wealthy in the current system when we passed these laws it was back in the 70s prices have gone up by a factor of 7.7 so we've seen a we've seen an erosion of the definition of accredited investor when Bel based on wealth to the tune of 7.7 times we need to change those numbers on the one hand and as
▶ 0:26:41the chairwoman points out also account for the fact that people who don't have high income don't have high wealth may have high knowledge and ought to be listed as accredited investors and I yield back gentleman yields back the chair now recognizes the chairman of the full committee the gentleman from Arkansas Mr Hill for one minute I thank my friend and uh colleague our chairman Mrs Wagner for hosting today's hearing look forward to working alongside you chair Wagner
▶ 0:27:11as we work to ensure America's capital markets Remain the strongest and the most competitive in the world Capital formation is the Bedrock of our economic growth it fuels Innovation empowers small business and creates opportunities for everyday Americans to build a nest egg and wealth yet in recent years we've seen an alarming Trend fewer companies are entering the public markets and when they do they face skyrocketing regulatory burdens stifling growth and job creation at its peak the Wilshire 5000
▶ 0:27:41index a benchmark for the entire stock market of the United States at 7500 companies today that number has been cut in half if we don't act now America's public markets will continue to shrink committee Republicans are committed to reversing this trend by building on our jobs act work and I look forward to working with you madam chair and I yield back gentleman yields back and the chair now recognizes the ranking member of the full committee the gentle lady from California Miss waters for one minute
▶ 0:28:11thank you very much uh chair Wagner Democrats have always championed small businesses in the 117th Congress we passed Landmark laws the inflation reduction act the chips Act and the American Rescue plan that both bolster small business and economic growth we know that when markets are fair disclosures are honest Financial intermediaries act in investors best interest and the Securities and Exchange
▶ 0:28:42Commission enforces the law business confidence and Investments flourish but Trump and unelected co-president Elon Musk are looking to defang defund and defame wall Street's cop on the Block the Securities and Exchange Commission fiddling with requirements in our Securities laws seems to miss to Mark when the Arbiter of those laws is on The Chopping Block i y
▶ 0:29:15back the ranking member yields back today we'd like to welcome the testimony of our five witnesses first we have Mr Andrew Barnell Mr Barnell is the CEO and co-founder of genoscope genoscoper of meeting many times and from their office in St Louis Mr barnells business has developed an Innovative and life-saving
▶ 0:29:46coloral cancer screening Technologies next Mr mckever Conwell Mr Conwell is the founder and managing partner of rare breed Ventures and emerging VC fund located in Baltimore Maryland next we have Miss Rebecca Coba Miss uh kasaba is the CEO and co-founder of dealmaker the global leader on in online Capital raising next on Deck is
▶ 0:30:16Miss Anna Peno Miss Peno is a partner in mayor Brown's New York office and co-leader of the global Capital markets practice and last but not least is Miss Alexandra thoron Miss Thorton is a senior director of financial regulation for inclusive economy at at the center for American progress we thank each of you for taking the time to be here today each of you will be recognized for five minutes to give an
▶ 0:30:47presentation uh of your testimony and without objection your written statements will be made part of the record Mr Barnell I believe you also have your wife with you today we welcome uh Miss barell uh you are now recognized sir for five minutes for your oral remarks chairwoman Wagner ranking member Sherman members of the subcommittee thank you for inviting me to testify today as a native of St Louis and the CEO of genoscoper
▶ 0:31:17in St Louis I am especially proud to be here today before our member of Congress chairwoman Wagner at janosi we are developing Innovative diagnostic tests for gast intestinal Health we're in the process of bringing our first product cense to the US market so more individuals can access life-saving screening options for coryl cancer I'm here today to share my experience with respect to raising capital for our company a journey that began in 2015 when my sister
▶ 0:31:47called to inform me she developed a technology that could save countless lives and that we would be founding a company together to do just that at the time I was an NBA student at the Wharton School and my sister was an mdphd student at the Washington University School of Medicine in St Louis I jumped at the opportunity it was a logical extension of my coursework in business and Healthcare and my early professional career in the financial services industry 10 years ago we started as two students with an idea we
▶ 0:32:17have since cultivated our business into a company with over 50 employees we've raised over $150 million of venture capital and are poised to bring a novel solution to Market to address the second deadliest yet most preventable cancer in our country today I have three topics to highlight the importance of startups to our economy the challenges that exist for startups when raising capital and how good policy can help facilitate access to Capital startups are critical economic
▶ 0:32:48growth drivers in the United States in 2023 over 5 million businesses were started in the us alone small businesses defined as having fewer than 500 employees have accounted for 71% of total do job creation in the current business cycle and new startups alone account for 26% of total job creation serving for centuries as the global epicenter of innovation has made America's economy the strongest in the world looking forward as we move into new phases
▶ 0:33:18of disruptive change is critical for our country to continue to support startups through a strong Workforce supportive infrastructure good government policy and a culture of Entre R preneurship and risk-taking approximately 90% of startups fail in one study of failed startups the top reason cited for failure was running out of cash or failing to raise New Capital startups need Capital to cover the initial cost of launching and operating their business supporting expenses such as product development
▶ 0:33:48marketing hiring office space inventory and research fundraising is a constant challenge for Founders it is estimated that venture capitalists fund fewer than 1% of the pitches that they receive at genosi we have navigated the full spectrum of capital raises friends family angels all the way through institutional venture capital and we have seen all of these challenges firsthand but we also count ourselves as fortunate having the background to overcome being young
▶ 0:34:18first time entrepreneurs raising Capital outside of Silicon Valley given the importance of startups to our economy and the challenges that exist for startups in raising Capital it is critical that government policy facilitates and does not stifle access to Capital our experience highlights the importance of the legislation under consideration by this subcommittee early stage investors like to deploy Capital locally and areas such as the Midwest see significantly less capital and venture
▶ 0:34:48capital investment per capita than other areas such as the West Coast lessening the burden for Angel Investors lowering the barriers for Venture fund formation and making crowdfunding more pervasive would all help startups access vital growth Capital genoscope will require additional Capital to grow and is preparing to access the public markets however disclosure requirements and the regulatory burden can be daunting elating these barriers for emerging growth companies makes sense lastly included
▶ 0:35:19here appended to my written testimony is a copy of written testimony that I submitted to your colleagues on the Ways and Means Committee last October describing the valley of death that life sciences startups often face after FDA approval but before Medicare coverage and inclusion in quality metrics beyond the topics of access to Capital I've highlighted today improve Federal policies that streamline Medicare coverage and payment and more Nimble federal agencies that Embrace Innovation are the key ingredients that life sciences startups like genoscope require to cross
▶ 0:35:49the valley of death and in turn boost the economy increase job growth and save lives I thank you all for your attention to these issues of the important work you're doing on the subcommittee to ensure access to capital thank you again for the opportunity to provide testimony and for your consideration of my recommendations I stand ready to serve as a resource to you and your col colleagues and welcome any questions thank you Mr Bernell now Mr uh Conwell you are recognized for five minutes for your oral
▶ 0:36:19remarks chairman woman Wagner ranking member Sherman members of the subcommittee thank you for the opportunity to testify today on the import of creating better access to capital for both entrepreneurs and those who fund their amazing companies my name is mckever Edward Conwell II and I am the founder and managing partner Rare Breed Ventures which I am representing today Rare Breed is a venture capital firm that invests in and supports Innovation Innovative startups at the earliest stages in 2020 I launched rare Bri ventures in a response to the lack
▶ 0:36:49of access to capital for founders of color and Founders outside of major investment hubs like New York and California as well as a response to lack of cultural competency from many VCS when it comes to investing in Founders who don't look like them and don't come from similar backgrounds these two issues came to me in the form of one entrepreneur and a woman by the name of shaa Step Jones a black single mom from Baltimore who was creating a dryer for wigs I immediately got what she was creating
▶ 0:37:19but other investors didn't so after three years of watching her get nothing but NOS from folks who didn't look like her and didn't understand what she was trying to do she decided the only way for her to get access to Capital was to become a surrogate mother even knowing that black women are three times more likely to die from pregnancy related causes this is nothing to say about her three degrees and the fact that she was a former patent uh patent examiner right this is why I started a rare breed but I didn't have a network of wealthy folks to raise from that forced me
▶ 0:37:50to get creative and use two regulations to help first was rule 506c of Regulation D which allows for public solicitation of fund offer for fund offerings but requires that every investor in that fund be an accredited investor the second was an amendment to section 3c1 of the Investment Company Act of 1940 which allowed for a fund of 10 million or less to raise from up to 250 investors instead of only a 100 the first regulation allowed me to use social media Twitter mainly to meet with
▶ 0:38:20many uh potential investors thanks to this I was able to have 1,128 meetings in my first 90 days and more than 4,000 me in total the second regulation allow allowed me to offer investors to invest as little as $10,000 compared to the traditional 100,000 they would have had to put up before the amendment this led to me having 194 investors in rare breed of those investors 83.5% invested 50,000 or less many of
▶ 0:38:50these investors are people of color and firsttime investors and funds because they hadn't had access to make such an investment and couldn't risk the high High minimum thresholds for a fund this means that before they that means that before they were limited to investing in companies either directly where the where there is a much higher risk of losing all of their money or investing in stocks of publicly traded companies which the average Venture fund has historically outperformed according to a Harvard Business Review but unfortunately without
▶ 0:39:20uh something like the I can act almost all of those small dollar investors who make up 83.5% my investors will not be able to invest in Rare Breed Ventures fund to that's 162 out of 194 investors since our new minimum will have to be 250,000 plus the current rules limit the amount of capital and sources of capital for smaller and newer investment funds leading to less Capital to help Drive Innovation economic growth and job creation especially when talking about companies started
▶ 0:39:50by founders of of color because we know that in particular black Le funds are four times more likely to invest and black Le companies also keeping in mind that almost all of the black Le Venture funds in America would fit under the new rules under the Ian act because most of our funds are under 150 million with the I can act such limit such limiting factors would be greatly reduced allowing more credit investors to have the opportunity to participate in this asset class with lower minimum invest with lower minimums investors can
▶ 0:40:21potentially invest smaller amounts of money into more Venture funds to spread out their risk and better diversify their invest Investments today many funds have to turn away investors because of these current limits this results in millions of dollars if not billions and potential funding for future Innovation and job creation while also excluding investors from being able to truly diversify their own Investments and limiting the ability and wealth creation even more so those who do have enough wealth to continue to participate in the Venture asset class are almost
▶ 0:40:51exclusively from a non-diverse population this only serves to further wind the racial the racial and gender wealth Gap in America and puts limits on the type of Innovations we see in this country I am excited to see Congress working through issues that impact the access to Capital that drives Innovation as someone who spent my entire career in Venture Capital as an advocate for access to Capital and reducing barriers I look forward to being supportive and assisting this Committee in any way possible thank you for the opportunity to testify today I look forward to any of your
▶ 0:41:21questions we thank you Mr Conwell uh next we we'll hear from Miss Saba you are recognized for 5 minutes for your oral remarks chairwoman Wagner ranking member Sherman and members of the subcommittee thank you for the opportunity to testify before you today my name is Rebecca cassaba I am CEO and co-founder of dealmaker the leading platform in online Capital formation to date dealmaker has facilitated over two
▶ 0:41:51billion in capital rais for over 900 American companies creating up to 40,000 new jobs I come from a family of entrepreneurs and am a former practicing attorney having spent over a decade in private practice in the capital markets the teamat dealmaker have the distinct honor of working with Founders building businesses they love we see firsthand the difficulties of the entrepreneurs journey and how much they and their families sacrifice to grow a business and create jobs
▶ 0:42:21in America we know the founder who slept on the store room floor for a year until he could get his business funded we know the founders who stake their personal relationships and reputations raising money from friends family and colleagues in order to get the idea they believe in off the ground the very hope vision and purpose of our Founders is why we do what we do this is the essence of the American dream and what drives job creation every day our team is privileged to serve these Founders
▶ 0:42:52in the most fundamental way possible and we take this responsibility seriously we do this by implementing congress's pioneering vision of the jobs act itself in the spirit of this Vision we submit three proposals designed to ignite economic growth and create new American jobs the first proposal is to remove the offering caps that inhibit growth and interfere with job creation reggae has capped at 75 million at dealmaker we regularly see companies who could raise
▶ 0:43:22more than 75 million we ask Congress to remove the offering cap alt together together in the modern internet era a cap on rega officially con constrains growth because of the cap companies are using alternative structures like donations tokens or institutional funding removing the regga maximum creates a pathway to Bringing unregulated Capital formation activities into a regulated space to grow the space we need to change the perception that only small companies can use
▶ 0:43:52the exemption reg CF is currently capped at 5 million which should be increased to 10 million the 2020 increase in the reg CF cap from 1.25 to 5 million stimulated Market activity by 250% the reg CF ecosystem is maturing with a growing prevalence of broker dealer participation as opposed to just funding portals companies are regularly reaching the $5 million cap on reg CF offerings when companies hit this maximum
▶ 0:44:23they fa face two suboptimal choices either return turn to traditional funding sources or prematurely transition to a more costly reggae our second proposal is to harmonize the reg CF and rega regimes today reg CF and rega exemptions are being used for similar purposes investors are investing in both types of interchangeably accordingly the rules between the two should be harmonized the best elements of each regime can be combined and shared
▶ 0:44:53this would be easier for businesses investors and Market particip ipants to understand and lead to better compliance three places where harmonization would remove significant friction are rule 12g rule 5110 and the marketing rules we have cited a number of the bills tabled where these harmonizations can be addressed finally the third proposal is to expand the availability of reg CF and rega to more participants to grow the space and create more jobs currently reg
▶ 0:45:23CF restricts the amount of money companies under common control can raise this restriction differentiates reg CF from traditional Capital raising mechanisms and reg a which do not have such limitations if the common control prohibitions are removed it would allow more VCB companies to enter the space this would capitalize more mature funded businesses and could also increase the survival rate of venture back businesses in conclusion let's reflect on how far we've come since
▶ 0:45:54Congress enacted the jobs act in 2012 Reg and reg CF have raised $3.7 billion reg CF has outpaced Venture Capital Growth by 4.4x as compared to 1.3x the capital markets have been Diversified as Congress intended to weather economic downmarket conditions during the worst year of the recent down Market cycle in 2023 the online Capital markets stayed over 40% stronger than the VC markets companies we supported
▶ 0:46:24survived and thrived when no one thought it would be possible by increasing the offering limits harmonizing the rules and allowing for more Capital markets participation in the space Congress will unlock even more growth in online Capital markets leading to further job creation the work that Congress is doing is critical and core to the job creation ethos of America as a result of your work we have the privilege of seeing firsthand our customers factories in new communities
▶ 0:46:54that are overlooked by Silicon Valley and wall Street and the pride that it brings them we are grateful for the opportunity to be a part of this hearing thank you Miss cassaba next on Deck is Miss p uh penedo you're recognized for five minutes for your oral remarks chairman Wagner ranking member Sherman and subcommittee members thank you for inviting me I appreciate this opportunity I have been a Securities lawyer for over 30
▶ 0:47:24years and I'm a partner at Mayor Brown my comments today are reflect my own views I began practicing in the early 1990s when IPOs including IPOs by smaller companies were quite plentiful that gave me the opportunity to work on many IPOs for companies of all sizes it was a time when the financing trajectory for companies was quite well understood and predictable within 5 to seven years of inception a company generally sought a
▶ 0:47:55liquidity event and usually that liquidity event was an IPO historically an IPO allowed a company to raise a significant amount of capital more Capital that it could raise through any other means an IPO was also regarded as an achievement for Founders and for the company's investors during that period of time there was also an infrastructure that supported these companies over time the market has evolved as we've discussed exempt offerings have become more significant with increased use
▶ 0:48:25of shelf registration statements promulgation of various safe harbors shortening of the rule 144 holding period at the same time there's been a proliferation of additional investors in the private markets hedge funds private credit funds private Equity Funds and other investors the shift away from IPOs in the public markets has occurred as a result of Market structure changes and increased regulation with sarbanes Oxley and The Dodd Frank Act and the costs
▶ 0:48:55associated with being a public company in recent years more prescriptive disclosure requirements have Arisen that add to this list more recently adopted disclosure requirements have moved away from the Bedrock principles of our Securities framework that of materiality so what's the upshot of all of this we have fewer public companies now than in the 1990s the overall number of IPOs has declined based on historic levels
▶ 0:49:25smaller public companies are are disproportionately impacted by the costs of being public once they are public they benefit less from their publicness what do I mean by this I mean that once a company becomes public historically it was always the case that it should be easier for these companies to raise money in the secondary Market that they would have liquid stock that there would be research analyst coverage for them but the historic promise of being public
▶ 0:49:55is not being realized ized for our smaller and mediumsized companies they're bearing the costs of being public but they're not reaping the benefits we should fix this Reliance on funding in the private markets is outpaced reliance on registered offerings regulators and legislators have expressed concerns regarding the growth of the private markets and their opaque character as I noticed noted when I previously appeared before the subcommittee it would be a really grave mistake to look at
▶ 0:50:25the private markets as being suspect and in need of Regulation and as the public and the public markets by contrast as being transparent and as being the best and the only solution for most companies regulating the private markets out of existence is not going to magically bring back institutional ex investors who are going to support micro cap and small cap stocks nor is it can magically bring back equity research coverage for small and micro cap
▶ 0:50:55stocks that would be forced to become SEC reporting companies before they're ready to do that it's important to recognize the markets have changed in really significant and irreversible ways and not to respond with reactionary responses most private Investments are limited to accredited investors only 19% of us households qualify as accredited investors however in practice I can tell you that most Investments
▶ 0:51:26are limited to institutions and not to accredited investors most of the bills under consideration today would fix this in addition they would strike the right balance and reach a new equilibrium between private and public and address other changes including providing access to a broader group of individuals through potentially registered funds and provide greater access to uh to
▶ 0:51:56Capital formation for bdcs and other registered funds that address Capital formation in my testimony I suggest a number of other recommendations for consideration so I thank you for your attention thank you Miss Peno and Miss Thorton you are now recognized for five minutes for your oral remarks thank you chairman Wagner ranking member Sherman and members of the subcommittee thank you for the opportunity to testify today Capital markets work best when there's
▶ 0:52:27an informed bargain between the seller and the buyer of Securities investors seeking returns provide their Capital to businesses and funds who in turn put that Capital to use information is an essential part of that bargain without it there would be significant investor loss and economic waste US capital markets are the most robust in the world in large part because they require those seeking to raise capital from investors to provide basic information to investors the government doesn't block investors it doesn't approve or disapprove
▶ 0:52:57of Investments Congress decided long ago that investors needed the government to ensure they had fundamental accurate information and basic rights and with those tools investors would be empowered to drive our Capital markets and economy forward the disclosure of information improves price Discovery makes the markets more fair more orderly and more efficient and protects investors from abuses such as a information asymmetry even the most sophisticated investors cannot exercise their Superior knowledge and expertise if they don't have reliable
▶ 0:53:27information about a company's financials operations and risks many of the bills before the committee today however would expand the ability of private Market companies and funds to sell Securities to a broader range of investors without providing accurate information about operations management risks and financial position the amount and type of information that potential investors and other participants in the public markets receive this is not expanding or improving Capital formation it is increasing risks for more investors and tilting the bargain in favor
▶ 0:53:58of the private party party seeking Capital it is expanding the reach of those hidden risks into potentially millions of American homes the timing for M much of these proposals seems particularly ill advised private markets are becoming ever larger without mandated information asset prices frequently become detached from the underlying intrinsic values of the assets themselves especially among large highly valued private firms or unicorns private company and private fund Stakes are frequently being sold in Loosely regulated secondary
▶ 0:54:28markets at fractions on the dollar and different groups of investors are frequently treated differently and provided with different information or none at all and while there is uh strong evidence that fraud occurs it's difficult to police introducing to these markets nonprofessional investors who don't have dedicated accountants lawyers risk officers or investment professionals or billions of dollars that they can afford to leave locked up for 10 years at a time is extremely risky and will likely lead to extensive loss for those investors and waste of capital
▶ 0:54:59it could it could facilitate the ability of private companies funds and their Founders and early investors to offload their riskiest worst opportunities onto a less Discerning customer that's not improving or forming Capital it is simply enabling a wealth transfer away from the retail investors who lack information worse the Securities and Exchange Commission which ensures this essential bargain between companies funds and investors is facing significant changes right now that could hamper its ability to protect investors when the Securities laws
▶ 0:55:29were first adopted and in the decades thereafter offerings to even a single person or to a small number of employees were deemed to be public offerings in need of being registered but beginning in 1982 with the promulgation of Regulation D there's been a proliferation of exemptions from the public disclosure framework the stated intention of those exemptions and their subsequent expansions has been to provide more access to capital for small businesses but the reality is that those exemptions along with a couple of loopholes in the law have enabled virtually any company of any size
▶ 0:55:59to obtain capital from the public without complying with the public disclosure framework as a result a substantial and growing number of companies are choosing to remain private as they raise capital and often only end up coming to the public markets to cash out significant investors and fun Founders the result of Congress and the SEC creating and expanding exemptions from the federal regulatory disclosure framework is that the vast majority of capital raised is exempt and that explosive growth of the private Market markets has come at the expense of public markets the problem
▶ 0:56:29is not that the rules prevent small businesses or startups from obtaining Capital it is that the rules allow allow today allow companies with billion dooll valuations billions in revenues and thousands of investors to never provide basic information to investors regulators and the public and private funds to raise billions of dollars from underlying investors without basic expectations like timely comprehensive and reliable disclosures about their finances governance and operations this the situation enables Capital Distortion Like inflated
▶ 0:56:59valuations lacks internal controls inconsistent disclosures across investors and potential Fraud and Abuse and today there are more than 1,200 private companies with more than a billion dollars each in my written testimony I've included several recommendations for how to rebalance public and private markets and I want to thank you for inviting me to testify today I I look forward to answering questions I thank you Miss Thorton for your testimony we'll now turn to member questions I recognize myself for five minutes
▶ 0:57:29for questioning Mr Barnell access to venture capital funding is not evenly distributed with most funding concentrated in California Massachusetts and New York uh entrepreneurs in other parts of the country such as St Louis where you and I come from face greater difficulties in raising the capital necessary for scaling can you discuss some of the difficult you faced early on in raising Capital absolutely
▶ 0:58:00uh we faced no shortage of of challenges um you know we were two students firsttime entrepreneurs raising capital in an industry that's highly regulated and Technical I would say hands down the the biggest challenge we had early on was that um you know in St Louis uh there were only a handful of early stage Venture firms um and raising those first couple rounds is always the most challenging um and so raising that Capital was definitely the biggest challenge have you you ever met with VCS in California for instance and what was your
▶ 0:58:30experience trying to gain investor interest in your company extensively so we spent a lot of time even early on going to the coast and one things that we one of the things that we found particularly for early stage investment Angel seed is that investors like to invest in their own backyard um I remember an angel investor uh who ran a fund out in San Francisco telling me uh we love what you're doing we love the technology you've built but why would we invest you and I invest in 25 companies just like you in San Francisco
▶ 0:59:01uh Mr berell can you discuss how the policies discussed today uh and the the bills that we're putting forward some 36 of them can improve access to capital for startups in areas like St Louis yeah one of the other things I wanted to highlight from my experience and I'll focus on our early rounds as well um there is no shortage of people that want to invest in Innovation want to invest in companies like ours the next big growth companies in the country but I can say coming from St Louis
▶ 0:59:31um versus you know traditional VC hubs we don't have as many of those systems and infrastructures to do it there aren't as many demo days and incubators and Angel funds for people to join and participate in so as I mentioned in my in my written testimony things such as making it easier for Venture funds to form uh making it easier to make Venture Investments crowdfunding uh being thoughtful about the incred investor definition all of those things really would help companies like ours thank you Mr Rell
▶ 1:00:02Miss penedo uh retail investor access to pooled investment vehicles that invest in our private markets uh seems to be overly restrictive uh whether it be through close in funds or other types of of funds do you believe that such restrictions on retail access are Justified I agree uh the retail access is overly restrictive in particular uh into interval funds closed end funds
▶ 1:00:32and other funds and to address some of the concerns that Miss thoron uh alluded to it would be prudent to um look at modernizing um the regulation of uh funds and fund um access for retail investors that's included in my testimony including specific recommendations along those lines it would be a way to allow access to other investors in a very controlled
▶ 1:01:02way within the framework provided by the Investment Company act and with information requirements so it would address many of the concerns that Miss Thornton recommended currently for example many funds um can only be sold to qualified clients many funds are limited in their ability to invest uh in private private funds or in private Securities um a number of the bills under consideration address
▶ 1:01:33correct now let me ask you would removing the limitations on Clos and fund investments in private Securities help address this issue it would address in part um the issue of directing more uh of of increasing or promoting Capital formation is there is there anything in the Clos in fund proposal discussed today that would move investor protections not one thing and why are private markets significant to Capital formation
▶ 1:02:03and why should we pursue policies that make private Market an attractive place to raise capital and and do such reforms have to come at the expense of making our public markets more attractive we shouldn't see it as a zero sum game it would be entirely wrong for uh us to to see these as in conflict with one another um the sec's office of advocate for small business um which takes into account and has as its goal
▶ 1:02:34investor protection makes it quite clear that um the private markets um should not be seen as competing with the public markets we need vibrant private markets thank you Miss Peno uh the chair now recognizes the ranking member of the subcommittee Mr Sherman for five minutes questions as our first witness pointed out 90% of these startups fail but it is a national interest to see them funded because the 10% that
▶ 1:03:04succeed can revolutionize our society that's why we need to make sure that these companies are able to get bank loans that bdcs are able to invest and that individual investors can invest but we want to protect the individual investors Republicans have often said that there's been a decline in the number of public companies and therefore there shouldn't be and that's because we put too many burdens on public companies if you want to register Securities it's not that easy
▶ 1:03:34but another reason why there are fewer public companies is that we've made it easier to stay private and nothing is a greater example of that than the definition of accredited investor which in effect has been over 90% repealed well you might ask well the statute's the same yes the statute says a million dollar makes you wealthy because it was passed in the 70s that today would be
▶ 1:04:07million so we have by inaction I think any statute that we pass that doesn't have an inflation adjustment in it is a mistake and this one is a big mistake it hasn't been adjusted for a long time so we have made it much much easier to be an accredited investor on the the wealth and income standard assuming that's even the right standard um Miss thoron um we have another Rule and that is a company becomes public if it has 2,000 owners
▶ 1:04:38but we got a giant loophole first of all we uh we went that we allowed the SEC to take that from 500 to 2,000 arguably should be taken back but when we count beneficial owners if there are 5,000 customers of Merill Lynch who are all have chosen to invest in a single security those 5,000 people do they how many do they count as under this rule probably one one that is new math
▶ 1:05:08taken to a whole new level if you're if we're going to have a limit on beneficial owners and I think we should we have to see through the street name and uh uh it is convenient to hold the security and street name you may but uh but we can count the beneficial um as to accredited investors uh a lot of our discussion here is on how to reform that we have
▶ 1:05:38now a standard B based on wealth and income and really we set those standards in the 70s so they're crazy but wealth and income even why are those relevant they either canote knowledge on the theory that rich people know a lot about sometimes or ability to absorb the loss I would say that we ought to devise standards that are focused on knowledge CPA uh
▶ 1:06:08maybe attorneys or the advisory team that must be truly independent and focus on ability to absorb a loss because our current role makes you an accredited investor to invest five or 10% of your money in one of these startups or 120% % of your net worth in one of these startups we value your wealth based on how much money you have independent of your home but then we say you can put a mortgage on your home now that you're a credit investor to invest
▶ 1:06:38in a company with a 90% likelihood of failure so I hope look forward to working with a definition of accredited investor that focuses on limiting the percentage of one's net worth or income that you're investing in any one issuance limiting what you put into all private companies and focusing on knowledge uh of the investor or their truly independent Advisory Group or advisors
▶ 1:07:09but to have wealth or income the idea that somebody has an income of a $200,000 and therefore is highly knowledgeable and expert again my colleagues have incomes of $200,000 just for working in Congress and only some of them Geniuses so um I look forward to uh uh to working on that and uh uh I yield back
▶ 1:07:39gentleman yields back the chair now recognizes the gentleman from Arkansas Mr Hill who's also the chair of our full committee on financial services for five minutes thank you chairwoman uh again thanks the panel for great testimony we appreciate you being with us today um Miss scova I wanted to talk about the sec's estimates on the cost of being a public company these are the same numbers that I have in my notes from 2015 so they don't seem very updated to
▶ 1:08:09me they say that to go public a traditional IPO has uh upfront costs of about 2.5 million and annual compliance cost of a million point one and a.
▶ 1:08:22half million thereafter I was uh the the uh interim chair of a small cap public company before I came to Congress probably 10 or 13 14 years ago and our quarterly bill from just the accounting firm uh was $400,000 a quarter so those numbers seem super out of date to me do you think they're accurate
▶ 1:08:52um I'm if it's okay I will volunteer answer that yeah I I directed it to you so oh I'm I'm Anna okay okay yeah I can't see your name from over that's that's quite all right so um you're you're absolutely correct that those are those are quite low um the average cost of going public for a company these days is is more uh in the line of you know just for for is probably
▶ 1:09:23more around 4 million without counting the the underwriter spread which is usually 7% of the amount that's offered and then the cost of being public um in the sec's office of advocate for small business um the costs are estimated and the study that the SEC put out in December of 2024 and the costs are significantly higher just as you've just as you've recounted
▶ 1:09:53and what's even more significant and more troubling um as noted in The sec's Advocate study is that the costs are disproportionately born by smaller and mediumsized businesses um particularly the costs associated with socks compliance yeah this has just been a 25y year you know race to the bottom for encouraging companies to be public in this country and we can do that in a safe and sound way but the the company that
▶ 1:10:23I served as an interim chair of so many many years ago you know just couldn't possibly do this it had a market cap at the time of like 75 75 million and you know they were spending 6 million they had their profitability was probably 6 to 10 million in uh earnings before interest in tax and they're spending what I just said you know two million of that a third on being public so it was a Preposterous idea they went private as you can imagine
▶ 1:10:53and we had uh uh we don't have 5,000 companies in the Wilshire 5,000 anymore we have 3700 so we don't even have enough qualifying public companies to be in the Wilshire 5000 index we only have 3,700 and that is because these costs are out of control in addition to the benefits of being private I'm for if people want to be private those costs have come down the compliance burer is better you can get to be a much
▶ 1:11:24larger cap company with private financing no problem but for people who want to access the public markets we have built a wall that is ridiculous let's say we want these costs you're talking about to be 1% of total expenses you'd have to be making uh by my calculation $500 million before tax to Warrant being public well that's ridiculous we're choking off the Golden Goose that lays
▶ 1:11:54the golden egg for Pension funds labor Pension funds Ira accounts 401K accounts so I hope Madam chair that we can do something about ongoing cost and work with the Securities and Exchange Commission and those Commissioners to bring it down to give more opportunities to our businesses seeking liquidity that way um let's talk about uh accredited investors briefly uh you think my idea of people that have professional
▶ 1:12:24qualification in their area of expertise Merit them being considered a investor uh consistent with some of the changes that the SEC made in 2020 of adding professional qualifications yes and this goes to um what uh Mr Sherman was saying of financial sophistication Financial sophistication has always been at the root of the definition thank you very much for that and Madam chair my time's expired you back
▶ 1:12:55yals back uh yes and we have a number of bills that we hope are going to uh help increase access to our public markets America has fallen behind uh the chair now recognizes the gentle woman from California Mrs Waters who is also the ranking member of the full committee for minutes Madam chair thank you so very much uh well a lot of time has been spent on um what is what is not
▶ 1:13:25happening with the SEC um I am reminded uh that Democrats have really been in the Forefront of providing access to Capital uh and support of small businesses um Democrats have a long history of promoting Capital formation both for small businesses and for communities that have been historically shut out of our Capital markets and banking system now if you will recall during the
▶ 1:13:55pandemic and after it became clear that the paycheck uh paycheck Protection Program or pppp was only serving Mega Banks and coner clients when we put that money together and some of the biggest corporations at Etc um went after the money and we were able to put more money into it Nidia Vasquez and I put another I think it was about $60 billion dollar into the small businesses uh the
▶ 1:14:26um Community Banks etc etc and um what I realized doing PPP was good it is for us to be able to make Capital available uh to small businesses and when I travel around the country and I ask the business small business people how many participated the hands go up uh because they remember and it saved their businesses it helped them them to keep their
▶ 1:14:56personnel etc etc additionally in December 2020 I worked with secretary minuchin who happen to be a republican H and Democratic colleagues to secure 122 billion in capital Investments um and this and grants uh for um cdfis now cdfis are very important Community Development financial institutions
▶ 1:15:26we've worked very hard and I want to know whether or not the opposite side of the aisle are going to support us as we go for increases for cdfis so that we can have more money for small businesses it really has done a great job in helping them to have access to Capital and I want you to know that the cityfi and minority these minority depository institutions could be leveraged up to 100 10 of 120
▶ 1:15:56billion in new financing for small businesses in the American Rescue plan I led the effort to provide 10 billion to the state small business credit initiative to support tens of billions of dollars in new loans Investments and technical assistance to support small businesses so we have several pieces of legislation like my bill entitled promoting and advancing communities of color through inclusive Lending an act to authorize 4 billion
▶ 1:16:27in additional support for cdfi and minority depository institutions so we've we've done a heck of a lot for small businesses it's time to stop talking um about we've got to do more only thing we can do is get rid of regulations that protect people the SEC is our comp on the Block and they protect these investors it's time to talk about what we're all willing to do to make sure we have access to Capital
▶ 1:16:57we have Avenues by which we can uh we can appropriate money into in order to do what we talk about we want to do and uh I'm going to have a whole package of bills more bills on how we can support access to capital for small businesses and I want some support from the opposite side of the aisle okay I'm sorry I didn't have any questions for you we've been talking about this for and so I'm trying to you know help
▶ 1:17:28everybody to understand is it's time to act Capital formation should be at the top of our agenda I yield back I I I thank the uh the G General a she yields back and I thank her for her her passion and fervor on this issue it is capital formation is the basis of who we are uh in terms of the American uh economic system and capitalism so we passed 36 Capital formation bills across the house floor last year many in a bipartisan way and we hope to get Senate
▶ 1:17:58support this time around um I now recognize a gentleman from Oklahoma Mr Lucas who is also the chair of the task force on monetary policy treasury market resilience and economic Prosperity you're recognized for five minutes sir Madam chair before I begin I'd like to submit for the record a letter of support from MetLife on my bill with Mr gimer Mr Foster and Mr bar the retirement fairness for Charities and educational institutions Act without objection thank you madam chair and thank you to our Witnesses for testifying today
▶ 1:18:28the United States has the most robust Capital markets in the world businesses investors the whole economy benefit when private and public markets are strong resilient and attractive I think we all agree on that Mr Barnell could you continue to talk for a moment about why we should focus on improving access to markets particularly in capital intensive Industries I'm from Oklahoma so Agriculture and energy are near and dear to my heart but they are incredibly intensive
▶ 1:18:59absolutely so uh speaking to our experience um you know there and speaking of St Louis in particular there are so many great ideas coming out of academic institutions um but capital is needed early on you know we hear a lot about uh minimum viable products and beta testing in capital intensive Industries you need Capital to prove out the concept before you can take the next step and so ensuring we have policy that does that is critical during the previous administration the SEC pursued an aggressive
▶ 1:19:29rule making agenda the breadth and depth of those rules were simply unprecedented and we've never seen anything like it I've made the point that the former chair seemed to Value speed and scope over quality during his tenure in my view the SEC should prioritize robust public engagement so we can trust that Ru making rule makings are bolstering our Market it's not stifling
▶ 1:20:00uh Miss pin how can this Administration differ in its regulatory approach to strengthen both public and private please we've already seen a very different tone from the acting chair of the SEC um and he had has uh articulated in a speech uh just yesterday that
▶ 1:20:30uh the SEC intends to engage the public and solicit uh comments from the public and intends to prioritize Capital formation which is very welcome and intends to solicit comment from the public on rule makings again U returning to uh the sec's historic uh tradition in in terms of the bills that are before the subcommittee today I think that they strike an appropriate tone
▶ 1:21:01uh in in considering the realities of the private markets and acknowledging that we're not going to um roll back time and we need to um really do what we can to Foster robust private markets while um doing so in a way that acknowledges the importance of investor protection so whether that's um promoting changes to the accredited investor definition
▶ 1:21:31that um recognize that there are additional financially sophisticated parties that can be accredited investors for example if chaperoned by um by registered broker dealers by registered investment advisors if they're advised by others uh in making those decisions if they pass a um a test that's administered by the SEC or by finra those are
▶ 1:22:01good qualifications and are wholly consistent with the mission of identifying investors that can fend for themselves those are not loopholes so those are good viable ways to qualify somebody as an accredited investor likewise um a lot of the changes to uh that are considered in the bills today that would modify for example the rules relating to business development companies that would
▶ 1:22:32reverse uh the sec's policy from 2006 relating to acquired fund fees that would bring more investors into business development companies that's an important change it would bring more uh capital and more investors into bdcs and that would promote Capital formation we spoke a little bit about closed end funds previously when chair Wagner asked about it um that would allow uh closed in funds to be um sold
▶ 1:23:02to investors that aren't accredited investors again an important change that would be beneficial yet protective of investors because closed 10 funds are regulated under the 40 act and under the 33 act so um all of those things are very positive thank you for those insights and it's important we listen to stakeholders once in a while isn't it chairman here here here and we're going to have a great opportunity
▶ 1:23:33Financial services. house.gov right following this this hearing so everyone all stakeholders Can U give their two cents the chair now recognizes the gentleman from Georgia Mr Scott for five minutes thank you madam chairman now miss thordon uh the Equity Market has been transformed by an explosive growth in the private Equity
▶ 1:24:03space and uh 25 years ago just think we 7,000 listed public companies in the United States and less than 1,000 companies owned by private Equity investors today more than 10,000 are owned by private Equity investors and just 4,000
▶ 1:24:33are P are now publicly listed how do you account for this well basically it's uh because the rules have been changed since around 1982 as I said in my testimony um and expanded to the exemptions to the public disclosure framework and the need for companies to be public companies and comply with that framework um we also have an erosion of the 12g limit on company's size
▶ 1:25:04when they can be in the private market so now companies that are whose Shares are held by an Institutional uh manager of some sort um can basically count as one share and and so when you have that 2,000 shareholder limit it's kind of meaningless when you have that situation and you have huge companies in the private markets um so now basically companies can grow huge in the private markets we have you know 1,200 as I said worldwide
▶ 1:25:34of in the private markets over 600 of those are us-based companies um many of them are multi-billion dollar companies and they don't they aren't mandated to disclose information um which is you know I I hear comments about how much disclosure has to be made when you go public but the reality is that when companies do fill out all that IPO information then for the first time in perhaps years disclose their F financials and those financials are audited
▶ 1:26:04by an independent auditor of course information comes out about the true value of the company and um so I I think it's incumbent upon us to insist that for new investors especially that that information be disclosed it's critically important when a company hasn't been disclosing for many years well thank you and now we always uh concerned about the two anchors that weigh
▶ 1:26:35here interest rates on one hand inflation on the other how do you see that having an impact those two I'm not I'm not really sure about that but I think that um as long as we make the rules such that people have a lot of options for raising money then they should be able
▶ 1:27:05to do so and we may need to provide more opportunities for small businesses for example to actually get loans and to have more funding um through cdfis um or whatever um but we also need to make sure that public companies all companies disclose what the impact of those changes in interest rates and changes in um inflation have on their company on their financials and so
▶ 1:27:35it's critically important for example that we have the the public Company accounting oversite board um which is you know make sure that the Auditors who audit financials of public companies actually are doing everything right so I think that's maybe how it's connected I've kind of danced around here but I I think that's really why how it's connected and we need to keep all that structure in place to make sure that investors have information about the impacts of these Market factors yeah you're absolutely
▶ 1:28:06right because right now these are the two parameters we're dealing with yeah interest rates and inflation um and uh our Administration is dealing with this we're dealing with it uh we're moving to downsize the federal government we're doing things right now that have never been done in restructuring it
▶ 1:28:37and we got to be careful and I'd like your points on what we've got to do thank you very much gentleman yields back the chair now recognizes the gentleman from Texas Mr sessions for 5 minutes mam chairman thank you very much this is the most interesting hearing on not just Capital formation but the development of small business IPOs and all the things that lend themselves to America's future Madame
▶ 1:29:07chairman I'd like to ask unanimous consent to interent to the record a a letter from Mr Teague Egan founder and CEO of energy Explorations technology known as energy X where he talks about the future of American Capital strengthening public and private markets by increasing investor access and facilitating Capital formation I ask that that please be entered in the rec objection uh Madam chairman we heard from
▶ 1:29:37Andrew Barnell who is from St Louis Missouri where I used to live know St Louis pretty well and he spoke about not just about the need for uh for IPOs and and New Economic drivers for small business but talked in his his uh testimony to us about maybe being isolated in a market that was not as robust for raising money so I would like to go if I can to uh Mr
▶ 1:30:07P Mrs panado and talk with her about and I read in her bio about how she brings a lot of money from overseas to America foreign financing that's here I'd like to drill down on some of the this because you talked about a balance that was necessary between private and public registered funds but specifically I'd like to talk about uh the role uh of of engaging
▶ 1:30:39finders within the broker dealer community and and we're we do legislation here and if you have any ideas about uh exempting finders from registration maybe in certain areas but add to this uh Marketplace in cities that may be out of large investor areas I'd like to ask you to please help us along that thinking please
▶ 1:31:10um the SEC has uh considered uh and and various advisory committees to the SEC have considered a finder exemption and have suggested a framework for an exemption ion for finders um for a number of years now and the small business Forum that the SEC hosts every year has um suggested and recommended that the SEC adopt a framework for finders I think
▶ 1:31:40that a limited framework for finders from the exemption for registration from uh broker dealers would be um would be something that would be advisable um however it should be a limited framework in light of the fact that um we do have uh a need both at the State uh level and at the federal level to register um persons who are providing services
▶ 1:32:10that that are broker dealer related so I would look to um the language that um the Securities and Exchange Commission has considered previously in terms of the finder's exemption and the language that the advisory committees to the SEC have previously considered in terms of what would be appropriate by way of a finder's exemption along those lines I would also consider um adopting finally
▶ 1:32:40you brought up the topic of foreign um activity I would consider adopting the uh or encouraging the SEC to undertake a study regard regarding adopting the amendments to 1586 which are exemptions for um foreign uh for certain the activities by um by uh foreign broker dealers um for for limited activities in the United
▶ 1:33:10States these were amendments that were proposed by the SEC they were well received generally by practitioners and by others and and they languish and uh they Rel largely to um the activities of foreign broker dealers with major investors this is all I think good news at least to me because we found that there are people that want to over regulate not only broker dealers they want to
▶ 1:33:41uh come in with other areas of government and hold people necessarily accountable about factors that were beyond their control perhaps inflation perhaps interest rate changes so I think it's very important I want to thank each of you for being here today uh and I think Madame chairman that gives us lots of room to work within a well regged idea and I want to thank you for holding this hearing today and I yield back my time thank you the gentleman yields back and the chair now recognizes
▶ 1:34:11the gentleman from California Mr Vargas for five minutes thank you very much Madame chair and I appreciate very much this hearing today and I thank the ranking member also um most of us are interested in protecting investors without sacrificing opportunities to generate wealth and I think that's what we've been talking about today but I do think that the cost of disclosure has been mentioned many times here um you have to place that against it versus you know the information that you need the accurate information to protect investors
▶ 1:34:42and that that's one of the issues I want to talk about the second one is and I don't want to put words in anyone's mouth but I I did hear someone say there really is no conflict between the private and the public market I'm not sure that that's true or if it is I'd like to see it because it does seem that one benefits off the other a little bit um and then lastly about the accredit investor because I I do agree with Mr Sherman that it's not only wealth or assets it's also knowledge although I would almost challenge
▶ 1:35:12him to to tell us which one of our colleagues is not a genius in fact I would give him a few seconds here if he wants to name names but anyway let's start with the dis cost of dis um Orton I mean you heard it here and and I think it is true I mean if you have a company that's you know that's making six million bucks a year and two million of it has to go for all these disclosures I mean that's an impossibility what what do you say to something like that the the example was given
▶ 1:35:43by the the the chair of the full committee well perhaps we should think about what we require of those companies that's It's always important to look back at regulations and rules and make sure that they accomplish what you want them to accomplish on the other hand when you talk about small businesses and startups there are risks there there's a reason why if they go to a bank the bank requires a lot more from them um than they would from a much larger well established company that has for years uh disclosed
▶ 1:36:13audited financials and so forth so um you know I'm not an expert on the different costs that are charged there may be fees that are excessive that are charged when this happens I'm sure all those let me ask Mr Barnell you you obviously have a company here that you're starting and I I hope you do have success certainly is a very noble cause um what about those costs we just talking about um so we're still a private company
▶ 1:36:43right um and now we do robust reporting and we do PC Audits and so we you know have financials and all those sorts of things um but as a private company who's prepar pring to be public at some point um you know I don't have all the details but we talk to investment bankers and others you know we know that there are several million dollars of annual costs as well as you know a number of hires that would need to be made within the company solely to deal um with with public reporting so um you know is it a barrier
▶ 1:37:13that you think that's insurmountable or do you think it's a barrier that you know is is reachable I think it's not nothing's insurmountable right but I think it's certainly a consideration that would delay uh it's a consideration that you know we might go public later as opposed to earlier if we take those costs in consideration okay well let's then if talking about the private versus the public why don't we go back to you Miss Thorton I mean you know you heard that not again I don't want to put I hate when people put words in my mouth but I did think I heard there's
▶ 1:37:43really no conflict no is that true or Miss P you you were shaking your head I'll give you the opportunity to so it it's not that there's no conflict what I said is that as a legislative and as a regulatory matter we should be encouraging both a thriving private market and a thriving Public Market not that there's no conflict that would be
▶ 1:38:14reductionist there are reasons why some companies choose to be private and why we have private markets and there are good and sufficient reasons why we should be encouraging companies to go public okay let me give M Norton a chance to challenge that potentially go ahead yeah I would say two things one is the companies that grow extremely large in the private markets they are doing a couple of things they're looking at public companies
▶ 1:38:44to try to you know justify their valuations rather than providing detailed information of their financials and everything else to just Jus ify their you know their valuation and and by the way in a public company that discloses a lot of information is having Market participants look at the company look at the information that's disclosed they're analyzing it that provides a lot of support for other investors who are looking at that company to invest but you have large excuse me private companies that
▶ 1:39:14are competing with similar companies in the public markets and that that doesn't seem okay my time has expired and I yield back and I thank the chair gentleman Neil's back the chair now recognized as a gentleman from Ohio Mr Davidson who is also the chair of the subcommittee on National Security listed finance and international financial institutions for five minutes thank the chairwoman I thank you our Witnesses for being here today and for your work in this field uh I ask unanimous cons consent to submit
▶ 1:39:45this letter from the accredited investor Alliance supporting our work to expand market access without objection um America is home to less than 5% of the world's population but we account for nearly 25% of global GDP even better our Capital markets account for more than 50% of the world's invested capital and unfortunately this abundance is not easily accessed by most Americans now as investors Americans benefit more than most countries because our retirement savings
▶ 1:40:15are overwhelmingly deployed and invested in our Capital markets and this isn't the case around the world uh even in Europe it's not as common however when American companies want to raise Capital they often confront substantial barriers as you all have highlighted today one of the most basic problems is the accredited investor limitation essentially unless you're already rich it's harder to get rich uh this paternalistic approach from government limits individual freedom to invest your own money uh
▶ 1:40:45it's supposed to protect investors but the reality is in practice it protects deal flow for the donor for Simplicity current law equates wealth with sophistication the problems especially acute for entrepreneurs who need to access capital for to grow their businesses and generally businesses have no ambition to build the sort of scale that it takes to access traditional Capital markets uh in initial public offering as Miss uh
▶ 1:41:16pendo highlighted cost Millions uh and can take Millions more in compliance and recurr cost so it's entirely unsuited to small and mid-market firms uh particularly those who want to remain private and while large companies can take on debt outside of banks by accessing the bond market small and mid Market firms generally have no such Market access so we should make it far simpler to raise equity and debt from private Capital uh all investors take on
▶ 1:41:47risk with a rational expectation of a risk appropriate rate of return anyone who acknowledges those risks and knows what they are investing in should not be prevented from doing so via government enforced restrictions after all the right to transact is fundamental it's not a permission granted by government and that's what we've turned it into as complete contradiction of our constitution our Bill of Rights recognizing that our rights are endowed by our
▶ 1:42:17creator and in limiting the government's ability to infringe upon these we act as somehow the government's The Giver of our ability to transact so my bill for this uh protects in accredit investors who simply say um that they uh certify to the issuer of Securities that they understand the risks of investment in private issuers this would have the effect of providing more opportunity to all investors so um
▶ 1:42:47pendo uh you know could you expand on how such a change would improve Capital formation pen yes um so I think again one has to go back to the fundamental um purpose of the accredited investor definition which is um to uh allow investors that are able to fend for themselves to invest in uh opportunities that
▶ 1:43:18um don't require the protections associated with registration so so um that would be investors that are financially sophisticated and we have to ascertain Financial sophistication through some means so you still you still support the framework that the government could be the giver of the rights and if we deem you sufficiently sophisticated using some alternative legal criteria then okay we'll let you do it so so that might include any of a number of
▶ 1:43:48the bills that are presented today for the subcommittee's consideration well I I believe that'll move be progress but I but I don't think that you can proceed from that premise so you maybe Mr Conwell when you look at your challenges what are you seeing in the market what's the challenge that that uh Venture firms like you are trying to do when you want to increase the ability of people that want to uh participate in the markets but also the people that are trying to raise Capital what are you confronting well we're confronting a
▶ 1:44:18limited of sources right um as you're raising a fund right now if you're raising 10 million Le you can raise from over 250 people right the moment you go over that it's only 100 people so it becomes real easy to figure out the math what's the the ma what the minimum amount you can take from an investment so if I'm raising 40 million the minimum check I'm can take is 250,000 so that means the amount of people I can go to to raise that capital is very limited and that means the the that means I have to fit in their framework for my fund to work and that's very limiting
▶ 1:44:48thank you so much my time has expired and I yield back gentleman yields back the chair now recognizes a gentleman from Illinois Mr Caston for five minutes thank you madam chair um Mr barell I I appreciated your comments because they were given well I sort of appreciated and there were going to be flashbacks because I had before coming here had raised a couple hundred million doing from private equity and always felt that tension where I I didn't want one more person in my office who represented my majority investor telling me what to do I see Mr con while laughing but we
▶ 1:45:18hadn't quite gotten big enough to have the you know the full reporting requirements to go public and I'm I'm sympathetic to that tension I also think that every debate we have on this committee is fundamentally about the tension between Capital Market access and investor protection push more in One Direction you go you go the wrong way on the other and and I think that's healthy to talk through it but I want to I want to try to highlight that Mr Conwell how much how much did you say you're currently managing in your current fund uh currently is 9.3 million okay and is that your first fund first fund yes and
▶ 1:45:48how many LPs do you have in there 194 okay and when you make an investment in one of your target companies do they all have to sign off on the investment or you've got a deal arrangement with them that they've agreed to be in the fund and then they trust you to make those investment decisions it's an agreement where they fully trust me to make the investments in the fund and they are and they are given all the documentation up front sure to let them know how I invest in what yeah which is which is fine and that was my experience but but my point is that none of those investors essentially get any disclosure other than when you come back to raise
▶ 1:46:18your next fund you're going to have to describe your Fund performance but you are not Prov providing those investors with disclosure as you shouldn't because I do I do I do provide them with disclosure compare if I was doing a public listing I would have to provide three years of audited financials I'd have to provide details on my management team I'd have to do all that stuff I give them all your LPS do not let let me move on your LPS don't have to go through do that disclosure which is fine I'm just flagging that there's a question of where the protections are for the LPS as accredited
▶ 1:46:48investors because we trust they have this and they don't miss pen there's been a lot of talk by my colleagues across the aisle which is just wrong so I'm hoping you can correct it can you talk about the the trend line in total Capital available for for Investments public and private over the last couple years rising or so um the in my testimony I have data um regarding the amount of um Capital that has been raised in uh public
▶ 1:47:18offerings which has um declined by comparison and the amount that has been raised yeah but but the total the total available has toal available has surged and broadly speaking that's been because private Equity has really surged and taken off absolutely so the so the idea that there's a shift and and just on that point you know what the total market cap is of all private Equity Funds versus the total market cap of public trade it vastly it vastly is yes yeah there's like 56
▶ 1:47:49trillion of private of of market cap in public funds absolutely private equity and private Credit in in in recent years as well so essentially The Surge of private Equity has created pockets of capital that early stage companies that are worth less can access thanks to people like Mr conall yes and we still have public markets on the back end for exits which is where the huge value creation is and so the story that people are fleeing public markets is really a story about there's
▶ 1:48:19been a huge surge in alternative types of capital that are available yes that people like my company Mr you know Mr Barnell you wouldn't have had you couldn't have gone public when you were two kids out of college nobody would have given you money you found people to give you money that's awesome right thanks to people like Mr Conwell like that's let's celebrate what that is but back to my my question it I have never met a CEO myself included who does not want Dumber money dumb money is awesome
▶ 1:48:49if you don't have accountability you can do what you want it's fantastic and so um Miss thoron should we be concerned that the Administration is laying off tons of people at the SEC including all of the directors who were responsible for making sure that there were appropriate disclosures of Mr musk's purchase of Twitter yeah that seems like working backwards on investor protection right absolutely um should we be concerned that all of my Republican colleagues are trying to say that if you tokenize a security you
▶ 1:49:19should not have even have to be regulated by the SEC which is the disclosure-based organization you should just all of a sudden you're commodity magically uh we should be very very concerned about that because people have an expectation of profit when they invest there are people who are new to this type of investing and they could lose a lot and they could you know when when uh Sam bankman freed did his thing yeah and I'm sorry to cut you off because I got 15 seconds I just want to give y are there any proposals before the committee today that would increase
▶ 1:49:50protection I don't recall seeing any when I did my initial review of the 30 exactly my point there's a healthy tension there's an effort going on in the Trump White House to fleece the investment in public gentle I welcome the attention but let's not deny what's going on here gentleman's times expired the chair recognizes a gentleman from Indiana Mr satman for five minutes thank you madam chair and I asked for unanimous consent to submit for the record a letter from the American Securities Association regarding the hearing today
▶ 1:50:20and um would uh without objection thank you um first of all thank you to all of you this has been a fascinating hearing um I uh I was absent from Congress for the last eight years and was an entrepreneur and looking to raise Capital to start companies or to revitalize companies or to uh to grow companies and so um Mr Conwell your story is fascinating uh congratulations uh on one hand but I know you've got probably some scars to show
▶ 1:50:51uh how you got to where you are as well as Mr uh Barnwell Barnell as as well and um uh but i' I'd like to ask a little bit about uh and I appreciate the gentleman's comments and you know we are really in that balance between access to Capital but in in protecting investors um and uh I've been in many meetings you trying to explain the project and say this is why you know we believe it's going to be successful and you know we would love your participation in investment as well and it it really it's
▶ 1:51:22um he mentioned there's dumb money out there uh that's unfortunate but you know we also people are wanting to participate because they're doing they're working on a in their daily job they're raising their family but they're also feeling like I have a little bit of money here I'd like to participate somewhere how can I do that what's the easiest way to do that and I I guess a question for Mr Conwell could you touch on maybe crowdfunding just a little bit and how that's playing in today's fundraising and uh Capital form
▶ 1:51:53if you wouldn't mind I'd like to see that question Miss Rebecca she does with crowdfunding she's the expert here all right that that's fine with me could you repeat the question well just to uh can you talk a little bit about crowdfunding I mean it's been around for a little while but with technology and uh easier access and could you talk a little bit about where crowdfunding is playing in capital formation in today's uh markets and fundraising yes it's incredibly important the technology that we've built at dealmaker and that a lot of our colleagues have built in the
▶ 1:52:23space is foundational to helping more entrepreneurs get funded in today's day and age we can do that especially for jurisdictions that aren't Silicon Valley or Wall Street by getting deals like Mr Andrew barnells in front of people in all different regions and so we can draw from the communities and we can help form businesses that aren't based in those City centers and what about investor protection through that Avenue what are your your thoughts on that is there
▶ 1:52:53enough protection is there enough information disclosed for the legislation is incredibly welld designed we have the form C we have the 1A what we've actually seen is that with that standardized disclosure more Junior investors can become more sophisticated because every deal they look at there's the same format where they can read the same information and it's actually desirable that the whole exempt markets move in that direction yeah okay Mr Barnell I mean congratulations on on your success and I know that uh as an
▶ 1:53:23entrepreneur you're always looking forward sometimes it's good for us to always just take a glance back and look at how far we've come but there's always more work to do uh could you talk a little bit you mentioned in your remarks about the difficulty raising uh funds in the midwest uh I guess I'm just curious because I come from Indiana and I would agree with that um comment but I'm kind of curious of your experience and why you mentioned that in particular and do you have any ideas uh what could be done to to change that yeah absolutely there's one
▶ 1:53:54stat I always like to cite it's it's not that there's an absence of uh industry or Capital to deploy right I think sometimes it's the infrastructure doesn't exist so if you look at the data you know 20% of the GDP in the country 20% of the jobs are in the midwest but only 4% of the venture capital is deployed there so it's not an absence of the capital it's an absence of the means to make it happen which is why I think things such as uh making it easier for Venture for funds to form because we have fewer Venture funds per capita than other places easier to crowdfund
▶ 1:54:24those are the ways we solve the solution uh and make it easier and provide the knowledge for people to invest in companies when they want to and when they see the opportunity is it just a matter of connecting the the those who have funds to those who have projects because I know I mean in the midwest I mean Congressman style and and my district are some of the heaviest manufacturing districts in the country and you know a lot of these these folks they maybe they came off the farm they know how to build a widget but they don't necessarily how to know how to finance something I mean is that something
▶ 1:54:55is there places out there that we try to connect people to be able to fund projects like that and and I don't know all the solutions but I could speak to some of our experience you know we're a coral cancer screening test uh and early on we had a lot of doctors and gastroenterologist say I want to invest in this I've never done it how do I do it is this like buying a stock right and so I think it's the education it's the funds I think there's a lot of things that we need to do to make it happen um but I think if you move that Direction over time you're going to be in a much better place from a capital
▶ 1:55:25formation perspective thank you madam chair gentleman's times expired the chair now recognizes the gentleman from Wisconsin Mr style who is also the chair of the subcommittee on digital assets Financial technology and artificial intelligence for five minutes thank you very much Madam chair thanks for holding today's hearing um like to start with you if I can miss Peno um merging growth companies how do we get companies onboarded navigating through um the capital raise
▶ 1:55:55in particular in early formation as we look at the number of companies uh that are choosing to go public we continue to see that decrease uh merging growth companies uh and the regulatory environment in that space uh is trying to lighten that burden to encourage uh early stage companies uh to move forward to access the public markets uh and to use the public markets as a vehicle uh for growth um I know you're familiar uh broadly with this space love you to comment on it but in um what types of Industries are uniquely utilizing
▶ 1:56:25this so Mr stman correctly noted both of our districts have a history of capital intensive manufacturing but there's also a lot of tech companies whether not it's biotech or other areas uh in what type of Industries or companies might be uniquely interested in emerging growth companies so almost all of the companies that have gone public since the jobs Act was adopted have qualified as egcs as emerging growth companies and the jobs act has been a resounding success so
▶ 1:56:56it's it would be I take issue with uh the subcommittee member who said that the bills under consideration today uh would uh eviscerate investor protection that's simply not true the framework for disclosures by egcs is robust there are some disclosure accommodations that are made for egcs but there are strong investor protections and the and are there certain
▶ 1:57:26industries that are uniquely inclined to to to look to the emerging Growth Company there it's it's a wide array of industries that have utilized the uh IPO on ramp and that includes tech companies Life Sciences companies Industrials consumer products companies so it's a very broad representation and it's been very dependent on the market and what the market is receptive to should Congress extend
▶ 1:57:56the the IPO onramp the E threshold Absol without question it has been a success it will continue to be a success and it will continue to attract companies I appreciate saying that I have legislation that would do just that fin final comment on this um is there stuff that is are there rules regulations adjustments that should be made at the SEC without acts of Congress as relates to emerging growth companies so the uh acting chair uh
▶ 1:58:27referenced in his speech that the SEC intends to look at right sizing regulation and looking at the disclosure accommodations for different sized companies smaller reporting companies and other companies and looking at the disclosure burdens that are applicable to different companies in uh among the bills under consideration today are looking at the definition of smaller reporting company accelerated filer large accelerated
▶ 1:58:57filer all of those things are appropriate measures and good things for Capital formation thank thank thank thank you very much I just want to be cognant of the time because I want to I want to come back over to Mr Conwell uh and Mr Barnell uh in particular as Mr stutzman referenced I'm from Wisconsin he's from Indiana manufacturing base uh but a long way from Silicon Valley New York City or other traditional uh VC hub um in your testimony um uh
▶ 1:59:27M Mr Conwell you referenced U some of the challenges you face and obtaining Capital Mr Barnell you've talked about this as well Are there specific policy changes orj adjustments uh that you would like to see I'll start with you Mr K and I'll come to you Mr Barnell U for me I am very focused on this uh uh limited partner limit on um in funds currently it's n it's which including yourself makes it 99 um in in the jobs act when they increase the limit
▶ 1:59:58for funds that were 10 million or less to have up to 250 that's what allowed me to raise my fund if not for that this doesn't happen and the 47 companies I invested in probably more than half of them don't exist right now that I'm going to higher than a $10 million limit those individuals are are I can no longer raise from and if they feel like I've done a good job they can no longer participate with thank thank you very much 15 seconds Mr Bernell anything jumped to mind uh just just very briefly I mean for us it really
▶ 2:00:28was investors like to invest local right especially at early stage and facilitating that I think so the answer is everyone should move to Wisconsin and as's a backup plan Indiana thank you very much appreciate being here mam chair you back don't don't leave St Louis Missouri Out Mr style all right uh gentleman yields back and the chair now recognizes a gentleman from New York by the way U Mr Lawler for five minutes uh thank you madam chair uh I have a letter to submit
▶ 2:00:58uh without objection to the uh on behalf of the Innovation Coalition without objection sword thank you uh it is ingenuity in the generations of entrepreneurs and innovators utilizing emerging technologies that have built America and will be crucial looking forward entrepreneurs and small businesses Drive the American economy in 2019 the small business administration calculated that close to 44% of our GDP
▶ 2:01:29was a result of small businesses we should be do doing everything we can to promote investment promote entrepreneurship and Foster small business growth whether it be cutting red tape providing additional access to Capital or simply getting government out of the way that's why I introduced the helping Angels Lead our startups act otherwise known as the Halos act to promote access to investment capital for small companies and ensure that startups can continue to generate interest and connect with
▶ 2:01:59investors this would ensure that demo days pitch competitions and Community Economic Development events where there is no specific investment offering are not considered General solicitation under regd the Halos act which is noticed with this hearing is one of a number of Common Sense legislative reforms we should be taking to ensure that startups and businesses have the resources they need to develop to grow and Thrive the jobs act
▶ 2:02:29directed the creation of Regulation crowdfunding to build on crowdfunding as a new and Innovative way for startups and small businesses to raise Capital typically over the Internet the number and size of Regulation crowdfunding offerings has continued to increase over time notice with this hearing is proposed legislation from my colleagues including a rep measure that seeks to build on that success Miss Coba I know you touched on
▶ 2:03:00this briefly about the benefits but how would enhancements to regulation crowdfunding help small businesses raise Capital would it be beneficial to expand the number and range of investors that can participate in crowdfunding offerings and are there additional enhancements that you believe we should make to improve the utility of yes absolutely and thank you for the question I agree with what you said the jobs act since its Inception has helped so many
▶ 2:03:30small businesses form and so many jobs be created there are very simple small adjustments that we can make so that the online CL crowdfunding space can flourish to allow more growth and more jobs to get funded and those are in our written statement that we advocate for the Halos Act is an incredible step in that direction appreciate it any of you uh care to comment as well no okay
▶ 2:04:00um I think from the standpoint of uh additional enhancements M Cobo what what would you say are the steps I think it's important to remember that non- accredited investors are looking to build wealth and studies show that younger Generations don't believe they're going to build their wealth from their direct jobs they're looking for other ways in the gig economy and they're looking to make investments and so if you regulate them out of a
▶ 2:04:30space where we're doing bad actor checks we're doing background checks we're doing disclosure documents you're just forcing them to put their money into other sectors like crypto like nfts like the public markets and there are no caps in those spaces under the jobs act there's a cap in how much they can invest in every single offering and so the jobs Act is welld designed that way if we remove the cap on reggae we can grow the space we can grow online offerings
▶ 2:05:01and we can grow the ecosystem and communities of people that want to invest in businesses they love we have a customer monogram that it was started by two doctors they saw the need for a robotic knee replacement surgery arm VC wasn't interested in funding that business but there's a lot of people out there that know someone that's had knee surgery that thought that was a really interesting business now that company is public on NASDAQ so if we can grow the online Capital formation Space by increasing
▶ 2:05:31the caps and streamlining the way rega and reg CF work together we can get more businesses funded appreciate it with that I yield back gentleman yields back the chair now recognizes the gentle lady from Michigan Miss mlan for five minutes thank you madam chair um before I get started I'd like to enter in for the record um a letter from engine which is a nonprofit group advocating for Tech startups um uh without objection thank you
▶ 2:06:01um I I'm gonna piggyback a little bit off my colleague um from New York Mr Lawler um and what we've been talking about I love economic growth it is the backbone of our our our great country in which we live in and and we we must remember that it is our economic system that gives us our social programs and I and I find it sometimes ironic that some members across the aisle from us are for growth they're just not for
▶ 2:06:31public growth they're they're only for public growth they're not for growth in the private sector and we have got to do more to incentivize growth in the private sector right not just the government but private sector is good entrepreneurialship is good that's what the this country was built upon so I I'm here to advocate for more private sector growth
▶ 2:07:01that all Americans can participate in um I have a little bit of experience I had a business for 35 years in the financial planning sector and just out of curiosity you know with all of the Departments that I had anyone want to guess where I had the most resources in terms of people and money what department maybe that was I think it was maybe the processing we did about 13 billion you know maybe the processing sector legal in compliance compliance spot
▶ 2:07:32on every year right now I do agree regulation is needed I would say guard rails are needed right but at some point in time we have to let the businesses run right we have to have a little bit of faith in people and over regulations do more harm than good on the consumer because we want competition competition is good right it lowers the
▶ 2:08:03prices um in order to achieve this economic growth in development though we need a strong and healthy Capital formation we we have we have to get this ideologically if we're not allowed to invest in our future my company would never have been able to survive we have to reinvest and it's it's critical Mr Pand Miss pandeo excuse me um what are some of the most burdensome regulations
▶ 2:08:33that prohibit Capital formation in your opinion so it's not so much that um they prohibit Capital formation as that um they make um being public uh less appealing than in Prior than than in past time times and a lot of that is um related to sban Oxley 404 um attestations um so that's that's certainly something and um one of the
▶ 2:09:03bills under consideration which addresses um socks attestation for low Revenue issuers uh would be very helpful um another uh would be looking at the disclosure burdens and um the standards uh for disclosures as it relates to different types of companies or companies of different sizes so that disclosures are more right sized if you will um and uh that would uh address whether companies that are
▶ 2:09:33smaller reporting companies um or uh accelerated reporters and so on could address the disclosure burdens depending on on their size um so that would be another issue um likewise uh a different um but related issue issue that is not under consideration but probably ought to be is um bringing back some of the ecosystem that once existed um for companies that are public and that would be addressing the
▶ 2:10:04regulation of research and addressing the um regulations and the rules related to offering related Communications so um I mentioned that our smaller public companies and our medium-sized public companies no longer benefit from being public a large part of that is because of the lack of research and the lack of liquidity in their stocks and I think we would all agree that we have to do more to incentivize as opposed to disincentivized
▶ 2:10:34in my last um few minutes few seconds what can we do in your opinion to ease some of the compliance and and disincentives what what could we do immediately in your opinion so extending some of the jobs benefits which these bills do would be a great start thank you and with that Madam chair uh my time is expired I back gentle lady yields back the chair now recognizes
▶ 2:11:04the gentleman from Montana Mr Downing for five minutes thank you madam chair first of all I have a letter from Carta that I would like to submit for the record objection thank you madam chair um you know I'm really uh really excited about the work we're doing on this uh on this committee uh my previous job I was the uh Securities commissioner for the state of Montana one of our charges was Capital formation it was always an interesting project because we have so much talent
▶ 2:11:35so many entrepreneurs and we also have money trying to find Investments and figuring out how to you know put the two together and do it uh you know within you know the uh regulatory framework it was it it was exciting work but obviously had its challenges um you Mr Conwell you know according to the small business 99.3% of businesses in Montana are classified as small businesses and employ about 67% of montanans um and being a rural State
▶ 2:12:05you know and talking about the challenges I had as as a regulator uh can you explain the challenges for Rural small businesses to find potential investors when they're located in places that lack any kind of capital raising uh networks um that is a compounding issue it's one of if you're in a a community like that there's there's going to be less funded companies already so there's less information there's less people you can go to learn from so I mean when you're getting
▶ 2:12:35started you start off just kind of fumbling off in the dark running into walls trying to figure out where to go what's an investor once you figure that out then you start going in your community like well where are they and then you realize at some point I got to go to New York or California and that's what it is that is we see time and time again in and even though we talk about the coast I'm from Baltimore my Founders leave and go to New York all day every day right so it's something that we see in all of these communities and and a lot of it is because well some of it is because
▶ 2:13:05the information is not as wiely out there of like these are the other for these are other ways you can get capital and people sharing that in their communities need more demo days those accelerators all that but then also incentivizing the the folks there locally to participate really the angel investors at the early stag is getting people started having those individuals in your local community who know you who believe in you who have seen you grow who have Affinity with you being able to put money behind you but with an incentive tax credit something
▶ 2:13:35like that something to make people start thinking about oh like this is a viable thing I believe something like that will start to buoy communities and Rural communities and we've seen something like that in Maryland um we have a u Economic Development Corporation Ted Cod that does Outreach into our rural areas specifically to do things like this right right um moving on you know I I I've struggled in a in a previous life uh raising money basically under regd exemptions you know alternative Investments
▶ 2:14:06and uh with um the accredited investor you know criteria and it's always it bugged me when I was on that side of it because it didn't seem to really correlate to your ability to make a decision on taking risk you know I would think if you were somebody in a experienced and uneducated who had a windfall maybe a you know you inherited some money you're an accredit investor but you could be a PhD in economics and finance with 100,000 bucks and you can't invest that so it really limits you know folks that can participate in these um so
▶ 2:14:36I'm going to go to miss uh Miss Coba um you know the current accredit investor standard limits in the private Market uh limits investments in the private markets to individuals with an annual income of at least 200,000 or net worth of over a million dollars and the medium the median income in Montana is nearly $71,000 with only 8% of households making $200,000 or more you we've discussed throughout this hearing that the overly restrictive accredited investor definition denies small business
▶ 2:15:07access businesses access to a large pool of investors and it's no surprise that uh the investors that typically meet the standard live in urban areas and I'm coming from a very District um Do You Believe rural investors can be just as sophisticated as Urban investors and should be allowed to more freely participate in private markets absolutely yes and thank you for the question I think that's a really important point they are looking to generate
▶ 2:15:37wealth creation the rules that we have in front of us already prevent them from investing too much in anyone offering so the rules are properly structured for them already and we need to realize that if we don't let them into the private markets their money is going to go elsewhere and the private markets are well regulated so they should be allowed to participate uh thank you can you uh maybe elaborate on or discuss how the current credit investor standard unfairly denies rural investor growth
▶ 2:16:07in their retirement accounts like a normal hardworking Montana yes because they're Limited in the offerings that they can get access to even some of the changes that we've advocated for removing common control would allow the them access to investment in VC companies for example there might be a VC with a portfolio of 10 companies and they want to do follow on investment in one nine of those companies are excellent companies they don't hit a 50% growth rate that a VC requires for follow on investment but maybe they're doing
▶ 2:16:3835% and lots of people in Montana could invest in that and make a good bit of money awesome well thank you I've run out of time but thank you for your responses gentleman yields back the chair now recognizes the gentleman from New York Mr Gino for five minutes thank you uh chairwoman thank you very much for holding this hearing today uh before I start my questions I would like to offer this letter from scru uh which talks about a virtual platform designed to connect early stage Founders investors and partners uh for the
▶ 2:17:08record as H yes ordered thank you thank Jem business development companies or bdcs are important are an important source of capital to Main Street businesses having a statutory mandate to invest the u in us-based small and midsize companies however the SEC has applied a rule known as the acquired fund fees and expenses uh to bdcs that presents a misleading picture of the true cost of investing in a BDC because of this bdcs were excluded from certain indices in indexes
▶ 2:17:38causing uh causing there has been an out causing an outflow of Institutional Investor dollars in bdcs I'm saying bdcs a lot uh I've put forward a bill recently that would fully exclude bdcs from the AF e requirement to fix this problem Miss Peno can you explain how the sec's posture on AF Fe has impacted bdcs their investors and portfolio companies sure so just as you said bdcs are filling an important Gap bdcs provide uh Venture
▶ 2:18:09debt and other funds that um banks are not providing to smaller in medium-sized businesses when the SEC changed its policy in 2006 um to require the presentation of AFF it now requires the presentation in uh the fee table of um an artificial and kind of inflated um percentage of fees over a period of time over a 1 three five
▶ 2:18:39and 10e Horizon and as you indicated um when that change became applicable it triggered um bdcs from falling out of a number of indices because so many institutional funds are index trackers it meant that institutional investors moved out of investing in bdcs that meant that bdcs lost a tremendous amount of uh investor interest in particular Institutional Investor
▶ 2:19:09interest and we should be promoting uh investor interest in bdcs again because bdcs Provide Capital to Main Street and Provide Capital and fill this Gap that is no longer being served by Banks we should also be considering other important steps to modernize the regulation of bdcs so I wholeheartedly support reversing the AFF policy and in my written testimony provide a number of
▶ 2:19:39suggestions for modernizing the regulatory framework relating to bdcs will the gentleman yeld um I got to get through this I'm sorry thank you uh so in your view exempting bdcs from the a requirement would result in more accurate disclosures yes it would okay great um alternative Investments which can include uh private credit real estate infrastructure have shown value in recent memory these vehicles help balance investment portfolios spurred job growth facilitate
▶ 2:20:09Capital formation help provide more uniform investment returns for individuals what role do you see uh Miss Peno in the alternative Investments playing in capital formation so alternative Investments including bdcs interval funds uh tender offer funds Target date funds all of these different funds can provide an important uh role in capital formation in terms of supporting investments
▶ 2:20:39in other uh private funds and investing in the Securities in in Securities of private companies and again we should be looking at ways to enhance um and promote retail um investment opportunities in in private funds and in modernizing the regulation of these regulated uh funds as well as in um looking at ways
▶ 2:21:10in which we can um further uh extend the reach of a lot of these regulated funds so that they can um provide so that they can offer fund interest not just to qualified clients but also to a broader range of investors thank and you talked about uh regulatory modernization in your answer before about bdcs do you think uh would you agree that regulatory modernization is necessary to provide greater options to qualified and accredit
▶ 2:21:40investors as well I do um I do think that that's absolutely necessary um and uh I think we've talked a little bit about um potential changes to the definition of accredited investor during this uh during today's hearing um many of the the measures I do support um in the context of bdcs in particular the AF change is important I think many of the changes that many of much of the relief that the
▶ 2:22:10Securities and Exchange Commission provided for bdcs during the pandemic uh which did not um sacrifice investor protection should be extended and uh was important and again to the extent that bdcs are significant for Capital formation it would be helpful thank you madam chair I ask you consent to put into the record a letter from the North American Securities administrators Association without objection so I'd
▶ 2:22:40also like to add to the record that the BDC bill is one that I introduced in the 116th 117th and 118th Congress and look forward to I love it when we can play well together both across both house lovely lovely and I believe our last uh uh uh person to come forward with uh with questions uh Our member is from gentleman from Tennessee Mr ogles you recognized for five minutes sir thank you madam chair and and thank you to the witnesses I know sitting here through the hearing is arduous but we appreciate
▶ 2:23:10you being here because the information you provide is valuable to us but also the American people uh Mr Barnell and Mr Conwell would you agree that overregulation is a major barrier to entrepreneurial Capital formation for investors yes yes so I want to put a pin in that for a moment so as we see the current Trump Administration aggressively moving to try to rightsize government as we see the Doge initiative under Elon Musk digging looking for areas of waste
▶ 2:23:41there's only so much the American government the the US government can do to cut waste and spending we've got to do our jobs and that's tough but the future of our economy the future of combat combating the $37 trillion dollar in debt and growing is the economy so as we look at Capital formation the purpose of this committee I want to ask the question is as we look to the
▶ 2:24:11Future Capital entrepreneurism the future of saving the Republic what role does does the regulatory regime play in hindering that growth that entrepreneurism and quite frankly our future I'll start with you Bam um so what I'll highlight and and I wholeheartedly agree that I think the foundation of our economy job creation uh Innovation it's all driven by by
▶ 2:24:41startups I think one of the things that I highlighted in my written testimony is ultimately we do see as we continue to grow uh the requirement potentially ultimately to access the public markets and one thing I highlighted a little bit earlier was that uh the disclosure requirements uh the regulatory requirements that go along with that um is a it's a challenge it's a real Challenge from a cost perspective as well as from a compliance perspective so that would be one thing that I would highlight that as we continue to grow would certainly be something that we wouldn't want to hinder our ability
▶ 2:25:12to uh continue to save lives through Innovative technology uh and also Drive job growth and Madam chair you know we saw in the last Administration the we weaponization of the government uh whether it's the justice department or the Regulatory Agencies against the American people against industry against businesses and again I just want to emphasize this this role of getting regulation out of the way of the economy getting regulation out of the way of the of the those who want to start the next next whatever right the next Tesla the next Facebook
▶ 2:25:42the next whatever whatever's Over the Horizon that we can't see and anticipate yet May well very well be hindered by this regulatory regime that was put in place that is literally targeting the F the consumer by getting the way of business Mr Mr C up as I mentioned in my testimony when I raised my fund I raised 10 million but I had been um oversubscribed I had got north of 30 million worth of Interest I turned away more than
▶ 2:26:12200 investors wanted to invest in my fund due to the limits and I invested in 47 companies had I raised 30 million i' invested in over 100 and and because I'm one of the earliest investors I'm typically the first investor in many of the companies like a company out of Memphis Tennessee blank beauty that it was a it was a little company making this cool robot that would make custom nail polish their first customer was Walmart now and what they did is they created a vending machine that will make you custom nail polish
▶ 2:26:42well Walmart also has this issue of people stealing things and so they're putting stuff behind glass they're looking to replace that glass with this really cool fun Innovative robot that is increasing sales and getting more people in the door from a little company out Memphis Tennessee that nobody had ever heard of or seen and I was the one to see them to make sure that this could be a thing all right well as someone who's a congressman from Tennessee we thank you investing in our economy and the job growth Etc I'm running low on time so I'll catch the next two ladies really quickly
▶ 2:27:12Miss um casab yes go ahead yes I think the point raising are incredibly important there are so many companies like Mr Cromwell highlighted that dealmaker backs and funds in Rural jurisdictions and the written submission that we've submiss submitted is just to get some of the regulations out of the way so that we can do more and if there are different nuances made if the Caps are improved if 5110 is removed there
▶ 2:27:43are different ways that we can get more entrepreneurs funded more jobs created Madam chair and imagine that less government is better Mr T the last word for all the reasons we discussed today I I support uh the bills that have been uh introduced Madam chair we thank you for your time your leadership and I yield back gentlemen yields back and last but not least just under the wire the gentleman from Massachusetts Mr Lynch is recognized
▶ 2:28:13for five minutes thank you madam chair I appreciate it um as as Mr Barnell uh mentioned in his first uh in his opening statement uh he talked about the fact that 90% of startups fail and so as as as Congress sees it we we question should we allow more people uh to get into that you know to invest in something where 90% fails
▶ 2:28:43should we allow uh you know small uh small Pion funds or or uh individuals who might be investing their life savings or or the the their retirement in in an area where we're going to see 90% failure and and that's that's what troubles us we do want to energize and and and finance startups
▶ 2:29:13because as as the ranking member has said I mean you know all you need is that 10% that succeeds and you can change the world right so we're trying to we're trying to manage this balance um so miss dton how do we how do we are we doing that properly now are we are we protecting small investors with an expansion of of uh you know accredited investor um and and opening up to a wider group um be in the best interest
▶ 2:29:44overall of of uh American investors I I think your concerns are well placed about about expanding who can invest in the private markets um because of a couple of things first of all there's no mandated disclosure in private markets so even if you were a sophisticated investor you wouldn't know that much about these companies but in addition um in the public markets information is disclosed publicly a lot of information and Market participants analyze it and there are all kinds of other Market participants
▶ 2:30:14that help investors understand that company the other big thing that I would be very concerned out is just that if you expand it beyond the current people who invest in the private markets you could be talking about people who um have investment savings that they're planning on using for retirement you could have pensions that um have their rules replaced with you know allowing them to uh invest more in alternative alternative Investments and you could really see um
▶ 2:30:45these are very highly risky markets and you could really see harm to people's retirement savings it could be truly harmful to them yeah and the other thing I worry about is is as you've mentioned is uh Pension funds so um I think 67% of investments in private Equity come from Pension funds um and so um it's the same thing with uh with the hedge fund investors I think
▶ 2:31:15some somewhat less but maybe 30% of of the inflow flow on on on uh hedge funds is coming from Pension funds as well we've seen some situations where um in recent collapses I think it was one of one of think it might have been Silicon Valley Bank where you know cpers the California uh uh pension fund was heavily was significantly invested in that and and it went South so um the
▶ 2:31:46the level of transparency that we would like to see and and and and availability of that information to the public is just not there it's just not there at all so um are there are there steps that we could take to to rebalance this in a way that that um that does not choke off uh you know investment meaningful investment to to startups and and uh other highrisk uh but worthy uh Investments and uh and yet give people an opportunity
▶ 2:32:16to over the long term uh earn suff sufficient um you know interest on their on their you know pension fund savings um I I really think that the main thing is to get the big companies out of the private markets to force them to comply with the public disclosure framework so there will then be more diversity in the public markets by the way and then the private markets will be better equipped for what they are appropriate for which
▶ 2:32:46is um small companies small business businesses and startups that need long-term capital that's quiet that is not worried so much about losing all their money so what was your position on the private fund advisor rule uh that the SEC had proposed I thought that wasn't a very well done rule I thought it was really important because right now investors aren't getting good advice they can't be sure that they are let's put it that way I thought there was some they may be paying
▶ 2:33:17higher fees that they may be paying hidden fees that they aren't aware of okay uh Madam chair thank you for your courtesy and I yield back gentlemen yields back and I just want to thank all of our Witnesses for their testimony today we certainly had very robust participation by our members which is uh I'm always glad and uh hearten to see uh without objection all members will have five legislative days to submit additional written questions for W uh the witnesses to the chair the questions will be forwarded to the witnesses for
▶ 2:33:47uh his or her response Witnesses please please respond no later than March 31st 2025 uh this hearing stands
▶ 2:34:48e e