House Financial Services Capital Markets Subcommittee Hearing on the JOBS Act at 5
Key Topics & Takeaways
Public Offerings: Witnesses and Representatives discussed at length the reasons for the decline in public offerings and public companies in the U.S. Witnesses generally agreed that the depth of private capital markets, and the compliance costs associated with being a public company, jointly discouraged public offerings. Most witnesses also spoke favorable of the Jumpstart Our Business Startups (JOBS) Act’s initial public offering (IPO) provisions and argued for their further expansion in future legislation.
Crowdfunding: There was also substantial discussion on the Securities and Exchange Commission’s (SEC) new crowdfunding rules and their impact on small businesses seeking financing. Witnesses said that crowdfunding was a useful mechanism for small businesses looking for capital. However, several witnesses criticized the SEC’s crowdfunding rules as overly complex and called on Congress and regulators to further relax the rules around the practice
Witnesses
Raymond Keating, Chief Economist, Small Business & Entrepreneurship Council
Brian Hahn, Chief Financial Officer, GlycoMimetics, Inc.
Andy Green, Managing Director of Economic Policy, Center for American Progress
Edward Knight, Executive Vice President and General Counsel, NASDAQ
Thomas Quaadman, Vice President, U.S. Chamber of Commerce
Opening Statements
In his opening statement, subcommittee Chairman Bill Huizenga (R-Mich.) discussed the problems small businesses face accessing capital markets due to “one-size-fits-all” securities regulations, and said the point of the Jumpstart our Business Startups (JOBS) Act of 2012 was to help small businesses access these capital markets, including in ways that involved going public. Huizenga argued that while the JOBS Act has facilitated economic growth and job formation, small businesses still face regulatory hurdles to accessing capital markets due to the Securities and Exchange Commission’s (SEC) slowness to implement JOBS Act rules. He said that JOBS Act rulemaking has “languished” since the law’s passage and accused the SEC of focusing its attention on “pressuring public companies with disclosure rules” and of “politicizing its agenda.”
In her opening statement, Ranking Member Carolyn Maloney (D-N.Y.) said she was proud to sponsor the JOBS Act in the 112th Congress. She specifically lauded the JOBS Act titles that created Regulation A+, as well as the crowdfunding exemptions. Maloney argued that now “is a good time to evaluate the progress of these provisions” and said Congress should explore if they are working as intended, if they have created investor protection issues, and if changes should be made to JOBS Act regulations. Maloney specifically expressed concern that crowdfunding investors were particularly susceptible to fraud, and cited FINRA’s recent decision to shutter the crowdfunding platform uFundingPortal (UFP) as evidence that more work is needed to protect investors.
Testimony
Raymond Keating, Chief Economist, Small Business & Entrepreneurship Council
In his testimony, Keating discussed in importance of capital markets to starting businesses, but noted that small business lending and angel investing is currently below pre-recession levels. Keating argued that an interrelated problem is lower levels of entrepreneurship in the economy, which has created less demand for investment. Keating discussed the importance of providing multiple avenues for small businesses to raise capital, and specifically called for Congress to exempt crowdfunding portals from liability for misstatements and inaccuracies by issuers of securities on their platforms. Keating noted that his written testimony provided data on recent trends in bank small-business lending, angel investing, and venture capital investment
Brian Hahn, Chief Financial Officer, GlycoMimetics, Inc.
In his testimony, Hahn discussed his experience as the Chief Financial Officer of a company that successfully used the JOBS Act to go public. Hahn said that the biotechnology industry generally has been a major beneficiary of the JOBS Act, and that companies in that sector have seen a dramatic increase in early stage financing. He also noted that many biotechnology companies have gone public since 2012 thanks to the law and its confidential filing and “testing the waters” provisions. Hahn also supported Rep. Sean Duffy’s (R-Wis.) Corporate Governance Reform and Transparency Act of 2016, saying it protected small businesses from proxy advisory firms seeking outsized influence in corporate decision-making.
Andy Green, Managing Director of Economic Policy, Center for American Progress,
In his testimony, Green argued that the impact of the JOBS Act has been mixed, as investor risks remain in private markets while businesses have not had a major improvement in their ability to access capital. Green also argued that emerging growth companies (EGC’s) tend to be lower quality investments, with material weaknesses and lower stock performance, so the benefits of de-burdening them with investor protection requirements will be limited. Green called on the SEC to be more aggressive in examining mergers and acquisitions, saying that M&A activity is likely a key reason for the decline in public companies.
Edward Knight, Executive Vice President and General Counsel, NASDAQ
In his testimony, Knight argued that public companies are key contributors to job growth, as most public companies grow their workforce size dramatically in the years after a public offering. Knight said that in NASDAQ’s experience, the confidential initial filing and “testing the waters” provisions were the most important for companies considering a public offering. Knight argued that despite some gains, the IPO market has “petered out” and said Congress should take steps “to restore vibrancy to these markets,” noting that Northern European stock exchanges have a higher rate of IPOs.
Thomas Quaadman, Vice President, U.S. Chamber of Commerce
In his testimony, Quaadman argued that the JOBS Act was helpful for small businesses exploring IPO’s. However, initial successes have been halted by the SEC, which has not implemented JOBS Act rules in a way to truly de-burden these businesses. Quaadman also criticized the SEC’s “1930s style disclosure regime” which he argued is being used to embarrass businesses instead of for legitimate investor protection needs.
Question & Answer
Huizenga outlined the current cost estimates for companies exploring IPO’s (which are generally agreed to be $2.5 million in upfront IPO costs with $1.5 million in annual compliance costs) and witnesses agreed the bulk of the expense for companies come from continuing compliance costs. Quaadman also pointed out that every IPO has a risk of a securities class action, which builds additional costs in to any IPO. Witnesses mainly agreed the JOBS Act’s provisions that allowed companies to ease in to public company reporting requirements helped encourage public offerings.
Quaadman and Knight pointed out that in recent years, public policy goals beyond investor protection have been added to public reporting requirements for companies. An example of this is the CEO pay ratio requirement, which requires companies to publish how much the CEO is paid relative to the average employee. Several witnesses argued that these additional burdens (and the reputational harm they can cause), when combined with the relatively vibrancy of private capital markets (in part due to well-capitalized sovereign wealth and private equity funds) discourage companies from going public. Several witnesses argued that the SEC should modernize disclosure, and Knight specifically called for an electronic filing option. Concerns were also raised about the role that activist proxy advisors play in discouraging IPOs.
In response to questions from Randy Hultgren (R-Ill.) Hahn called the JOBS Act an “unqualified success” and specifically lauded the “testing the waters” and confidential IPO filing measures as helpful to companies. Hahn said that in medical and technology fields, the complexity of products can intimidate investors, so roadshows are necessary to help investors understand a business and its activities. Knight also argued that confidential IPO filings are useful as they allow companies to explore an IPO without having to publicly disclose proprietary information that may be useful to competitors. Additionally, confidential filings mean companies are not accused of having “failed” at an IPO if they decide to remain private.
Maloney noted that the SEC’s crowdfunding rules have been in place since May 2016 and that FINRA has already shuttered a crowdfunding portal due to compliance issues. She asked if crowdfunding has increased the risk of fraud while helping businesses raise capital. Green argued that crowdfunding is going well, but the rules have not been in place long enough to render final judgements on them. Green argued that FINRA’s enforcement action is a positive sign, and shows regulators are serious about fraud.
French Hill (R-Ark.) asked witnesses if there were problems with the final crowdfunding rule. Knight argued that the response to the rule has been muted, and it should be revisited to encourage more crowdfunding. Knight and other witnesses agreed that the SEC made the rule too complicated and made the crowdfunding exemption too narrow.
Rep. Tom Emmer (R-Minn.) asked about the importance of crowdfunding for small and local businesses. Quaadman said that many local businesses have been cut off from traditional financing mechanisms like community bank lending, and that crowdfunding is a useful alternative to this. Keating pointed out that community banks have suffered steep declines in numbers nationally since 2008, and so providing alternatives to bank lending is critical to encourage entrepreneurship and small business formation.
Financial CHOICE Act
Rep. Stephen Lynch (D-Mass.) asked about Financial CHOICE Act’s provisions that would impose “significant requirements” on the SEC before taking enforcement actions, and if these provisions would complicate efforts to prosecute bad actors. Green said that the provisions would hurt investor protection and encourage “moral hazard.” Green argued that “Congress should not make it harder for the SEC to engage in enforcement.”
Tick Size Programs
Hultgren asked about different proposals to change tick sizes for some traded companies. Knight said that current pilot programs seem to indicate increased liquidity for small-cap companies because of tick size changes, but that it is still too early to draw conclusions on these programs efficacy.
Basel III Capital Standards
Towards the end of the hearing, Quaadman and other witnesses pointed out that Basel III created disincentives in the banking industry to taking business deposits, and have also discouraged business lending. Maloney asked witnesses to clarify these remarks, and Quaadman stated that “European banking regulators look at Basel III as a ceiling, while U.S. regulators look at it as a floor.” This means that U.S. regulations are overly severe, relative to European ones. Due to the complexity of Basel III’s risk-weighting requirements, regional banks have been forced to cut back from market activities in which they previously served as the main source of liquidity. Maloney expressed surprise that regional banks were being held to international banking standards, given they do not operate internationally. She closed the hearing by asking Huizenga to explore this issue with the subcommittee in the future.
For more information on this hearing, please click here.
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Key Topics & Takeaways
Public Offerings: Witnesses and Representatives discussed at length the reasons for the decline in public offerings and public companies in the U.S. Witnesses generally agreed that the depth of private capital markets, and the compliance costs associated with being a public company, jointly discouraged public offerings. Most witnesses also spoke favorable of the Jumpstart Our Business Startups (JOBS) Act’s initial public offering (IPO) provisions and argued for their further expansion in future legislation.
Crowdfunding: There was also substantial discussion on the Securities and Exchange Commission’s (SEC) new crowdfunding rules and their impact on small businesses seeking financing. Witnesses said that crowdfunding was a useful mechanism for small businesses looking for capital. However, several witnesses criticized the SEC’s crowdfunding rules as overly complex and called on Congress and regulators to further relax the rules around the practice
Witnesses
Raymond Keating, Chief Economist, Small Business & Entrepreneurship Council
Brian Hahn, Chief Financial Officer, GlycoMimetics, Inc.
Andy Green, Managing Director of Economic Policy, Center for American Progress
Edward Knight, Executive Vice President and General Counsel, NASDAQ
Thomas Quaadman, Vice President, U.S. Chamber of Commerce
Opening Statements
In his opening statement, subcommittee Chairman Bill Huizenga (R-Mich.) discussed the problems small businesses face accessing capital markets due to “one-size-fits-all” securities regulations, and said the point of the Jumpstart our Business Startups (JOBS) Act of 2012 was to help small businesses access these capital markets, including in ways that involved going public. Huizenga argued that while the JOBS Act has facilitated economic growth and job formation, small businesses still face regulatory hurdles to accessing capital markets due to the Securities and Exchange Commission’s (SEC) slowness to implement JOBS Act rules. He said that JOBS Act rulemaking has “languished” since the law’s passage and accused the SEC of focusing its attention on “pressuring public companies with disclosure rules” and of “politicizing its agenda.”
In her opening statement, Ranking Member Carolyn Maloney (D-N.Y.) said she was proud to sponsor the JOBS Act in the 112th Congress. She specifically lauded the JOBS Act titles that created Regulation A+, as well as the crowdfunding exemptions. Maloney argued that now “is a good time to evaluate the progress of these provisions” and said Congress should explore if they are working as intended, if they have created investor protection issues, and if changes should be made to JOBS Act regulations. Maloney specifically expressed concern that crowdfunding investors were particularly susceptible to fraud, and cited FINRA’s recent decision to shutter the crowdfunding platform uFundingPortal (UFP) as evidence that more work is needed to protect investors.
Testimony
Raymond Keating, Chief Economist, Small Business & Entrepreneurship Council
In his testimony, Keating discussed in importance of capital markets to starting businesses, but noted that small business lending and angel investing is currently below pre-recession levels. Keating argued that an interrelated problem is lower levels of entrepreneurship in the economy, which has created less demand for investment. Keating discussed the importance of providing multiple avenues for small businesses to raise capital, and specifically called for Congress to exempt crowdfunding portals from liability for misstatements and inaccuracies by issuers of securities on their platforms. Keating noted that his written testimony provided data on recent trends in bank small-business lending, angel investing, and venture capital investment
Brian Hahn, Chief Financial Officer, GlycoMimetics, Inc.
In his testimony, Hahn discussed his experience as the Chief Financial Officer of a company that successfully used the JOBS Act to go public. Hahn said that the biotechnology industry generally has been a major beneficiary of the JOBS Act, and that companies in that sector have seen a dramatic increase in early stage financing. He also noted that many biotechnology companies have gone public since 2012 thanks to the law and its confidential filing and “testing the waters” provisions. Hahn also supported Rep. Sean Duffy’s (R-Wis.) Corporate Governance Reform and Transparency Act of 2016, saying it protected small businesses from proxy advisory firms seeking outsized influence in corporate decision-making.
Andy Green, Managing Director of Economic Policy, Center for American Progress,
In his testimony, Green argued that the impact of the JOBS Act has been mixed, as investor risks remain in private markets while businesses have not had a major improvement in their ability to access capital. Green also argued that emerging growth companies (EGC’s) tend to be lower quality investments, with material weaknesses and lower stock performance, so the benefits of de-burdening them with investor protection requirements will be limited. Green called on the SEC to be more aggressive in examining mergers and acquisitions, saying that M&A activity is likely a key reason for the decline in public companies.
Edward Knight, Executive Vice President and General Counsel, NASDAQ
In his testimony, Knight argued that public companies are key contributors to job growth, as most public companies grow their workforce size dramatically in the years after a public offering. Knight said that in NASDAQ’s experience, the confidential initial filing and “testing the waters” provisions were the most important for companies considering a public offering. Knight argued that despite some gains, the IPO market has “petered out” and said Congress should take steps “to restore vibrancy to these markets,” noting that Northern European stock exchanges have a higher rate of IPOs.
Thomas Quaadman, Vice President, U.S. Chamber of Commerce
In his testimony, Quaadman argued that the JOBS Act was helpful for small businesses exploring IPO’s. However, initial successes have been halted by the SEC, which has not implemented JOBS Act rules in a way to truly de-burden these businesses. Quaadman also criticized the SEC’s “1930s style disclosure regime” which he argued is being used to embarrass businesses instead of for legitimate investor protection needs.
Question & Answer
Huizenga outlined the current cost estimates for companies exploring IPO’s (which are generally agreed to be $2.5 million in upfront IPO costs with $1.5 million in annual compliance costs) and witnesses agreed the bulk of the expense for companies come from continuing compliance costs. Quaadman also pointed out that every IPO has a risk of a securities class action, which builds additional costs in to any IPO. Witnesses mainly agreed the JOBS Act’s provisions that allowed companies to ease in to public company reporting requirements helped encourage public offerings.
Quaadman and Knight pointed out that in recent years, public policy goals beyond investor protection have been added to public reporting requirements for companies. An example of this is the CEO pay ratio requirement, which requires companies to publish how much the CEO is paid relative to the average employee. Several witnesses argued that these additional burdens (and the reputational harm they can cause), when combined with the relatively vibrancy of private capital markets (in part due to well-capitalized sovereign wealth and private equity funds) discourage companies from going public. Several witnesses argued that the SEC should modernize disclosure, and Knight specifically called for an electronic filing option. Concerns were also raised about the role that activist proxy advisors play in discouraging IPOs.
In response to questions from Randy Hultgren (R-Ill.) Hahn called the JOBS Act an “unqualified success” and specifically lauded the “testing the waters” and confidential IPO filing measures as helpful to companies. Hahn said that in medical and technology fields, the complexity of products can intimidate investors, so roadshows are necessary to help investors understand a business and its activities. Knight also argued that confidential IPO filings are useful as they allow companies to explore an IPO without having to publicly disclose proprietary information that may be useful to competitors. Additionally, confidential filings mean companies are not accused of having “failed” at an IPO if they decide to remain private.
Maloney noted that the SEC’s crowdfunding rules have been in place since May 2016 and that FINRA has already shuttered a crowdfunding portal due to compliance issues. She asked if crowdfunding has increased the risk of fraud while helping businesses raise capital. Green argued that crowdfunding is going well, but the rules have not been in place long enough to render final judgements on them. Green argued that FINRA’s enforcement action is a positive sign, and shows regulators are serious about fraud.
French Hill (R-Ark.) asked witnesses if there were problems with the final crowdfunding rule. Knight argued that the response to the rule has been muted, and it should be revisited to encourage more crowdfunding. Knight and other witnesses agreed that the SEC made the rule too complicated and made the crowdfunding exemption too narrow.
Rep. Tom Emmer (R-Minn.) asked about the importance of crowdfunding for small and local businesses. Quaadman said that many local businesses have been cut off from traditional financing mechanisms like community bank lending, and that crowdfunding is a useful alternative to this. Keating pointed out that community banks have suffered steep declines in numbers nationally since 2008, and so providing alternatives to bank lending is critical to encourage entrepreneurship and small business formation.
Financial CHOICE Act
Rep. Stephen Lynch (D-Mass.) asked about Financial CHOICE Act’s provisions that would impose “significant requirements” on the SEC before taking enforcement actions, and if these provisions would complicate efforts to prosecute bad actors. Green said that the provisions would hurt investor protection and encourage “moral hazard.” Green argued that “Congress should not make it harder for the SEC to engage in enforcement.”
Tick Size Programs
Hultgren asked about different proposals to change tick sizes for some traded companies. Knight said that current pilot programs seem to indicate increased liquidity for small-cap companies because of tick size changes, but that it is still too early to draw conclusions on these programs efficacy.
Basel III Capital Standards
Towards the end of the hearing, Quaadman and other witnesses pointed out that Basel III created disincentives in the banking industry to taking business deposits, and have also discouraged business lending. Maloney asked witnesses to clarify these remarks, and Quaadman stated that “European banking regulators look at Basel III as a ceiling, while U.S. regulators look at it as a floor.” This means that U.S. regulations are overly severe, relative to European ones. Due to the complexity of Basel III’s risk-weighting requirements, regional banks have been forced to cut back from market activities in which they previously served as the main source of liquidity. Maloney expressed surprise that regional banks were being held to international banking standards, given they do not operate internationally. She closed the hearing by asking Huizenga to explore this issue with the subcommittee in the future.
For more information on this hearing, please click here.