▶ 0:13:43the committee on financial services will come to order. Without objection, the chair is authorized to declare a recess of the committee at any time. This hearing is entitled Beyond Silicon Valley: Expanding Access to Capital Across America. Without objection, all members will have five legislative days within which to submit extraneous materials to the chair for inclusion in the record. I now recognize myself for four minutes for an opening statement. Good morning.
▶ 0:14:12I want to welcome our members today to a hearing on expanding access to capital, and I really look forward to this great panel's testimony. Over my financial career prior to entering Congress in Arkansas and Texas, I've seen firsthand the incredible entrepreneurial talent that's alive and well outside traditional venture and financial hubs like New York or San Francisco. Across our country, Americans are building companies that can drive our economy forward.
▶ 0:14:39Yet, too often, these promising startups lack access to local advice and capital that they need to grow, scale, and succeed. Right now, virtually all venture funding pours into just a few coastal coastal cities, leaving the innovators and entrepreneurs of flyover country, often overlooked and underfunded.
▶ 0:15:00When capital circulates this geographically in this geographically concentrated eddy, investors in the economy at large miss out on big ideas, innovations, and economic breakthroughs that can and do emerge from the labs, kitchen tables, and garages in Arkansas, Nebraska, or Ohio. Talent and ambition don't stop at state borders, and neither should investments.
▶ 0:15:28In Little Rock, we've seen companies like Aptigy, which started from scratch and grew into a powerhouse by providing communication tools to schools nationwide. That's the innovation born in Arkansas, benefiting students everywhere. It's proof that when investments are made outside of traditional hubs, incredible things can happen. At the same time, the number of public companies in the United States has declined dramatically from over 7,000 30 years ago to fewer than 4,000 today.
▶ 0:15:57In my view, threatened litigation, excessive cost, and regulatory burdens have made it much harder for small businesses to go public, shutting out entrepreneurs and everyday investors alike. We must ensure that local incubators and small business investors have the support they need and that those aspiring risk-taking teams, regardless of where they're based, can succeed. Our capital market should work for everyone.
▶ 0:16:23That means reducing barriers for startups to access funding, incentivizing investment in regional businesses, and reforming outdated regulations that improve access to growth capital to ensure that a public offering is more of a viable option. Once again, by incentivizing investments in regional startups, supporting local incubators, and streamlining rules, we can create an environment where more companies can scale, thrive, and ultimately become public companies.
▶ 0:16:51and for the means that we're ensuring that we're not just creating opportunities for companies to grow, but also expanding investment opportunities for Americans that want to be a part of that growth. For too long, investment opportunities, particularly in private markets, have been reserved for the select few. By broadening access, we create more avenues for wealth creation, allowing everyday investors to share in the long-term prosperity that comes from innovation.
▶ 0:17:17Modernizing our securities laws can help break down these barriers so that every founder, regardless of background or location, has the resources to support and build the next great American success story. The policies that we're discussing today will not only expand across access to capital, they will also strengthen our economy and create lasting opportunities for millions of Americans. With that, I yield back the balance of my time and I recognize the ranking member of our committee, Mrs.
▶ 0:17:45Waters for four minutes opening statement. Uh thank you very much Mr. Hill. Before I begin I want to comment about the outrageous national security breach reported yesterday. It is my understanding uh that the uh details of the attack were shared with someone who wasn't cleared putting the lives of those involved and the whole mission in jeopardy.
▶ 0:18:13This latest breach follows unlawful access to the critical payment systems and the data of Americans. Mr. Chair, I hope you agree that enough is enough. I wish we had more positive information uh to report on. Uh but the incompetence of this administration is glaring. With that, I appreciate today's hearing on capital formation.
▶ 0:18:41The reality is that our economic outlook is bleak and is entirely of the president's own doing. Mr. Chair, I want to take a moment to read excerpts that highlight the magnitude of the economic crisis created by Donald Trump. From Reuters, more than 4 trillion in stock market values has evaporated since Trump took office. from the Financial Times.
▶ 0:19:11Quote, "Econ uh economists expect Trump's policies to slow economic growth and fuel higher From INC magazine, Trump's tariffs are causing some startups to scrap their IPOs from rooers.
▶ 0:19:33JP Morgan, chief global economist, says the risk of a recession will rise to quote probably 50% or above when Trump's April 2nd tariffs kick in. This is the state of economy. As a result of Trump's disastrous policies and dumb trade wars, our stock markets are in chaos. And the strong economy he inherited from President Biden is no more.
▶ 0:20:04Right now, instead of expanding their business or in investing in their workers, business owners are dealing with a Trump induced recession and are panicking at the thought of higher prices for goods and raw materials from overseas. All of this is slowing hiring, killing innovation, and making it harder for American companies to compete globally.
▶ 0:20:32But Trump's economic policies aren't just hurting American businesses and workers. No, Trump is an equal opportunity destroyer of finances. People preparing to retire, people he has forced to retire, and the people he has wrongfully fired have all seen their nest eggs and hard-earned savings reduced to rubble.
▶ 0:20:56Instead of displaying leadership, competence, and care, Trump has been golfing at Mara Lago, promoting his own Mimic Con, and filming Tesla ads. Actually, on the White House lawn for the richest man on earth, Elon Musk. Unfortunately, that's not all. This month, Trump signed an executive order gutting the Community Development Financial Institutions Fund.
▶ 0:21:26Mr. Chair, for over 30 years, CDFIs have been strongly supported by Democrats and Republicans. We have have them in our districts and have all seen firsthand the critical work they do in supporting small businesses and underserved communities. Eliminating CDFIS because they serve the underserved is a MAGA equivalent of cutting off your nose to spite your face.
▶ 0:21:53The same executive order would also gut the Minority Business Development Agency. And make no mistake, these cuts to workingclass families in underserved communities and the small businesses that they serve are all designed to pay for the only thing the Trump administration actually cares about, tax cuts for billionaires. I thank the gentleoman. I yield back. She yields back.
▶ 0:22:19Chair recognizes the chair of the subcommittee on capital markets, Miss Wagner from Missouri, for a one minute opening statement. I thank you, Mr. Chairman. And you know what? I couldn't be more optimistic about our economy and the direction that our country is moving. As the chairman noted, talent and innovation aren't confined to the coasts and investments shouldn't be either.
▶ 0:22:44This hearing is about giving hardworking everyday Americans access to the kinds of high growth opportunities that for too long have been reserved for the wealthy. so Congress can help Main Street investors invest and save for the future. We've done this before, Mr. Chairman. The bipartisan Jobs Act showed how smart, balanced reforms can open up markets without sacrificing investor protections.
▶ 0:23:10Now, it's time to build on that success by helping more companies go public, expanding access to capital for all, and creating real wealth, building opportunities for millions of Main Street investors in our congressional districts, the second congressional district of Missouri and the nation. Let's cut the red tape from our rules and strengthen our markets because more opportunity means a stronger, better economy for all. And I yield back. Gentlewoman yields back. The chair recognizes the ranking member of the subcommittee on capital markets, Mr.
▶ 0:23:38Sherman for one minute opening statement. I join the ranking member in noting that everyone on that signal chant knew they were exchanging war plans on a signal chant, not a system for classified information. Then they added a journalist to the chat. Then the secretary of state lied about it only to be corrected by Trump's National Security Council.
▶ 0:24:03The SEC oversees the uh the largest capital markets in the world and in the history of the world. We're dealing with a hundred trillion dollars of securities. Our entire economy, the world's economy is dependent upon it. So, let's let just let some guy like big balls take a whack at it. Well, he did. $50,000 payout for everybody at the SEC who leaves. What gaps does that have in enforcement?
▶ 0:24:32What gaps does that have in the ability to approve a registration of securities? We won't know because we don't know who takes that buyout, but we do know that the people taking the buyout are the ones that the private sector values the most and they're going to make a lot of money in the private sector. I yield back. Gentleman yields back. Today we welcome the testimony of Steve Casease. Mr. Casease is the chairman and CEO of Revolution, an investment firm backing entrepreneurs at every stage of their development.
▶ 0:24:59His entrepreneurial career began in 1985 when he co-founded America Online, AOL. Candace Matthews Brocken, Miss Matthews Brocken is the general partner of Light Ship Capital, a Cincinnati based venture capital fund that invests in companies throughout the Midwest. Bill Newell, Mr. Newell is the senior business adviser and former CEO of Sutro Biioarma, a biotech firm focused on the research, development, and manufacturing of next generation cancer medicines. Joel Troder.
▶ 0:25:29Mr. Troder is the co-founder of Laam Watkins National Office. He was a principal author of the IPO related provisions in the jobs act of 2012. And Amanda Scene, Miss Seene is the director of the Alabama Securities Commission. We welcome all of you. Thanks for taking time to be with us. You'll be recognized for five minutes to give an oral presentation of your testimony. And without objection, your written testimony will be made part of the record. Mr. case. You're recognized for five minutes.
▶ 0:26:00Good morning and chairman Hill and Ranking Member Waters and members of this US House Committee on Financial Services. It's my pleasure to be here to discuss the future of entrepreneurship in America. Indeed, it warms my heart to be participating in a house hearing titled Beyond Silicon Valley expanding access to capital across America.
▶ 0:26:23I want to start by acknowledging that for decades, despite party differences, legislation to encourage entrepreneurship and expand access to capital for entrepreneurs has largely received bipartisan support. Today's hearing underscores this committee's commitment to prioritizing entrepreneurship and innovation, and I thank you for your leadership in making this a shared national effort.
▶ 0:26:50Four decades ago, I co-founded America Online, AOL, a company that helped usher in the internet revolution. AOL was the first internet company to go public, and at its peak, nearly half of all internet users went through the platform. After AOL, I dedicated myself to backing the next generation of entrepreneurs as founder, chairman, and CEO of Revolution, based here in Washington, DC.
▶ 0:27:18Revolution's mission is to build disruptive, innovative companies that upend age-old industries with a unique focus on startups based outside of the coastal tech hubs. Startups are indeed the lifeblood of our economy, driving innovation, creating jobs, and fueling growth in red and blue communities nationwide.
▶ 0:27:42Indeed, new businesses play a significant role in net new job creation, according to data from the National Bureau of Economic Research. Yet, entrepreneurs, especially those outside of Silicon Valley and Boston and New York, still face significant challenges in accessing the capital they need to start and scale.
▶ 0:28:05In 2017, when Revolution launched our Rise of the Rest seed fund, led at the time by JD Vance, who is now our vice president, roughly 75% of venture capital flowed to just three states, California, Massachusetts, and New York, with 47 states left to share the remaining 25%.
▶ 0:28:29We've made some progress, but unfortunately the split remains largely the same today. The federal government can help close this gap, and there is strong precedent to do so. In 2011, I was part of the president's council on jobs and competitiveness with a number of leaders from finance and tech.
▶ 0:28:49Our proposals eventually became the bipartisan Jumpstart Our Business Startups Act, the Jobs Act, which passed the House by a vote of 390 to 23. The jobs act included, as you know, three key goals. First, make it easier to launch and invest in startups via crowdfunding. Second, allow those seeking investment to make general solicitation appeals.
▶ 0:29:17and third create an IPO on-ramp for young companies to make going public a easier. Given the success of the jobs act as well as the outsized role startups play in job creation and economic growth, it makes sense for this committee to explore additional ways to expand access to capital for entrepreneurs and enhance the ability of more investors to participate in private markets.
▶ 0:29:41First, on the IPO front, while late stage companies have had access to growth capital in recent years, that funding option is not guaranteed and more companies may need to consider going public at an earlier stage in their development, which makes having a viable path for IPOs critical.
▶ 0:30:00Additionally, Revolution partnering with Pitchbook found that between 2011 and 2021, more than 1,400 new venture firms emerge from smaller ecosystems across the country. These firms are crucial because they are much more likely to invest in local and regional startups.
▶ 0:30:20This committee can take steps to support and sustain these regional funds, including by expanding the pool of potential investors and by streamlining the regulations that apply to upandcoming venture funds. To be clear, none of the reforms proposed should come at the expense of appropriate investor protection, which is of course important, but at the same time, we need to make sure we strike an appropriate balance. If we want more capital funding more entrepreneurs, we need to make some changes.
▶ 0:30:51Some of which could create some risk. But at the same time, if we make no changes and we just maintain the status quo, we are in fact constraining the pool of investors and of entrepreneurs that we need to ensure that we continue to have a robust innovation economy, not just on the coast, but across the country. We all know that talent exists everywhere.
▶ 0:31:14This committee is in a unique position to pass legislation to support the next generation of entrepreneurs and investors and create more opportunity for places that often feel left behind. I applaud the efforts you are taking today to level the playing field and as we approach the 250th anniversary of our nation next year, empower entrepreneurs nationwide to write the next chapter of the American story. Thank you for the opportunity to join you today. I look forward to your questions.
▶ 0:31:44Thank you, Mr. Case. Mr. New, you are now recognized for five minutes. Chairman Hill, Ranking Member Waters, and distinguished members of the House Committee on Financial Services. I'm honored to appear before you today to discuss capital formation in the United States and the need for reforms that support entrepreneurs, protect investors, and promote innovation. My name is Bill Newell, and I'm a senior business adviser with Such Bioarma.
▶ 0:32:09I've been at Sutro since January 2009 until recently serving as its CEO. I also serve on the board of the Biotechnology Innovation Organization and chair Bio's capital formation working group. I want to commend the members of this committee for working on a bipartisan basis to improve access to capital through targeted reforms that protect investors and rightsize needed regulations.
▶ 0:32:32In the last Congress, this committee advanced a number of measures and I hope that this Congress will be able to move that legislation into law. Sutra Bioarma focuses on research, development, and manufacturing of next generation cancer medicines. Our company is 22 years old. I was employee 19 and until recently, we had over 300 employees. In many ways, Sutro's corporate journey is a microcosm of the small biotech experience. We were initially financed by private investors, including venture capitalists.
▶ 0:33:02We IPOed in 2018, benefiting from the Jobs Act of 2012 that makes it easier for small companies to go public. All told, Sutra has raised almost $1.6 billion in the company's history. That eyebrow raising figure and our over 20-year company journey is unfortunately very typical of the small biotech experience in bringing a product to market. Bringing a new medicine to approval is very very expensive and risky.
▶ 0:33:29In this environment, many companies in our industry have had to downsize and end programs because of limited capital availability. Unfortunately, Such is no exception. It takes on average 10.5 years for a candidate entering phase one to reach approval. The average R&D cost to produtical from discovery to launch is $2.3 billion. Drug discovery is expensive. That's why access to capital is so crucial.
▶ 0:33:56We're in a constant race against time to develop a life-saving drug before funding runs out. 13 years ago, this committee passed the Jumpstarter Business Startups Act. The jobs act rightsized regulations for small and emerging growth companies, and we need to build off the success of the jobs act. Private markets play a crucial role in the growth and success of small biotech firms. A company often starts with just angel investors.
▶ 0:34:23Angels are the critical first dollars that bridge the valley of death for the biomedical innovation ecosystem. We need more angels, not fewer. The equal opportunity for all investors acts expands the pool of angel investors. The current definition for accredited investor is not based on the assessment of investment risks, how to evaluate opportunities or conduct due diligence. Rather, the current standard is entirely predicated on wealth and the ability to absorb total loss.
▶ 0:34:51This bill directs the SEC to create a thorough accredited investor gam exam that allows more people to understand invest who understand investing to participate in the marketplace. We have the deepest most liquid and most competitive equity markets in the world. But fewer companies are going public these days for a variety of reasons. It's expensive to be a public company. Funds must be diverted away from critical research and development, clinical development and scientists and more towards regulatory filings, paperwork, quarterly reporting, and accountants and lawyers.
▶ 0:35:21The emerging growth company designation is a critical reason why the jobs act was so successful at incentivizing IPOs, especially from smaller companies. The EGCS status currently lasts for 5 years. The 5-year timeline is simply too short for small biotechs. It's like having a tax system based on age instead of income, which makes no sense. The helping startups continue to grow act allows for an additional five-year extension of the EGC exemption.
▶ 0:35:52The SEC needs to report on and revise the definition of small business. The non-controversial small entity update act does just that. It passed this committee 42 to nothing last Congress and passed the House 367 to8. So, we appreciate the strong bipartisan support for this legislation. The SEC also needs to update their public float threshold triggers.
▶ 0:36:13Chairman Tim Scott included a provision in his bill empowering Main Street in America Act that would require the SEC to revise thresholds for smaller reporting companies to account for a 12-month rolling average of $700 million or less for their public float. By converting public floats to a rolling average trigger, it avoids surprise expenses for companies that may have a small temporary blip in their stock price.
▶ 0:36:36In conclusion, I support transparent and reliable capital markets, both private and public, that allow companies to efficiently graduate or transition from funding structures while minimizing overlap and reporting and disclosure burdens. Thank you for inviting me to provide my perspective on these issues. And I welcome the committee's questions. Thanks, Mr. Dell. Miss Matthews Brocken, you're now recognized for five minutes. Thank you very much, chairman, ranking member Waters, and members of the committee.
▶ 0:37:05Thank you for inviting me here today. My name is Candace Matthews Bre. I'm the founding partner of Light Ship Capital and CEO of Lightship Foundation and a native Ohioan. Recently, my team and I launched a fund of funds called Ankor. But really to understand why we launched that fund of funds, let me first start with the journey that brought us here. Light shift started as a nonprofit focused with one goal. Helping entrepreneurs in communities that often get overlooked.
▶ 0:37:32While our early work had great successes, we soon realized that helping individual businesses just wasn't enough. The larger system around them still needed fixing. To truly support entrepreneurs, we had to build something bigger. So through acquisition, we expanded our work by bringing together three nationally recognized programs. NewMi Accelerator, Black Tech Week, and Founder Gym. Each had strong educational resources and supportive communities.
▶ 0:38:00Black Tech Week in particular has been running for 11 years as a major tech conference that is now located in Cincinnati, Ohio. By combining these organizations under the Light Shift Foundation, we gave them the resources and structure needed to grow and support even more entrepreneurs around America. We couldn't do this alone. However, we've been supported by amazing public and private partners like Jobs Ohio, who share our vision for economic development and growth.
▶ 0:38:27We then created our own venture fund to invest directly in talented entrepreneurs who were overlooked by traditional investors. But even as we saw success, we discovered an even bigger problem. Venture capital is still mostly focused in coastal cities like New York and San Francisco. Talented founders like us in the Midwest and South and other regions are just still left out. And that's why we started Anker.
▶ 0:38:54Anker originally began with a series of meetings around the country with groups of experienced fund managers who were frustrated by the barriers we were all facing. Even though we had proven ourselves, we struggled to raise money because we weren't from traditional venture capital markets. This created what we call emerging manager redlinining, an unintentional bias against new and regional funds, particularly outside of the major coastal cities.
▶ 0:39:18By blocking firsttime and emerging funds, we unintentionally support geographic bias, limit opportunities for promising managers, and miss out on potentially great returns. Ankor directly tackles this market failure. Our fund of funds help support promising new managers across the heartland, Midwest, and South. We provide resources they need to succeed and generate strong returns for their investors. And we've introduced three key innovations at Ankor.
▶ 0:39:46Now, first of all, Anker recently received an SBIC green light from the Small Business Administration, a crucial first step that signals confidence that the SBA is our anchor investor and it helps attract further investment. Secondly, our fund structure helps investors benefit from successful startups while reducing the risk of large losses across the entire portfolio.
▶ 0:40:09And lastly, we eliminated the double fees that are common in traditional funds, making Ankor more affordable and more attractive to institutional investors like pension funds and endowments. However, there are still policy barriers that we need to address. Right now, venture capital funds benefit from certain exemptions under the investment advisors act, but fund of funds like ours do not. We have to register.
▶ 0:40:35Extending these exemptions equally to all venture funds, including fund of funds, would remove unnecessary hurdles and modernize investment rules. Secondly, current law also limits venture funds to just 250 investors. And with inflation, this just doesn't work. So for a $2 billion fund like ours, that means each investor must contribute around $8 million on average, effectively excluding 99% of Americans.
▶ 0:41:02Increasing the investor cap from 250 to something like 2,000 as proposed by the deal act would dramatically lower the entry point, allowing more Americans to participate. And finally, we suggest one more policy improvement. Public investment funds like pens public pensions and endowments should be required to review proposals from firsttime and emerging managers. They don't have to invest, but they shouldn't be allowed to have rules to automatically exclude new managers.
▶ 0:41:31Many of those managers being in the middle of the country. This simple change would significantly reduce geographic bias and democratize access to venture capital across the country. Building and supporting fund to funds like Ankor is the key solution to addressing capital inequality in America's underserved regions. Reducing barriers to these funds isn't just helpful, it's essential. It's how we ensure economic growth and innovation in every part of our country. Thank you for your time and I look forward to your questions and continuing the conversation.
▶ 0:42:02Thank you very much. Mr. Troder, you're recognized for five minutes. Chairman Hill, Ranking Member Waters, and members of the committee. It's good to be with you here today. Based on my experience as a leader of the IPO task force, I'm pleased to share my perspectives on reforms to expand access to capital across America. The Jobs Act of 2012 is a bipartisan success story and a model for the innovative solutions you're now considering.
▶ 0:42:3013 years ago, Congress enacted our IPO on-ramp proposal by an overwhelming bipartisan majority and President Obama signed it into law. Title one has been called the most successful title in the jobs act and academic research has concluded that the IPO on-ramp provisions significantly increased IPO volume. The jobs act succeeded and the proposals under consideration today bear the same hallmarks of that success.
▶ 0:43:00I fully support the committee's efforts to enact balanced reforms in federal securities regulation and I urge your support for the proposals listed in my written remarks. These proposals represent measured, carefully calibrated solutions to facilitate capital formation. With that said, I'd like to make three points.
▶ 0:43:22First, the Jobs Act changed none of the robust anti-fraud provisions of the federal securities laws, and neither would any of the proposals before you today. I cannot overstate the importance of this point. There's a long list of liability provisions and compliance obligations that apply to all public companies. They are extensive and rigorous and they will remain in full force in effect unddeinished by any of the proposals before you.
▶ 0:43:53Second, the jobs act used a balanced approach that scales the regulatory burden to a company's size and maturity. The IPO on-ramp concept allowed the regulatory burden to scale to the size of the company. A simple but powerful concept borrowed from SEC rules in the debate over more versus regulation.
▶ 0:44:16This is a compelling way forward rather than more versus less balanced regulation that scales over time. This approach encourages capital formation while maintaining a much greater level of securities regulation for mature public companies. That greater regulation includes the internal controls audit of Sarbain Oxley 404B which will continue to apply to larger public companies.
▶ 0:44:46Critics of scaled regulation overlook this point when they cite the high-profile accounting scandals that led to the enactment of the Sarbain Oxley Act. It's important to remember those companies were huge mega cap Fortune50 companies that would never have been eligible for any of the relief from section 404b of Sarbain Oxley.
▶ 0:45:11Neither the jobs act nor any of today's proposals would give regulatory relief to companies of that Even if you pass every proposal before you today, every public company must undergo audit by a PCAOB registered auditing firm and comply with all of the robust anti-fraud provisions of the federal securities laws.
▶ 0:45:34And all of the largest US public companies representing nearly all of total US market capitalization would remain subject to section 404b of the Sarbain Oxley Act. That brings me to my third and final point. Of the proposals before you, two in particular stand out. Extending the IPO on-ramp and expanding the category of well-known seasoned issuers. I discussed both of these proposals at length in my written remarks.
▶ 0:46:05They build on decades of successful experience promoting capital formation without compromising fundamental investor protections. They would have the greatest impact of the proposals before you and I urge you to adopt them along with the many other excellent proposals under consideration today. You have the opportunity to build on the success of the jobs act and its lessons. And given the direct connection between capital formation and job creation, the opportunity is compelling.
▶ 0:46:35I welcome your questions. Thank you. Thank you, sir. Director, you're recognized for five minutes. Good morning, Chairman Hill, Ranking Member Waters, and distinguished members of this committee. Thank you for inviting me to share with you the perspective of state securities regulators or regulators if you're from the south. It is a privilege for me to be here today and I hope that you'll consider our important roles as you continue deliberations on the legislation before this committee.
▶ 0:47:03My testimony will focus on preserving the role of states in overseeing our local markets in facilitating responsible capital formation and I will underscore our critical role in protecting investors. The states are proud to be part of a team of regulators responsible for promoting stability in our financial markets and protecting investors.
▶ 0:47:24This heavy responsibility grew out of a recognized need by a state legislature over a century ago to promote transparency and honesty in our markets. Many of the principles first crafted by states were adopted at the federal level to address the abuses that led up to the stock market crash of 1929.
▶ 0:47:43In the decades since, the US capital markets have flourished, both providing extraordinary capital for businesses and safe opportunities for investor investors to build sound financial futures. For the past 100 years, the United States of America has stood out before all other nations as the greatest economy and strongest engine for growth in history. There has never been anything like it before and in my opinion never will be again.
▶ 0:48:11this while being subjected to reasonable regulation. It is the foundation of our success. History has also shown us that we must constantly examine our regulatory framework and where needed adjust. Again, states have been leaders in this effort, including by developing new regulatory frameworks for capital formation while also serving as the warning early warning detectors for new and emerging threats to investors.
▶ 0:48:40As Congress examines further revisions to the federal securities laws, including legislation aimed at capital formation in rural areas, we urge you to strongly consider and embrace the state's important role in capital formation and continue to promote our ability to oversee local markets.
▶ 0:49:00This ensures that smaller offerings, the kind most likely to reach main street investors, are being reviewed by us, that we are able to exclude bad actors from our markets, and that we can keep supporting our entrepreneurs and small businesses, all so that investors can continue to trust the local markets in which they invest. It's hard to talk about capital formation, though, without mentioning the potential for fraud and abuse.
▶ 0:49:27I've witnessed firsthand the aftermath of the devast devastation brought about by bad actors. My first few cases as a young lawyer followed the 2008 financial crisis triggered by the collapse of the sunprime mortgage market. During the course of the investigation, I met with defrauded investors from all walks of life. I heard their stories and their pain was palpable. I knew these people. They lived in our communities and they turned to us for help.
▶ 0:49:56Many of our victims were small business owners that had turned to private markets for funding when lenders were pulling back. Fraudsters exploit every opportunity. Through the years, I've met with thousands of investors across Alabama and the US. I sat with them in their living rooms as they tearfully shared the details of bad investments that ultimately caused them to lose their life savings. The 2008 crisis left investors distrustful of our markets and our regulators.
▶ 0:50:26And we have worked hard for years to rebuild that trust. While states responded to the concerns of investors, Congress worked hard to provide stronger regulatory frameworks to restrengthen our markets and restore the trust of Americans.
▶ 0:50:42Over 2,000 years ago, Uripid said, "They say the gods themselves are moved by gifts, and gold does more with men than words." While I still believe, and I know you do too, that people are good, we are not infalluable and missteps can have major consequences. History has shown us over and over again. But it has also shown us that strong oversight and accountability have a significant deterrent impact.
▶ 0:51:10And that is why I urge you to key consider the state's critical role in ensuring that our financial industry players are subject to some level of oversight and that they can be held accountable when the public demands they should be. In closing, I want to emphasize that we do understand and share the same goals as the members of Congress who support our robust public markets. And as we seek ways and opportunities for investors to strengthen these public markets, consider the state's important role.
▶ 0:51:40Thank you again and I look forward to your questions. Thank you very much, director. I'll now we'll turn to member questions and I'll yield to myself five minutes for starting that process. Um, Miss Matthews Brock and Keane, from your experience, I really enjoyed your testimony about small firsttime fund managers. I I I know that firsthand and I know how the consulting system is biased against firsttime managers going to institutional investors.
▶ 0:52:09So I really appreciate your your testimony. I think that is informative to the committee. Uh you talked about your priority on regional diversity as well and you talked about two principal reforms you thought that would be helpful for smaller funds. the fund of funds approach and the limitations there and then the limitation on total number of investors. Would you just reiterate that point and compare it to the work you're doing? Yeah, absolutely.
▶ 0:52:36So, you know, really the minimal the minimum viable fund size is really around $50 million, right? Um and so in order to kind of get to that number, you have to uh bring in a group of investors that can write a certain size check. The bigger the check, the easier it is to kind of chunk that down. For a fund of funds, it's a much bigger much bigger fund. So for us, we're raising a $2 billion fund.
▶ 0:53:02Even if we were raising a billion or $500 million, it's a pretty significant check size that you need in order to um to to kind of close the fund. Um, so for us, what we're what we're asking here as we're talking about the Deal Act in particular is to kind of shrink that number down. So for raising, like I just said, $2 billion, we need people to write $8 million checks or lots of people who can write 100 or $200 million checks.
▶ 0:53:30I would bet almost every person in this room who has fundraised knows exactly who those people are in this country. It's a very small number of um what we're looking to do is to give more people that opportunity. Um beyond that, I know we we kind of both talked about um kind of the number of investors, but I also kind of mentioned pension funds and public public uh investment funds.
▶ 0:53:54Right now, our universities, our teachers unions, they're sending their dollars to the coasts. Um and each time they do that, they're building wealth on the coasts and that money stays there long term. Now, does some of the money come back with returns? It absolutely does. But those fund managers make money. The families then grow there in those individual cities. We find angel investors growing there and then spending more money on companies there.
▶ 0:54:24We're also seeing those tech companies grow and thrive and it's not coming back to the center of the country. Thank you very much for your your views on this important set of measures. Mr. case. She makes she makes the case that you've been talking about in terms of the bias towards the rise of the rest of the halo effect, the gravitational pull back to the coast despite your best efforts on mentorship, availability of directors, uh, coaching and funding
▶ 0:54:54from the work you've done over the past two decades. What are we missing? What what's what's incentive system is you think that we should change? Well, as I said in my testimony, it's a it's a mix of things, but some of it is creating a sense in these communities in the middle of the country uh that they're really have an opportunity to participate in the innovation economy. A lot of people, as you well know, in place like Arkansas and others feel like they need to leave to go to Silicon Valley or some other other place.
▶ 0:55:22One great story I mentioned in my written testimony is a entrepreneur who was actually at a hedge fund in San Francisco when he came up with an idea for a a platform called Acre Trader and he moved back to Arkansas to Fagatville to start that that that company. But he left Arkansas to go to the coast because he didn't feel like he could he could you know kind of find his way if he stayed. He was an exception that came back to start the company there. How do we create more of those where fewer people are leaving?
▶ 0:55:51There's less of what some have called a brain drain of people leaving different cities in the middle of the country to go to the coast. And how do you create a boomerang of people returning? That requires time. It doesn't happen overnight. But having venture capital in those communities to back the next generation of companies. Having some of those companies graduate to be successful enough to go public and create wealth for all the investors but also the employees. Some of whom then want to start other companies. Some of whom then will become angel investors in other companies.
▶ 0:56:18And it creates this you know ecosystem and and sort of a a positive uh cycle. And so that's what we're trying to do that we I think we have made some progress in some of these cities, but I I do think we need to continue to build on it. And the 37 different bills that have been proposed by this committee are I've read through some of them, I think, are steps in the right direction. Thank you. Well, I've certainly seen that with the work of Startup Junkie and the incubator, small business incubators.
▶ 0:56:45The Kaufman Foundation's work has been dramatic both in Fagatville and in Little Rock in creating an angel investor cohort and a startup environment. Mr. New I want to conclude by just asking you to for the submit for the record your views on uh the lack of participation in the reggga A proposals from the work you did in jobs act and and more bias towards regggd but I'm going to I mean I'm sorry Mr. Troder uh but I'm going to yield back and call on the ranking member for her five minutes of questions.
▶ 0:57:16Thank you very much Mr. Chairman. Uh Mr. case. Uh, I appreciate your leadership with the rise of the rest and your work during the jobs act. Through your investments across the country, you've been seeing firsthand what works for small businesses in underserved communities. Democrats on this committee have consistently delivered results for small businesses.
▶ 0:57:38During the pandemic, I worked with ranking member uh Velasquez to asssure 60 um secure 60 billion in paycheck protection program. That's the PPP program. Loans specifically for community financial institutions to reach small businesses left behind by big banks.
▶ 0:57:59We also worked with Republicans during Trump's first term to secure a historic 12 billion for community development financial institutions and minority depository institutions in 2020, which is projected to support more than 130 billion in new financing for underserved communities over the next decade.
▶ 0:58:22Additionally, committee Democrats worked with the Biden administration to renew the state small business credit initiative, which is already providing billions of dollars in new capital access for small businesses. As I said today and at the prior hearing, I look forward to working with Chairman Hill to advance sensible reforms that support small businesses and our public markets while keeping investors and consumers top of mind.
▶ 0:58:51Nevertheless, Mr. Casease, no doubt you have seen reporting that the Trump Musk administration is trying to shut down the Community Development Financial Institution Fund and the Minority Business Development Agency based on your extensive work with entrepreneurs in overlooked communities.
▶ 0:59:12What specific economic damage would occur if the current administration eliminates these and other small business support programs through your rise of the rest bus tour? I understand you have traveled 11,000 miles across the country. Which regions and demographics would be most severely impacted if these critical capital sources disappear? You know what the CDF fund is.
▶ 0:59:40Thank you, Ranking Member Waters for your leadership on on these issues over obviously a long period of time and we have with Rise Rest traveled quite extensively around the country and we've ended up making investments now in over 200 companies in over a 100 different cities. So it is fairly broad. I think it's 38 uh 38 states. So we have seen a lot we've impacted a lot of entrepreneurs which is a reminder that there are great entrepreneurs building great companies everywhere. it just takes a little more effort to identify them and back them and mentor them and and support them.
▶ 1:00:10Uh in terms of your specific question, I'm on the side of more capital going to more entrepreneurs in more places and and and programs like CDFI and others I think are helpful in that regard. I've not seen the specific proposals to modify that or or or change that. But in general at this this juncture, I think we need to be kind of reaching out trying to level the playing field in any way. If you don't really know what's going with CDFI, if you find out that it's going to be eliminated, would you support CDFI? I I do support CDFI. Thank you very much. On to Mr. Troder.
▶ 1:00:39Elon Musk is currently being sued by the Securities and Exchange Commission for allegedly swindling Twitter's investors of over $150 million and previously was penalized for 40 million for misleading Tesla uh investors.
▶ 1:00:56now through Doge um he potentially has access to the SEC's confidential information and have already demonstrated um their utter disregard for data privacy including gaining access to the data of Musk's competitors at the Consumer Financial Protection Bureau. And also it is alarming uh that Mr.
▶ 1:01:23MS can't even uh secure his own website which has been hacked. The SEC SEC possesses non-public information about pending IPOs, mergers, whistleblower complaints, and ongoing enforcement actions, including against Muskown companies and competitors. You have long advised public and private companies that engage in capital raising activities.
▶ 1:01:47Could you discuss the sensitivity of the information shared with the SEC and what would happen if that information were to fall into the hands of competitors or leak prematurely into the markets? And could, for example, there be a conflict of interest with someone accessing the internal deliberations of the SEC if that person also has pending litigation. Mr. Trader, the SEC has in recent years been very focused on its own cyber security.
▶ 1:02:15one one way in which I've seen as a practitioner um their approach has changed on confidential um information that comes into the SEC so the confidential treatment request process during SEC registration the SEC has worked to make that self-executing so that information does not go to the SEC unless and until they request it so that's one example that comes to mind when you raise this issue of uh cyber security at the agencies thank you sir Now
▶ 1:02:45we call on the gentleman from Michigan, the vice chair of the full committee, Mr. Heisa, who's the sponsor of the accredited investor definition review act and improving disclosures for investors act. Mr. His recognized for five minutes. Thank you, Mr. Chairman. And I want to echo a sentiment that I've heard from many already about uh that Congress should further expand the accredited investor definition to include a wider range of potential investors.
▶ 1:03:11According to the SEC, 19% of US households qualify as uh the under the definition of an accredited investor in 2022. 19%. That's locking out 81% of our population from ever having the opportunity uh to invest in those small businesses. And um I I this was brought to really to the forefront that we had a witness uh last Congress. Her name was Omi Bell.
▶ 1:03:40and I I recall she was here in from DC who founded an organization that assists African-American female founders in securing funding to develop and grow their businesses. And Miss Ms. Bell spoke about the challenges she faced as a young entrepreneur receiving her first uh investment from her mother who was not an accredited investor uh and how updating that accredited investor definition would actually expand the opportunities uh for those businesses who are trying to raise capital.
▶ 1:04:09But um and I I see uh Miss Matthews Bken nodding her head quite a bit. I'm going to go to you first then. Uh how would expanding this accredited investor definition to include criteria besides wealth and income uh how would that expand opportunities for both prospective investors and for those entrepreneurs especially in those underrepresented communities? Yeah, So right now anyone over 18 can sports bet.
▶ 1:04:38They can uh go and play the lottery. Um they can go on to lots of apps and buy cryptocurrency with very little education. Um but what they can't do is go and invest in companies that have um years and years of documentation and financials um because they've been blocked out by rules and regulations against them. So what would that change?
▶ 1:05:04It would it would bring in new investors, new angel investors because right now you have to have such an incredible amount of net worth. Um there are lots of people that work for my team that aren't able to be investors. They aren't accredited investors, but they know much more than the general American public. So So what you'll hear from critics of expanding this is that well see there's not going to be any any sort of safety net. There's not going to be any sort of review. These people are just it's going to be caveat emptor.
▶ 1:05:34They're going to get hosed. We know it's going to be there and it's only the federal government's definition of who should be investing that's saving them from themselves. Do you buy that? I think that we could probably set a rule around the percentage of of money that you're you're using every year. I think that could be fairly simple. That's something we could do for all of those things that I mentioned in the past. So, some reasonable things that are that reasonable and the assumption that bothers me, Mr.
▶ 1:05:58chairman is that if if we were to change this federal definition of what an accredited investor is, that means there's no definition or no, uh guard rails, uh to any of this investing, which simply isn't the case. Um uh Mr. Troder, uh I'm going to uh do quick actually Mr. Case and Newell, if you could really super quickly answer this. Um I'm I'm curious how current investor definition is. Ms.
▶ 1:06:26Matthews Bken was talking about how that that that really limits private capital for entrepreneurs and what does that mean for our so for for the economy and Well, there are a lot of people who have ideas in terms of starting companies. Uh many don't have the commitment to follow through. It's hard. It's far.
▶ 1:06:51It's definitely very hard and definitely, you know, you're risky and you put your your your career at at often at risk. But there are many who I found who do have the desire to go farther. Uh but don't have access to the capital to get going. Uh they don't have the money themselves. They don't necessarily have in their network friends and family who can write the the checks, which is why it is so important to to open up.
▶ 1:07:13So it yes we need to be protect people but we also need to enable people who have ideas and want to pursue the American dream start a company to have a path to do that and investors have a path to also invest so it's not just essentially because of the current income uh rules other rules related to credit investors kind of the rich getting richer how do we kind of level the playing field for investors as well that's a problem the rich getting richer on this sorry I've got 22 seconds left I have to move on uh to Mr. Troder very quickly.
▶ 1:07:41Current law uh issuers using rule uh 506c are permitted to engage in general solicitation before filing a form D as long as they verify that all purchasers are accredited. Um the SEC to mandate advance advance form D filings before any general solicitation. How does that affect materially delaying capital raises and deter issuers like Angel's List, Carta, others uh from using that rule 506 C?
▶ 1:08:09Well, given the amount of time to come, I'll just say it's not a good idea. I I would not support it. Okay. And maybe we can expand that in writing. So, with that, Mr. Chairman, appreciate it. Yield back. Gentleman yields back. Chair recognizes the gentleoman from New York, the ranking member of the Small Business Committee, Miss Vasquez, for five minutes. Thank you, Mr. Chairman.
▶ 1:08:28Miss Matthews, I would like to uh remind you and everyone in this room that the funds to funds dynamic uh you're speaking so highly of was a proposal proposed and finalized by the SBA under the Biden administration and I'm very proud to support it.
▶ 1:08:52Uh I am the ranking member of the House Small Business Committee as the chairman um referred to and I am here to tell you that expanding our private markets and engaging in private market offerings isn't the only way for small businesses to acquire equity capital.
▶ 1:09:12The SBA's SBIC program as of 2024 have deployed more than 130 billion dollars of capital to more than 194,000 small businesses. The CDFI venture capital fund also responsively invests equity capital to underserve and under capitalize small businesses.
▶ 1:09:39Yet the Trump administration's executive order does exactly the opposite. We need to be discussing ways to strengthen not destroy this type of programs. Miss Sen, the title of today's hearing is beyond Silicon Valley expanding access to capital across America.
▶ 1:10:02While the title is certainly correct, the actions by the Trump administration and congressional Republicans tell a different story. President Trump recently issued the executive order that aims to curtail the non-stutory work of the CDFI program.
▶ 1:10:22If we are going to broaden uh the reach of capital beyond Silicon Valley, isn't this exactly the type of public private program we should be Thank you for the question. I I'm glad you guys included Alabama beyond Silicon Valley. You can't get much further.
▶ 1:10:41Uh while our office does not directly administer CDFI programs, I did reach out both locally and nationally to my colleagues in banking and credit unions and they discussed at length the impact that those programs have had on their communities. As a matter of fact, in Alabama alone, there are 10 CDFI credit unions. We're fairly rural, 40% that serve over 300,000 members supporting 2.9 billion in loans and 3.7 billion in deposits.
▶ 1:11:06They have extended nearly $18 million in total financial bene benefits to the underserved communities in Alabama. Our credit union friends are here too and they can provide further information to me if they'd like. Thank you very much. And Miss Sen, the US capital markets have seen tremendous growth over the past decade with a disproportionate share of the growth seen in private markets.
▶ 1:11:29Some of us are concerned that large private companies and private funds have misused securities exemptions to effectively stay private indefinitely, avoiding the transparency and accountability obligations to which many similarly situated public counterparts must adhere. It is a concern you share.
▶ 1:11:54It's a concern in every industry that some bad actor is going to exploit some opportunity to defraud somebody. Um, we certainly see in in Alabama, we have a law enforcement agency and I'm mindful of the fact that I'm here for all 50 states and I talk to my colleagues at least twice a week and we do see fraudsters exploiting the form D and the regulatory um offerings and the the forms that are provided to investors and they use those to create an appearance of legitimate at legitimacy at times.
▶ 1:12:23And so we want to preserve the integrity of those exemptions while also deterring fraud. And on the state level, y'all, we see so much and we see the people that are engaged in the transactions within our borders. And it's so critically important because we're able to help prevent some of that and those bad actors that are misusing those forms to defraud our main street and retail investors. We're in a position to be able to put a a stop or at least deter that conduct. Thank you. Thank you.
▶ 1:12:48In your opinion, how do we appropriately balance the need for small businesses to have a less less expensive method for raising equity capital through a private offering with the transparency needs of investor? Do you feel these balances are currently tailored appropriately? We're always going to advocate for more investor protections.
▶ 1:13:13uh exemptions are a privilege and these businesses that are able to take advantage of it, it's because we believe that those mechanisms are trusted or there's some oversight generally by another agency for example a banking authority on a local level though many of these opportunities are um at least on the form D for the state side in favor of of the businesses and just in Alabama as a reference and I know my colleagues in other states we offer programs to help small businesses get started with our guidance guidance on
▶ 1:13:43a state level and we connect each other to we have a huge networking um a huge network of resources in Alabama but we're able to help them to build a foundation that enables them to be successful as they do continue to grow and many of our communities we are beyond Silicon Valley y'all but we have so many people that are excited about investing in within their communities and so we help at the securities commission facilitate those resources and get them on a good level ground thank you yield back gentleoman yields back I like that yawn.
▶ 1:14:13I like like the Alabama accent. It's I can understand Uh Mr. Sessions from Texas, you're recognized for five minutes. Chairman, thank you very much. Chairman Casease and Miss Bracken, I'm going to primarily ask your opinion in just a few minutes. uh the entire panel here is champions of capitalism and this committee appreciates and respect not only the words that you bring to us but really the ideas about us getting stronger.
▶ 1:14:43I uh note chairman case in your conversation with the committee in your testimony you talk about a Texas company uh and that added 4,000 jobs because you got in and became an investor and helped them.
▶ 1:14:59Uh I also note that in your testimony chairman case you talk about 75% of venture capital flow to three states California Massachusetts and New York with 47 states left to share the remaining 25% and your data is up till to last 2024 which means that it would be current.
▶ 1:15:27I want to ask your opinion about the things that we have been attempting to do to meet the challenge in Texas. We know that we have uh enormous growth and opportunity that we have to meet the challenge in Texas, not only from the promise of these companies, whether it be large data centers, chip manufacturers that probably already have the funding that they or sources that they need, but maybe the hundreds of small
▶ 1:15:57companies that might be suppliers and and add to that robust development. Our governor Greg Abbott has convened uh two champions of capitalism and and and influence uh in the state of Texas, Ross Bro Jr. and Harlon Crowe, both of Dallas, Texas. And they have started a strategic Texas fund.
▶ 1:16:24It is it has the the balance of the support of government through the governor of the state of Texas and then the entrepreneur leaders we've always heard if business leaders lead others can follow.
▶ 1:16:39Can both of you take in the two minutes and 40 seconds left and give us perhaps a a one minute analysis about things that you've learned about doing this that may help them be successful, things that might be s important for me as a member uh and give us your viewpoint about uh Texas trying to break into that outside of the 25% with 47 other states. Chairman Casease. Uh sure.
▶ 1:17:06First of all, thank you for the the question and and the insights around what's happening in Texas. We've now done a number of things investing in a number of different cities in in Texas and there is a lot of momentum. Uh but there's still a lot of work to do. I think the last number I recall seeing is the state of Texas which as you know is a pretty big state with pretty big cities is getting somewhere between two and 3% of venture capital. California was getting over 50%. The reason for that is because you create these this you positive cycle I talked about earlier. People want to be there, so people move there.
▶ 1:17:36The investment then backs companies there. The success of those companies then ripples through the economy there. They saw this even in Northern Virginia. AOL started in Tyson's Corner, Virginia. When we went public uh in 1992, that created kind of wealth in the community. You saw the benefits of that backing other startups in in the in the in the corridor towards you Dallas airport. So momentum begets momentum and the leadership of people in the community, successful entrepreneurs, successful business leaders is very important.
▶ 1:18:04Actually, when we were there with our Rise of the Rest bus in Texas, Harlland Crow hosted us for an event and we've also spent time with Ross Perau Jr. people like that stepping up to say we need to do more to support entrepreneurs in our communities. We don't want them to leave to go someplace else. We want them to stay. And if they did leave, we want them to come back. and we want to create a sense of possibility in our community so people really do believe they can start and scale a significant company here. Thank you, Miss Bryen.
▶ 1:18:31Yeah, in the state of Ohio um we've done the same thing public private partnerships to help our venture capital industry grow. So, uh firstly through Ohio third frontier that helped to seed multiple funds around the state part of it being seeded by SSBCI um more than 10 years ago.
▶ 1:18:49Um, we've also launched a new fund, the Ohio Fund, which is kind of just what you're talking about in Texas, primarily focused in our state, bringing together lots of our um larger research and development organizations around the state and and seeding lots of new funds um and new innovations. Uh we also have an Ohio growth fund um that's funded by jobs Ohio um that comes from a bond issue as well as um dollars that come in from Ohio Liquor and Beyond.
▶ 1:19:17So that is a way for our state to kind of create new jobs and bring in new revenue and attract new dollars into the state and really spur growth. Thank you very much, Mr. Chairman. It's my hope that every member of this committee will listen and learn that economic growth and development is good for their people back home, that capitalism works, and we're at a time now that can be a golden age for America. Mr. Chairman, I yield back my time. Thank you, Mr. Sessions.
▶ 1:19:44The chair recognized the gentleman from California, the ranking member of the capital market subcommittee, Mr. Sherman, for five minutes. Um, Miss Bracken, I think you're right that FDIC insurance limit ought to be higher for at least for checking accounts that are used for operations by small business. Mr. Croder, you tell us that we can rely on these anti-fraud provisions, but we offering $50,000 buyout for every SEC employee that enforces those provisions.
▶ 1:20:14Then we're closing all the regional offices, including the one in Los Angeles that enforces those provisions. how we can't relax um the the rules in reliance on the basic anti-fraud provisions if we won't enforce the anti-fraud provisions. Crime in the suits will grow if we follow the rule of Doge and defund uh the police.
▶ 1:20:44Uh Mr. Heisinga, uh you're right. The accredited investor definition is crazy. It's based on the idea, several ideas, each of which are stupid. One is that a couple with $300,000 is rich, $300,000 income. And second, that rich people should be the ones that are accredited. We should, as Mr. Ms.
▶ 1:21:08Bracken points out, look at the percentage of the assets that the person is investing in that investment and perhaps in all private offerings combined. uh and I think Mr. Heisinga there are a number of bills that look at what knowledge the investor has and uh uh we ought to look at the uh independent and truly independent adviserss available to the investor.
▶ 1:21:31Another definition that we have that makes no sense is that we say that you become a public company when you have 2,000 holders of record. Okay, 2,000 investors that's a public company. But in counting to 2000, we count all Maril Lynch customers as one. I'm a Maril Lynch customer. They got thousands, hundreds of thousands of people. I haven't met them. They're not part of my family.
▶ 1:21:56And yet when we add, so we have this weird math where 2,000 can mean 200,000. Um we uh uh we one of our witnesses says that when you make an accredited investment you have years and years of financial information sometimes but not um look I've been on the business side of this helping companies raise capital back last century I agree I
▶ 1:22:27realize every investor protection is experienced by the business people involved as a hassle and a barrier. But if we don't have investor protections, we won't have vibrant capital markets. And if a capitalism worked best without investor protections, then Usuzbekistan with no capital investor protections would be doing better than Wall Street.
▶ 1:22:53Um, I want to thank uh, Chairman Hill for including in the list of bills that we're dealing with today the Access to Small Business Investor Capital Act. Uh, I introduced this bill in the 116th, 117th, 118th, and now the 119th Congress. I believe the fourth time is the charm. Uh, I'm honored to be joined by Mr. Heisinga, uh, uh, and Mr. Garbaniano and Ms. Binham in that effort. Uh Mr.
▶ 1:23:24Troder, why is it important that we have uh uh vibrant BDC's and that we not have this peculiar uh provision in calculating their expenses that keeps them out of the Well, that's uh my area of focus is really on corporation finance and the part of the SEC that registers uh IPOs and I don't really have much to say about
▶ 1:23:54that uh question. If I may, I would say on your enforcement question, the private securities litigation I is is very active. I I recognize that, but an awful lot of times the the person you're suing is um we really need but you know certainly by the time you get the private securities regulation um and Mr.
▶ 1:24:16Troder uh what do we do to so that we have uh public and private and and private capital markets at every stage uh do uh uh private is private capital part of that effort? I would say absolutely yes private capital is um certainly a part of that effort. I think uh regulation D is an important part of of that regulation um environment.
▶ 1:24:44Um one other thing um is on your issue of a major broker dealer counting as one holder of record that really only happens once a company has already gone public and that that method of counting usually doesn't come into play. I would I would disagree with you and uh look forward to talking to you about it. Sure. Gentleman yields back. gentleman from Oklahoma. The chairman of the task force on monetary policy, Mr. Lucas, is recognized for five minutes.
▶ 1:25:09And he's also the sponsor of HR 1013, the retirement fairness for U Charity and Educational Institutions Act. Thank you, Mr. Chairman, and thank you to our witnesses today. And I too want to express my appreciation for the chairman for attaching that very bill, the Fairness Retirement Act for Charities and Educational Institutions Act, to this hearing.
▶ 1:25:32My bill would allow teachers, charity workers, and other nonprofit employees participating in 403b retirement plans access to the same investments available to workers with 401k plans or 457b plans. This bipartisan bill provides fairness investment opportunities for nonprofit employees. So, I'm glad to see that noticed today. Shifting my focus, I'd like to discuss the disturbing trend we've seen in recent decades of fewer and fewer companies entering public markets.
▶ 1:26:02When I came to Congress, there are over 8,000 public company listings in the United States. Today, there are fewer than 4,000. Healthy public markets allow companies to receive lower cost funding while giving investors opportunities to deploy their capital and seek a return. We should make sure our companies have the option to go and stay public without burdensome prohibitive regulations. Mr. Troder, can you talk about the regulatory barriers that companies face when looking to raise capital through public markets?
▶ 1:26:34Well, they are extensive and again I think one of the big problems in this area is that if you think of how um total market capitalization is distributed, you have fully half of market US market cap represented by about 50 companies. If you extend it to the the largest 500, that's the vast majority of market capitalization. And you have regulations that are designed to apply to all uh public companies as if they are each the same size. They're simply not.
▶ 1:27:03So the the great thing about the jobs act and the emerging company uh emerging growth company definition was to provide that kind of on-ramp relief. It should be extended. Thank you. All of those barriers that you mentioned are particularly challenging for businesses who don't have access to all this capital early on or for those with high input costs like a and energy in my home state. This is also a challenge in our private markets.
▶ 1:27:29If you can't raise series A capital, it's difficult to secure series B or C or D funding. Private markets have experienced sustained growth for the ba past decade but that growth is concentrated in places like California, New York. Uh Miss Bracken, why is it important that private markets are accessed in geographically diverse areas? Why do we all need to be able to tap these resources? Yeah.
▶ 1:27:55Um I'm actually going to uh answer that by also saying, you know, 44% of our kind of US economy is generated by small businesses, right? So these tech companies are those companies. If we are concentrating all of the capital in three major cities as Mr. K said um then we we can't grow businesses. Not all businesses are started in a garage. Some of them are started in laboratories. Um one of those was an antihistamine at the University of Cincinnati and they made benadryil.
▶ 1:28:25Those things are made other places and we have to have the capital um to put into those firms. Mr. Case would you like to comment on that as well? Why is it important that companies across a broad array of diverse experiences and industries have access to funding, not just those with Ivy League founders? Well, for a couple reasons. One is, as we've all been discussing, and you well know, the these new companies, these startups are the big job creators, the big economic drivers.
▶ 1:28:55So, if we have that only happening in a few places, we don't have a a diverse innovation economy. We have a lot of communities that feel like they're being left behind. We have a lot of communities where they're seeing job loss due to disruption without getting any of the job gains that can also come from from uh from new companies. So that's a key part of it. Another key part of it though is entrepreneurs fundamentally see a problem and decide to do something about it. Create a company to do something about it.
▶ 1:29:21The problems you see in rural America are different than the problems you see in in New York City for example. So in the area of agriculture technology, a tech, uh we're you're likely to find an entrepreneur with an insight into the future of farming in Nebraska more than you are in in Silicon Valley. And so we need to make sure we get all those ideas on the table. We have more shots and goal, if you will, as as a country. And that requires getting more people from more places into the innovation economy.
▶ 1:29:53Clearly, we need to modernize our security laws with incremental reforms to make capital formation through public and private markets attractive to business all types, all sizes, all locations. Thank you for this very important hearing, Mr. Dave. Today, Mr. Chairman, I yield back. Gentleman yields back. The gentleman from Massachusetts, the ranking member of the financial techn digital assets financial technology and artificial intelligence subcom, Mr. Lynch, recognized for five minutes. Thank you, Mr. Chairman, and and the ranking member.
▶ 1:30:21And thank you to our witnesses for your willingness to help this committee with its work. You know, when I when I talk to most business leaders today in in the current environment, uh I find that the greatest obstacle that they talk about to capital formation and and launching new development is actually uh President Donald Trump and and his 1.4 4 trillion in chaotic on again offag again tariffs and and uh on on steel, on aluminum,
▶ 1:30:51on lumber. And uh as a as a former construction manager, um it makes it very very difficult for for banks and finance companies to quantify risk on a on a loan when you've got this threat out there of of 25 to 50% tariffs on some of these basic building uh products. Um and and creates a lot of uncertainty which which is problematic in in lending.
▶ 1:31:21Uh Mr. case. Do you agree this uncertainty is is a problem? Yes. I think business looks for clarity and uncertainty and when there is confusion less likely to invest. All right. Yeah, there you go. Thank you. I appreciate that. Um and and as far as private versus public markets, I got some data here from Citizens Bank.
▶ 1:31:42Since 2001, the number of private equitybacked companies grew from from 2,000 US companies to 11,500 companies. On the other hand, and that's a 400% increase. On the other hand, at the same time, the number of publicly listed companies declined sharply from 7,000 to only 4,500.
▶ 1:32:05uh director sen uh while nine out of 10 new ventures fail uh pension funds uh seem to be I mean twothirds of new private equity investments come from pension funds 30% of hedge funds investors and 23% of venture capital investors are are pension funds this means that a substantial portion of of of pension funds uh retirement savings of teachers firefighters police officers nurses,
▶ 1:32:35government employees, construction workers, and other main street middle class folks are are invested in private funds. And I I understand the mix that uh that uh pension fund managers are seeking, and I understand uh they're searching for yield, but but why is it important that we maintain adequate regulatory requirements to keep investors safe?
▶ 1:32:57and and could lowering lowering uh requirements like changing the accredited investor definition endanger pension funds and other investors. Based on the information you provided from Citizens Bank, it sounds like our private marketers are doing exceptionally well with the funding that they have now, right?
▶ 1:33:17Uh we do the states do support uh modifications some reforms to the accredited investor definition but what we're asking for is also disclosures more transparent disclosures on these private offerings. The public markets are out there and for the entire world to see all of their financial records and their people are able to scrutinize them across the globe. And so with the private markets it's important for all investors. I know these are some of these are high-risisk businesses that are given access to retail not just retail given access to the high-risisk businesses.
▶ 1:33:48Um many of them are startups nent stage but but having those disclosures on the other side as well are critically important to allowing these people to invest you know mitigate the risk. So that that shift of uh investment the flow of investment to private private equity it's it there's a there's a lack of transparency on on that side when compared to uh public companies. Is that right?
▶ 1:34:15There is it is a more opaque market than the public market certainly because all of the the filings are out there for the world to see on the on the private side what we see and this is you know I emphasize again the state's roles in all of this for the especially the smaller businesses and smaller offerings when you have somebody within the state within those local markets helping review documents with these companies that are getting off the ground um this information you know financials aren't available to everybody business plans aren't available they're filed public confidentially with us And so
▶ 1:34:45um so yeah, investors don't have as much information near the information they have as as they do with public companies. One one incident that we were faced with last year was when Silicon Valley Bank failed. Uh when we looked at the list of of uh uh uh investors in in that company uh Kalpers uh California uh uh pension fund was was a significant investor. So it just um you have any thoughts on that? Well, pension.
▶ 1:35:14I know in Alabama we do have a a pension fund and we have a phenomenal team of adviserss that do a great job of keeping that fund healthy. So, I mean pension fund, you know, they can weigh their own respective risks, but I know each state has an opinion. Thank you, Mr. Chairman. I yield back. Gentleman yields back. Chair recognizes the gentleoman from Missouri, the chair of the capital markets subcommittee, Miss Wagner, Missouri.
▶ 1:35:34she's sponsoring attached to this hearing the small entity update act, the encouraging public uh offerings act, the increasing investor opportunities act, and the developing and empowering our aspiring leaders act, the deal act. Mr. Wagner, you're recognized for five minutes. I uh thank you, Mr. Chairman. Uh Mr. Casease, I'm going to get right to it here. You've spent years championing entrepreneurship beyond Silicon Valley through the rise and rest fund.
▶ 1:36:05Uh can you explain why current capital formation policies are failing entrepreneurs in rural areas and how the proposed reforms could change Thank you for your question and we have had great success across the country including Missouri. One of the companies we backed in St. Louis, Somersault is doing extremely well.
▶ 1:36:25Uh the challenge for entrepreneurs in these rise of the rest cities in these places outside of the major coastal tech hubs is they generally don't have access to the capital they need to get started. They don't have the friends and family and there's not enough local venture funds to to really give them that first start and then as they expand they don't have the capital they need to to to to grow the company.
▶ 1:36:46Uh so creating more opportunities for more entrepreneurs in more parts of the country to get that initial capital is critically important and the kind of things this committee is is is discussing including making it easier for credit investors and encouraging more angel investors and supporting the as I mentioned in my testimony the 1400 regional funds that have started in the next 10 years. How do we make sure the majority of those go forward and ways to make it easier for them to raise capital so they can then invest that capital in entrepreneurs in their backyard?
▶ 1:37:16And to that point, Mr. Case, venture capital networks are often built on elite university ties and personal relationships. How could allowing larger VC funds to invest in smaller regional funds help break down these barriers uh and distribute capital to more areas of the country?
▶ 1:37:34I agree with your hypothesis that in places like Silicon Valley, it's obviously a very robust, very successful ecosystem, but often it is sort of insular, maybe even a little bit elite and they're generally focused on backing entrepreneurs in Silicon Valley that came from Stanford or you know, worked at Google or some other other company. And so getting some of that capital focused on other parts of the country is important.
▶ 1:37:57And as you say, make it easier for them to invest in some of these regional funds to support those funds, but also to have some insights into what's happening in those markets, some deal flow. Some of those small companies may then expand and need the capital that they could then use their core funds for. And allowing a fund of fund investment into these smaller firms wouldn't just benefit the venture capital firms and their investors. Correct. Correct. Okay.
▶ 1:38:23And what would the impact be on on the underfunded startups throughout the country? More capital going to more more entrepreneurs and more places will then result in more companies starting, more of them getting the point where they're scaling and can be successful, which will drive obviously job growth and economic growth. M case.
▶ 1:38:40According to the SEC small business advocate, uh, rule 506 C as created by the jobs act is disproportionately used by firsttime and diverse fund managers because it allows issuers to broadly solicit and advertise an offering.
▶ 1:39:00Do you see a risk that an advanced form D filing requirement could create hesitation among entrepreneurs and fund managers toward using this exemption out of concern they might inadvertently run a foul of technical requirements? I think that is a concern.
▶ 1:39:21I did work on the jobs act more than a decade ago and it was as I said my testimony I was delighted that it passed but also delighted it passed in a bipartisan way and I think it did strike the right balance in terms of enabling good things to happen while also protecting from bad things from happening and continuing to strike that balance is obviously critically important.
▶ 1:39:39Uh, Miss Matthews Bracken, uh, what would be the real world impact on founders, particularly under represented ones, if general solicitations had to be delayed due to a pre-filed form D requirement? And what would that would that chill the use of the exemption entirely? Yes, it would have a chilling effect. Um, I I don't see a reason to file a form before you've gotten it done.
▶ 1:40:07um it just would create another barrier that is completely unnecessary. I um I would I would tend to agree, Mr. Troder. Uh many retail investors lack access to high growth private companies because they're not accredited. We've talked about this, I'm sure. Would lifting the cap on private investments within closedend funds provide a practical regulated pathway for broader retail exposure to private markets without undermining investor protection?
▶ 1:40:36Yes, I think that's a a fair inference and a sensible approach. Great. Thank you. I think we are all in agreement. I appreciate you all being here and we look forward to we've got up to 40 capital formation bills that this that the capital markets uh committee is advancing and I look forward to getting to a markup so that we can advance those to the floor hopefully get some uh support in the Senate too. So, I thank you Mr. Chairman. I yield back. Thank the chairwoman.
▶ 1:41:03Chair recognizes the gentleman from Missouri, the ranking member of our housing and insurance subcommittee, Mr. Clever, for five minutes. Thank you, Mr. Chairman. Um, Minn, uh, I don't know, maybe you or some of the other panel panelists are familiar with the butterfly effect.
▶ 1:41:24uh that a little butterfly could uh light on your shoulder and you take a bad step and the bad step uh causes you to fall and you fall and tear an ACL and then you have to go to the uh hospital uh and it goes on and essentially the butterfly effect is that something inconsequential can happen but it could have significant impacts along the the butterfly
▶ 1:41:55effect. And on March 14th uh of of this year, uh the president issued an executive order entitled continuing the reduction of the federal bureaucracy in which president declared that certain agencies uh are part of the federal bureaucracy that is and I quote unnecessary unquote.
▶ 1:42:20And the uh EO eliminates non-stutory functions and reduces the statutory functions of agencies that president calls unnecessary governmental uh entities. That's seem seemingly you know just something happens and they wrote they barely uh mention it on the news.
▶ 1:42:42Um but one of those impacted agencies uh was the United States inter agency council on homelessness and all of us I am I'm a my experiences um in life impacts you know my present attitude and my views and and so I am convinced that maybe in second and third place the the most significant domestic
▶ 1:43:12challenge we have is is is housing accommodating the people of this country and affordable and decent housing. Um, and one of the problems that that that move by the president had is that uh it it impacts the um MBDA uh the minority business
▶ 1:43:43um agency. Uh and it also impacts the CDFI fund. CDFI fund. Let I mean, you know, I represent an area, an urban area mainly. Um, and this is going to help devastate an already devastating problem impacting the country.
▶ 1:44:07Uh, can can you or somebody uh tell me how we get rid of this? I mean, how can we undo the butterfly effect? Is it possible? This is this is this in the real world, not the political world where people try to, you know, say something to hurt somebody else. This is a real problem. Can anybody help me?
▶ 1:44:33Congressman, I'm not sure if we can undo it, but you know, as I said earlier, if 44% of the US economy is generated by small business, we we wouldn't we wouldn't get rid of funding for farmers because we need to eat. And we wouldn't um get rid of funding for the military because we need to keep each other safe. And we shouldn't make it more difficult to run a small business in the middle of America because that is how we drive the American economy. So how do we undo it?
▶ 1:45:00It's with conversations like this and making certain that we don't defund the things that are running the US economy. Anybody else agree with that? I do agree with that and I also would echo what you said around the housing situation that I think it's a national challenge to build more homes for more people at different price points and with an eye towards affordability and that there's much that can be done at the federal level and a lot that can be done at the local and state level to unleash really a revolution in housing.
▶ 1:45:30I think we the last several decades we have not really seen the innovation in that sector that's critically necessary and there's a mix of things. Some of it is regulatory policy including some of the things at the local level. Some of it is innovations around construction technologies. Uh but we've got to figure out ways to get more people in in homes and and get the affordability you down. That's an issue in almost every uh part of this country. Yeah. Yeah, I just add that as a 40% rural state here in Alabama and our colleagues, we are boots on the ground.
▶ 1:46:00These people are in our backyards. We see them, you know, across our communities. And so by helping empower and grow our small businesses, they can create jobs in our within our states and we're able to do that. With regard to your CDFI um statement, I've have talked with our local banks and credit unions and they have very much so experienced the impact in those communities, especially in rural Alabama. Thank you, Mr. Chairman. Thanks, Mr. Clear. Gentleman from Kentucky, the chairman of the financial institutions subcommittee, Mr. Bar, is recognized.
▶ 1:46:30He's the author of the Small Business Investor Capital Access Act. Mr. Bar, you're recognized for five minutes. Uh, thank you, Mr. Chairman. Excuse me. Um, Mr. Casease, uh, excessive compliance burdens uh should not prevent the flow of capital into main street businesses, uh, the driver of economic growth in our country. and your testimony that roughly um 75% of venture capital flowed to just three states, California, Massachusetts, and New York with 47 states left to share the remaining 25%. That's alarming.
▶ 1:47:00It's alarming for Kentucky startups uh that that you know in flyover country don't have access to capital. Um, the private fund investment registration act of 2010 exempts private fund investors with less than 150 million in assets under management from SEC registration, but that requirement has not been changed in 15 years since it was enacted. So, um, as uh the chairman pointed out, I introduced the Small Business Investor Capital Act to address that issue, adjust it for inflation.
▶ 1:47:29Would tying the exemption threshold for certain private fund advisors to inflation help rightsize regulation for smaller funds? Yes, I I believe it would be a step in the right direction. More capital going to more entrepreneurs and more places I think will be helpful to those communities and helpful to the country.
▶ 1:47:44and and talk a little bit more and you've you've already answered my colleagues questions about this, but what are some of the things we can do to build on the jobs act to attract more capital to those other 47 states like Kentucky where you do have startups that don't have access to a lot of capital. We have, you know, a few private equity firms that focus on manufacturing. That's great, but doesn't really address uh those venture uh stage firms.
▶ 1:48:12We have a bluegrass angels group that does great stuff helping commercialization out of the University of Kentucky. What are some of the things that we can do to add to the jobs act to attract capital to those startups in places like Kentucky? I'd say uh mixed news on this front. The big data in terms of how much capital is going to the the the the 47 states at 25% is still a little bit troubling, a little bit sobering.
▶ 1:48:37At the same time, over the last decade, 1,400 new venture firms have started in in different parts of the country. So, part of the challenge is how do you get more funds like that and how do you maximize a number of those funds to succeed to their second fund and their and their third fund. Opening up more groups of investors, including modifying the credit investor uh language and rules would be helpful in in that regard.
▶ 1:49:00anything that can get more capital into more fund managers in these communities because they're much like to find the entrepreneurs in their own backyard, back those entrepreneurs, mentor those entrepreneurs, and then when they scale, connect them to other entrepreneurs in other regions, other parts of the the country. It really has to start locally. If people can't raise that capital locally, they they often decide they have to move to the coast, places like Silicon Valley, to really have a shot at the American dream. Well, thank you for that testimony. And Mrs. Matthews Brachen.
▶ 1:49:31Um, I want to ask you about the SBIC licensing process and, uh, the experience you had with Lightship. Uh, uh, you know, we we have some, uh, folks in Kentucky, uh, who want to start SBIC's. Um, they have, uh, private capital to help put up, but it the licensing process seems to be very cumbersome at the SBA.
▶ 1:49:53And um you know when you talk about getting capital to parts of the country that need it and don't have it uh this is a big impediment uh at the small business administration um do you think that the licensing process is a barrier to new SBIC's being formed in the heartland of our country? Um I am told by some of these uh folks that want to start an SBI that it's like an a black box over there. People apply and then hear nothing until they do.
▶ 1:50:19it could be months and months before they even get a response on whether their application has any issues. I would say that we had the opposite um situation. Um I feel as if there was a lot of transparency around the process from start to finish um from deadlines to when we would hear back on on certain portions of the application. It is an arduous process. There are FBI background checks. There are background checks with lots of different people.
▶ 1:50:45But I will say step by step that SBA SBIC team was equipped to say yes if they could if we had the experience necessary. Well, my experience with my constituents is that um you have to have uh experience with an SBIC in order to be approved and it's a chicken or the egg. How are we going to get more SBI's if the SBA uh SBA won't approve them for people who have never done them before? Uh so we need to work on that with uh administrator Leler. Finally, a quick quick question for Mr.
▶ 1:51:15Troder, I introduced um the regulation advancement for capital enhancement act that would streamline reggga, reducing the waiting period for offering statements filed with the SEC under reggga ex expediting uh small and medium enterprises uh like in the horse racing industry, innovative companies that securitize thoroughbred raceh horses, democratizing raceh horses uh uh horse racing so that all Americans can invest in helping capital formation when done in a manner that maintains robust investor protection.
▶ 1:51:45Mr. Troder, what are the benefits of streamlining SEC filings under reggae? Well, I think your proposal is a great step in the right direction. The difficulty in my mind with reggae has always been not necessarily the limitation on the amount that you can offer, although that's certainly a factor. The difficulty is that to do a regggae offering, you're doing almost all of the work of a regular way IPO.
▶ 1:52:10And so if you're going to do almost all of that work, you might as well do a little extra work and have a real IPO. So that's the challenge that reggae has always faced in in my experience. Thank you. I yield. Thank you, Chairman Bar. Chair recognizes the gentleman from Illinois, Dr. Foster, the ranking member of our financial institutions subcommittee for five minutes. Thank you, Mr. Chairman.
▶ 1:52:32And I I guess I'd like to start by congratulating the Trump administration on delivering from its campaign promise of making using technology to make the most transparent administration ever. That they're really um doing very well on that. Um and and I al I want to say a little bit about um about trying to get geographic diversity into into investments and and because you know back I guess I had a little bit of seniority on Mr.
▶ 1:52:58case since it was five decades ago that I started my company with my little brother and 500 bucks for my parents that now manufactures the majority of the theater lighting equipment in the US about 1500 employees we manufacture in Middleton Wisconsin and Msaini Wisconsin and you're forgiven if you don't know those but the it strikes me that there are two barriers to trying to make businesses work in the heartland one of them is capital which we've discussed a lot the other one is access to people and that depends a lot on the nature of
▶ 1:53:28the business. If you're trying to scale a a chain of doughnut stores, you have all the people you need in any city in the in the United States. If it's a really high-tech firm, then there's trouble because you often have to recruit um both spouses. And this is a classic problem. It's called the twobody problem in academics. And it's a huge thing.
▶ 1:53:50if you're trying to, you know, you have a top-of-the-line software developer or a biotech person, um, you can you can get them to move to Chicago or to Madison or to Austin, you can't get them to move to Dixon, Illinois, you know, and it's a it's a huge problem. You know, Mr. Case, you've been struggling with this. And I think that's part of the reason why we've made so little progress on this. What what's your thinking on on that second barrier? No, I totally agree with your assessment. Capital's important, but in some ways, talent is more important. You need the talent to get started.
▶ 1:54:17you need the talent to to to scale and it's more difficult uh to get that talent in certain parts of of the country. We have seen examples of successes in in including in Illinois cities like uh uh Chicago bigger cities that back Oh yeah, Chicago's been the number one number one but even I was going to say as you well know in in normal Bloomington you know Rivian has has done you know you know quite well and scaling quite quite rapidly.
▶ 1:54:42Uh so you need to find the opportunity that leads people to not want to leave and creates a boomerang of people who want to return because they really believe that that's happening and then you start building that that ecosystem and leveraging the national labs which are spread around the country and the research universities that are spread around the country. One company back in Atlanta called Hermy is working on Mach 5 engine is in Atlanta because the you know Georgia Tech is turning into a feeder of talent young young engineers and others who can be part of that.
▶ 1:55:11So the talent exists in these cities. Uh it it then tends to go to the coast. We need to keep more of that, you know, from from leaving and get more of it to return. Yeah. Well, I think we should just pay pay more attention to that second issue and understand if that's a something that can really be overcome or just something we ought to design around. Uh now the issue of accredited investors, it strikes me that there sort of two dimensions here. One of which is the wealth, the ability to bear losses and that's important. The other one is the knowledge. And it strikes me there are multiple dimensions to that knowledge test.
▶ 1:55:41Uh because uh you know there's the knowledge of just the nature of investment and there's a big spread in the sophistication of investors. There's the accuracy of the auditing of the financials. All right. And there's then there's the understanding of the actual business model. And so Mr.
▶ 1:55:57New in in the history of your company that you went through in your testimony, it um you know the you had very sophisticated initial investors from which you raised the first couple hundred million bucks and then you went public and then you described a big bubble in the in the valuation when a bunch of frankly dumb money came you were sitting around during COVID sitting on the couch saying biotech's interesting I'll invest in biotech firms and I imagine most of those public investors didn't have couldn't identify didn't know the difference between a um uh
▶ 1:56:27antibbody drug conjugate and a hole in the ground, but they just wanted to invest in biotech. And so that and most of those investors, the money they put in has been wiped out because now you know you're the sophisticated investors know you were doing something that had a low probability of success and a huge payout and they provided a valuation. The the public investors had no idea.
▶ 1:56:47And and so I was just wondering, you know, is there um a reason why we should maybe look at that second dimension of the sector that you're investing in and have different thresholds in different sectors so that the doughnut shops chain of doughut shops have a very low threshold because everyone can understand it and for complex sectors um maybe a different set of qualifications. Congressman, thank you very much for that question and I think that's an astute observation.
▶ 1:57:14uh the biotechnology industry which I've been in for over 25 years uh was not something that came to me naturally because I did not take science in school. So I had to learn progressively year over year what the industry is about, what the science is about. I already had the business fundamentals because of my background as a corporate lawyer.
▶ 1:57:33So I understood the business aspect of it and it is a unique issue where you see in the capital markets public um people who don't know anything can invest but in the private markets people who don't know anything can't can invest if they have a lot of money. I'm afraid my time is up but if any of you have thoughts on that about having sort of different thresholds for different sectors based on the complexity I'd be interested in hearing. Gentleman yields back. Thank you so much Dr. Foster.
▶ 1:57:59Chair recognizes the gentleman from Texas, the chairman of our small business committee, Mr. Williams, who's also the author of expands protections for research reports covering all securities of all issuers. Mr. Williams, you're recognized for five minutes. Thank you, Mr. Chairman. Thank all of you for being here today. And the jobs act made it easier for broker dealers to issue reports about small growing companies planning to go public by exempting these reports from being treated as an offer to sell securities.
▶ 1:58:26This exemption has been instrumental in facilitating access to research coverage for small and emerging companies, helping them attract investor interest in the IPO process. However, current provision is limited to emerging growth companies, leaving out a vast number of potential issu issuers who could also benefit from increased transparency and market insight. My bill would expand the research report exemption to include reports about any e issuer that undertakes a proposed public offering of securities.
▶ 1:58:54This would enhance market efficiency, provide investors with more comprehensive information, ultimately helping to level the playing field. Mr. Troder, uh, could you explain how such an expansion would benefit the marketplace without compromising investor protection, especially as research analysis remain subject to robust SEC and FINRA regulations? Yes, this is a perfect example of how the IPO on-ramp provisions can be extended.
▶ 1:59:20So, you're building on an existing exemption that's available for emerging growth companies relating to their equity securities. Your bill would expand that to all companies regardless of their size, regardless of whether they're emerging growth companies, larger companies, and would apply not only to equity securities, but also to debt securities. There's we have 13 years of experience with the exemption. Uh it's been very helpful for emerging growth companies to have uninterrupted research written on their companies.
▶ 1:59:50Um, and it would be beneficial for all uh companies to to benefit from that as well. It's also based on an SEC rule that's a a little bit more limited than your provision, but your provision would be be very helpful. Okay. Thank you. Access to capital remains a critical challenge for many small businesses across the country, particularly those in rural areas, and I represent a lot of rural area in Texas, and many rural entrepreneurs are still struggling to secure funding they need to grow and survive, primarily because of regulatory and compliance burdens.
▶ 2:00:18Despite the legislative efforts to ease these barriers, there are still significant gaps when it comes to ensuring small rural businesses have plenty of options to access crucial capital. So myth Matthews Bracken, can you elaborate on what challenges rural small businesses are currently facing in assessing capital? Absolutely. We we service lots of um entrepreneurs and founders around the state of Ohio, especially in in rural areas. The the capital isn't there.
▶ 2:00:46they're many times having to leave their cities um or enter programs that are offered um by our state or the federal government um so that they can access capital um it's it's incredibly difficult um but it is possible. We've met people in you know Youngstown, Ohio building $14 million companies um but it it's possible but incredibly difficult. So I think if left to our own devices, capital markets are really going to go to concentrated areas here in the country and those people will be left out. Okay.
▶ 2:01:16Now, uh, small businesses are facing an increasingly difficult environment when it comes to securing capital as we've talked about particularly given the rise in regulatory compliance costs, the concentration of venture capital funding in states like California, New York, and Massachusetts. And for the lack of capital uh or for many small businesses outside of these traditional investment hubs, the lack of capital resources and difficulty of meeting regulatory requirements creates significant obstacles to growth and sustainability.
▶ 2:01:43Uh this situation not only limits the small business growth potential but also hampers economic development in communities that could greatly benefit from entrepreneurial investment. So uh Mr. uh case uh from your experience or I'm sorry u would any of the capital formation policies discussed today make it easier for unrepresented entrepreneurs or those from flyover states to raise capital? Yes, it's always going to be a challenge to start a company anywhere.
▶ 2:02:11It's a bigger challenge if you're not in one of the major coastal tech hubs. uh and the the the legislation that's been con being considered by this committee will be a step in the right direction to make it a little bit easier for entrepreneurs in places that aren't where most of the capital is right now to have access to capital to get started and scale our businesses. So I think there's some constructive conversation. I haven't read every single one of the 37 bills that have been proposed, but what the summaries I've read have been I think helpful and build on the work of the jobs act more than a decade ago.
▶ 2:02:42Right. Thank you very much. And Mr. Chairman, I yield my time back. Gentleman yields back. Chairman recognizes the gentleman from California, the ranking member on our task force on monetary policy, Mr. Vargas, for five minutes. Uh, thank you, Mr. Chairman. Again, I appreciate very much this hearing. I want to thank all of the witnesses here today. Have two lines of questioning. Today, I would like to ask about risk and investors protection and also about the diversity of access to capital around the country. Uh, Mr.
▶ 2:03:11Troder, I'm I'm welcome back by the way. Good to see you again. Thank you. I'm I'm tempted to give you more time to ask to answer the the ranking membmber's question on Elon Musk's conflict of interest, but I think I'll skip that one for you. Give you a break. But I do want to ask about this. On page three of your testimony and also your testimony today, you say a few things. None of the proposals would alter any of the robust anti-fraud provisions of the federal securities laws. And you go on the two key proposals on the list of proposals. tour.
▶ 2:03:41By far the most important, extending the IPO on-ramp based on 13 years of successful experience. Just talked about that and expanding eligibility for well-known seasoned insurers status based on decades of successful experience. So, we had have some and you did mention the 50 largest companies, the 500 largest companies market cap that they control.
▶ 2:04:03So, how do you protect, you know, and and I do agree with much what of what's been said, but how do you make sure that these small investors, these these new people coming into the market don't get Again, I would begin with the anti-fraud provisions of the federal securities laws, which are very rigorously enforced by the private securities bar, frankly. So, class action litigation is a real thing. When your stock drops significantly, you you do get sued.
▶ 2:04:31um uh uh that we had Bill Larak in San Diego. I'm very familiar with that. Yeah, you get lacked. So, so um that that is by far and away the most significant source of discipline in our capital markets. Um and none of these provisions before you just like the jobs act alter the liability matrix under the 34 act or the 33 act. There's very robust but giving more time. I mean you talk about the 404b that you know you don't have the independent auditor. Yeah.
▶ 2:05:01Give them a little more time you know for these small companies onramp. I mean how does that not more risk? Yeah. So 404b is an internal controls audit. It's separate apart from the financial statements audit. You do every public company has an independent auditor that's PCAOB registered. Every single one. Uh the jobs act did not change that. The jobs act extended an on-ramp that already existed under SEC regulations for new public companies that got a little more time before they had to do 404b compliance.
▶ 2:05:31And again, my point on that is it is directly targeting the top of the highest. Exactly. Scaling regulatory burden. Okay. Okay. Thank you, m Mr. Case. You're talking about diversity of you know access to capital and entrepreneurship and thank you again for your efforts. One of the things you didn't talk about, we talked about briefly here is housing. I I asked AI. You know, what is the price differential in homes from Silicon Valley and Arkansas? In Silicon Valley, it's over $2 million now.
▶ 2:06:02In Arkansas, it's $299,500. I mean, it seems to have a natural, you know, opportunity there in Arkansas versus Silicon Valley. So why don't you just have naturally reoccurring the occurrence of these investments in places where people can afford to live? I do think there are some significant cost of living uh advantages in many parts of the country including in in uh as you mentioned in in Arkansas.
▶ 2:06:31Uh and that is one of the reasons people might consider staying where they are or moving back to someplace. But you still need to have that innovation engine in that community. You still need to have enough startups, enough critical mass to be able to have venture funds, have enough venture fund success so you can do kind of follow-on investing which then leaves people growing up there or going to school there to stay there and maybe even some of the people who left for what they thought were greener pastures to to return.
▶ 2:06:58And so there are huge advantages all across the country in terms of the cost of living, cost of doing business, huge advantage in terms of understanding some of the legacy industries now that we're moving into the third wave of the internet. Agriculture and many other sectors are being reimagined. Manufacturing is being reimagined. The skill set around that does exist. One of the things that you didn't talk about though is cultural also. It's interesting that on the coast that everybody likes to beat up on. I live on the coast. I live in San Diego.
▶ 2:07:24We are rather progressive in how we look at young entrepreneurs and and also you know you have different types of entrepreneurs. You have a lot of people from different countries that are come come to our you know our state and we don't discriminate. Our our gross state product now is over $4 trillion. It's the fifth largest economy in the world if it was a country. And you go to some of these other states they don't want immigrants. You know they beat up on them all the time. These universities they go after them.
▶ 2:07:50They make fun of Ivy Leaguers here and all of a sudden say why don't these young smart kids come to these these states? Well, I wonder why. Anyway, with that, I'll yield back. Gentleman yields back. The gentleman from Georgia, Mr. Laddermox recognized for five minutes. Thank you, Mr. Chairman. Thank you all for being here uh to discuss this uh important topic. And uh Mr. Troder, I want to ask you about the decline in initial public offerings over the past decades.
▶ 2:08:17As you've mentioned, while the Jobs Act of 2012 helped lower IPO barriers from a compliance perspective, and we've seen some recovery in the IPO market driven by large companies, small companies continue to see a decline in IPO activity. To what extent is the underwriting cost for IPOs a barrier to entry for wouldbe public companies? Well, um, my focus is on the regulatory burden, which I think is very significant, and I think Mr.
▶ 2:08:45New um hit it on the head when he said that the easiest way to fix this is to extend that IPO on-ramp concept that we already Okay. Um and it you brought up the the regulatory burdens and how have they reduced the a new company's willingness to help take smaller companies public or underwriters to take small companies public? Sure.
▶ 2:09:08Well, by reducing the regulatory burdens associated with going public and then by extending the regulatory relief that you get as a new public company, you make the whole process more streamlined. Okay. My understanding underwriting fees are the largest single direct cost associated with an IPO. Has the current regulatory environment driven those fees up? And could rights sizing a particular regulation help bring those fees down? I mean, again, I I tend to think that those fees are market driven.
▶ 2:09:39Um, and the the way that um that you can most effectively help the system is by extending in terms of especially with IPOs, simply extend the IPO on-ramp. We have 13 years of success, make it a longer period, not just uh limited to five years, but 10 years post IPO. Okay. Thank you. Um, I want to kind of follow up on something that uh my colleague Mr. Vargas had brought up.
▶ 2:10:04Um and you've spoken before and and here today about the need to extend the IPO on-ramp uh from the jobs act. One of the benefits of on-ramp and and emerging growth companies designation from jobs is that exemption from the Sarbain Oxley 404b um as you were discussing earlier.
▶ 2:10:24Can you expand on why the provision in Sarbain Oxley why what is the provision in Sarbain Oxley and why it's so difficult to comply with for new companies? Well, it's a provision that um originally comes from banking regulations. So, it's focused more on the internal control process that a company would have uh and it's related to ultimately safety and soundness concerns of a particular company.
▶ 2:10:49So what happened with Sarbain Oxley is that system was imposed on the entire public company ecosystem. Notwithstanding the fact that what you were what what the the best way to target that regulation would have been to target it at the the the companies that pose the most systemic risk. Uh so again total market uh is almost exclusively much much larger companies.
▶ 2:11:15So you can you can readily give significant relief to newcomers, new entrance into the system uh and without any offsetting increase in systemic risk to total market cap. Okay. Something else I'd like for you to elaborate on. Um you've you've made it clear in here that um an exemption from 404B, an extension for ECG, is safe. Why why do you feel that is safe?
▶ 2:11:41we I would point you to 13 years of successful experience with new IPO companies. Um and again the IPO on-ramp concept was borrowed from SEC rules. So even under SEC rules regardless of the size of a company as a new IPO company you get until your second annual report before you have to comply with section 404b. That's just a recognition of the fact that it takes a lot of time to put all those processes in place.
▶ 2:12:05So with uh companies that satisfy the EGC definition, as long as they continue to do so, they have that relief. And again, Mr. Newell's point uh spoken like a CEO, that relief can and should be extended based on 13 years of successful experience. This is not it's not it's no longer experimental. We we have the data. You've done it. It succeeded fabulously. You should extend this concept.
▶ 2:12:31So at that stage of a company's growth 404A is adequate as as far as internal management assessment. Yes, absolutely. Management is required to maintain effective internal control over financial reporting. They're required to assess the effectiveness of it and certify to it. Mr. Newell has signed his name on the dotted line as to that effectiveness. This is a a very significant um enforcement mechanism on its own.
▶ 2:13:01But then to have in addition to the financial statement audit which is a big undertaking, a separate internal controls audit um is a significant cost. Okay. Thank you. I yield back. Gentleman yields back. Uh the gentleman from Illinois, the vice ranking member of the committee, Mr. Cassim's recognized for five minutes. Thank you, Mr. Chair. Um thank you all for being here. Um the so I think and I'm sure my colleagues will correct me if I have this wrong. I think Dr.
▶ 2:13:27Foster and I are the only two members of this committee who actually have entrepreneurial experience in terms of taking a business from an idea through attracting talent, fundraising, making it into something that was cash flow positive and ultimately selling on the back end. Um I say that not to brag, but to say that is important that our nation's CEOs have representation in Washington.
▶ 2:13:47um they often don't have a loud enough voice and speaking as one myself um the uh our nation's CEOs desperately would like more access to capital without constraints. Um certainly in my own expert experience um it was a nuisance having young whipsmart MBAs riffling through my books and questioning my wisdom from the local private equity fund. Um the I also did not particularly want to get involved in all the nuisance of public disclosure that the SEC would required for investor protection.
▶ 2:14:17If you are fortunate enough to have someone of Dr. Fosters and my temperament and wisdom, you don't need investor protection. All you need is our wisdom as entrepreneurs. Um not everybody has that of course. Um, and I say that because, you know, the United States economy is the envy of the world because historically we have balanced that tension between access to capital for entrepreneurs and making sure we have deep capital markets. We have the deepest capital markets in the world.
▶ 2:14:46We also have robust investor protections. But if we've learned anything from the first 65 days of the Trump administration, um, arsonists can work a lot faster than homebuilders do. things that take lifetimes to build, from our relationships with our European allies to basic decency um to basic national security protocols can be destroyed overnight and take a long time to rebuild. And so we've seen what $4 trillion of collapse in equity values. We've seen a collapse in M&A activity.
▶ 2:15:17Um we've seen a large number of private equity firms who are now raising debt in order to pay dividends, which I think is banker speak for let's kick the can down the road. um and hope that a future administration will fix what just got broke. Um but it feels to me in this moment that we need to be doubling down on investor protection um because that's who's going to get hurt if we're not careful. And to that end, Mr. Troder, I'd like to chat a little bit about some of these fund of fund structures.
▶ 2:15:44My my understanding, and correct me if I'm wrong, is that right now if you're going to set up a registered fund of funds, you've got a registered investment adviser who has a fiduciary obligation to the fund. Got that right? Um, so if you were to bring retail investors into that structure, would that RAIA have provide investor protection for the retail investors or would that be treated as a separate I would have to get that's that's outside of my area. So I'd have to get back to you on that. Okay.
▶ 2:16:14Does anybody know the answer to that question? Because I mean the concern is like you know you don't want to have like multiple tiers of in the capital structure that could run down. Um, let me stay with you Mr. TRD right right now it's also my understanding that SEC staff positions have generally said that fund of funds should not have more than 40% investment in any fund to maintain diversity but that's not that's not a formal rule it's sort of general guidance do I have that right I'm sorry I'm my area is in the 33 and 34 act
▶ 2:16:44um and and that's my area of expertise so I'm probably not the right person to comment on 40 act compared okay well well I guess what I'm asking is it seems to me like there's a there's a benefit in diversity and I think we can agree that I think there's a bipartisan agreement of increasing access to these vehicles, but do retail investors have protections in those under current structure? Do we have to add additional rules? I guess Mr. Case, I'd turn to you.
▶ 2:17:08Do you think if we were to make this expansion that we should ensure that those fund of funds have some kind of mandated diversity of funds or some additional protection for retail investors who don't have the sophistication that the that the Fidelities of the world or the pension funds do? A couple points.
▶ 2:17:25Uh first of all I think in terms of retail investors who might become able to invest in companies or funds if there's a change in the in the rules around accredited investors actually investing in funds for most of them might be the smarter way to go. It's a little bit why in investing in the stock market you can make you can pick stocks or you can invest in a fund manager who will manage it for you. Uh you might not get the full upside then if you pick them but you also sometimes can hedge some of the downside.
▶ 2:17:53So actually making it easier for people to invest in more diversified funds that are investing in multiple funds or multiple companies I think is is is is important. But I guess the concern there was unless unless we put in the kind of disclosures that public companies have the you've got retail investors who may not have the sophistication, don't understand the liquidity issues, don't understand the way the capital structure was set up where they're going to be underwater in most likely scenarios. How do we get that protection if if we don't have the kind of disclosures that we have in an SEC environment?
▶ 2:18:23I do think the process of deciding what an accredited investor should be and and what kind of tests should be put in place other than just you know wealth. I I think there's a number of proposals being considered. I'm sure the SEC can figure out a right an appropriate way to strike that that balance having time is expired. Uh I'm out of town but welcome any continued comments. Thank you. Yield back. Gentleman yields back.
▶ 2:18:45The gentleman from Ohio, the chairman of the national security elicit finance and international financial institutions subcommittee and the sponsor of HR145 risk disclosure and investor attestation act, Mr. Davidson is recognized. Uh thank the chairman, thank our colleagues and our committee. Uh to Mr. Casten, uh he and Mr. Foster may be the only two Democrats with private sector experience, but thankfully that's not true of the Republican side of the aisle. I hope he gets to know some more of us uh better.
▶ 2:19:12Uh the uh the witnesses do have lots of private sector experience. I appreciate you guys being here and frankly for some of you I've really admired what you've done. Mr. Casease in particular who who didn't notice the the rise of AOL and a lot of the work you've done since. But I noted that you have ties back to Cincinnati with Proctor and Gamble and of course uh Miss Matthews Bin based out of Cincinnati. So great to see uh our slice of America so well represented here today.
▶ 2:19:42And that's part of the goal is, you know, America does so well uh with less than 5% of the world's population. We have roughly 25% of the world's GDP, but over 50% of the world's invest invested capital. Unfortunately, that capital isn't all invested in Cincinnati and Western Ohio and Ohio as well as it is in some other slices of America.
▶ 2:20:06And I think it's great that we've got this hearing today to highlight how we can help uh see some of that capital flow invested differently. Frankly, one of the concerns I've had is for small and mid-market firms in particular when they want to raise capital, they don't really have as big of an offering, they don't even intend to build an enterprise that is going to attract the kind of valuations that do well in IPOs. Um, you know, you have to raise pretty substantial capital to cover the regulatory barrier.
▶ 2:20:35And then if you want to even solicit an offering uh often that offering is shaped by uh rules that are fundamentally they say to protect investors but the the reality is we know it's really protecting deal flow for a lot of people that are already wealthy and they get first looks at some of the deals and that's why I've introduced the the bill Mr.
▶ 2:20:58style referenced which is the risk disclosure addestation act which is since it's my money let me acknowledge the risks and make my own investments and while here in Congress we might not have a path to do that my hope is that we could do that in Ohio so Miss Matthews Bken if we could uh simply have uh that act pass in Ohio with the limitation that you're soliciting investment from Ohioans and not across state lines What would that
▶ 2:21:28do for a fund like what you've what what you're operating in terms of the ability to raise capital and deploy it in Ohio? It would it would definitely help our fund, but also entrepreneurs around the state. So, the gentleman from Kentucky earlier today referenced the Bluegrass Angels. That group was formed from um uh Kentucky Tax Credits allowing investors to invest and and into companies from Kentucky. That was an incredible program for them.
▶ 2:21:56and they saw lots of other new angel groups pop up around the state. So, um, with what you're saying, I think that that risk disclosure attest at aistation act would would definitely be helpful in the state of Ohio. Yeah. So, we we can hopefully do that for the whole country, but if not, I've been talking with uh, you know, our our lawmakers that are state-based and saying, why can't we do some of these nice things for our own state, make Ohio a better uh, destination for capital? You know, Mr.
▶ 2:22:21case in in in your opinion, what kinds of opportunities are missed by, you know, places like Ohio as so much capital is flowing to three states that you highlighted in your opening testimony. Well, I I appreciate you referencing my first job was in Cincinnati. I enjoyed my time there. My second job was in Witchah, Kansas. I enjoyed my time there. I was born and raised in Hu, Hawaii and then started AOL in Northern Virginia.
▶ 2:22:48So maybe that helps inform some of my empathy and uh passion around the rise of the rest, the entrepreneurs building companies in in other places. I think it's also worth noting that venture capital is a relatively new concept. It didn't exist 60 70 years ago. Then if you had an idea, you got went to the bank and got a loan. Uh but banks usually don't loan to risky startups unless there's a personal guarantee which also creates some some risk. So venture capital becomes a path for people to start companies if they don't have capital or easy access to to capital.
▶ 2:23:18And some of the things that this committee is considering that will make it easier for new venture funds to start and scale in places like Ohio and other parts of the of the country I think is a step in the right direction as these companies scale. Making it a little easier to consider going public as a young emerging growth company also is important. That's obviously a key part of the the jobs act I worked on more than a decade ago. I think so we have made progress. We we continue to be the most innovative entrepreneur nation in the world, but we can continue to build on that and try to create a more inclusive innovation economy.
▶ 2:23:48So, it's not just the coast, it's it's everybody everywhere. Thank you for that. And one area that I hope we get to is debt because whether whether companies want to do an initial public offering or not, their ability to solicit debt outside of bank debt because there are risk classifications that are different could really help capital formation. My time has expired and I yield. Gentleman yields back. The gentleman from California, Mr. Licardo, is recognized for 5 minutes. Thank you, Mr. Chair. Thank you all for your testimony. It's been very informative. Uh, Mr.
▶ 2:24:16Case, I I really want to thank you for your pioneering work in our innovation economy and for your work with rise with the uh for the rest. It's uh it's important uh I think we all recognize him from Silicon Valley but uh it's important that opportunity be broadly distributed in our country and I appreciate your your great work there as well as with President Obama's u council on jobs u and competitiveness which ultimately resulted in the recommendations we seen that formed
▶ 2:24:46the jobs act in 2012 uh which I think has has spawned great progress though obviously we have much much more work to who um you know in in page four of your remark remarks, your written remarks as well as a little bit in your testimony, we've heard a bit about your view of talent. That's not just about capital flows. In fact, talent can be more important than capital. Uh and specifically in page four, you talk about high-skll immigration.
▶ 2:25:13Uh and I agree with your assessment, talent is evenly distributed in this world uh and across the globe. And as we think about uh the imperative for ensuring access to talent in our country, I mean you mentioned certainly um the Heartland visa which is promising. Uh but wouldn't it be true also that generally lifting the lid on immigration particularly high-skll immigration would be a great boon for the entire country?
▶ 2:25:41For example, if at the University of Arkansas they could staple a green card to every diploma of a graduate in science or tech, uh wouldn't that do great wonders for Arkansas? Yes. No, I' I've uh been vocal about this for two decades, testified in the Senate around immigration reform over a decade ago. I believe this part of the secret sauce that's powered the American economy is being a magnet for talent. people coming here from all around the world.
▶ 2:26:06Which of doesn't mean we of course don't want to develop our own talent and improve our education system and teach more skills around creativity, communications, collaborations are things that are critical for entrepreneurial success. We need to continue to remain that of immigrants.
▶ 2:26:20So I do worry I understand it's tied up in a much more complicated and very sensitive highly politically charged discussion around immigration but I think we do run the risk of losing our our edge you know now that we've seen a globalization of innovation a globalization of entrepreneurship a globalization of the capital markets uh and so I I think it is very important that the Congress continue to to focus on this issue and figure out how to strike the right balance so we can continue to attract people when they graduate from our universities try to as as
▶ 2:26:50you say, staple the green card. Uh make sure that we we're keeping as many people here as possible, attracting as many people to come here as possible because the data is pretty compelling that these aren't job takers but job makers and having more entrepreneurs building more companies that are creating more jobs and driving more economic growth and doing it in more parts of the country I think is essential as we think about this next chapter for America. Thank you, Mr. Case. I appreciate that.
▶ 2:27:16As you know, I come from a region of the country where more than 40% of our adults were born in a foreign country. I think that has something to do with the secret of our success and more than half of our venture-funded startups or in fact have a foreignb born founder. Uh I'd like to see that happen elsewhere in the country as well. U Mr. New want to thank you for your leadership uh in the Bay Area as a business leader and certainly with bio uh which is an incredibly important organization for biotech industry.
▶ 2:27:44Um I I I agree with your your fundamental notion that we need to expand the definition of accredited investors uh to really get at a more sophisticated definition that focuses on the competence the capacity of the investor not simply their wealth. Um and you seem to acknowledge that Mr. Foster's recommendation was not a bad one of having actual sophistication apply to industries or subindustries.
▶ 2:28:11Uh but we're currently facing administration that is essentially defunding the financial police at the SEC. Uh how can we do that uh in a world in which we have fewer and fewer folks to actually implement? That's the conundrum to be honest. Um in order to expand access to capital, you need to expand the people who we think are rightly able to assess the risk of an opportunity. At the same time, as Mr.
▶ 2:28:40Trotder talked about there are fundamental laws that are necessary to protect the integrity of the capital markets and to protect investors as well. If we have lawyers leaving the SEC, uh we will have less enforcement and that allows for more fraud to occur. If we have reviewers leaving the SEC who do not um who are not replaced, then your process of actually getting your registration statement filed, processed, and approved is going to take longer.
▶ 2:29:10It presently takes about 90 to 150 days in order to do that. So, uh making it longer would be harder. Thank you, sir. You have my time. Gentleman yields back. The gentleman from Tennessee, Mr. Rose, is recognized for five minutes. Thank you, Chairman Style. And I want to thank Chairman Hill and Ranking Member Waters for holding this important hearing. And thank you to our witnesses for taking time to be with us today. I know it's a sacrifice when you come to do this and we appreciate it.
▶ 2:29:37Most venture capital funding is concentrated as we've heard discussed today in California, Massachusetts, and New York despite these states having high individual income tax rates. Meanwhile, my home state of Tennessee proudly boasts no state level individual income tax. Yet, Tennessee lags behind these other states in venture capital funding. Mr. Troder, what factors contribute to this disparity? And I know we've heard some of that today.
▶ 2:30:06And why don't states like Tennessee, which would seem to foster uh interest from investors because of the tax treatment, um why do they have a significant economic advantage over Tennessee and attract more venture capital funding? Well, I think you're you're um going to the heart of a lot of what Mr. Casease has spent a long time trying to solve. Uh I would defer to his insights on the answer to that question.
▶ 2:30:35uh my perspective is simply uh to foster IPO activity you want to streamline that process and make it less burdensome and you want to make it less burdensome for a company to become once it is public to begin life as a new public company and extend the period of relief that's available for those companies based on 13 years of successful experience. Well, so I'll take you up on your challenge and Mr. Case you might speak to that.
▶ 2:31:03It would seem it's at least to me and I was uh as as my friend Mr. Davidson pointed out some of us many of us on this side of the aisle were successful in starting businesses and I certainly was and and thankful to be in a state like Tennessee where we got favorable tax treatment. Uh speak to that if you will. Well, there's a lot going on in Tennessee. I know it pretty well. Actually have a couple grandkids uh grown up in Nashville. We have investments in Chattanooga and other parts of the of the state.
▶ 2:31:32And actually our first ride the rest tour over 10 years ago uh in Nashville was part of that that visit. So the momentum there and the cranes you know building there are showing real momentum in in in that city. As you say though a lot of that's attracting bigger companies in part because of tax but also the talent pool and other other kinds of things to be there. The question is how do you get more of the entrepreneurs staying there and starting there? And that ties in with some of the things we've been talking about today. Having more regional venture funds that are based in in Tennessee matters.
▶ 2:32:01having people focus in the area including uh things like the startup Tennessee efforts and having the Nashville entrepreneurship center helps enable more more momentum uh there. So I think the momentum is building in in Nashville and and Chattanooga and other parts of the of the state but it can be go higher. Obviously you know Tennessee is a big state with a lot of opportunities but still relative to other places like California, New York, Massachusetts are are not getting access to the capital. that does lead some of the people growing up in in Tennessee to decide to leave to go to the coast.
▶ 2:32:31So, we have to stop that or at least slow that. Is it about that critical mass? Is that really the factor or are there things that Tennessee and other states are not doing that they should be doing to foster that? Well, there's a number of things we've talked about capital access. That's critically important. If you don't have the ability to start the company, it's it's obviously not going to get get started. We've talked about talent. How do you make sure you have a critical mass of talent which is why clustering in different cities makes sense. It doesn't just have to be a few cities though.
▶ 2:33:00We want it to be dozens and dozens of cities. There are some cultural aspects. I think Tennessee is doing a good job of this. But how do you make sure entrepreneurs in your community recognize that you are celebrating their risk takingaking and if they fail, encourage them, get up again, try again. Uh some communities that you people would then be branded a failure. One of the great things about Silicon Valley is that's just viewed as a a process of part of the process of uh becoming a entrepreneur.
▶ 2:33:27Sometimes you you including me, I got it wrong the first time before I I got it right with the with AOL. And so creating that culture where people recognize the importance of entrepreneurs, recognize they are the the innovators, they are the pioneers, they it does take take a lot of risk and be supportive of them, I think is critically important. But Tennessee is doing well. So you you mentioned in your Mr. Case in your written testimony highlights of the importance of competing globally with China by boosting investments in research and development at our universities.
▶ 2:33:56And little time left here, but in my own business startup, we eventually had to abandon the Chinese market because they stole our intellectual property. We ultimately decided there just wasn't enough upside there. In the 10 seconds left here, how do we confront that? We make these investments in developing IP, but do we really cash in on them as a country if we don't protect our innovators? We do need to protect our IP.
▶ 2:34:21No question with other countries now competing in a variety of technologies, AI, robotics, and other kinds of things. And we need to continue to invest in that R&D. My company AOL wouldn't have been possible without the government creating the internet through the investments in in in DARPA. So, we need to make sure we're we're planting that seed corn of new innovation. My time is expired. I yield back, Mr. Gentleman's time has expired. Miss Talib, the gentleoman from Michigan is recognized for five minutes. Thank you, Mr. Chair.
▶ 2:34:46You know, many people think that the primary purpose uh of the stock market is to raise funds for companies. Um but that's not actually the case. Uh when companies want capital for investment, uh they rely on retained earnings, bank loans and corporate bond market, and then maybe the stock market. Take the difference between primary and secondary markets. Miss Shan, I I don't know if you know, can you explain the difference between primary and secondary stock markets?
▶ 2:35:16Yeah, if you're speaking about our um you know, very publicly traded markets, NASDAQ versus over-the-counter type markets. um some of them you know over the counter markets penny stocks and higher risk type investments um versus our public markets who are have to adhere to massive disclosures and other requirements.
▶ 2:35:40So our smaller secondary markets um you know also face the investors you know have different um their risk tolerances are different on the secondary markets I guess well in 2022 I think this is why it's important the value of stocks traded in the US was about $44 trillion and then the value of new securities issued by US corporations that year that is the primary market activity was just at 71 billion uh dollars and so mostly the stock market is where
▶ 2:36:10early investors cash out and the wealthy speculate. Okay. Yeah. And I say that because the bottom 50% of households in our country rank ranked by wealth only 1% 1% of corporate equities and mutual fund share only only it's only 1%. The wealthiest 10% of those households uh on the other hand own 87% of all corporate equities um in mutual fund shares.
▶ 2:36:39Um so I think it's just really important to see when we talk about this where the real impact is. Um but there are institutions whose sole um mission is to provide access to capital for the households and companies that they need most.
▶ 2:36:53Um, and so one of the things that I've um, like for instance, I don't know if if you're familiar with community development um, CDFI, community development financial institutions provide financial services and access to capital to lowincome individuals and communities um, especially around affordable housing and those that that's their purpose. That's the purpose of CDFIS.
▶ 2:37:15However, earlier this month, the president issued an executive order eliminating uh much of the CDI FI fund uh as the LA law allows. Uh it's being challenged. So, can you explain what the CDI FI funds does and what the impact in eliminating might be right now?
▶ 2:37:34While the state securities regulators don't directly administer those funds, I did reach out to my colleagues in the banking and credit union world and they all were um emphatic about the impact that CDFIS have had on their communities, especially I'll speak for Alabama and the rural communities. I know there was upwards of $18 million in financial impact in our communities. So, they um they provided me success stories about the the program. Yeah.
▶ 2:38:01Yeah, I mean I know it's both rural and and and urban, but most of it's even around addressing the housing crisis uh that we have in our country right now. Um you know, many of the communities, the one in your community, in your backyard, one in my backyard in Detroit, I mean these communities are starved for investment. Um and that's why CDFIs have played an incredibly important role uh in providing that capital. And the fund is effective.
▶ 2:38:25I mean, I think on an average, uh, recipients, uh, leverage each dollar awarded by the fund into eight dollars of funding from the sources. Uh, over the last 10 years, this is important for my colleagues, at the last 10 years, CDFI fund has helped finance over half a million units uh, of affordable housing, 42,000 commercial real estate projects, and 17.9 million in personal loans and 1.3 million in small business loans.
▶ 2:38:53Um so I don't know how we can talk about access to capital in this committee when the president is trying to take away uh from the very people it helps the most. CDFIs are critical. One last question uh for you Miss Sean. You know last week the new director of the Federal Housing Financial Agency FHFA uh Bill is it pulley py maybe is that Bill Py are you familiar with that new director?
▶ 2:39:20I well he appointed himself the chair of Fanny May and FA Freddy Mack. Now the FHFA is the regulator of agencies. Do you understand? Is this a Those decisions that were made at the executive level, you know, but but we have a regulator that sits now on the board, the very agency he's supposed to Those are decisions that are made at the executive level. But isn't that a conflict?
▶ 2:39:48The states you know aren't I mean common sense tells you it's a conflict of interest okay thank you Mr. the gentleman's time is expired I now recognize myself for five minutes for questions u want to start with you Mr.
▶ 2:40:05If I can, your opening testimony uh you told the story of Sutro and the evolution uh from startup uh to public company and navigating that's a a challenge and something that we want more companies uh in the United States to do and making sure that those uh startups have access to the public markets is essential. Was just referenced that maybe they could use retained earnings. Can startups use retained earnings? Maybe we just knock that question out of the gates. Do you have retained earnings in your startup? We have no retained earnings.
▶ 2:40:34We have No, because it's a startup, right? That's exactly. So, you're looking for figuring out where you have finance in the capital markets are really really important in particular uh in our startups. Uh and you took advantage of the emerging growth uh company status uh in that startup. Is that accurate? That is correct. And would you have been able to go public in the manner and the time frame that you did uh without the EGC status that was available to you? And if not, why not?
▶ 2:40:59It would have been much more challenging for us to do that because the amount of financial resources that we would have needed to front-end load to meet the requirements of full disclosure under 404b would have been prohibitive. We would have had to quadruple our accounting function uh and hope that we still got public. So you would have had to you would have had to triple it. So then the the reverse question would be what happens when you lose EGC status? Did you have to would you would you have to triple that then?
▶ 2:41:28We lost EGC status um because we went over the public float threshold uh for a brief period of time and it cost us a million dollars in extra fees for accounting purposes. So would your view then So great. So would your view be that we should then re-examine the current time limit on EGC status? Yes sir and thank you for your leadership on that. I I appreciate that. Um and then let me come I'm going to jump to you Mr. Troder if I can.
▶ 2:41:55Um, some have claimed uh that extending EGC status would put investors at risk. We heard actually comments from one of my colleagues here. Um, but nothing in the in the jobs uh or the EGC bill would alter uh the application for existing uh anti-fraud provisions. Correct. Exactly right. It would have no impact on SC disclosures and reporting obligations. Is that correct? Correct. And it would have no impact on corporate governance standards. Is that correct? Yes. And it would have uh no reporting obligations of officer.
▶ 2:42:24It would have no impact on the reporting obligations of officers, uh, directors and significant stockholders. Correct. That's right. And so are investors at risk if we allow an extension of the EGC status? Uh, not at all. And so why should we have the EGC status then in the first place? Again, it's about allowing the system to scale the regulatory burden to the size of the company being regulated. Um, and the EGC definition shows you that there's an opportunity to extend that. I I I appreciate that.
▶ 2:42:54I just think it's so important that we look at allowing startups uh to have an avenue and access into the public markets that we're encouraging US doiciled US employers uh to have access to those public markets so that they can grow and grow here in the United States so that people can get good and better paying jobs uh than they already have. In my limited time left, I want to stay with you if I can, Mr.
▶ 2:43:16Troder, uh and dig into the Wixie um Um, companies that qualify as well-known seasoned issuers, Wixie, um, are granted more flexibility in accessing US public markets, uh, through automatic shelf registrations. Um, I have a bill that would expand the Wixie status by updating the definition to apply to all companies uh, that otherwise satisfy the Wixie definition with a public flow to 75 million instead of 750 million.
▶ 2:43:42Again, driving that access further down uh, into the market. Can you discuss uh briefly uh why expanding the Wixie eligibility would promote capital formation uh while maintaining investor protections? Yes, and I'm strongly supportive of this measure that you've introduced. U the uh this is a category of issuer that's been around now for more than 20 years. The SEC introduced it to in 2005. It's been incredibly successful.
▶ 2:44:10It's been very helpful for companies going to market to take advantage of uh opportunistic uh timing and to be able to control more of their capital formation destiny as they go to market. Um the uh eligibility for short form registration was based in 1992. The SEC looked at what companies have an efficient market in their security. That was before the modern internet. Um and that was before uh Edgar.
▶ 2:44:39the SEC filings even became available online. Obviously, technology has drastically accelerated the efficiencies there and and your bill merges those two categories. It's a great step forward. Thank Thank you very much. I thank you all for being here today. I think it's so important that we're making sure that we have capital access available to startup companies across the United States of America. Uh in big cities like New York, that's fine. but also uh in states like mine uh in Wisconsin uh and in the state of our our next gentleman.
▶ 2:45:08Um oh, we're jumping over. I was going to say Indiana, but I'll yield back. We'll come to you in a moment. Uh my colleague from Indiana. Uh we now recognize the gentleman from Texas, the ranking member for oversight and investment subcommittee, Mr. Green. Thank you, Mr. Chairman.
▶ 2:45:21And of course, we want access to capital in Texas as So ah I thank the uh witnesses for appearing and would associate myself with the ranking members opening statement and would agree that um be what I'm about to talk about is beyond Silicon Valley.
▶ 2:45:40It is about expanding access to capital, but it takes a slightly different twist because I received this communique and um it indicates within that you are holding a real check for $1,250. Sure enough, there is a check for $1,250.
▶ 2:46:03And it goes on to indicate that um if I accept this promisory note uh then I should keep it for my records. And I can understand why because on the reverse side of this page uh there's information about what the consequences are of accepting this promisory note.
▶ 2:46:26And uh one of the uh items indicated that I will be agreeing to is this this has an annual percentage rate. I assume all the witnesses are familiar with the term annual percentage rate. If you're not, would you raise your hand? Okay, let the record reflect that they're all familiar with it. Says the annual percentage rate would be 91.27%.
▶ 2:46:56I see you all looking in dismay, and I I was too. In fact, I was thunderruck when I received this. 91.27% loan finance charge $700 total repayment $1,950. Says I'll be paying $100 for an acquisition charge, $600 for installment account handling charge. Well, and and by the way, can be accelerated without notice.
▶ 2:47:27Um, I think that this is egregious and I think that while we are concerned about the businesses and I am I have many small businesses in my district, I'm also concerned about the consumers and this type of loan in my opinion epitomizes what predatory lending is is all about. uh to receive this check, a live check that I can cash and then receive this loan.
▶ 2:47:56Or I might add this, it was sent to me uh in English and in Spanish, the offer, but the actual information concerning the contract, all of that is in English, bait you in in the language that you speak and then have you sign a contract in a language that you may not be as familiar with.
▶ 2:48:16Uh, this causes me a good deal of concern because we have a CFPB that is now wounded and I'm curious as to what consumers who receive this type of predatory offer will do once they conclude that they have been in some way harmed. Who do they turn to without a consumer financial protection bureau? Which leads me to what I plan to do.
▶ 2:48:42I'm going to ask the U chair of the committee to hold a hearing on predatory lending. It would seem to me that this is uh very important to the consumer. I appreciate what we're doing for the businesses, but the consumer is also of paramount importance and I will be making this request.
▶ 2:49:04Again, loan, annual percentage rate, 91.27%. Um, just for edification purposes, would any of you um accept a loan that had an annual percentage rate in excess of 90%? If you would raise your hand.
▶ 2:49:30Okay, let the record reflect that no hands have been raised and and I will understand why. I won't I won't put you on the spot and ask you why you wouldn't. I I would simply say for me it's quite egregious and I do plan to ask the chairman to um convene a hearing on this type of predatory lending. Uh this is something that concerns my constituents. This is a kitchen table issue.
▶ 2:49:56Some of these other issues that we confront, they may be kitchen table issues, but they're not for the people that I represent for the most part. Perhaps for the Plutocrats, the these are kitchen table issues, some of these other things, but this is bread and butter for a lot of people in my district. Mr. Chairman, I yield back the balance of my time. Thank you. I now recognize myself for five minutes for my questions. First, I want to begin by thanking the witnesses for being with us today.
▶ 2:50:22And before I get on to my thoughts, um, my mortgage I'm about to sign is six and a half% and that's the annual percentage rate. Um, if I were to get a payday loan because I needed money for a week at 2%. That would be 104% APR. So, it all depends on the length of time and the need of the money. And I think that we got to stop using APR because it is not a good reflection of the value of access to capital for short shorter duration periods of time.
▶ 2:50:53Onto the topic at hand, uh expanding access to capital for American entrepreneurs, specifically venture capital funds is an important issue not only for the startup ecosystem, but for the economic environment in general. While venture capital plays a vital role in fueling innovation and economic growth, the reality is that most VC funding is concentrated in just a few states, leaving many promising entrepreneurs across the country struggling to secure the capital they need to scale. This imbalance has real consequences.
▶ 2:51:21Entrepreneurs outside of major tech hubs face significant challenges, particularly when it comes to raising early stage funding, which is essential for growth. Without access to series A and B funding, many startups never get the chance to reach their full potential. By reducing regulatory hurdles and expanding opportunities for capital formation, we can help create a more comprehensive and dynamic startup landscape, one that supports innovation and job creation in every corner of the country, not just in a handful of cities. Mr.
▶ 2:51:49Case, uh, section 3C1 of the Investment Company Act of 1940 exempts funds with fewer than a 100 beneficial owners from registration as an investment company. It also includes an exemption for qualified venture funds with fewer than 250 beneficial owners and $10 million in aggregate capital contributions and uncalled capital commitments. Can you explain based on your experience the difficulty in complying with these thresholds?
▶ 2:52:15Thank you for your question and your preamble talking about the importance of obviously entrepreneurship and making sure capital is available to entrepreneurs everywhere. Uh in terms of some of the specific rules on venture funds, I think limitations such as you talked about would result in as firms venture firms start scaling, they would not be able to accept new investors.
▶ 2:52:36And I think opening up to a broader range of investors, including relooking at the accredited investor roles would be a step in the right direction to help those venture funds that that can then help invest in in in companies hopefully in their in their regions. Thank you for that.
▶ 2:52:51Uh, Miss Matthews Bin, would would raising the cap for the qualifying venture capital fund exemption to 150 million and increasing the number of allowable beneficial owners to 2,000 help VC firms, especially smaller firms and underserved regions, uh, to better support entrepreneurs and drive investment? Yes, it it absolutely would. Um, it would open up a brand new market for us.
▶ 2:53:14um for a smaller firm um as I said earlier kind of like a $50 million minimally viable uh firm um that would open up a lot of kind of smaller dollar checks and allow us to grow new funds across states in the middle of America. Thank you for that. I'm proud that my bill, the Improving Capital Allocation for Newcomers or IAN Act, was included in the chairman's expanding access to capital package last Congress and was once again considered in the capital market subcommittee this session.
▶ 2:53:42The IAN Act makes it easier for South Carolina investors to support local startups and entrepreneurs. By raising the cap on qualifying venture capital funds from 10 million to 150 million and increasing the investor limit from 250 uh to 600, we're removing barriers that have held small businesses back for too long. These changes will give overlooked entrepreneurs the capital they need to grow, create jobs, and strengthen our economy.
▶ 2:54:07Uh, Miss Matthews Bin, based on your experience, how frequently do small businesses and entrepreneurs face exclusion from the investment landscape due to excessive regulatory hurdles or high barriers to entry every day. Um, it's it's an everyday thing, especially in my state, the state of Ohio. Um, we have, oh my goodness, less than 20 large venture capital funds in our state.
▶ 2:54:33And if you're thinking about going to each of those individual funds, some of them are only making five to 10 investments a year and there are thousands of startups um that need support and capital. Thank you for that. The last four years, we've gotten very out of balance with our regulatory schemes and we're not keeping up uh with the legal frameworks for businesses to thrive. This country needs to be the best place to start a business, to grow a business, and we're working here in Congress with the administration to get us back in line so we can continue to be competitive in the global economy.
▶ 2:55:04That's what's driving a lot of the legislation. That's what what's driving all of uh the current administration's decision making. And I think things are going very well and I'm very optimistic for the future. With that, I yield back. I now recognize the the gentleman from Indiana, Mr. Stman for 5 minutes. Thank you, Mr. Chairman, and thank you to all for being here.
▶ 2:55:26Uh, this is a topic that I always enjoy discussing and as an entrepreneur myself and and have the experience of raising capital over the last uh eight years in the private sector, um, it's a it's a thrill and sometimes it's not. And uh, but uh, uh, it's an interesting time, especially with all of the macroeconomics, not only here in the United States, but around the world as well.
▶ 2:55:50And u you know there's the old saying that capital is cowardly and uh there's times uh that uh you know we um we hope I mean every project is a worthwhile project but we also know that not every project works out. In fact, the majority of them don't work out. And so, it does um we do have to be careful um and that it's not just loose and that there's uh people that are taken advantage of. But at the same time, this is also what makes America the greatest nation on earth.
▶ 2:56:19And uh um I've got um a bill that I'd like to ask um Miss Matthews Beene a question about. My bill is the Investment Opportunity Expansion Act, which would allow an individual to qualify as an accredited investor if their aggregate investment is an unregistered securities offering if it's not more than 10% of the individual's net assets or the individual's annual income, whichever is greater.
▶ 2:56:44How would expanding the accredited investor definition while limiting an investor's risk exposure, benefit Main Street investors and ultimately strengthening our capital markets? it would give people an incredible opportunity. So, I mentioned earlier there um there are lots of other things that we can spend our money on. We can spend our money on cryptocurrency, sports betting, you name it. Um but not necessarily things that we can really generate wealth from.
▶ 2:57:11Um that would be a wealth generating opportunity for people across the country. I think putting guard rails um to the earlier congressman's point is necessary to protect people because we are in a moment where consumers need to be protected. Yeah. Anybody else on the panel like to comment on accredited investors the the increase?
▶ 2:57:34You know, I I think uh the way the accredited investor definition works today, it really does not um allow for individuals who can understand and financially afford the risk to take it. If you happen to be born rich, then you're presumed to be a brilliant investor, but really you were born rich. Yeah. No. Well, and one of the things that I often see is that a lot of folks in the Midwest and Indiana where I'm from, they want to invest in Indiana.
▶ 2:58:01and they would, you know, and it's also nice to be able to see wherever you place your money that you can drive down the street and go visit and ask questions. Um, and I think that's an important component to it as well. Um, Ms. Matthews Bkin, I've got another question as well, um, related to crowdfunding. Uh, we had a really good subcommittee hearing on capital markets last month, um, in which we heard several witnesses on how we can expand access to capital for businesses.
▶ 2:58:30Um but uh many diverse founders and small businesses outside the traditional capital hubs have found funding opportunities through uh regulation crowdfunding. Why is this an important tool? Is it an important tool moving forward? And is there any um particular comments you have to raising capital as in a crowdfunding mechanism? No, crowdfunding definitely fills a gap for folks that have difficulty around raising friends and family rounds. Mhm.
▶ 2:59:00Um so it gives that new opportunity. Um I will say that it does not necessarily um signal to professional investors however that that investment is a good investment. Um so there are a lot of learnings that have to be had around crowdfunding as well. It's one thing to go out to the crowd but but likes don't necessarily generate revenue for a company. It's all about whether or not that company is sustainable over time beyond that moment of the big push of the crowdfunding campaign.
▶ 2:59:27Are you seeing crowdfunding still as I mean there was kind of a spike there in popularity with it. Is it settling or is it still a popular option? Uh where do you think it's going right now? I would say a year ago it was much more popular. I say I'd say we're living in a moment right now of volatility where people aren't spending their extra cash um on crowdfunding campaigns. Yeah. I think the economy is really tight right now.
▶ 2:59:51uh people just don't have disposable income because either they're they couldn't spend it in investments or they could spend it on going out to eat. And I don't think I think we're seeing that it's not happening in either one. Um Mr. Troder, I'd like to ask you um I've got a bill that's called the Regulation A+ Improvement Act, which would increase the amount that companies can raise under Regulation A from 50 million to 150 million. Uh any thoughts or comments, good, bad, indifferent? Step in the right direction. And I think it's a helpful move.
▶ 3:00:21Okay. Very good. Well, thank you again to all of you and this is um you know interesting times. Uh of course we have a lot of decisions to make here in Washington that will affect our economy but uh those decisions do affect startups. Those affect growth and hopefully we make the right decisions that uh people will feel confident that they can invest again and with certainty that it's a good investment. So thank you Mr. Chairman. I'll yield back. Thank you. The gentleman from Massachusetts, Miss Presley, is now recognized for five you.
▶ 3:00:52Uh for today's hearing, the subject expanding access to capital, we don't need to search far and wide for a new solution. Uh and we don't need to start reducing transparency requirements, loading up on investor risks by deregulating. Instead, we should focus on improving the institutions and regulations that help protect investors and to support businesses. For example, venture capital funds play a significant role in directing capital to startups.
▶ 3:01:22Mr. Casease, you are a billionaire businessman who operates a venture capital firm. So, I'm sure you would agree that VC funds can provide an array of necessary um supports for businesses from monetary investments to technical assistance etc. Yes, venture venture capital firms can back entrepreneurs and help start and scale the companies and create jobs and drive economic growth. But but there is room for improvement. The venture capital ecosystem is not perfect.
▶ 3:01:53Now, um, I don't want you to take this this personally, Mr. Case, but far too many VC firms look just like you, and they mostly invest in startups by white men. According to Forbes, 98% of venture capital goes to white men, despite the fact that diverse run businesses have a 25% higher return rate. Mr. Chair, I would like to uh enter into the record this September 2024 article titled Building Venture Capital.
▶ 3:02:22that's more inclusive than the boys club. Without objection, so ordered. Believe it's time to start supporting venture capital funds that are investing in diverse businesses. For example, in my district, the Massachusetts SE 7th, Mendoza Ventures uh is a firm that is uh raking in profit in AI, cyber security, and fintech with 90% of its portfolio consisting of startups led by immigrants, people of color, and women.
▶ 3:02:51Now, this this is one VC doing this, but we need a hundred more. The status quo works great for white men, but we need to expand capital access to all entrepreneurs, regardless of their race and gender, and the responsibility of recognizing and confronting the disparities in capital access shouldn't fall only on the shoulders of venture capital funds. There are other organizations that are designed to help undeserved populations that this committee should be uplifting.
▶ 3:03:18Miss Sen, can you talk about why community development financial institutions CDFIS were created and what exactly they do? Right here. Thank you. Um, so while the state securities regulators don't directly administer those programs, I have consulted with my colleagues in the depository institution world and they have expressed uh and been emphatic about the impact that CDFIs have had on communities. I know in Alabama we're 40% rural.
▶ 3:03:47um they cited to several examples of where they've been able to help those uh underserved areas. Thank you. So essentially CDFIs invest capital to businesses that would otherwise be neglected and underresourced in the Commonwealth of Massachusetts. We have more than 30 CDFIs, but I want to highlight one that's headquartered in Boston investing in the businesses in my district.
▶ 3:04:11One United Bank is the largest blackowned bank in the country and helps create economic opportunity for entrepreneurs in chronically economic distressed neighborhoods. At the height of the pandemic, many of the large and popular banks were denying PPP loans to small businesses, but One United and other CDFIs made sure that local entrepreneurs and their workers were able to make ends meet. So, I'm firmly and proudly pro CDFI.
▶ 3:04:39Fortunately, Donald Trump uh is not. Trump signed an executive order attacking the Community Development Financial Institutions Fund despite the fact that it is fully authorized by Congress. He is doing the exact opposite of what this hearing is about.
▶ 3:04:56Instead of expanding access to capital, Trump's executive order will make it harder to access for all businesses, urban, rural, from mom and pop shops to tech startups, whether they're in Massachusetts or Alabama. This committee cannot have a serious hearing about solutions to help businesses succeed while Trump destroys the agencies that they rely on, chokes off their capital funding, and then puts tariffs in the way.
▶ 3:05:25I was hearing about these fears and anxieties from uh small business owners throughout my um district at uh town halls this past week. It's time for my Republican colleagues uh to grow a spine and obstruct these efforts and recognize that the real problem here is Donald Trump. I yield back. The gentleman from Pennsylvania Chairman of Oversight Investigation Subcommittee, Mr. Muer, is now recognized for five minutes. Thank you, Chairman.
▶ 3:05:54Uh thank you all very much for for being here and providing us this information. Appreciate it. So according to Forbes, the number of publicly traded companies in the US has dropped uh considerably since 1997. During the Trump years, it was a 50% increase. Under the Biden years, there was a decrease, although a slight decrease. Meanwhile, the average co uh the cost of of going public now exceeds $12 million.
▶ 3:06:22um pricing out obviously small businesses and everyday investors. Uh President Trump, Secretary Bessent, and incoming SEC Chair Paul Atkins are working to rep privatize the economy and put capital back in the hands of the American people by leveraging both public and private markets, making it simpler to raise capital so every day investors can have access to uh to the uh to the markets. Um Mr.
▶ 3:06:51Troder Americans rely on closedend funds for retirement investing. Yet SEC staff number of years back uh limited these funds to investing just 15% of assets in private securities unless they're sold only to accredited investors. Do you believe lifting this arbitrary cap safely uh can expand access for everyday investors to high growth private Yes, I do. Okay. What what do you think it should be lifted to?
▶ 3:07:21Well, I I don't have I think um expanding access um is a good step. I agree. Uh is this typical for the SEC staff to provide guidance? Again, it was back back in the 90s, but is that something that's typical or do you think should be atypical?
▶ 3:07:44Well, there are a number of areas where the SEC staff provides its interpretive guidance and that becomes an important benchmark for private industry and figuring out how to apply either the statute or the um a rule that the SEC has adopted. Okay. Hopefully the new administrator keeps an eye on that. I think he will. crowdfunding. Uh issuers uh raising $100,000 or less provide independently reviewed financial statements.
▶ 3:08:14Uh current law does not require crowdfunding under uh $100,000. I plan on introducing access act, the access act of 2025, which increases that amount to 500,000. Uh I see you're nodding your head. You think that's a good idea. Um Miss Bracken, your thoughts? No, absolutely.
▶ 3:08:36That's one of the kind of biggest biggest barriers to entry on the crowdfunding campaigns um is that those independent audits uh small firms um don't have the capital um to do those each and every year um to fundra. So primarily you think that would be beneficial to small business? Yes. Great. Thank you, Mr. Casease. Uh nice to see you again. Um venture capital goes to businesses in large metro areas far more than rural areas, California, New York, Massachusetts, etc.
▶ 3:09:05Uh, if we made it easier for venture capital funds to operate, for example, by raising the 10 million limit on what qualifies as a small fund, do you think that would help more money reach startups in rural areas? Yes, it would. Okay. Uh, good. Well, that sounds easy enough, right? We'll get on that one as well. Uh, Mr. Mr. Troder, back to you. The average cost of going public, $12 million.
▶ 3:09:31You think expanding the current on-ramp relief for emerging companies like requiring two years of financial statements instead of three would make it easier for more companies to go public? Yes, I do. I'm strongly supportive of that. Okay. So, we we um we think just making things easier, simpler, less regulations uh will be beneficial to businesses, to our economy, uh to overall uh growth of small businesses and large businesses. Yes, that makes a lot of that's very logical.
▶ 3:10:01It makes a lot of sense. Uh the CFPB is going to go under reform. Um many of us don't believe the CFPB's been constructive. We think it's been uh the opposite of constructive, Uh Mr. Trout, I'll go back to you. What are your thoughts on reforms to the I'll have to leave that to others. It's that's a not my area. Okay. Not your area, Mr. renewal. Sorry, Congressman. It's not my area yet.
▶ 3:10:31Okay, Miss Bracken. No, was the case. You must No, no, no. No comment on CFBB. All right. Well, we got plenty of comments on it, so we can we can handle minimal comments there. Uh access to capital during the uh the Biden uh need these reforms will create a great deal of improvement. Uh, Miss Becky, would you agree with that?
▶ 3:11:02I'd prefer not to comment on that. Okay, understood. But the what we just discussed, of course, would be reforms, improvements to what's existed before. So, that would create access to capital. So, that's really where I was going with that. I yield back, Mr. Chairman. Thank you. The gentleman from California, Miss Kim, is now recognized for five minutes. Thank you, chairman. I want to thank our witnesses for uh testifying and appearing before our committee today.
▶ 3:11:26You know, you've heard the small businesses are the backbone of our economy and it's especially important for the constituents and the businesses that I represent in Orange County, Southern California. Uh that's why last Congress I introduced the improving access to small business information act with my colleague uh Congressman Josh Godheimer from uh New Jersey.
▶ 3:11:49And that bill would ensure that the process for collecting public feedback from uh small businesses is uh streamlined and more efficient at SEC. Uh so let me ask you a question Mr. Newall. Um during your tenure at Sutro, what struggles did you identify that small companies had in getting the SEC to take their feedback into account?
▶ 3:12:18Thank you, Congresswoman, for your question. I I think the um there are a number of ways in which we as a small company interacted with the SEC uh from the initial stages of doing um regggd offerings uh through a public offering in and of itself. uh in a public offering process, you do your level best to try to write your registration statement uh so that it passes muster quickly and that you can raise the capital as quickly as possible.
▶ 3:12:48I will say that the regulatory response time frames are excessively long and the public capital markets do not wait uh for anyone. If money's available, you take it and if you take too long going through a registration process, money that might have been available may no longer be there. So, we're just a small cog as a small company in in the wheel and we're all treated the same.
▶ 3:13:09Whether it's a public offering of General Motors or a public offering of Sutro Bio, the same rules and regulations apply and I don't think people understand there are differences and those differences need to be taken into consideration. Thanks for that. Uh I think the goal is if we want our businesses especially small businesses to grow and become more uh public uh then we need to ensure that the SEC has no difficulty in hearing back or feedback uh from the businesses.
▶ 3:13:38Um so let me move on. It is my fear that when uh venture capital firms engage in pattern m uh matching I think we discussed that probably before but they overlook talented entrepreneurs who don't fit the uh the typical mold but have innovative ideas.
▶ 3:13:59Uh, Miss Breen, um, how often are you seeing these, uh, non-traditional founders overlooked by venture capital firms because the founders don't, uh, you know, don't, uh, do the pattern match for stereotypical factors uh, for success. Yeah, people have a tendency to invest in people that they know, like, and trust. And sometimes that's in the region that they live in.
▶ 3:14:24Um but according to the angel capital association uh women and their angel portfolios tend to invest at a 70% rate in other women right and so if we apply that to other other markets if we are able to diversify the investors that are investing around the country I think we'll see less pattern matching so how can we adjust our capital market regulation to incentivize more venture capital investment in very diverse uh founders well I think it's still important to to make certain that
▶ 3:14:54we are um funding and having uh programs like SSBCI. I know that has helped our state incredibly in Ohio. Um and those regulations um and those um have have really helped to grow in certain areas of the state that would have never had any venture capital at all. Uh so your firm uh Light Ship Capital, how have you capitalized or utilized the enrichment programming to mentor those uh founders?
▶ 3:15:23Oh, well, we uh we offer programming in in 16 cities around the country and we help companies to grow the amount of revenue that they're that they're attracting. Um and and we've helped oh my gosh, $500 million in in uh capital has been attracted to our portfolio of companies. Thank you. you know since uh co 19 we have seen a decline in of number of companies going public because economic conditions have been unstable throughout the Biden Harris administration.
▶ 3:15:52Uh I want to ask the question to Mr. Case. Do you believe that the long-term stable economic growth that we're seeing under uh President Trump uh who is aiming to deliver um will result in increased initial public offerings. Well, I continue to stay out of politics and focus on policy. That's my my approach for 40 years. It will continue. But I do think figuring out ways to open up the IPO market to more companies. So when they have a need for capital, if it's not available in the private market, they have a path to go public makes sense.
▶ 3:16:22And some of the things that this committee is considering, I think are steps in the right direction. Thank you. Thank you all the witnesses for The gentleman from Florida, Mr. Donald's, is now recognized for five minutes. Uh thank you, chairman. um witnesses, thanks for being here. Really appreciate it.
▶ 3:16:41Um you know, as we're having this discussion on capital flow in the United States and really trying to find ways to open up that flow um for people, you know, who traditionally are not your accredited investor, I think it's important to take a step back and realize something. When we made this rule um decades ago, um it was the understanding that this was to help protect uh your your your small netw worth retail investor.
▶ 3:17:08But if you look at just technology over the last generation and a half, two generations, every American is walking around with a supercomput in their pocket. Your your average American has more information about companies and more information about markets than they ever could have possibly had at any other point in American history.
▶ 3:17:31Yet, we still have, in my view, a very archaic rule around what we would designate to be an accredited investor to protect the American people from the hardships of capital markets. And listen, capital markets um are not a guarantee. They are never a guarantee, but they do provide real opportunities for people to build wealth in this country, especially as asset ownership continues to be the driver of how people build wealth. Mr.
▶ 3:18:01Newell, how detrimental has the current def definition of accredited investor been to capital formation? There's no question that if you limit the number of people who can provide capital to a business, you are making it much more difficult for that business to grow and thrive and survive.
▶ 3:18:19So, I'm in favor of a much broader statement of accredited investor that really empowers individuals as you've suggested to be making their own investment decisions and that's not what the current standard allows. uh what would what would be the economic benefit of eliminating the accredited investor rule altogether?
▶ 3:18:38Again, it gives u it democratizes, if you will, the opportunity to invest in earlier stage companies and technologies, ones where you may have some acute insights as to why that technology is going to be beneficial not only to the company, but to growing in the community in terms of jobs and also growing your own personal wealth. And if you're not satisfying the current accredited investor decision, you're locked out of that investment opportunity. Uh Mr.
▶ 3:19:05Troder, what are the regulatory restrictions that have caused the recent shift away from public offerings and towards private markets? Well, there there are many and there many of them are long-term uh issues, but uh again, I would say that the success of the jobs act and 13 years of experience with the IPO on-ramp can and should be extended and you can significantly increase expand the category of emerging growth companies and help IPO activity.
▶ 3:19:35Oh, what factors what are the factors contributing to the rise of costs associated with going Well, the the regulatory burden on the disproportionate regulatory burden on smaller companies trying to go public is is definitely a factor. The jobs act was an attempt to address that. I think it it has done um very meaning it has made a meaningful difference, but it could make a bigger difference. Mr.
▶ 3:19:58Kay's what are some of the unique challenges entrepreneurs outside of the coastal venture capital hubs are what are they really facing when it comes to capital formation? And Mr. super keen. If we have time, I would love for you to answer the same question. As we've been talking about today, there are big challenges that if you if you have an idea and you don't have capital yourself, you don't necessarily have friends and family that have capital to back you, uh many people will never start that company. That company could have been the next, you know, big idea that could have changed the world and created a lot of jobs and driven a lot of economic growth.
▶ 3:20:29So access to capital exactly what this committee is focused on is critically important and making it easier for entrepreneurs who have ideas to take those into the market is important. Making easier for them to raise capital make it easier for the venture funds particularly regional venture funds to raise capital all will contribute uh to trying to level the playing field and create more opportunity for more people in more places. Mim. Yeah, I would say we are seeing more cities grow.
▶ 3:20:54So in your great state of Florida, um Miami is seeing a lot of growth right now in the venture capital space and that's because the dollars came there kind of right around COVID and sometimes and really a little bit before that. So you have dollars there, you've had the universities double down on computer science so that the talent is there. Um and we have a very diverse community of people um from Latin and South America who have come um and helped to grow all of those companies. Well, I thank you for mentioning that.
▶ 3:21:20been talking a lot the last couple of weeks about Florida uh in a lot of respects becoming the financial capital of not just the United States but of the world with a lot of uh the whether it's venture digital assets etc. But I but the one thing I'd be remiss in not pointing out is that it's going to be critical for the future of our economy and our nation that people who are at the bottom end of the economic ladder have real opportunities to invest in some of these fledgling companies.
▶ 3:21:48Um, imagine if you know a local waiter was able to invest in Snapchat. Gentleman's became Snapchat. I yield. Thanks, gentleman from Florida. The gentleman from New York is recognized. Mr. Garbrino is the author of a bill to exclude qualified institutional buyers and qualified accredited investors from the record holder count for mandatory registration, a modestly named bill, and the small entrepreneurs empowerment and development, the seed act. Mr. Carino, you recognize four or five men. Thank you, Mr. Mr.
▶ 3:22:17Chairman, thank you for that wonderful shout out about these two wonderful bills uh that I'm lucky to sponsor. Uh thank you all the witnesses for being here today. For more than 80 years, closen funds have provided nearly 4 million investors, including many retirees with steady diversified income. As registered funds, closedend funds are subject to rigorous safeguards such as protections related to valuation, disclosure, and conflicts of interest.
▶ 3:22:41Thanks to Chair Wagner's leadership, the bipartisan increasing investor opportunities act would allow retail investors to easily access a more diversified pool of private investments through strong protections of a registered fund. So try to do you believe that closed end funds could be a vi a viable option for retail investors looking to increase access to private investments? Yes, I believe they could. Why?
▶ 3:23:06I I I would support um more open access to retail investors generally on different products. Thank you. As fewer companies go public, there have been come there have become fewer investment opportunities for most Americans in recent memory, alternative investments have shown value by facilitating capital formation and helping provide more uniform investment returns for individual investors.
▶ 3:23:33I asked this same exact same question uh at a cap market subcommittee hearing last month and I'm going to ask it again because I think it's important to get it on record. Uh Mr. Casease, can you speak to what role alternative investments can play in capital formation? Well, first of all, on a personal note, I agree with the nature of your question. When I took my company, America Online, public in 1992, we raised $10 million and the value of the company that day was $70 million.
▶ 3:24:00And that's way most companies were able to access the growth capital they they needed because of the growth of the capital markets and more latestage capital being available as well as some of the challenges of of uh going public and and being public that doesn't happen anymore. And so as a result the people who saw that my company go from 70 million in value at its peak 160 billion those were retail investors who got the benefit of they've been deprived of that from most of the innovation companies that that exist today.
▶ 3:24:27So figuring out ways for to get companies on that path to being a public company if they choose to. Some prefer staying public staying private because the you know they can take a longer term strategy and some have access to you know that latest stage growth capital but the ones who want to go public we need to make it just a little bit easier for them to do it a little more a little less burden some a little less costly. So that's that was my next question. You would agree that regulatory modernization is necessary to provide greater options to qualified and great investors and just the public. Absolutely.
▶ 3:24:58Wonderful. Thank uh speaking of a company's decision of whether to go public or stay private, it's often one of the most significant inflection points in a company's growth. In the case when companies deem that costs associated with going public are too high and that regulatory burdens of staying public aren't worth it, we should ensure that there's a private market framework that supports companies throughout their life cycle.
▶ 3:25:19I have a bill, as the chairman mentioned, that would exclude qualified institutional buyers and institutional credit investors from the mandatory registration threshold of 2,000 or more holders of records. Mr. Troda, should these institutional investors be counted towards this threshold? And if not, can you explain to us the benefits that their exclusion could have in a company's ability to remain private? I support your bill. I believe they should not be.
▶ 3:25:43Uh I think it's an important step in allowing a private company to keep um to to maintain flexibility on whether and when it becomes a public company and your bill would be an important step toward that. I think so as well. So I hope it uh we have a markup soon. I hope it passes uh unanimously. Um my last question because I have some time left. uh small businesses and entrepreneurs experienced significant losses during the first half of the 2020s which were beyond uh their control.
▶ 3:26:14Microl lending has demonstrated track record around the world for providing muchneeded capital to entrepreneurs often women minorities in underbanked communities. This in turn helps them start and grow their businesses. The proposed seed act includes micro offering exemption that allows companies to raise up to $250,000 without any disclosure requirements but subject to anti-fraud and bad actor disqualifications. Mr. Been, can you explain how small businesses would benefit from this exemption?
▶ 3:26:45So today many people ac across the country don't have access to friends and family rounds. Um if you don't come from a wealthy family, you don't have someone to help you to get started. Um, while I don't come from a wealthy family, my f my father helped me to start my first business with a $10,000 loan. And so being able to access up to $250,000 would allow us to grow companies across the country. Wonderful. I appreciate that and I think you're absolutely right and we should uh we should pass the seed act as quickly as possible. So with that, Mr.
▶ 3:27:15Chairman, I yield back. Gentleman yields back. Gentleman from Wisconsin, Mr. Fitzgerald is recognized for five minutes. Thank you, Mr. Chair, and uh thanks to the witnesses for hanging in there. I know it's been uh kind of a long morning. Uh Mr. Newell, uh you've seen firsthand how the regulatory burdens and I know you spoke about this earlier. Do the compliance costs and disclosure requirements push companies to seek alternative paths um like mergers, private funding or even overseas markets.
▶ 3:27:44You know, the compliance costs of going public uh are substantial. I think we've talked about it today. I I know we spent um about $5 million in accounting just to satisfy the accounting requirements to go public. So when you know that that uh money is going to go out of pocket with no real benefit to you and your business, you naturally think about alternative strategies to finance the company and move it forward.
▶ 3:28:12And the ones that you've suggested are things that happen. There's a a a process called a dual track process that exists where oftentimes companies will look to either raise capital through an initial public offering or at the same time look to sell or merge their company into another company. And that's because they don't necessarily want the burdensome uh um consequences of going public uh and may be able to actually continue their journey as a company but in a different fashion.
▶ 3:28:40So if you think do you think if Congress extended kind of the on-ramp period, you know, what changes would be necessary to ensure kind of that the companies themselves not only go public but also kind of thrive in the in the public markets I think long term. Yeah, thank you Congressman for that question.
▶ 3:29:00I think it's important that we um have ways in which not only companies avoid excess of costs that really do not contribute to the growth of the company and are not necessary for investor protections but then look at ways in which we can expand the access to capital to those companies. Oftentimes just because you go public it doesn't mean you've got all the capital in the world that you need and so you continually have to look for new sources of capital. uh certainly very true uh in our biotechnology industry.
▶ 3:29:30Uh you need to keep going back and finding new investors and that means any limitation on who can invest, the amounts they can invest, all of that as a barrier to your being able to continue uh and succeed with your business. Very good. Thank you, Mr. Casease.
▶ 3:29:45Expanding and diversifying the pool of individuals whose qualify as accredited investors as we know is essential to unlocking new funding opportunities for especially for entrepreneurs right um and founders in in really companies small companies across whole nations. So um some of those current regulations as been discussed this morning and this afternoon um still pose significant challenges. I mean that's why we're here today I think.
▶ 3:30:14How do current regulations around accredited investors create barriers for both the investors and the entrepreneurs? And I know you've discussed this again earlier, but what what are some of the reforms that would help expand access to capital while maintaining the protections that investors are looking for? Obviously that you have to strike the right balance, giving people the opportunity to invest, but in a way that that that is safe and makes sense.
▶ 3:30:41But it goes back to what I said before and probably should have emphasized it more earlier. There's sort of been a structural change in the capital markets in the last several decades and in my era when companies like my company AO was going public but also when Microsoft was going public and Amazon was going public and many other companies were going public in the 1990s they generally raised capital much earlier in the cycle. All of those for example valuations at the time were in the few hundred million dollar range.
▶ 3:31:09Now, nobody goes public until they're many billions of dollars of valuation. That what that essentially means is those retail investors who believed in Microsoft or believed in Amazon and were able to get in kind of on the ground floor, not at the first venture capital level, but kind of on the ground floor were able to see the benefit of that and it benefited their their families in terms of the the appreciation of of wealth. that's largely been taken away because companies are not going public until it's much later. And that's not entirely because of regulation.
▶ 3:31:38Some companies choose not to go public because they didn't want to take a longer term uh attitude, but most of it is because they have access to capital now to grow without going public, which is different than three decades ago and they're just worried about the costs and complexities of of being public. As a result, the individual investors are being deprived of the opportunity to participate in some of that upside. Modifying the accredited investor role so they can invest in these high growth companies when they are private would be a step in the right direction. Very good. Thank you very much. I yield back.
▶ 3:32:10Gentleman yields back. Gentleman from Nebraska, chairman of our housing insurance committee, Mr. flood who is the author of uh a bill to exclude qualified uh this is see no that's the wrong may I just yield to Mr. Flood for five minutes thank you Mr. Chairman, uh, this hearing topic is near and dear to my heart.
▶ 3:32:31Uh, how to drive access to capital outside of Silicon Valley and outside of the cities on the coast is something I've worked on since I entered public service in partnership with great state groups like Invest Nebraska. One of the elements that makes Silicon Valley the pinnacle hub of entrepreneurial activity and investment in the country is networks.
▶ 3:32:51If you're an aspiring entrepreneur with an idea for a new project, you want to be in the same place as the venture capital firms that could serve as a funding source for you and the talented software engineers that could help you build your project. In other words, a good hub provides both the capital and the labor uh to make that dream a possibility. The challenge for communities that aren't already in that kind of a hub is to a certain degree u the name of the game.
▶ 3:33:16You can have great schools that are graduating talented young people, but if there isn't the capital available near them, in many cases, they'll leave town and go to a hub that has it all in the same place. What we see is enormous value created in these hubs. Vast sums of wealth and opportunity driven in part by the best and brightest young people that have left behind smaller communities where they grew up. Lots of times, these hub communities rebel against the very growth activity that they enjoy.
▶ 3:33:40In some parts of the country, gentrification has become a bad word used to reference out oftowners dri who have driven up the cost of goods and housing. The great irony is that there are communities across the country yearning for a fraction of the kind of investment and economic activity that a hub like San Francisco enjoys. In the past, I've been interested in how to build one of these hubs in Nebraska.
▶ 3:34:02Books like uh Brad Feld and Ian Hathaways the startup community way evolving an entrepreneurial ecosystem serve as a potential blueprint on how to get that done and I've read them with great interest but I think there's an even bigger picture question underlying the entrepreneurial hub concept. At what point is a geographic hub no longer necessary? Technology has broken down many of the barriers that makes geography such a strong barrier between people. You can hop on a plane to San Francisco and be there within a day.
▶ 3:34:32You can communicate with people all across the country and world easily through messaging and video applications. This me this question is really for all witnesses. I'd like to hear from all of you. I'd be curious to hear from you regarding your thoughts on this topic. Is there a point where these entrepreneurial ecosystems would no longer be necessary at all or they wouldn't necessarily need to be located in one geographic place? We'll start with you Mr. Case.
▶ 3:34:56I think it we certainly want to build out dozens and dozens of ecosystems and there's still still something even in a world where there's more virtual, more remote to having clustering of talent, but it's just unfortunate that the clustering is only happening in places like San Francisco and New York. I there's progress in places like Lincoln and Omaha and even an effort around creating more of a regional hub. So, it's a couple of midsize cities can work together to create a broader entrepreneurial zone. I think that's a step in the right direction.
▶ 3:35:23I would add that Lincoln, Nebraska, which is the largest city in my district, has seen some success here, but building upon that success is really the question. Mr. Newell, you know, the thing that I learned in the pandemic was that it was difficult to get the richness of ideas uh by remote linking to people. It's some there's something valuable about being able to meet a friend at a coffee shop and talk about an idea with them that you can't replace with a Zoom meeting.
▶ 3:35:49Now, Zoom meetings can be necessary supplements to it, but I do think the success of the Silicon Valley, Boston, San Diego, other communities, uh, has to do with the proximity of people, and that's an important thing that we need to remember. We lost it in the pandemic, and thank God it's coming Yeah, the critical mass is necessary.
▶ 3:36:11I would say that, you know, 10 years ago when I got into the tech community, um Steve brought the bus through Cincinnati and at that point our network really exploded and um we understood what the playbook looked like. Um and so I think it's necessary as we kind of build out innovation hubs as you're saying in in Nebraska. We're doing that in Ohio with innovation hubs in our kind of 3C cities. Um and the critical mass and us being next to each other is important. Thank you. I I agree with all these comments.
▶ 3:36:40You're never going to replace face-to-face interactions, but I also think the technology changes things and makes it more efficient. Yeah, I'm excited. We have Innovate Alabama, much like Invest Nebraska, and our state has innovation hubs across the state and we reach all um geographic regions of our state. I think it's critically important. We have economic incentives and non-economic incentives and having people collaborate is a key to prospering our Alamians. I mean, our community wants to invest in Alabama.
▶ 3:37:07We have attractive geographic, you know, incentives, the beaches, the coast. So, we highlight that and and we're excited about bringing entrepreneurs into the state. And I think you guys are in a unique position to be able to go back to your states and help prosper them through those economic hubs. They're a big success in Alabama. I would be remiss if I didn't also recognize Little Rock thanks to our chairman and his efforts at uh innovation and growing jobs and entrepreneurial activity. With that, I yield back. Gentleman yields back. Chair recognizes from New York, Mr.
▶ 3:37:34Lawler, the vice chair for communications of the committee and also the author of the helping angels lead our startups halos act. Mr. Lawler, you're recognized for 5 minutes. Thank you, Mr. Chairman. Small businesses are now facing these turbulent economic times, having to contend with many regulations that the previous administration put into place, which could stifle economic growth, prevent entrepreneurs from achieving their full potential, and frankly prevent folks from living out their American dream.
▶ 3:38:02Entrepreneurs and small businesses drive the American economy. In 2019, the Small Business Administration calculated that close to 44% of our GDP was a result of small businesses. We should be 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 of entrepreneurship.
▶ 3:38:29That's why I introduced the Helping Angels Lead Our Startups Act or the Halos Act last Congress and reintroduced it again. The Halos Act will promote access to investment capital for small companies and ensure that startups can continue to generate interest and connect with investors.
▶ 3:38:47It will do this by ensuring that demo days, uh, pitch competitions, and community economic development events where there is no specific investment offering are not considered general solicitation under regggd. In doing so, companies will be able to engage with a wider audience of investors and spread word of the products and services that they can offer to help develop a thriving and diverse economy.
▶ 3:39:12In addition to driving economic force angel investors provide by supporting tens of thousands of small companies per year, long-term impact can be seen as companies such as Amazon, Costco, Facebook, Google, and Starbucks were all initially funded by angel investors.
▶ 3:39:29We have seen many successes since the passing of the bipartisan jobs act over a decade ago, which helped reduce barriers to investment by alleviating burdens on businesses, cutting red tape, and making capital raising uh in our public markets easier and less costly for emerging companies.
▶ 3:39:48Not only will we be clearing the way for businesses to expand and develop, but we will also be helping to build a more diverse and inclusive universe of entrepreneurs and founders by expanding opportunities to under reppresented entrepreneurs and communities facing capital formation challenges. The Halos Act will simply allow folks to get eyes on their businesses and potentially find the vital investor they need to succeed. Think Shark Tank.
▶ 3:40:17Uh, I look forward to reintroducing the Halos Act and which passed out of this committee last year and to seeing it signed into law. Mr. Case, in 2020, the SEC adopted amendments to regggd to allow for certain demo day communications to be exempt from being considered general solicitation or general advertising. The amendment also defined Angel Investor Group for the purpose of federal securities laws.
▶ 3:40:44These changes were made to support startups discussing their products and business plans demo day events without it being considered an initial offering uh investment offering. How critical are the changes made in 2020 to capital formation and should Congress uh solidify these changes by codifying them into law?
▶ 3:41:05I support the principles you mentioned that we need to figure out more ways for our entrepreneurs who have ideas to talk talk about those ideas including demo days and other gatherings of startups uh and educate people about the potential of a of a particular market and modifying some of the rules or perhaps the legislation you're you're proposing the bill you're proposing uh that would make it easier for angel investors make it easier for entrepreneurs would be a step in the right direction in your um startups generally hesitate
▶ 3:41:36uh to participate in demo days in large measure due to fears of violating securities laws. Um so do you see that cottifying these exemptions would help give entrepreneurs some more confidence in going out and seeking the funding that they need to grow their business? Yes, I believe it would. Great. Uh would anybody else care to comment? The states certainly support I'm I'm sorry. Go ahead. Go ahead. Those demo days and pitches.
▶ 3:42:03We do it all the time in Alabama, but you know, as state securities regulators, since we're seeing these um operations going on across our state, we just want to be sure that we don't have and we see it all the time, y'all. I mean, I prosecute these cases where you've got a a startup that um isn't very business savvy and they're misusing the funds and they're not doing what they're saying. They're making misrepresentations. So, knowing that they're out there, it's important to sort of help prevent some of that and keep these businesses uh like I said, build a good foundation. But, um you know, the pitches and the demo days are very successful in Alabama.
▶ 3:42:34You know, I think it's important that you u spread the message of what you're doing and why it's important and why it's going to be a value uh valuable investment and the more that you can allow that to happen uh the better it will be for the country. Thank you, Mr. Chairman. I yield back. Gentleman yields back. Gentleman from Tennessee, Mr. Ogles, is recognized for five minutes. Thank you, Mr. Chairman. Uh Mr. Charter, I want to revisit uh Mr. Garbarino's conversation about the closed-end funds and and give you a little more opportunity there.
▶ 3:43:02But millions of Americans, including many in Middle Tennessee, depend on CEFs as a critical source of retirement savings and investment opportunities. We're talking about expanding access to capital. CFS can be a significant force multiplier in helping our fellow citizens achieve the American dream. As you mentioned, Mr. Case in 2023, total closed end funds, CF assets were 544 billion. Traditional CFS had total as assets of roughly 250 billion.
▶ 3:43:30Unlisted CFS including interval funds, tender offer funds, and business development companies had total assets of 77 billion, 60 and 159 billion, respectively. Unfortunately, the SEC maintains that a closedend fund should hold no more than 15% of its asset and private funds and that if a closed-end fund exceeds this amount, the CF CF should offer its share to accredited investors, which as many of my colleagues have noted is in desperate need of definition upgrade.
▶ 3:44:00In the in the case of CFS candidly, there are few investment vehicles that have more robust investor protections including investment advisors, directors, extensive disclosures, reporting requirements, etc. So, Mr. Troder, in your view, given these protections, is it a worthwhile trade-off to maintain the SEC staff position limiting private fund investments to 15% of a CF's assets? Why or why not? Well, I think you're putting your finger on 15% is a little arbitrary.
▶ 3:44:30It's a staff position. I think uh it makes sense to broaden that. Well, and I I think there there's the opportunity when when you have a fund, you they can analyze their own risk uh you know protocols and and you know uh tolerance quite frankly. But um it does make uh sense to allow CF to invest what they think is basically how they should invest in the private securities.
▶ 3:44:54creating arbitrary anti-free market limitation crowds out the the market, needlessly precludes retail investors from critical opportunities. I'm grateful for to the gentleoman from Missouri, the chairwoman of the capital market sub commmittee for her legislation, the increasing investor opportunities act and look forward to working with her on that one. But uh the current definition of accredited investor limits private market investments to those deemed sophisticated. Mr.
▶ 3:45:20Stman's bill, the Investment Opportunity Expansion Act, would expand the accredited investor definition to include individuals whose investment 10% who invest 10% or less of either their net assets or annual income, whichever is greater, in a private offering. Mr. case.
▶ 3:45:35Can you flesh out a little bit for me if the opportunities that an investor would have had in the early days when you were launching AOL versus the regulatory regime that kind of is styied those opportunities and quite frank you know the limits the access to that American dream limits that access to I mean the returns that you saw under your tenure were phenomenal of course right and not every investment is going to have that but again let the free market decide if you will yeah as I as I mentioned earlier uh in the 80s
▶ 3:46:05and 90s when venture capital as a sector an asset class was less developed. There was less of it. It was harder to get uh and also once you got to a certain SCA stage you had to go public in order to access additional capital because of the growth of capital markets and venture capital and later stage growth. Companies can stay private longer and many choose to and that's totally fine.
▶ 3:46:27Uh but as I said earlier, it has the unintended consequence of depriving individual investors, retail investors of the ability to invest in some of these companies when they're up off up and running. Whether it be AOL or Uber or Amazon or other companies, you might have been a customer one of those customer companies believed in that CH company, but you didn't have the ability to invest until much much later when they go public when they're worth 10 billion or $20 billion or or more.
▶ 3:46:51uh and so figuring out ways to allow people to invest in those companies by modifying the accredit investor uh you know kind of rules would open up that market to other investors who could then participate in some of the upside of some of these companies and you note it there obviously risks associated with that so you need to figure out how to strike the right balance but it does feel like it's time to take a fresh look yes sir well and then you Mr.
▶ 3:47:14Would you expand um would you have would an expanded definition of accredited investor have been able to help you as you started your suture bio sutro bioarma company? Absolutely. When the company was first started in 2003, it was really friends and family. Venture capital didn't come in for a couple of years. So, uh it was really important to have uh those angel investors around the table. Uh and you know, the more you have the the more successful you're likely to be with your business. Yes, sir. Thank you. And Mr. Mr.
▶ 3:47:43Chairman, I think the the the note here is that obviously we proceed responsibly and with caution, but there's missed opportunities for their retail investment to invest in investor in the sector to to win and achieve that American dream. And with that, Mr. Chairman Chairman, I thank you and yield back. Gentleman yields back. The gentleoman from Michigan, the chair of the Republican conference, Miss Mlan, is recognized for five minutes. I will try and be quick since we have votes. Mr. Chairman, thank you.
▶ 3:48:09Um, I'm going to piggyback off uh what Congressman Ogles was talking about. Um, M. Rakine, what variables other than wealth and income do you think we should consider um when expanding uh the accredited investor definition and and look at it both from both the investor end and the entrepreneurial end? Um, I would say there's probably two areas that you could look at.
▶ 3:48:38Um experience would be one of them experience in investing. So have you have five years of experience? Is that what not necessarily in investing um but really in in different markets. So there could be someone who studied chemistry or biology in college and deeply understands biotech. They have experience in that space. So experience and education could be the way um could be another way to expand that.
▶ 3:49:06And I don't want to put words in your mouth, but I want to make sure I understand. So in experience, maybe in the sector. In the sector. Okay. Thank you. And anything else? I I wouldn't want to limit it any more than it already is. I think the the point of this is to expand it so that capital isn't constricted as much as it is right now. I agree, Mr. Case. I'd like to hear your opinion on that as well. I agree that sector expertise helps.
▶ 3:49:32Also having some investor expertise, understanding the complexities of these securities and what happens with follow-on rounds I think is is important. Number of the proposals that require some level of education, maybe passing some kind of test would be a step in that right direction. I'm sorry. Passing some kind of test. Did you say some way to to to make sure that people making these investments understand not just the opportunities but how the structures work and what some of the risks are? Yeah, there many different ways to do that.
▶ 3:50:00But I think I think that's part of it would I think be important. Very helpful. Thank you, Mr. Troder. We've heard from numerous small business owners in Michigan, my state, who uh found working with the SEC, me being one of them, over the past uh years to be or extremely um expensive, complicated, especially the past four years.
▶ 3:50:26What I'm trying to figure out is, you know, I h I had my own financial services company at one point. Um, we had more people in the compliance department than we had in the processing department, than we had in the client service department, right? And and we were so worried about making a mistake that we spent a lot of resources doing that to make sure that we were compliant.
▶ 3:50:49What I'm trying to figure out is can you discuss ways to actually reduce friction um in the registration process or or from the SEC? I mean I think it was started with good motive but just like everything I think we're a long way from home. We've talked about a lot of those ideas. I mean you you have sponsored a bill that would be very helpful in that regard.
▶ 3:51:16Um it doesn't necessarily affect every single company going public, but many companies going public will run into a problem with their auditor independence. Uh and there are private company auditor independence rules um that are um that apply to preIPO companies and then the PCAOB and SEC rules are much more rigorous and demanding and your bill would be very helpful for companies like that. That I just want to make sure I get you on record. you'd be in support of that.
▶ 3:51:46You think that's a good idea? Yes, it's a great idea. Thank you. No, I I mean it is important and I think we all um have good intentions when we put these regulatory bodies together, right? We want to provide guard rails, but at some at some point they just grow so big and they get so overwhelming that they actually begin to do the opposite and they have the opposite effect for both the companies and and the investors um that we've talked about. So with that, Mr. Chairman, we have votes.
▶ 3:52:16I'm going to yield back. Thank you all for your time. Gentlemen, gentlewoman yields back. Pursuant to the previous order, the chair declares the committee in recess subject to the call of the chair. We will reconvene immediately following the last vote in this series of floor votes. So, the committee stands in recess.
▶ 4:29:55Okay. The committee will reconvene and come to order following our recess. The gentleoman from Texas, Miss Dela Cruz, is now recognized for 5 minutes. Thank you so much, um, Chairman, and thank you to all the witnesses for being here. Do appreciate it. Texas um has homes to over or is home to over 3.3 million small businesses and is a destination for businesses of all sizes.
▶ 4:30:26My district is all the way down in deep South Texas, a very rural area, uh hard to raise capital, but very entrepreneurial. And in fact, I myself am a small business owner and have uh been blessed to open several different types of small businesses.
▶ 4:30:45And so I understand how challenging it can be especially in a minority community like mine is uh being a female and then opening a small businesses with all the challenges. Um my question is directed to Mr. Bracken. What are some of the issues startups face when they are located in more rural districts like mine? Uh, good afternoon. Thank you, Congresswoman.
▶ 4:31:14Um, so I would say it depends on kind of the small rural region. So, is it covered in the county? Um, does that county or city support economic development work? So, are is there educational programming available? So I think there are a lot of different things that people need beyond just capital. So if your region doesn't have kind of economic development work happening within it, you sometimes don't know how to access those things.
▶ 4:31:40So what is that center point within your community that can help you to grow and thrive as a business? Is that the SBA? Is that a a score mentor? Is that just someone who has set up a local innovation hub? Um all of those things are necessary um to help a company to grow. Thank you so much. And I your misses. I'm sorry. That's okay. We're all moving fast. We are moving fast here. Thank you so much. I appreciate it. And you're absolutely right.
▶ 4:32:09As I said, uh I've been blessed to be a part of many different types of businesses, opening them uh by myself. And sometimes you just don't know where to start. And if you're not in a community that has a small business association or a uh university that has an SBA area that can help you, then then you can feel quite lost and overwhelmed, right?
▶ 4:32:34And as a small business owner myself, like I said, um sometimes with those challenges, especially the capital challenge, then they often close. What is the statistic? Do you know something like 50% of small business openings close within the first 3 years? Well, I'm not certain of the small business number, but I know for for tech companies it's, you know, eight eight fail out of 10 generally, right?
▶ 4:33:00So, that number is really high um at the early kind of preede seed stage. Um it's later where they start to grow, but I don't know that that small business number. Eight out of 10 is very high. What do you think some of the steps for Congress or or that Congress could take in order to assist? Um well, I would say more support around technical assistance for companies.
▶ 4:33:25I would say there isn't really a nationwide push behind um helping with technical assistance for technology companies. The Small Business Administration is still supporting in general main street businesses. um that could be through other orgs like ours where we support um through kind of economic development work. We're in seven cities in the state of Ohio and and nine cities elsewhere in in the country. So that is one area.
▶ 4:33:51Um another is just making it easier for for capital to flow throughout all of the states. So SSBCI has been brought up several times today. I would say continuing that program is incredibly important. It has helped to capitalize lots of companies that were started in garages and labs across the country. Thank you, Mr. Troder. How can we make public markets more attractive? Well, um continue with the success of the jobs act.
▶ 4:34:21So, in particular, make it more make it easier to go public. Um, and then once you are public, make it easier to be a new public company and entice companies that are considering an IPO by lowering the cost of being a new public company for a meaningful period of time after the IPO. Those would all be helpful steps and you can do all of those by expanding the definition of emerging growth company. Thank you. I yield back.
▶ 4:34:51The gentleman woman yields. Uh the gentleman from Iowa, Mr. Nun, is now recognized for 5 minutes. Well, thank you uh Chairman Downing on this. Always good to have an Air Force guy as your wingman up in the seat there. Um we appreciate it certainly as a combat veteran ourselves. Let me begin by iterating. The US capital markets remain the envy of the entire world. We have a lot of good opportunity here. Our markets provide unrivaled liquidity.
▶ 4:35:16They have transparency, competition, rule of law, which helped million of Americans, including millions right in my home state of Iowa. The challenge, however, is despite our nation's financial strength, access to capital remains overly concentrated, particularly in the east and west. I see my colleague from Alabama nodded. This is the reality. Last year alone, 33,000 new small businesses launched in Iowa, but our markets still fail to reflect their growth.
▶ 4:35:42Imagine the economic power if we were able to bring more of this capital to the heart of the heartland. Now, Miss McCre Matthews Matthews Breen, excuse me, um you're an Ohio gal. You recognize this firsthand. I think that you know that um we struggle with our traditional financial when it comes to raising that initial c funding.
▶ 4:36:04Limited availability of initial capital outside of major investment hubs reinforces a pattern matching a tendency for fund startups to resemble what we've seen in the past which makes it even more difficult for a Central America opportunity to get outside of Boston or New York or Miami or Silicon Valley. All great places, but we've got an opportunity right here.
▶ 4:36:30You've helped lead some real successful examples of what securing capital in the Midwest might look at some of the key factors that we should focus on to increase and lower barriers for small companies. Tell me how Ohio and Iowa could better fit into this model. I I think we need to look a little bit at the model that you see on the coast. Um but we also need to fit it to ourselves, right? Um I would say in the Midwest we are more thoughtful about the way that we spend money.
▶ 4:37:00Um and so first and foremost um we we make certain that companies are generating revenue that they can see growth. Um and we can we can really build our own model. So earlier today I talked about Ohio Third Frontier and Jobs Ohio. Those are the ways that we are capitalizing our businesses and putting Ohio companies first. I think o Iowa could definitely do the same thing and you're seeing that across the country and those things work quite well. Can I couldn't agree with you more and I think you're right. There's a model we can use on both sides of this.
▶ 4:37:31Um as we look at the lack of small businesses in our public markets now they're deprived of the investing opportunities to invest in high growth companies because they don't have the same opportunity. Have you seen opportunities for businesses in Ohio or other places to be able to capitalize on those high return yields? You know, that's not a question that I don't think I could answer, but Joel, do you want to take that one? All right, Mr. Troder, she just teed it up for you, brother.
▶ 4:38:00Well, I don't have an easy answer to that question. I mean my my um my emphasis again is on improving capital formation by um principally expanding the category of emerging growth company and expanding the well-known seasoned issuer definition. And I think all of the proposals before you are all are steps in the right direction.
▶ 4:38:24um they they all uh help facilitate capital formation and take down some of the barriers that are uh unnaturally inhibiting uh steps to grow capital and and raise capital and help businesses grow. So Mr. Charter on that example um I'll take you one step further.
▶ 4:38:43uh you know the jobs act created the EGC designation which is an example that grants certain smaller companies relief from specific disclosure compliance requirements for a limited period and helps ease their transition effectively into the public market. You know I have a bill that would allow EGC's to present a 2 years of audit financial statement. It would uh rather than what's currently out there right now three um in both the IPO and spin-off transaction.
▶ 4:39:10Is this an example of something that could help us get into the public market space? And if so, how? Yes, that's definitely a great example. So, EGC's when they go public, they can go public with two years. But there are these aberrational circumstances that your bill would address where uh experience has shown that despite having gone public with two years, for whatever weird reason, they're required to present a third year. And it makes no sense. and and um you there's no easy path for relief for those companies.
▶ 4:39:40So um and and addressing that scenario in a spin-off scenario um as well as a case where maybe a newly public emerging growth company has acquired another company and they have to come up with a third year of target financial statements that that makes no sense in those situations. So, you're fixing parts of the rules where um there there's an extra burden that really shouldn't be there. Hopefully, that's a good honor. Mr. Chairman, thank you very much. I yield the remainder of my time. The gentleman yields.
▶ 4:40:10Uh I now recognize myself for five minutes for questions. And first, without objection, I enter into the record a comment letter from the Institute for Portfolio Alternatives. So, ordered. Uh Montana is a very rural state and according to the SBA about 99 more than 99% of Montana businesses are considered or classified as small businesses and they employ a super majority of the state 67% of Montanants.
▶ 4:40:37I have a lot of experience dealing with the challenges of a startup especially in a in a rural state and uh this is mostly a comment. I I really appreciate, you know, some of the comments that we've had on the unique challenges that uh rural startups face. Uh but I'm going to start on something a little bit different. One of the issues that I've had in my, you know, career before politics is uh um like the definition of accredited investors.
▶ 4:41:01It's something that has uh that bugged me because it seemed like it uh disqualified a lot of Americans from being able to participate in alternatives. And it was a it was a it was a big problem for that. And uh so Mr. Troder, the current accredited investor standard limits investments in the private market dollars and net worth over a million dollars. And the median income in Montana is about $71,000 with only 8% of households making $200,000 or more.
▶ 4:41:31Over 99% of US companies are not publicly traded. So my question is, does this deny retail investors growth and diversity in their retirement accounts when they can essentially only invest in less than 1% of US companies? Yes, it does. And I I've been to a number of these hearings where a lot of emphasis is placed on this definition.
▶ 4:41:54Uh it does seem like there's uh room for common sense expansion of the definition and to take a more permissive approach. Right. It's it's always I've always struggled with the fact that you could have no experience and a lot of money and you're qualified or you can have a lot of experience and not enough money and you're not qualified. And uh so thank you for your answers there. So uh I'm going to go to um uh Miss uh BEN.
▶ 4:42:19So most VC funding, venture capital funding is concentrated in California, Massachusetts and New York. uh you again struggled with this you know trying to start a startup company um outside of uh California and we've discussed a lot today on how new challenges are needed to expand venture capital access to other states like Montana. The 2012 jobs act contains several provisions to make raising capital in private markets easier.
▶ 4:42:44So after the passage of the jobs act, did you see some venture capital funding going to other areas that would demonstrate the need for Congress to do more now? Yeah. So I will say that I have been in the tech industry specifically for the last 10 years. So some of that was before my time.
▶ 4:43:04However, I will state that um SSBCI funding did get put into the the state of Ohio and it helped launch three major funds in our state um Cincy Techch, Rev One and Jumpstart. We have seen incredible economic development in our in our state because of that and I think that states like yours in Montana could could see the same if we continue those those programs. Thank you. Thank you. Um shifting on to Mr. Newell.
▶ 4:43:31Um, the US has recorded several of its worst years on record for initial public public offerings as costs associated with going public have doubled since the 1990s. Costs are crazy. Uh, Gary Gendler, the former chair of the SEC, never proposed a single rulemaking to make raising capital easier. In fact, he pushed policies to make private markets less attractive, like adding costly regulatory requirements and disclosures on private funds.
▶ 4:43:58So, can you explain why it's a bad idea to try to force companies to go public uh when they're not ready? You know, the regulatory burden of becoming a public company is insubstantial. Uh the accounting costs that are required can run into the millions of dollars. And you know that that's money that is not going to advancing your business. That's not not money going to hire new employees.
▶ 4:44:24that is money going to satisfy accounting requirements that frankly are not right sized for the business at that point in time. So it acts as a great deterrent and I would say that you know you you you have to think carefully about going public. It's one of these be careful what you wish for because you might get it.
▶ 4:44:43Um, and there are a lot of things that if you're not well advised, you're going to discover that you now need to triple the size of your accounting force, your finance team, just to meet compliance requirements when really that's not necessary for investor protection. There are other investor protections we have as well. And we've talked about a lot of them here today. Yeah. Well, thank you and I I thank all the witnesses for your time today. This has been use uh very useful, informative.
▶ 4:45:07I yield my time and uh I'd like to thank you all for your testimony and without objection all members will have five legislative days to submit additional written questions for the witness witnesses to chair. Uh the questions will be forwarded to the witness for his response or her response witnesses. Please respond no later than April 29th, 2025. And with that uh this uh hearing is adjourned.