The Future of American Capital: Strengthening Public and Private Markets by Increasing Investor Access and Facilitating Capital Formation

1[House Hearing, 119 Congress]2[From the U.S. Government Publishing Office]34 .                               ------5       THE FUTURE OF AMERICAN CAPITAL: STRENGTHENING PUBLIC AND6           PRIVATE MARKETS BY INCREASING INVESTOR ACCESS AND7                     FACILITATING CAPITAL FORMATION89=======================================================================1011                                HEARING1213                               before the1415                    SUBCOMMITTEE ON CAPITAL MARKETS1617                                 of the1819                    COMMITTEE ON FINANCIAL SERVICES20                     U.S. HOUSE OF REPRESENTATIVES2122                    ONE HUNDRED NINETEENTH CONGRESS2324                             FIRST SESSION2526                               ----------2728                           FEBRUARY 26, 20252930                               ----------3132                            Serial No. 119-63334       Printed for the use of the Committee on Financial Services3536       [GRAPHIC(S) NOT AVAILANLE IN TIFF FORMAT3738        THE FUTURE OF AMERICAN CAPITAL: STRENGTHENING PUBLIC AND3940           PRIVATE MARKETS BY INCREASING INVESTOR ACCESS AND4142                     FACILITATING CAPITAL FORMATION4344        THE FUTURE OF AMERICAN CAPITAL: STRENGTHENING PUBLIC AND45           PRIVATE MARKETS BY INCREASING INVESTOR ACCESS AND46                     FACILITATING CAPITAL FORMATION4748=======================================================================4950                                HEARING5152                               before the5354                    SUBCOMMITTEE ON CAPITAL MARKETS5556                                 of the5758                    COMMITTEE ON FINANCIAL SERVICES59                     U.S. HOUSE OF REPRESENTATIVES6061                    ONE HUNDRED NINETEENTH CONGRESS6263                             FIRST SESSION6465                               __________6667                           FEBRUARY 26, 20256869                               __________7071                            Serial No. 119-67273       Printed for the use of the Committee on Financial Services7475                            www.govinfo.gov76                 HOUSE COMMITTEE ON FINANCIAL SERVICES7778                    FRENCH HILL, Arkansas, Chairman7980BILL HUIZENGA, Michigan, Vice        MAXINE WATERS, California, Ranking81    Chairman                             Member82FRANK D. LUCAS, Oklahoma             SYLVIA R. GARCIA, Texas, Vice83PETE SESSIONS, Texas                     Ranking Member84ANN WAGNER, Missouri                 NYDIA M. VELAZQUEZ, New York85ANDY BARR, Kentucky                  BRAD SHERMAN, California86ROGER WILLIAMS, Texas                GREGORY W. MEEKS, New York87TOM EMMER, Minnesota                 DAVID SCOTT, Georgia88BARRY LOUDERMILK, Georgia            STEPHEN F. LYNCH, Massachusetts89WARREN DAVIDSON, Ohio                AL GREEN, Texas90JOHN W. ROSE, Tennessee              EMANUEL CLEAVER, Missouri91BRYAN STEIL, Wisconsin               JAMES A. HIMES, Connecticut92WILLIAM R. TIMMONS, IV, South        BILL FOSTER, Illinois93    Carolina                         JOYCE BEATTY, Ohio94MARLIN STUTZMAN, Indiana             JUAN VARGAS, California95RALPH NORMAN, South Carolina         JOSH GOTTHEIMER, New Jersey96DANIEL MEUSER, Pennsylvania          VICENTE GONZALEZ, Texas97YOUNG KIM, California                SEAN CASTEN, Illinois98BYRON DONALDS, Florida               AYANNA PRESSLEY, Massachusetts99ANDREW R. GARBARINO, New York        RASHIDA TLAIB, Michigan100SCOTT FITZGERALD, Wisconsin          RITCHIE TORRES, New York101MIKE FLOOD, Nebraska                 NIKEMA WILLIAMS, Georgia102MICHAEL LAWLER, New York             BRITTANY PETTERSEN, Colorado103MONICA DE LA CRUZ, Texas             CLEO FIELDS, Louisiana104ANDREW OGLES, Tennessee              JANELLE BYNUM, Oregon105ZACHARY NUNN, Iowa                   SAM LICCARDO, California106LISA McCLAIN, Michigan107MARIA SALAZAR, Florida108TROY DOWNING, Montana109MIKE HARIDOPOLOS, Florida110TIM MOORE, North Carolina111112                      Ben Johnson, Staff Director113114                                 ------115116                    SUBCOMMITTEE ON CAPITAL MARKETS117118                     ANN WAGNER, Missouri, Chairman119120ANDREW GARBARINO, New York,          BRAD SHERMAN, California,121    Vice Chairman                        Ranking Member122FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York123PETE SESSIONS, Texas                 DAVID SCOTT, Georgia124WARREN DAVIDSON, Ohio                JUAN VARGAS, California125BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas126MARLIN STUTZMAN, Indiana             SEAN CASTEN, Illinois127MIKE LAWLER, New York                STEPHEN F. LYNCH, Massachusetts128ANDY OGLES, Tennessee                EMANUEL CLEAVER II, Missouri129ZACH NUNN, Iowa                      JOSH GOTTHEIMER, New Jersey130LISA McCLAIN, Michigan               CLEO FIELDS, Louisiana131MARIA SALAZAR, Florida               JANELLE BYNUM, Oregon132TROY DOWNING, Montana133MIKE HARIDOPOLOS, Florida134                         C  O  N  T  E  N  T  S135136                              ----------137138                      Wednesday, February 26, 2025139                           OPENING STATEMENTS140141                                                                   Page142Hon. Ann Wagner, Chairwoman of the Subcommittee on Capital143  Markets, a U.S. Representative from Missouri...................     1144Hon. Brad Sherman, Ranking Member of the Subcommittee on Capital145  Markets, a U.S. Representative from California.................     3146147                               STATEMENTS148149Hon. French Hill, Chairman of the Committee on Financial150  Services, a U.S. Representative from Arkansas..................     4151Hon. Maxine Waters, Ranking Member of the Committee on Financial152  Services, a U.S. Representative from California................     4153154                               WITNESSES155156Mr. Andrew Barnell, CEO and Co-Founder, Geneoscopy...............     5157    Prepared Statement...........................................     8158Mr. McKeever E. Conwell II, Founder and Managing Partner,159  RareBreed Ventures.............................................    11160    Prepared Statement...........................................    13161Ms. Rebecca Kacaba, CEO and Co-Founder, DealMaker................    70162    Prepared Statement...........................................    72163Ms. Anna T. Pinedo, Partner, Mayer Brown.........................    88164    Prepared Statement...........................................    90165Ms. Alexandra Thornton, Senior Director of Financial Regulation,166  Inclusive Economy, Center for American Progress................   105167    Prepared Statement...........................................   107168169                                APPENDIX170171                   MATERIALS SUBMITTED FOR THE RECORD172173Mr. Andrew Barnell174    Testimony submitted to the Ways and Means Committee..........   150175Hon. Frank D. Lucas:176    MetLife......................................................   156177Hon. Pete Sessions:178    Mr. Teague Egan, Founder and CEO of an Energy Explorations179      Technologies, Inc. (EnergyX)...............................   158180Hon. Ann Wagner and Hon. Warren Davidson:181    Accredited Investor Alliance (AIA)...........................   162182Hon. Marlin Stutzman:183    American Securities Association (ASA)........................   164184Hon. Mike Lawler:185    Innovation Ecosystem Coalition...............................   167186Hon. Lisa McClain:187    Startup Founders, Investors And Members Of The Innovation188      Ecosystem Letter...........................................   170189Hon. Andrew Garbarino:190    Scroobious...................................................   176191Hon. Brad Sherman:192    North American Securities Administration Association (NASSA).   179193194                   QUESTIONS SUBMITTED FOR THE RECORD195196Written responses to questions for the record from Representative197  Ann Wagner198    Ms. Rebecca Kacaba...........................................   221199Written responses to questions for the record from Representative200  Brad Sherman201    Ms. Alexandra Thornton.......................................   224202Written responses to questions for the record from Representative203  Maxine Waters204    Mr. Andrew Barnell...........................................   226205    Ms. Rebecca Kacaba...........................................   228206    Ms. Anna Pinedo..............................................   229207    Ms. Alexandra Thornton.......................................   230208209                              LEGISLATION210211H.R. ----, the Fair Investment Opportunities for Professional212  Experts Act....................................................   235213H.R. ----, the Accredited Investor Definition Review Act.........   239214H.R. ----, the Improving Access to Small Business Information Act   243215H.R. ----, the Small Entity Update Act...........................   246216H.R. ----, the Equal Opportunity for All Investors Act of 2025...   250217H.R. ----, the Encouraging Public Offerings Act of 2025..........   254218H.R. ----, a bill to amend the Securities Exchange Act of 1934 to219  specify certain registration statement contents for emerging220  growth companies, to permit issuers to file draft registration221  statements with the Securities and Exchange Commission for222  confidential review, and for other purposes....................   259223H.R. ----, a bill to amend the Federal securities laws to specify224  the periods for which financial statements are required to be225  provided by an emerging growth company, and for other purposes.   261226H.R. ----, the Enhancing Multi-Class Share Disclosures Act.......   264227H.R. ----, the Senior Security Act of 2025.......................   267228H.R. ----, the Middle Market IPO Underwriting Cost Act...........   276229H.R. ----, the Promoting Opportunities for Non-Traditional230  Capital Formation Act..........................................   280231H.R. ----, the Improving Disclosures for Investors Act of 2025...   282232H.R. ----, the Helping Angels Lead Our Startups (HALOS) Act of233  2025...........................................................   291234H.R. ----, the Increasing Investor Opportunities Act.............   296235H.R. ----, the Retirement Fairness for Charities and Educational236  Institutions Act of 2025.......................................   301237H.R. ----, the Remove Aberrations in the Market CAP Test for238  Target Company Financial Statements............................   308239H.R. ----, the Helping Startups Continue to Grow Act.............   310240H.R. ----, the SEC and PCAOB Auditor Requirements for Newly241  Public Companies...............................................   312242H.R. ----, the Expands Protections for Research Reports to Cover243  All Securities of All Issuers..................................   315244H.R. ----, a bill to exclude QIBs and IAIs From the Record Holder245  Count for Mandatory Registration...............................   317246H.R. ----, a bill to expand Well-Known Seasoned Issuer247  Eligibility....................................................   319248H.R. ----, the Smaller Reporting Company, Accelerated Filer, and249  Large Accelerated Filer Thresholds.............................   321250H.R. ----, the Unlocking Capital for Small Businesses Act of 2025   325251H.R. ----, the Small Business Investor Capital Access Act........   333252H.R. ----, the Improving Capital Allocation for Newcomers (ICAN)253  Act of 2025....................................................   335254H.R. ----, the Small Entrepreneurs Empowerment and Development255  (SEED) Act of 2025.............................................   337256H.R. ----, the Regulation A+ Improvement Act of 2025.............   342257H.R. ----, the Developing and Empowering our Aspiring Leaders258  (DEAL) Act of 2025.............................................   344259H.R. ----, the Improving Crowdfunding Opportunities Act..........   347260H.R. ------, the Amendment for Crowdfunding Capital Enhancement261  and Small-business Support (ACCESS) Act of 2025................   353262H.R. ----, the Restoring Secondary Trading Market Act............   355263H.R. ----, the Risk Disclosure and Investor Attestation Act......   357264H.R. ----, the Investment Opportunity Expansion Act..............   359265H.R. ----, the Accredited Investors Include Individuals Receiving266  Advice from Certain Professionals Act..........................   361267H.R. ----, To permit a registered investment company to omit268  certain fees from the calculation of Acquired Fund Fees and269  Expenses, and for other purposes...............................   364270271          THE FUTURE OF AMERICAN CAPITAL: STRENGTHENING PUBLIC272273         AND PRIVATE MARKETS BY INCREASING INVESTOR ACCESS AND274275                     FACILITATING CAPITAL FORMATION276277                              ----------278279                      Wednesday, February 26, 2025280281                     U.S. House of Representatives,282                   Subcommittee on Capital Markets,283                           Committee on Financial Services,284                                                   Washington, D.C.285286    The subcommittee met, pursuant to notice, at 10:02 a.m., in287room 2128, Rayburn House Office Building, Hon. Ann Wagner288[chairwoman of the subcommittee] presiding.289    Present: Representatives Wagner, Lucas, Sessions, Davidson,290Steil, Stutzman, Garbarino, Lawler, Ogles, McClain, Salazar,291Downing, Hill, Sherman, Scott, Vargas, Gonzalez, Casten, Lynch,292Bynum, and Waters.293    Chairwoman Wagner. All right. Good morning. The294Subcommittee on Capital Markets will come to order.295    Without objection, the chair is authorized to declare a296recess of the committee at any time.297    This hearing is titled ``The Future of American Capital:298Strengthening Public and Private Markets by Increasing Investor299Access and Facilitating Capital Formation.''300    Without objection, all members will have 5 legislative days301within which to submit extraneous materials to the chair for302inclusion in the record.303304    OPENING STATEMENT OF HON. ANN WAGNER, CHAIRWOMAN OF THE305  SUBCOMMITTEE ON CAPITAL MARKETS, A U.S. REPRESENTATIVE FROM306                            MISSOURI307308    Chairwoman Wagner. Chairman--I now recognize myself, as309chairman, for 4 minutes for an opening statement.310    Good morning, and welcome to our very first Capital Markets311Subcommittee hearing. I want to thank you all for joining us312today. We are going to be discussing ways to strengthen both313public and private markets by expanding investment314opportunities and reducing regulatory barriers to capital315formation.316    Securing funding is essential for small businesses, yet317many entrepreneurs face roadblocks. While the bipartisan JOBS318(Jumpstart Our Business Startups) Act of 2012 was a landmark319step in making capital more accessible, significant regulatory320barriers remain. If we fail to act, we risk stifling innovation321and economic expansion.322    One of the most pressing challenges is the restrictive323definition of ``accredited investor.'' Current regulations324primarily allow only high-net-worth individuals to invest in325private markets, shutting out many financially knowledgeable326Americans who have the expertise but perhaps not the wealth to327participate in these opportunities. Expanding investment328opportunities beyond the limited few who qualify under this329narrow definition will unlock new sources of capital,330benefiting both businesses and investors.331    Small businesses also face growing obstacles when seeking332funding. Traditional bank loan approval rates have dropped333significantly, leaving many entrepreneurs with limited options.334No business should be forced to rely solely on financial335institutions when alternative sources of capital are available.336    Expanding investor access to private markets and337streamlining regulatory requirements for raising private338capital will create more opportunities for businesses to secure339funding and for investors to participate in economic growth.340    These challenges are not just theoretical. This is the341reality faced by American entrepreneurs. My constituent Andrew342Barnell, who is here today, and his sister, Erica, are perfect343examples of why access to capital matters. Their344entrepreneurial journey demonstrates the power of American345innovation, but they, like too many founders, especially those346in communities outside traditional financial hubs, have faced347barriers that limit their ability to expand and create jobs.348    Across the country, countless small businesses and349entrepreneurs face similar roadblocks, preventing great ideas350from becoming successful, job-creating enterprises. As Acting351Security and Exchange Commission (SEC), Chair Uyeda recently352said, and I quote, we should be encouraging, not restricting,353the ability of companies to raise capital.354    Regulations should protect investors, but they should not355suffocate market access or drive companies overseas. We must356ensure both public and private markets remain viable funding357options, giving businesses the flexibility to grow in the way358that best suits them.359    The reforms that we discuss today build upon the foundation360by the JOBS Act. By reducing regulatory barriers, increasing361access to capital, and safely expanding investor access, we can362ensure that innovation and economic growth continue to363flourish.364    To ensure that we get this right, after today's hearing,365the committee will be requesting feedback from stakeholders on366legislative proposals aimed at strengthening our capital367markets, and we want to hear directly from investors and368entrepreneurs, small businesses, and all market participants369about how we can improve access to capital without sacrificing370investor protection.371    After this hearing, we will put out a press release that is372going to be requesting feedback via this press release and a373list of prompts on the Financial Services Committee website, so374go to FinancialServices.house.gov.375    Access to capital is not a partisan issue. It is about376ensuring that businesses and investors and workers have the377tools that they need to succeed.378    I want to thank you all, and I look forward to today's379discussion.380    The chair now recognizes the ranking member of the381subcommittee, the gentleman from California, Mr. Sherman, for 4382minutes for an opening statement.383384 OPENING STATEMENT OF HON. BRAD SHERMAN, RANKING MEMBER OF THE385  SUBCOMMITTEE ON CAPITAL MARKETS, A U.S. REPRESENTATIVE FROM386                           CALIFORNIA387388    Mr. Sherman. The SEC oversees our capital markets, which389are the nerve center of global capitalism. Virtually all of the390most powerful companies in America and, really, the world391function with one goal: increasing the value of their392companies' securities in our capital markets. Our capital393markets are the envy of the world, and the securities traded394there are worth over $100 trillion.395    I do not think it is a good idea to let ``Big Balls'' just396take a whack at it. Whether it is crime in the streets or crime397in the suites, we should not defund the police. The SEC more398than pays for itself. It has a $2 billion budget; it secured399over $8.2 billion in fines last year and returned $3.2 billion400to investors.401    One thing I am concerned about is insider trading. We saw402this when, for 1 week--everybody knew when Trump got elected403crypto would go up a bit. Bitcoin went up 22 percent in that404first week and Dogecoin went up 135 percent. During that week,405there were only a couple of people who knew that this406commission would get this weird name designed to advertise one407crypto coin. I do not know who knew that. I do know that Elon408Musk is more powerful than any one Member of Congress--I am409humble enough to say that--but Musk does not file any of the410financial reports that we have to file.411    We will see a couple of years from now whether we see $8.2412billion a year returned by the new SEC in fines and $3.2413billion to investors. If not, it will not be because there are414no crooks on Wall Street. The wolves of Wall Street are not415going to become lambs. It will be because the SEC was defanged416and/or defunded.417    Business needs capital, particularly small and medium-size418business. Traditionally that was banks, but we have told all419the banks they cannot even make any prime plus 3, prime420plusloans. We need to focus on bank regulation. We421need to allow credit unions to make more business loans. We422need to allow the Business Development Companies (BDCs) to play423their role in developing businesses.424    That is why I got the Access to Small Business Investor425Capital Act, which I introduced in the 116th, 117th, and 118th426Congress. I will be reintroducing it in the 119th Congress and427looking for as many cosponsors as possible.428    Finally, our banking system discriminates against business429loans by saying that if the banks instead deploy their money430into marketable securities, they do not have to mark--to market431their losses, particularly those securities they list as being432ones they plan to hold to maturity.433    As to the ``accredited'' definition, ``accredited434investor'' definition, it needs work--but not just expansion,435but also contraction. The idea that somebody is high-income436because they have $200,000--keep in mind, Members of Congress,437if they get reimbursed for their living expenses here in438Washington, are listed as having incomes of $200,000. Not a439single one of my colleagues has said that the congressional pay440package represents high-income and a million dollars does not441make you wealthy in the current system.442    When we passed these laws, it was back in the 1970s. Prices443have gone up by a factor of 7.7, so we have seen an erosion of444the definition of ``accredited investor'' when based on wealth445to the tune of 7.7 times.446    We need to change those numbers on the one hand and, as the447chairwoman points out, also account for the fact that people448who do not have high income, do not have high wealth, may have449high knowledge and ought to be listed as accredited investors.450    I yield back.451    Chairwoman Wagner. The gentleman yields back.452453  STATEMENT OF HON. FRENCH HILL, CHAIRMAN OF THE COMMITTEE ON454    FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM ARKANSAS455456    The chair now recognizes the chairman of the full457committee, the gentleman from Arkansas, Mr. Hill, for 1 minute.458    Chairman Hill. I thank my friend and colleague, our459chairwoman, Mrs. Wagner, for hosting today's hearing.460    I look forward to working aside you, Chair Wagner, as we461work to ensure America's capital markets remain the strongest462and the most competitive in the world.463    Capital formation is the bedrock of our economic growth. It464fuels innovation, empowers small business, and creates465opportunities for everyday Americans to build a nest egg and466wealth.467    Yet, in recent years, we have seen an alarming trend. Fewer468companies are entering the public markets, and when they do,469they face skyrocketing regulatory burdens, stifling growth and470job creation.471    At its peak, the Wilshire 5000 index, a benchmark for the472entire stock market of the United States, had 7,500 companies.473Today, that number has been cut in half. If we do not act now,474America's public markets will continue to shrink.475    Committee Republicans are committed to reversing this trend476by building on our JOBS Act work, and I look forward to working477with you, Madam Chair.478    I yield back.479    Chairwoman Wagner. The gentleman yields back.480    The chair now recognizes the ranking member of the full481committee, the gentlelady from California, Ms. Waters, for 1482minute.483484    STATEMENT OF HON. MAXINE WATERS, RANKING MEMBER OF THE485  COMMITTEE ON FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM486                           CALIFORNIA487488    Ms. Waters. Thank you very much, Chair Wagner.489    Democrats have always championed small businesses. In the490117th Congress, we passed landmark laws--the Inflation491Reduction Act, the Creating Helpful Incentives to Produce492Semiconductors (CHIPS) Act, and the American Rescue Plan--that493bolster small business and economic growth.494    We know that when markets are fair, disclosures are honest,495financial intermediaries act in investors' best interests, and496the Securities and Exchange Commission enforces the law,497business confidence and investments flourish.498    Trump and unelected Co-President Elon Musk are looking to499defang, defund, and defame Wall Street's cop on the block, the500Securities and Exchange Commission. Fiddling with requirements501in our securities laws seems to miss the mark when the arbiter502of those laws is on the chopping block.503    I yield back.504    Chairwoman Wagner. The ranking member yields back.505    Today, we would like to welcome the testimony of our five506witnesses.507    First, we have Mr. Andrew Barnell. Mr. Barnell is the CEO,508and Co-Founder of Geneoscopy--``Geneoscopy'' I guess that is509how you pronounce it. Yes. He is also one of my constituents,510with whom I have had the pleasure of meeting many times. From511their office in St. Louis, Mr. Barnell's business has developed512an innovative and lifesaving colorectal cancer screening513technology.514    Next, Mr. McKeever Conwell. Mr. Conwell is the Founder and515Managing Partner of RareBreed Ventures, an emerging venture516capital (VC) fund located in Baltimore, Maryland.517    Next we have Ms. Rebecca Kacaba. Ms. Kacaba is the CEO and518Co-Founder of DealMaker, a global leader in online capital519raising.520    Next on deck is Ms. Anna Pinedo. Ms. Pinedo is a Partner in521Mayer Brown's New York office and Co-Leader of the Global522Capital Markets practice.523    Last but not least is Ms. Alexandra Thornton. Ms. Thornton524is the Senior Director of financial regulation for Inclusive525Economy at the Center for American Progress.526    We thank each of you for taking the time to be here today.527    Each of you will be recognized for 5 minutes to give an528oral presentation of your testimony, and, without objection,529your written statements will be made part of the record.530    Mr. Barnell, I believe you also have your wife with you531today.532    We welcome you, Mrs. Barnell.533    You are now recognized, sir, for 5 minutes for your oral534remarks.535536  STATEMENT OF ANDREW BARNELL, CEO AND CO-FOUNDER, GENEOSCOPY537538    Mr. Barnell. Chairwoman Wagner, Ranking Member Sherman,539members of the subcommittee, thank you for inviting me to540testify today.541    As a native of St. Louis and the CEO of Geneoscopy, a life-542sciences startup company headquartered in St. Louis, I am543especially proud to be here today before our Member of544Congress, Chairwoman Wagner.545    At Geneoscopy, we are developing innovative diagnostic546tests for gastrointestinal health. We are in the process of547bringing our first product, ColoSense, to the U.S. market so548more individuals can access lifesaving screening options for549colorectal cancer.550    I am here today to share my experience with respect to551raising capital for our company, a journey that began in 2015552when my sister called to inform me, she developed a technology553that could save countless lives and that we would be founding a554company together to do just that.555    At the time, I was an MBA student at the Wharton School,556and my sister was an M.D./Ph.D. student at the Washington557University School of Medicine in St. Louis. I jumped at the558opportunity. It was a logical extension of my coursework in559business and healthcare and my early professional career in the560financial services industry.561    Ten years ago, we started as two students with an idea. We562have since cultivated our business into a company with over 50563employees; we have raised over $150 million of venture capital564and are poised to bring a novel solution to market to address565the second deadliest yet most preventable cancer in our566country.567    Today, I have three topics to highlight: the importance of568startups to our economy, the challenges that exist for startups569when raising capital, and how good policy can help facilitate570access to capital.571    Startups are critical economic-growth drivers in the United572States. In 2023, over 5 million businesses were started in the573United States alone. Small businesses, defined as having fewer574than 500 employees, have accounted for 71 percent of total job575creation in the current business cycle, and new startups alone576account for 26 percent of total job creation.577    Serving for centuries as the global epicenter of innovation578has made America's economy the strongest in the world. Looking579forward, as we move into new phases of disruptive change, it is580critical for our country to continue to support startups581through a strong workforce, support infrastructure, good582government policy, and a culture of entrepreneurship and risk-583taking.584    Approximately 90 percent of startups fail. In one study of585failed startups, the top reason cited for failure was running586out of cash or failing to raise new capital. Startups need587capital to cover the initial costs of launching and operating588their business, supporting expenses such as product589development, marketing, hiring, office space, inventory, and590research.591    Fundraising is a constant challenge for founders. It is592estimated that venture capitalists fund fewer than 1 percent of593the pitches that they receive. At Geneoscopy, we have navigated594the full spectrum of capital raises--friends, family, angels,595all the way through institutional venture capital--and we have596seen all of these challenges firsthand. We also count ourselves597as fortunate, having the background to overcome being young,598first-time entrepreneurs raising capital outside of Silicon599Valley.600    Given the importance of startups to our economy and the601challenges that exist for startups in raising capital, it is602critical that government policy facilitates and does not stifle603access to capital. Our experience highlights the importance of604the legislation under consideration by this subcommittee.605    Early stage investors like to deploy capital locally, and606areas such as the Midwest see significantly less capital and607venture capital investment per capita than other areas, such as608the West Coast. Lessening the burden for angel investors,609lowering the barriers for venture fund formation, and making610crowdfunding more pervasive would all help startups access611vital growth capital.612    Geneoscopy will require additional capital to grow and is613preparing to access the public markets. However, disclosure614requirements and the regulatory burden can be daunting.615Alleviating these barriers for emerging-growth companies makes616sense.617    Lastly, included here, appended to my written testimony, is618a copy of written testimony that I submitted to your colleagues619on the Ways and Means Committee last October describing the620``valley of death'' that life-sciences startups often face621after Food and Drug Administration (FDA) approval but before622Medicare coverage and inclusion in quality metrics.623624    [The referred information can be found in the appendix:]625626    Beyond the topics of access to capital I have highlighted627today, improved Federal policies that streamline Medicare628coverage and payment and more nimble Federal agencies that629embrace innovation are the key ingredients that life-sciences630startups like Geneoscopy require to cross the valley of death631and, in turn, boost the economy, increase job growth, and save632lives.633    I thank you all for your attention to these issues and for634the important work you are doing on this subcommittee to ensure635access to capital. Thank you again for the opportunity to636provide testimony and for your consideration of my637recommendations. I stand ready to serve as a resource for you638and your colleagues and welcome any questions.639640    [The prepared statement of Mr. Barnell follows:]641    [GRAPHIC] [TIFF OMITTED] T9636.007642643    [GRAPHIC] [TIFF OMITTED] T9636.008644645    [GRAPHIC] [TIFF OMITTED] T9636.009646647    Chairwoman Wagner. Thank you, Mr. Barnell.648    Now, Mr. Conwell, you are recognized for 5 minutes for your649oral remarks.650651   STATEMENT OF McKEEVER E. CONWELL II, FOUNDER AND MANAGING652                  PARTNER, RAREBREED VENTURES653654    Mr. Conwell. Chairwoman Wagner, Ranking Member Sherman,655members of the subcommittee, thank you for the opportunity to656testify today on the importance of creating better access to657capital for both entrepreneurs and those who fund their amazing658companies.659    My name is McKeever Edward Conwell II, and I am the Founder660and Managing Partner of RareBreed Ventures, which I am661representing today. RareBreed is a venture capital firm that662invests in and supports innovative startups at the earliest663stages.664    In 2020, I launched RareBreed Ventures in response to the665lack of access to capital for founders of color and founders666outside of major investment hubs like New York and California,667as well as a response to lack of cultural competency from many668VCs when it comes to investing in founders who do not look like669them and do not come from similar backgrounds.670    These two issues came to me in the form of one671entrepreneur, a woman by the name of Shawna Stepp-Jones, a672Black single mom from Baltimore who was creating a dryer for673wigs. I immediately got what she was creating, but other674investors did not.675    After 3 years of watching her get nothing but noes from676folks who did not look like her and did not understand what she677was trying to do, she decided the only way for her to get678access to capital was to become a surrogate mother, even679knowing that Black woman are three times more likely to die680from pregnancy-related causes. This is nothing to say about her681three degrees and the fact that she was a former patent682examiner.683    This is why I started RareBreed, but I did not have a684network of wealthy folks to raise from. That forced me to get685creative and use two regulations to help. First was rule 506(c)686of Regulation D, which allows for public solicitation for fund687offerings but requires that every investor in that fund be an688accredited investor. The second was an amendment to section6893(c)(1) of the Investment Company Act of 1940 which allowed for690a fund of $10 million or less to raise from up to 250 investors691instead of only 100.692    The first regulation allowed me to use social media,693Twitter mainly, to meet with many potential investors. Thanks694to this, I was able to have 1,128 meetings in my first 90 days695and more than 4,000 meetings in total.696    The second regulation allowed me to offer investors to697invest as little as $10,000, compared to the traditional698$100,000 they would have had to put up before the amendment.699This led to me having 194 investors in RareBreed. Of those700investors, 83.5 percent invested $50,000 or less.701    Many of these investors were people of color and first-time702investors in funds because they had not had access to make such703an investment and could not risk the high minimum thresholds704for a fund. This means that, before, they were limited to705investing in companies either directly, where there is a much706higher risk of losing all of their money, or investing in707stocks of publicly traded companies, which the average venture708fund has historically outperformed, according to Harvard709Business Review.710    Unfortunately, without something like the Improving Capital711Allocation for Newcomers (ICAN) Act almost all of those small-712dollar investors, who make up 83.5 percent of my investors,713will not be able to invest in RareBreed Ventures Fund II--that714is 162 out of 194 investors--since our new minimum will have to715be $250,000-plus.716    The current rules limit the amount of capital and sources717of capital for smaller and newer investment funds, leading to718less capital to help drive innovation, economic growth, and job719creation, especially when talking about companies started by720founders of color, because we know that, in particular, Black-721led funds are four times more likely to invest in Black-led722companies. Also keeping in mind that almost of the Black-led723venture funds in America would fit under the new rules in the724ICAN Act because most of our funds are under $150 million.725    With the ICAN Act, such limiting factors would be greatly726reduced, allowing more accredited investors to have the727opportunity to participate in this asset class. With lower728minimums, investors can potentially invest smaller amounts of729money into more venture funds to spread out their risk and730better diversify their investments.731    Today, many funds have to turn away investors because of732these current limits. This results in millions of dollars, if733not billions, in potential funding for future innovation and734job creation, while also excluding investors from being able to735truly diversify their own investments and limiting the ability736of wealth creation.737    Even more so, those who do have enough wealth to continue738to participate in the venture asset class are almost739exclusively from a non-diverse population. This only serves to740further widen the racial and gender wealth gap in America and741put limits on the type of innovations we see in this country.742    I am excited to see Congress working through issues that743impact the access to capital that drives innovation. As someone744who has spent my entire career in venture capital as an745advocate for access to capital and reducing barriers, I look746forward to being supportive and assisting this committee in any747way possible.748    Thank you for the opportunity to testify today. I look749forward to any of your questions.750751    [The prepared statement of Mr. Conwell follows:]752    [GRAPHIC] [TIFF OMITTED] T9636.010753754    [GRAPHIC] [TIFF OMITTED] T9636.011755756    [GRAPHIC] [TIFF OMITTED] T9636.012757758    [GRAPHIC] [TIFF OMITTED] T9636.013759760    [GRAPHIC] [TIFF OMITTED] T9636.014761762    [GRAPHIC] [TIFF OMITTED] T9636.015763764    [GRAPHIC] [TIFF OMITTED] T9636.016765766    [GRAPHIC] [TIFF OMITTED] T9636.017767768    [GRAPHIC] [TIFF OMITTED] T9636.018769770    [GRAPHIC] [TIFF OMITTED] T9636.019771772    [GRAPHIC] [TIFF OMITTED] T9636.020773774    [GRAPHIC] [TIFF OMITTED] T9636.021775776    [GRAPHIC] [TIFF OMITTED] T9636.022777778    [GRAPHIC] [TIFF OMITTED] T9636.023779780    [GRAPHIC] [TIFF OMITTED] T9636.024781782    [GRAPHIC] [TIFF OMITTED] T9636.025783784    [GRAPHIC] [TIFF OMITTED] T9636.026785786    [GRAPHIC] [TIFF OMITTED] T9636.027787788    [GRAPHIC] [TIFF OMITTED] T9636.028789790    [GRAPHIC] [TIFF OMITTED] T9636.029791792    [GRAPHIC] [TIFF OMITTED] T9636.030793794    [GRAPHIC] [TIFF OMITTED] T9636.031795796    [GRAPHIC] [TIFF OMITTED] T9636.032797798    [GRAPHIC] [TIFF OMITTED] T9636.033799800    [GRAPHIC] [TIFF OMITTED] T9636.034801802    [GRAPHIC] [TIFF OMITTED] T9636.035803804    [GRAPHIC] [TIFF OMITTED] T9636.036805806    [GRAPHIC] [TIFF OMITTED] T9636.037807808    [GRAPHIC] [TIFF OMITTED] T9636.038809810    [GRAPHIC] [TIFF OMITTED] T9636.039811812    [GRAPHIC] [TIFF OMITTED] T9636.040813814    [GRAPHIC] [TIFF OMITTED] T9636.041815816    [GRAPHIC] [TIFF OMITTED] T9636.042817818    [GRAPHIC] [TIFF OMITTED] T9636.043819820    [GRAPHIC] [TIFF OMITTED] T9636.044821822    [GRAPHIC] [TIFF OMITTED] T9636.045823824    [GRAPHIC] [TIFF OMITTED] T9636.046825826    [GRAPHIC] [TIFF OMITTED] T9636.047827828    [GRAPHIC] [TIFF OMITTED] T9636.048829830    [GRAPHIC] [TIFF OMITTED] T9636.049831832    [GRAPHIC] [TIFF OMITTED] T9636.050833834    [GRAPHIC] [TIFF OMITTED] T9636.051835836    [GRAPHIC] [TIFF OMITTED] T9636.052837838    [GRAPHIC] [TIFF OMITTED] T9636.053839840    [GRAPHIC] [TIFF OMITTED] T9636.054841842    [GRAPHIC] [TIFF OMITTED] T9636.055843844    [GRAPHIC] [TIFF OMITTED] T9636.056845846    [GRAPHIC] [TIFF OMITTED] T9636.057847848    [GRAPHIC] [TIFF OMITTED] T9636.058849850    [GRAPHIC] [TIFF OMITTED] T9636.059851852    [GRAPHIC] [TIFF OMITTED] T9636.060853854    [GRAPHIC] [TIFF OMITTED] T9636.061855856    [GRAPHIC] [TIFF OMITTED] T9636.062857858    [GRAPHIC] [TIFF OMITTED] T9636.063859860    [GRAPHIC] [TIFF OMITTED] T9636.064861862    [GRAPHIC] [TIFF OMITTED] T9636.065863864    [GRAPHIC] [TIFF OMITTED] T9636.066865866    Chairwoman Wagner. We thank you, Mr. Conwell.867    Next we will hear from Ms. Kacaba.868    You are recognized for 5 minutes for your oral remarks.869870   STATEMENT OF REBECCA KACABA, CEO AND CO-FOUNDER, DEALMAKER871872    Ms. Kacaba. Chairwoman Wagner, Ranking Member Sherman, and873members of the subcommittee, thank you for the opportunity to874testify before you today.875    My name is Rebecca Kacaba. I am CEO and Co-Founder of876DealMaker, the leading platform in online capital formation. To877date, DealMaker has facilitated over $2 billion in capital878raised for over 900 American companies, creating up to 40,000879new jobs.880    I come from a family of entrepreneurs and am a former881practicing attorney, having spent over a decade in private882practice in the capital markets.883    The team at DealMaker have the distinct honor of working884with founders building businesses they love. We see firsthand885the difficulties of the entrepreneurs' journey and how much886they and their families sacrifice to grow a business and create887jobs in America. We know the founder who slept on the storeroom888floor for a year until he could get his business funded. We889know the founders who stake their personal relationships and890reputations, raising money from friends, family, and891colleagues, in order to get the idea, they believe in off the892ground.893    The very hope, vision, and purpose of our founders is why894we do what we do. This is the essence of the American Dream and895what drives job creation.896    Every day, our team is privileged to serve these founders897in the most fundamental way possible, and we take this898responsibility seriously. We do this by implementing Congress's899pioneering vision of the JOBS Act itself. In the spirit of this900vision, we submit three proposals designed to ignite economic901growth and create new American jobs.902    The first proposal is to remove the offering caps that903inhibit growth and interfere with job creation.904    Reg A is capped at $75 million. At DealMaker, we regularly905see companies who could raise more than $75 million. We ask906Congress to remove the offering cap altogether. In the modern907internet era, a cap on Reg A officially constrains growth.908Because of the cap, companies are using alternative structures,909like donations, tokens, or institutional funding.910    Removing the Reg A maximum creates a pathway to bringing911unregulated capital-formation activities into a regulated912space. To grow this space, we need to change the perception913that only small companies can use the exemption.914    Reg CF (Regulation Crowdfunding) is currently capped at $5915million, which should be increased to $10 million. The 2020916increase in the Reg CF cap from $1.25 million to $5 million917stimulated market activity by 250 percent.918    The Reg CF ecosystem is maturing, with a growing prevalence919of broker-dealer participation as opposed to just funding920portals. Companies are regularly reaching the $5 million cap on921Reg CF offerings. When companies hit this maximum, they face922two suboptimal choices: either return to traditional funding923sources or prematurely transition to a more costly Reg A.924    Our second proposal is to harmonize the Reg CF and Reg A925regimes.926    Today, Reg CF and Reg A exemptions are being used for927similar purposes. Investors are investing in both types of928offerings interchangeably. Accordingly, the rules between the929two should be harmonized. The best elements of each regime can930be combined and shared. This would be easier for businesses,931investors, and market participants to understand and lead to932better compliance.933    Three places where harmonization would remove significant934friction are Rule 12(g), Rule 5110, and the marketing rules. We935have cited a number of the bills tabled where these936harmonizations can be addressed.937    Finally, the third proposal is to expand the availability938of Reg CF and Reg A to more participants to grow the space and939create more jobs.940    Currently, Reg CF restricts the amount of money companies941under common control can raise. This restriction differentiates942Reg CF from traditional capital-raising mechanisms and Reg A,943which do not have such limitations.944    If the common-control prohibitions are removed; it would945allow more VC-backed companies to enter the space. This would946capitalize more mature funded businesses and could also947increase the survival rate of venture-backed businesses.948    In conclusion, let us reflect on how far we have come.949Since Congress enacted the JOBS Act in 2012, Reg A and Reg CF950have raised $3.7 billion. Reg CF has outpaced venture capital951growth by 4.4 times as compared to 1.3 times.952    The capital markets have been diversified, as Congress953intended, to weather economic down-market conditions. During954the worst year of the recent down-market cycle, in 2023, the955online capital markets stayed over 40 percent stronger than the956VC markets. Companies we supported survived and thrived when no957one thought it would be possible.958    By increasing the offering limits, harmonizing the rules,959and allowing for more capital markets participation in the960space, Congress will unlock even more growth in online capital961markets, leading to further job creation.962    The work that Congress is doing is critical and core to the963job-creation ethos of America. As a result of your work, we964have the privilege of seeing firsthand our customers' factories965in new communities that are overlooked by Silicon Valley and966Wall Street and the pride that it brings them.967    We are grateful for the opportunity to be a part of this968hearing.969970    [The prepared statement of Ms. Kacaba follows:]971    [GRAPHIC] [TIFF OMITTED] T9636.067972973    [GRAPHIC] [TIFF OMITTED] T9636.068974975    [GRAPHIC] [TIFF OMITTED] T9636.069976977    [GRAPHIC] [TIFF OMITTED] T9636.070978979    [GRAPHIC] [TIFF OMITTED] T9636.071980981    [GRAPHIC] [TIFF OMITTED] T9636.072982983    [GRAPHIC] [TIFF OMITTED] T9636.073984985    [GRAPHIC] [TIFF OMITTED] T9636.074986987    [GRAPHIC] [TIFF OMITTED] T9636.075988989    [GRAPHIC] [TIFF OMITTED] T9636.076990991    [GRAPHIC] [TIFF OMITTED] T9636.077992993    [GRAPHIC] [TIFF OMITTED] T9636.078994995    [GRAPHIC] [TIFF OMITTED] T9636.079996997    [GRAPHIC] [TIFF OMITTED] T9636.080998999    [GRAPHIC] [TIFF OMITTED] T9636.08110001001    [GRAPHIC] [TIFF OMITTED] T9636.08210021003    Chairwoman Wagner. Thank you, Ms. Kacaba.1004    Next on deck is Ms. Pinedo.1005    You are recognized for 5 minutes for your oral remarks.10061007   OPENING STATEMENT OF ANNA T. PINEDO, PARTNER, MAYER BROWN10081009    Ms. Pinedo. Chairwoman Wagner, Ranking Member Sherman, and1010subcommittee members, thank you for inviting me. I appreciate1011this opportunity.1012    I have been a Securities Lawyer for over 30 years, and I am1013a partner at Mayer Brown. My comments today reflect my own1014views.1015    I began practicing in the early 1990s, when initial public1016offerings (IPOs), including IPOs by smaller companies, were1017quite plentiful. That gave me the opportunity to work on many1018IPOs for companies of all sizes. It was a time when the1019financing trajectory for companies was quite well-understood1020and predictable. Within 5 to 7 years of inception, a company1021generally sought a liquidity event, and usually that liquidity1022event was an IPO.1023    Historically, an IPO allowed a company to raise a1024significant amount of capital--more capital than it could raise1025through any other means. An IPO was also regarded as an1026achievement for founders and for the company's investors.1027During that period of time, there was also an infrastructure1028that supported these companies.1029    Over time, the market has evolved, as we have discussed.1030Exempt offerings have become more significant, with increased1031use of shelf registration statements, promulgation of various1032safe harbors, and shortening of the Rule 144 holding period. At1033the same time, there has been a proliferation of additional1034investors in the private markets--hedge funds, private credit1035funds, private equity funds, and other investors.1036    The shift away from IPOs and the public markets has1037occurred as a result of market structure changes and increased1038regulation, with Sarbanes-Oxley and the Dodd-Frank Act, and the1039costs associated with being a public company. In recent years,1040more prescriptive disclosure requirements have arisen that add1041to this list. Recently adopted disclosure requirements have1042moved away from the bedrock principles of our securities1043framework, that of materiality.1044    What is the upshot of all of this? We have fewer public1045companies now than in the 1990s. The overall number of IPOs has1046declined, based on historic levels. Smaller public companies1047are disproportionately impacted by the costs of being public.1048    Once they are public, they benefit less from their1049publicness. What do I mean by this? I mean that once a company1050becomes public, historically it was always the case that it1051should be easier for these companies to raise money in the1052secondary market, that they would have liquid stock, that there1053would be research analyst coverage for them, but the historic1054promise of being public is not being realized for our smaller1055and medium-size companies. They are bearing the costs of being1056public, but they are not reaping the benefits. We should fix1057this.1058    Reliance on funding in the private markets has outpaced1059reliance on registered offerings. Regulators and legislators1060have expressed concerns regarding the growth of the private1061markets and their opaque character.1062    As I noted when I previously appeared before this1063subcommittee, it would be a really grave mistake to look at the1064private markets as being suspect and in need of regulation and1065the public markets, by contrast, as being transparent and as1066being the best and the only solution for most companies.1067    Regulating the private markets out of existence is not1068going to magically bring back institutional investors who are1069going to support micro-cap and small cap stocks, nor is it1070going to magically bring back equity research coverage for1071small and micro-cap stocks that would be forced to become SEC1072reporting companies before they are ready to do that.1073    It is important to recognize that the markets have changed1074in really significant and irreversible ways and not to respond1075with reactionary responses.1076    Most private investments are limited to accredited1077investors. Only 19 percent of U.S. households qualify as1078accredited investors. However, in practice, I can tell you that1079most investments are limited to institutions and not to1080accredited investors. Most of the bills under consideration1081today would fix this.1082    In addition, they would strike the right balance and reach1083a new equilibrium between private and public and address other1084changes, including providing access to a broader group of1085individuals through potentially registered funds and providing1086greater access to capital formation for BDCs and other1087registered funds that address capital formation.1088    In my testimony, I suggest a number of other1089recommendations for consideration.1090    I thank you for your attention.10911092    [The prepared statement of Ms. Pinedo follows:]1093    [GRAPHIC] [TIFF OMITTED] T9636.08310941095    [GRAPHIC] [TIFF OMITTED] T9636.08410961097    [GRAPHIC] [TIFF OMITTED] T9636.08510981099    [GRAPHIC] [TIFF OMITTED] T9636.08611001101    [GRAPHIC] [TIFF OMITTED] T9636.08711021103    [GRAPHIC] [TIFF OMITTED] T9636.08811041105    [GRAPHIC] [TIFF OMITTED] T9636.08911061107    [GRAPHIC] [TIFF OMITTED] T9636.09011081109    [GRAPHIC] [TIFF OMITTED] T9636.09111101111    [GRAPHIC] [TIFF OMITTED] T9636.09211121113    [GRAPHIC] [TIFF OMITTED] T9636.09311141115    [GRAPHIC] [TIFF OMITTED] T9636.09411161117    [GRAPHIC] [TIFF OMITTED] T9636.09511181119    [GRAPHIC] [TIFF OMITTED] T9636.09611201121    [GRAPHIC] [TIFF OMITTED] T9636.09711221123    Chairwoman Wagner. Thank you, Ms. Pinedo.1124    Ms. Thornton, you are now recognized for 5 minutes for your1125oral remarks.11261127 STATEMENT OF ALEXANDRA THORNTON, SENIOR DIRECTOR OF FINANCIAL1128  REGULATION, INCLUSIVE ECONOMY, CENTER FOR AMERICAN PROGRESS11291130    Ms. Thornton. Thank you.1131    Chairwoman Wagner, Ranking Member Sherman, and members of1132the subcommittee, thank you for the opportunity to testify1133today.1134    Capital markets work best when there is an informed bargain1135between the seller and the buyer of securities. Investors1136seeking returns provide their capital to businesses and funds,1137who in turn put that capital to use.1138    Information is an essential part of that bargain. Without1139it, there would be significant investor loss and economic1140waste. U.S. capital markets are the most robust in the world,1141in large part because they require those seeking to raise1142capital from investors to provide basic information to1143investors.1144    The government does not block investors. It does not1145approve or disapprove of investments. Congress decided long ago1146that investors needed the government to ensure they had1147fundamental accurate information and basic rights, and, with1148those tools, investors would be empowered to drive our capital1149markets and economy forward.1150    The disclosure of information improves price discovery,1151makes the markets more fair, more orderly, and more efficient,1152and protects investors from abuses, such as information1153asymmetry. Even the most sophisticated investors cannot1154exercise their superior knowledge and expertise if they do not1155have reliable information about a company's financials,1156operations, and risks.1157    Many of the bills before the committee today, however,1158would expand the ability of private market companies and funds1159to sell securities to a broader range of investors without1160providing accurate information about operations, management,1161risks, and financial position--the amount and type of1162information that potential investors and other participants in1163the public markets receive.1164    This is not expanding or improving capital formation, it is1165increasing risks for more investors and tilting the bargain in1166favor of the private party seeking capital. It is expanding the1167reach of those hidden risks into potentially millions of1168American homes.1169    The timing for many of these proposals seems particularly1170ill-advised. Private markets are becoming ever larger. Without1171mandated information, asset prices frequently become detached1172from the underlying intrinsic values of the assets themselves,1173especially among large, highly valued private firms, or1174unicorns. Private company and private fund stakes are1175frequently being sold in loosely regulated secondary markets at1176fractions on the dollar. Different groups of investors are1177frequently treated differently and provided with different1178information or none at all. While there is strong evidence that1179fraud occurs, it is difficult to police.1180    Introducing to these markets' nonprofessional investors,1181who do not have dedicated accountants, lawyers, risk officers,1182or investment professionals or billions of dollars that they1183can afford to leave locked up for 10 years at a time, is1184extremely risky and will likely lead to extensive losses for1185those investors and waste of capital. It could facilitate the1186ability of private companies, funds, and their founders and1187early investors to offload their riskiest, worst opportunities1188onto a less discerning customer. That is not improving or1189forming capital, it is simply enabling a wealth transfer away1190from the retail investors who lack information.1191    Worse, the Securities and Exchange Commission, which1192ensures this essential bargain between companies, funds, and1193investors, is facing significant changes right now that could1194hamper its ability to protect investors.1195    When the securities laws were first adopted and, in the1196decades thereafter, offerings to even a single person or to a1197small number of employees were deemed to be public offerings in1198need of being registered. Beginning in 1982 with the1199promulgation of Regulation D, there has been a proliferation of1200exemptions from the public disclosure framework.1201    The stated intention of those exemptions, and their1202subsequent expansions has been to provide more access to1203capital for small businesses, but the reality is that those1204exemptions, along with a couple of loopholes in the law, have1205enabled virtually any company of any size to obtain capital1206from the public without complying with the public disclosure1207framework.1208    As a result, a substantial and growing number of companies1209are choosing to remain private as they raise capital and often1210only end up coming to the public markets to cash out1211significant investors and founders.1212    The result of Congress and the SEC creating and expanding1213exemptions from the Federal regulatory disclosure framework is1214that the vast majority of capital raised is exempt, and that1215explosive growth of the private markets has come at the expense1216of public markets.1217    The problem is not that the rules prevent small businesses1218or startups from obtaining capital. It is that the rules today1219allow companies with billion-dollar valuations, billions in1220revenues, and thousands of investors to never provide basic1221information to investors, regulators, and the public, and1222private funds to raise billions of dollars from underlying1223investors without basic expectations, like timely,1224comprehensive, and reliable disclosures about their finances,1225governance, and operations.1226    This situation enables capital distortion, like inflated1227valuations, lax internal controls, inconsistent disclosures1228across investors, and potential fraud and abuse. Today, there1229are more than 1,200 private companies with more than a billion1230dollars each.1231    In my written testimony, I have included several1232recommendations for how to rebalance public and private1233markets.1234    I want to thank you for inviting me to testify today. I1235look forward to answering question.12361237    [The prepared statement of Ms. Thornton follows:]1238    [GRAPHIC] [TIFF OMITTED] T9636.09812391240    [GRAPHIC] [TIFF OMITTED] T9636.09912411242    [GRAPHIC] [TIFF OMITTED] T9636.10012431244    [GRAPHIC] [TIFF OMITTED] T9636.10112451246    [GRAPHIC] [TIFF OMITTED] T9636.10212471248    [GRAPHIC] [TIFF OMITTED] T9636.10312491250    [GRAPHIC] [TIFF OMITTED] T9636.10412511252    [GRAPHIC] [TIFF OMITTED] T9636.10512531254    [GRAPHIC] [TIFF OMITTED] T9636.10612551256    [GRAPHIC] [TIFF OMITTED] T9636.10712571258    [GRAPHIC] [TIFF OMITTED] T9636.10812591260    Chairwoman Wagner. I thank you, Ms. Thornton, for your1261testimony.1262    We will now turn to member questions. I recognize myself1263for 5 minutes for questioning.1264    Mr. Barnell, access to venture capital funding is not1265evenly distributed, with most funding concentrated in1266California, Massachusetts, and New York. Entrepreneurs in other1267parts of the country, such as St. Louis, where you and I come1268from, face greater difficulties in raising the capital1269necessary for scaling.1270    Can you discuss some of the difficulties you faced early on1271in raising capital?1272    Mr. Barnell. Absolutely. We faced no shortage of1273challenges. We were two students, first-time entrepreneurs,1274raising capital in an industry that is highly regulated and1275technical.1276    I would say, hands down, the biggest challenge we had early1277on was that in St. Louis, there are only a handful of early-1278stage venture firms. Raising those first couple rounds is1279always the most challenging and so raising that capital was1280definitely the biggest challenge.1281    Chairwoman Wagner. Have you ever met with VCs in1282California, for instance? What was your experience trying to1283gain investor interest in your company?1284    Mr. Barnell. Extensively. We spent a lot of time, even1285early on, going to the coasts, and one of the things that we1286found, particularly for early-stage investment, angel/seed, is1287that investors like to invest in their own backyard.1288    I remember an angel investor who ran a fund out in San1289Francisco telling me, ``We love what you are doing. We love the1290technology you have built but why would we invest in you when I1291can invest in 25 companies just like you in San Francisco?''1292    Chairwoman Wagner. Mr. Barnell, can you discuss how the1293policies discussed today and the bills that we are putting1294forth, some 36 of them, can improve access to capital for1295startups in areas like St. Louis?1296    Mr. Barnell. Yes. One of the other things I wanted to1297highlight from my experience--and I will focus on our early1298rounds as well--there is no shortage of people that want to1299invest in innovation, want to invest in companies like ours,1300the next big growth companies in the country, but I can say,1301coming from St. Louis versus traditional VC hubs, we do not1302have as many of those systems and infrastructures to do it.1303There are not as many demo days and incubators----1304    Chairwoman Wagner. Uh-huh.1305    Mr. Barnell [continuing]. and angel funds for people to1306join and participate in.1307    As I mentioned in my written testimony, things such as1308making it easier for venture funds to form, making it easier to1309make venture investments, crowdfunding, being thoughtful about1310the ``accredited investor'' definition--all of those things1311really would help companies like ours.1312    Chairwoman Wagner. Thank you, Mr. Barnell.1313    Ms. Pinedo, retail investor access to pooled investment1314vehicles that invest in our private markets seems to be overly1315restrictive, whether it be through closed-end funds or other1316types of funds.1317    Do you believe that such restrictions on retail access are1318justified?1319    Ms. Pinedo. I agree that retail access is overly1320restrictive, in particular into interval funds, closed-end1321funds, and other funds.1322    To address some of the concerns that Ms. Thornton alluded1323to, it would be prudent to look at modernizing the regulation1324of funds and fund access for retail investors. That is included1325in my testimony, including specific recommendations along those1326lines.1327    It would be a way to allow access to other investors in a1328very controlled way within the framework provided by the1329Investment Company Act and with information requirements. It1330would address many of the concerns that Ms. Thornton1331recommended.1332    Currently, for example, many funds can only be sold to1333qualified clients. Many funds are limited in their ability to1334invest in private funds or in private securities. A number of1335the bills under consideration address the restriction----1336    Chairwoman Wagner. Would address that, correct.1337    Now, let me ask you, would removing the limitations on1338closed-end fund investments in private securities help address1339this issue?1340    Ms. Pinedo. It would address, in part, the issue of1341directing more--of increasing or promoting capital formation.1342And----1343    Chairwoman Wagner. Is there anything in the closed-end fund1344proposal discussed today that would remove investor1345protections?1346    Ms. Pinedo. Not one thing.1347    Chairwoman Wagner. Why are private markets significant to1348capital formation, and why should we pursue policies that make1349private markets an attractive place to raise capital? Do such1350reforms have to come at the expense of making our public1351markets more attractive?1352    Ms. Pinedo. We should not see it as a zero-sum game. It1353would be entirely wrong for us to see these as in conflict with1354one another.1355    The SEC's Office of Advocate for Small Business, which1356takes into account and has as its goal investor protection,1357makes it quite clear that the private markets should not be1358seen as competing with the public markets. We need vibrant----1359    Chairwoman Wagner. Thank you.1360    Ms. Pinedo [continuing]. private markets.1361    Chairwoman Wagner. Thank you, Ms. Pinedo.1362    Ms. Pinedo. You are welcome.1363    Chairwoman Wagner. The chair now recognizes the ranking1364member of the subcommittee, Mr. Sherman, for 5 minutes for1365questions.1366    Mr. Sherman. As our first witness pointed out, 90 percent1367of these startups fail, but it is a national interest to see1368them funded, because the 10 percent that succeed can1369revolutionize our society. That is why we need to make sure1370that these companies are able to get bank loans, that BDCs are1371able to invest, and that individual investors can invest. We1372want to protect the individual investors.1373    Republicans have often said that there has been a decline1374in the number of public companies and, therefore, there should1375not be--and that is because we put too many burdens on public1376companies. If you want to register securities, it is not that1377easy.1378    Another reason why there are fewer public companies is that1379we have made it easier to stay private. Nothing is a greater1380example of that than the definition of ``accredited investor,''1381which in effect has been over 90 percent repealed. You might1382ask, ``Well, the statute is the same.'' Yes, the statute says a1383million dollars makes you wealthy, because it was passed in the13841970s. That today would be $7.7 million.1385    We have, by inaction--I think any statute that we pass that1386does not have an inflation adjustment in it is a mistake and1387this one is a big mistake. It has not been adjusted for a long1388time, so we have made it much, much easier to be an accredited1389investor on the wealth and income standard, assuming that is1390even the right standard.1391    Ms. Thornton, we have another rule, and that is, a company1392becomes public if it has 2,000 beneficial owners, but we have a1393giant loophole. First of all, we allowed the SEC to take that1394from 500 to 2,000. Arguably it should be taken back.1395    When we count beneficial owners, if there are 5,0001396customers of Merrill Lynch who all have chosen to invest in a1397single security, those 5,000 people, how many do they count as1398under this rule?1399    Ms. Thornton. Probably one.1400    Mr. Sherman. One. That is new math taken to a whole new1401level.1402    If we are going to have a limit on beneficial owners--and I1403think we should--we have to see through the street name. It is1404convenient to hold the security in street name, but we can1405count the beneficial owners.1406    As to accredited investors, a lot of our discussion here is1407on how to reform that. We have now a standard based on wealth1408and income. Really, we set those standards in the 1970s, so1409they are crazy, but wealth and income--even why are those1410relevant? They either connote knowledge, on the theory that1411rich people know a lot about money--sometimes--or ability to1412absorb the loss.1413    I would say that we ought to devise standards that are1414focused on knowledge--MBA, CPA, maybe attorneys, or the1415advisory team, then it must be truly independent--and focus on1416ability to absorb a loss.1417    Because our current rule makes you an accredited investor1418to invest 5 or 10 percent of your money in one of these1419startups or 120 percent of your net worth in one of these1420startups. We value your wealth based on how much money you1421have, independent of your home. Then we say, you can put a1422mortgage on your home now that you are an accredited investor1423to invest in a company with a 90 percent likelihood of failure.1424    I look forward to working with a definition of ``accredited1425investor'' that focuses on limiting the percentage of one's net1426worth or income that you are investing in any one issuance,1427limiting what you put into all private companies, and focusing1428on knowledge of the investor or their truly independent1429advisory group or advisors.1430    To have wealth or income--the idea that somebody has an1431income of $200,000 and therefore is highly knowledgeable and1432expert? Again, my colleagues have incomes of $200,000 just for1433working in Congress, and only some of them are geniuses.1434    I look forward to working on that, and I yield back.1435    Chairwoman Wagner. The gentleman yields back.1436    The chair now recognizes the gentleman from Arkansas, Mr.1437Hill, who is also the chair of our full Committee on Financial1438Services, for 5 minutes.1439    Chairman Hill. Thank you, Chairwoman.1440    Again, thanks to the panel for great testimony. We1441appreciate you being with us today.1442    Ms. Kacaba, I wanted to talk about the SEC's estimates on1443the cost of being a public company. These are the same numbers1444that I have in my notes from 2015, so they do not seem very1445updated to me. They say that, to go public, a traditional IPO1446has upfront costs of about $2.5 million and annual compliance1447costs of $1.5 million thereafter.1448    I was the interim chair of a small cap public company1449before I came to Congress, probably 10 or 13, 14 years ago, and1450our quarterly bill from just the accounting firm was $400,000 a1451quarter.1452    Those numbers seem super-out-of-date to me. Do you think1453they are accurate?1454    Ms. Pinedo. If it is okay, I will volunteer and answer1455that.1456    Chairman Hill. Yes, I directed it to you, so you----1457    Ms. Pinedo. Oh. I am Anna Pinedo.1458    Chairman Hill. Okay.1459    Ms. Pinedo. Yes.1460    Chairman Hill. I cannot see your name from over here.1461    Ms. Pinedo. That is quite all right.1462    You are absolutely correct that those are quite low. The1463average cost of going public for a company these days is more1464in the line of, just for--is probably more around $4 million,1465without counting the underwriters' spread, which is usually 71466percent of the amount that is offered, and then the cost of1467being public.1468    In the SEC's Office of Advocate for Small Business, the1469costs are estimated in the study that the SEC put out in1470December 2024, and the costs are significantly higher, just as1471you have recounted.1472    What is even more significant and more troubling, as noted1473in the SEC's Advocate study, is that the costs were1474disproportionately borne by smaller----1475    Mr. Hill. Yes.1476    Ms. Pinedo [continuing]. and medium-size businesses,1477particularly the costs associated with----1478    Mr. Hill. Right.1479    Ms. Pinedo [continuing]. Sarbanes-Oxley (SOX) compliance.1480    Chairman Hill. Yes, this has been a 25-year race to the1481bottom for encouraging companies to be public in this country.1482We can do that in a safe and sound way, but the company that I1483served as an interim chair of so many years ago just could not1484possibly do this. It had a market cap at the time of, like, $751485million to $100 million, and they were spending $6 million--1486their profitability was probably $6 million to $10 million in1487earnings before interest and tax, and they were spending what I1488just said $2 million of that, a third, on being public. It was1489a preposterous idea, and they went private, as you can imagine.1490    We do not have 5,000 companies in the Wilshire 50001491anymore. We have 3,700, so we do not even have enough1492qualifying public companies to be in the Wilshire 5000 index.1493We only have 3,700, and that is because these costs are out of1494control--in addition to the benefits of being private.1495    I am for--if people want to be private, those costs have1496come down, the compliance burden is better. You can get to be a1497much larger-cap company with private financing. No problem. For1498people who want to access the public markets, we have built a1499wall that is ridiculous.1500    Let us say we want these costs you are talking about to be15011 percent of total expenses. You would have to be making, by my1502calculation, $500 million before tax to warrant being public.1503That is ridiculous. We are choking off the golden goose that1504lays the golden egg for pension funds, labor pension funds,1505individual retirement accounts (IRAs), 401(k) accounts.1506    Ms. Pinedo. Yes----1507    Chairman Hill. I hope, Madam Chair, that we can do1508something about this ongoing cost and work with the Securities1509and Exchange Commission and those commissioners to bring it1510down to give more opportunities to our businesses seeking1511liquidity that way.1512    Let us talk about accredited investors briefly. Do you1513think my idea of people that have professional qualifications1514in their area of expertise merits them being considered an1515accredited investor?1516    Ms. Pinedo. Consistent with some of the changes that the1517SEC made in 2020 of adding professional qualifications, yes.1518This goes to what Mr. Sherman was saying, of financial1519sophistication.1520    Chairman Hill. Right.1521    Ms. Pinedo. Financial sophistication has always been at the1522root of the definition.1523    Chairman Hill. Thank you very much for that.1524    Madam Chair, my time has expired. I yield back.1525    Chairwoman Wagner. The gentleman yields back.1526    Yes, we have a number of bills that we hope are going to1527help increase access to our public markets. America has fallen1528behind.1529    The chair now recognizes the gentlewoman from California,1530Ms. Waters, who is also the ranking member of the full1531committee, for 5 minutes.1532    Ms. Waters. Madam Chair, thank you so very much.1533    While a lot of time has been spent on what is and what is1534not happening with the SEC, I am reminded that Democrats have1535really been in the forefront of providing access to capital in1536support of small businesses. Democrats have a long history of1537promoting capital formation both for small businesses and for1538communities that have been historically shut out of our capital1539markets and banking system.1540    Now, if you will recall, during the pandemic and after, it1541became clear that the Paycheck Protection Program (PPP) was1542only serving megabucks and concierge clients. When we put that1543money together and some of the biggest corporations, et cetera,1544went after the money and we were able to put more money into1545it--Nydia Velazquez and I put another--I think it was about $601546billion--into the small businesses, the community banks, et1547cetera, et cetera. What I realized during PPP was how good it1548is for us to be able to make capital available to small1549businesses.1550    When I travel around the country, and I ask the small-1551business people how many participated, their hands go up,1552because they remember, and it saved their businesses. It helped1553them to keep their personnel, et cetera, et cetera.1554    Additionally, in December 2020, I worked with Secretary1555Mnuchin--who happened to be a Republican--and Democratic1556colleagues to secure $12 billion in capital investments and1557grants for Community Development Financial Institutions1558(CDFIs).1559    Now, CDFIs are very important. We have worked very hard,1560and I want to know whether or not the opposite side of the1561aisle are going to support us as we go for increases for CDFIs1562so that we can have more money for small businesses. It really1563has done a great job in helping them to have access to capital.1564    I want you to know that the CDFIs and these minority1565depository institutions could be leveraged up to $120 billion1566in new financing for small businesses.1567    In the American Rescue Plan, I led the effort to provide1568$10 billion to the State Small Business Credit Initiative to1569support tens of billions of dollars in new loans, investments,1570and technical assistance to support small businesses.1571    We have several pieces of legislation, like my bill1572entitled ``Promoting and Advancing Communities of Color Through1573Inclusive Lending Act'' to authorize $4 billion in additional1574support for CDFIs and minority depository institutions.1575    We have done a heck of a lot for small businesses.1576    It is time to stop talking about ``we have to do more''--1577``the only thing we can do is get rid of regulations that1578protect people.'' The SEC is our cop on the block, and they1579protect these investors. It is time to talk about what we are1580all willing to do to make sure we have access to capital. We1581have avenues by which we can appropriate money into in order to1582do what we talk about we want to do.1583    I am going to have a whole package of bills, more bills, on1584how we can support access to capital for small businesses, and1585I want some support from the opposite side of the aisle, okay?1586    I am sorry I did not have any questions for you. We have1587been talking about this for years. I am trying to help1588everybody to understand this. It is time to act. Capital1589formation should be at the top of our agenda.1590    I yield back.1591    Chairwoman Wagner. All right. I thank the gentlelady. She1592yields back, and I thank her for her passion and fervor on this1593issue.1594    It is--capital formation is the basis of who we are, in1595terms of the American economic system and capitalism. We passed159636 capital formation bills across the House floor last year,1597many in a bipartisan way, and we hope to get Senate support1598this time around.1599    I now recognize the gentleman from Oklahoma, Mr. Lucas, who1600is also the Chair of the Task Force on Monetary Policy,1601Treasury Market Resilience, and Economic Prosperity.1602    You are recognized for 5 minutes, sir.1603    Mr. Lucas. Madam Chair, before I begin, I would like to1604submit for the record a letter of support from MetLife on my1605bill with Mr. Gottheimer, Mr. Foster, and Mr. Barr, the1606Retirement Fairness for Charities and Educational Institutions1607Act.1608    Chairwoman Wagner. Without objection.16091610    [The information referred to can be found in the appendix.]16111612    Mr. Lucas. Thank you, Madam Chair.1613    Thank you to our witnesses for testifying today.1614    The United States has the most robust capital markets in1615the world. Businesses, investors, the whole economy benefit1616when private and public markets are strong, resilient, and1617attractive. I think we all agree on that.1618    Mr. Barnell, could you continue to talk for a moment about1619why we should focus on improving access to markets,1620particularly in capital-intensive industries? I am from1621Oklahoma, and so agriculture and energy are near and dear to my1622heart, but they are incredibly capital-intensive.1623    Mr. Barnell. Absolutely.1624    Speaking to our experience and speaking to St. Louis in1625particular, there are so many great ideas coming out of1626academic institutions, but capital is needed early on. We hear1627a lot about minimum viable products and beta testing. In1628capital-intensive industries, you need capital to prove out the1629concept before you can take the next step. Ensuring we have1630policy that does that is critical.1631    Mr. Lucas. During the previous administration, the SEC1632pursued an aggressive rulemaking agenda. The breadth and depth1633of those rules were simply unprecedented. We have never seen1634anything like it. I have made the point that the former Chair1635seemed to value speed and scope over quality during his tenure.1636    In my view, the SEC should prioritize robust public1637engagement so we can trust that rulemakings are bolstering our1638markets, not stifling them.1639    Ms. Pinedo, how can this administration differ in its1640regulatory approach to strengthening both public and private1641markets? Please.1642    Ms. Pinedo. We have already seen a very different tone from1643the Acting Chair of the SEC. He has articulated in a speech1644just yesterday that the SEC intends to engage the public and1645solicit comments from the public and intends to prioritize1646capital formation, which is very welcome, and intends to1647solicit comment from the public on rulemakings, again,1648returning to the SEC's historic tradition.1649    In terms of the bills that are before the subcommittee1650today, I think that they strike an appropriate tone in1651considering the realities of the private markets and1652acknowledging that we are not going to roll back time, and we1653need to really do what we can to foster robust private markets1654while doing so in a way that acknowledges the importance of1655investor protection.1656    Whether that is promoting changes to the ``accredited1657investor'' definition that recognizes that there are additional1658financially sophisticated parties that can be accredited1659investors. For example, if they are chaperoned by registered1660broker-dealers, by registered investment advisors, if they are1661advised by others in making those decisions, if they pass a1662test that is administered by the SEC or by Financial Industry1663Regulatory Authority (FINRA), those are good qualifications and1664are wholly consistent with the mission of identifying investors1665that can fend for themselves. Those are not loopholes. Those1666are good, viable ways to qualify somebody as an accredited1667investor.1668    Likewise, a lot of the changes that are considered in the1669bills today that would modify, for example, the rules relating1670to business development companies, that would reverse the SEC's1671policy from 2006 relating to acquired fund fees, that would1672bring more investors into business development companies, that1673is an important change. It would bring more capital and more1674investors into BDCs, and that would promote capital formation.1675    We spoke a little bit about closed-end funds previously1676when Chair Wagner asked about it. That would allow closed-end1677funds to be sold to investors that are not accredited1678investors--again, an important change that would be beneficial1679yet protective of investors, because closed-end funds are1680regulated under the Investment Company Act of 1940 and under1681the Securities Act of 1933. All of those things are very1682positive.1683    Mr. Lucas. Thank you for those insights.1684    It is important we listen to stakeholders once in a while,1685is it not, Chairman?1686    Chairwoman Wagner. Hear, hear.1687    Mr. Lucas. I yield back.1688    Chairwoman Wagner. Hear, hear. We are going to have a great1689opportunity, FinancialServices.house.gov, right following this1690hearing, so everyone, all stakeholders, can give their 2 cents.1691    The chair now recognizes the gentleman from Georgia, Mr.1692Scott, for 5 minutes.1693    Mr. Scott. Thank you, Madam Chairman.1694    Now, Ms. Thornton, the equity market has been transformed1695by an explosive growth in the private equity space. Twenty-five1696years ago--just think--we had 7,000 listed public companies in1697the United States and less than 1,000 companies owned by1698private equity investors. Today, more than 10,000 are owned by1699private equity investors and just 4,000 are now publicly1700listed.1701    How do you account for this?1702    Ms. Thornton. Basically, it is because the rules have been1703changed since around 1982, as I said in my testimony, and1704expanded the exemptions to the public disclosure framework and1705the need for companies to be public companies and comply with1706that framework.1707    We also have an erosion of the 12(g) limit on company size1708when they can be in the private markets. Now companies whose1709shares are held by an institutional manager of some sort can1710basically count as one share, and so, when you have that 2,000-1711shareholder limit, it is kind of meaningless when you have that1712situation and you have huge companies in the private markets.1713Now, basically, companies can grow huge in the private markets.1714    Mr. Scott. Uh-huh.1715    Ms. Thornton. We have 1,200, as I said, worldwide in the1716private markets. Over 600 of those are U.S.-based companies.1717Many of them are multibillion-dollar companies.1718    They are not mandated to disclose information, which is--I1719hear comments about how much disclosure has to be made when you1720go public. The reality is that when companies do fill out all1721that IPO information and for the first time in perhaps years1722disclose their financials and those financials are audited by1723an independent auditor, of course information comes out about1724the true value of the company.1725    I think it is incumbent upon us to insist that, for new1726investors especially, that information be disclosed. It is1727critically important when a company has not been disclosing for1728many years.1729    Mr. Scott. Thank you.1730    Now, we are always concerned about the two anchors that1731weigh here: interest rates on one hand, inflation on the other.1732    How do you see that having an impact, those two?1733    Ms. Thornton. I am not--I am not really sure about that,1734but I think that, as long as we make the rules such that people1735have a lot of options for raising money, then they should be1736able to do so.1737    We may need to provide more opportunities for small1738businesses, for example, to actually get loans and to have more1739funding, through CDFIs or whatever. We also need to make sure1740that public companies--all companies disclose what the impact1741of those changes in interest rates and changes in inflation1742have on their company, on their financials.1743    It is critically important, for example, that we have the1744Public Company Accounting Oversight Board, which makes sure1745that the auditors who audit financials of public companies1746actually are doing everything right.1747    I think that is maybe how it is connected. I have kind of--1748--1749    Mr. Scott. Uh-huh. Yes.1750    Ms. Thornton [continuing]. danced around it here, but I1751think that is really how it is connected. We need to keep all1752that structure in place to make sure that investors have1753information about the impacts of these market factors.1754    Mr. Scott. Yes, you are absolutely right, because right now1755these are the two parameters we are dealing with----1756    Ms. Thornton. Yes.1757    Mr. Scott [continuing]. interest rates and inflation. Our1758Administration is dealing with this. We are dealing with it. We1759are moving to downsize the Federal Government. We are doing1760things right now that have never been done and restructuring1761it. We have to be careful, and I like your points on what we1762have to do.1763    Thank you very much.1764    Ms. Thornton. Certainly.1765    Chairwoman Wagner. The gentleman yields back.1766    The chair now recognizes the gentleman from Texas, Mr.1767Sessions, for 5 minutes.1768    Mr. Sessions. Madam Chairman, thank you very much. This is1769the most interesting hearing on not just capital formation but1770the development of small-business IPOs and all the things that1771lend themselves to America's future.1772    Madam Chairman, I would like to ask unanimous consent to1773enter into the record a letter from Mr. Teague Egan, founder1774and CEO of an Energy Explorations Technologies, known as1775EnergyX, where he talks about ``The Future of American Capital:1776Strengthening the Public and Private Markets by Increasing1777Investor Access and Facilitating Capital Formation.''1778    I ask that it please be entered in the record.1779    Chairwoman Wagner. Without objection.17801781    [The information referred to can be found in the appendix.]17821783    Mr. Sessions. Madam Chairman, we heard from Andrew Barnell,1784who is from St. Louis, Missouri, where I used to live. I know1785St. Louis pretty well. He spoke about not just the need for1786IPOs and new economic drivers for small business but talked in1787his testimony to us about maybe being isolated in a market that1788was not as robust for raising money.1789    I would like to go, if I can, to Ms. Pinedo and talk with1790her about--and I read in her bio about how she brings a lot of1791money from overseas to America, foreign financing that is here.1792I would like to drill down on some of this because you talked1793about a balance that was necessary between private and public1794registered funds.1795    Specifically, I would like to talk about the role of1796engaging finders within the broker-dealer community. We do1797legislation here and if you have any ideas about exempting1798finders from registration maybe in certain areas but adding to1799this marketplace in cities that may be out of large investor1800areas, I would like to ask you to please help us along that1801thinking, please.1802    Ms. Pinedo. Sure.1803    The SEC has considered and various advisory committees to1804the SEC have considered a finders' exemption and have suggested1805a framework for an exemption for finders for a number of years1806now. The Small Business Forum that the SEC hosts every year has1807suggested and recommended that the SEC adopt a framework for1808finders.1809    I think that a limited framework for finders from the1810exemption for registration from broker-dealers would be1811something that would be advisable. However, it should be a1812limited framework in light of the fact that we do have a need,1813both at the State level and at the Federal level, to register1814persons who are providing services that are broker-dealer-1815related.1816    I would look at the language that the Securities and1817Exchange Commission has considered previously in terms of the1818finders' exemption and the language that the advisory1819committees to the SEC have previously considered in terms of1820what would be appropriate by way of a finders' exemption.1821    Along those lines, I would also consider adopting finally--1822you brought up the topic of foreign activity. I would consider1823adopting the--or encouraging the SEC to undertake a study1824regarding adopting the amendments to 15a-6, which are1825exemptions for foreign--for certain--the activities by foreign1826broker-dealers for limited activities in the United States.1827    These were amendments that were proposed by the SEC. They1828were well-received, generally, by practitioners and by others,1829and they were languished. They relate largely to the activities1830of foreign broker-dealers with major institutional investors.1831    Mr. Sessions. This is all, I think, good news, at least to1832me, because we found that there are people that want to1833overregulate not only broker-dealers. They want to come in with1834other areas of government and hold people necessarily1835accountable about factors that were beyond their control--1836perhaps inflation, perhaps interest rate changes. I think it is1837very important.1838    I want to thank each of you for being here today.1839    I think, Madam Chairman, that gives us lots of room to work1840within a well-regarded idea, and I want to thank you for1841holding this hearing today.1842    I yield back my time.1843    Chairwoman Wagner. Thank you.1844    The gentleman yields back.1845    The chair now recognizes the gentleman from California, Mr.1846Vargas, for 5 minutes.1847    Mr. Vargas. Thank you very much, Madam Chair, and I1848appreciate very much this hearing today. I thank the ranking1849member also.1850    Most of us are interested in protecting investors without1851sacrificing opportunities to generate wealth, and I think that1852is what we have been talking about today. I do think that1853constant disclosure, as has been mentioned many times here--you1854have to place that against, versus the information that you1855need, the accurate information to protect investors. That is1856one of the issues I want to talk about.1857    The second one is--and I do not want to put words in1858anyone's mouth, but I did hear someone say that there really is1859no conflict between the private and the public market. I am not1860sure that is true. If it is, I would like to see it because it1861does seem that one benefits off the other a little bit.1862    Then, lastly, about the accredited investor, because I do1863agree with Mr. Sherman that it is not only wealth or assets,1864but also knowledge--although I would almost challenge him to1865tell us which one of our colleagues is not a genius. In fact, I1866would give him a few seconds here if he wants to name names.1867    Anyway, let us start with the cost of disclosure.1868    Ms. Thornton, you heard it here, and I think it is true: If1869you have a company that is making $6 million a year and $21870million of it has to go for all these disclosures, that is an1871impossibility.1872    What do you say to something like that, the example that1873was given by the chair of the full committee?1874    Ms. Thornton. Perhaps we should think about what we require1875of those companies. It is always important to look back at1876regulations and rules and make sure that they accomplish what1877you want them to accomplish.1878    On the other hand, when you talk about small businesses and1879startups, there are risks there. There is a reason why, if they1880go to a bank, the bank requires a lot more from them than they1881would from a much larger, well-established company that has for1882years disclosed audited financials and so forth.1883    I am not an expert on the different costs that are charged,1884and there may be fees that are excessive that are charged when1885this happens. I am not sure.1886    Mr. Vargas. Let me----1887    Ms. Thornton. I would look at all those.1888    Mr. Vargas. Let me ask Mr. Barnell.1889    You obviously have a company here that you are starting,1890and I hope you do have success. It certainly is a very noble1891cause. What about those costs we were just talking about?1892    Mr. Barnell. We are still a private company----1893    Mr. Vargas. Right.1894    Mr. Barnell [continuing]. and we do robust reporting, and1895we do Public Company Accounting Oversight Board (PCAOB) audits,1896and so we have financials and all those sorts of things.1897    As a private company who is preparing to be public at some1898point--I do not have all the details of who we talked to,1899investment bankers and others. We know that there are several1900million dollars of annual costs as well as a number of hires1901that would need to be made within the company solely to deal1902with public reporting. So----1903    Mr. Vargas. Is it a barrier that you think is1904insurmountable? Or do you think it is a barrier that is1905reachable?1906    Mr. Barnell. I think it is not--nothing is insurmountable,1907right? I think it is certainly a consideration that would1908delay--it is a consideration that--we might go public later as1909opposed to earlier if we take those costs into consideration.1910    Mr. Vargas. Okay.1911    Let us, then--talking about the private versus the public,1912why do we not go back to you, Ms. Thornton. You heard that--1913and, again, I do not want to put--I hate when people put words1914in my mouth, but I did think I heard there is really no1915conflict. Is that true?1916    Ms. Pinedo, you were shaking your head. I will give you the1917opportunity too----1918    Ms. Pinedo. It is not that there is no conflict. What I1919said is that, as a legislative and as a regulatory matter, we1920should be encouraging both a thriving private market and a1921thriving public market, not that there is no conflict. That1922would be reductionist.1923    There are reasons why some companies choose to be private1924and why we have private markets, and there are good and1925sufficient reasons why we should be encouraging companies to go1926public----1927    Mr. Vargas. Okay. Let me give Ms. Thornton a chance to1928challenge that potentially.1929    Go ahead.1930    Ms. Thornton. Yes. I would say two things.1931    One is, the companies that grow extremely large in the1932private markets, they are doing a couple of things. They are1933looking at public companies to try to justify their valuations1934rather than providing detailed information about their1935financials and everything else to justify their valuation.1936    By the way, in a public company that discloses a lot of1937information, is having market participants look at the company,1938look at the information that is disclosed, and they are1939analyzing it. That provides a lot of support for other1940investors who are looking at that company to invest.1941    You have large private companies that are competing with1942similar companies in the public markets and that does not1943seem----1944    Mr. Vargas. Okay. My time has expired, and I yield back,1945and I thank the chair.1946    Chairwoman Wagner. The gentleman yields back.1947    The chair now recognizes the gentleman from Ohio, Mr.1948Davidson, who is also the Chair of the Subcommittee on National1949Security, Illicit Finance, and International Financial1950Institutions, for 5 minutes.1951    Mr. Davidson. I thank the chairwoman.1952    I thank you, our witnesses, for being here today and for1953your work in this field.1954    I ask unanimous consent to submit this letter from the1955Accredited Investor Alliance supporting our work to expand1956market access.1957    Chairwoman Wagner. Without objection.19581959    [The information referred to can be found in the appendix.]19601961    Mr. Davidson. America is home to less than 5 percent of the1962world's population, but we account for nearly 25 percent of1963Global Gross Domestic Product (GDP). Even better, our capital1964markets account for more than 50 percent of the world's1965invested capital. Unfortunately, this abundance is not easily1966accessed by most Americans.1967    Now, as investors, Americans benefit more than most1968countries because our retirement savings are overwhelmingly1969deployed and invested in our capital markets, and this is not1970the case around the world. Even in Europe, it is not as common.1971    However, when American companies want to raise capital,1972they often confront substantial barriers, as you all have1973highlighted today.1974    One of the most basic problems is the ``accredited1975investor'' limitation. Essentially, unless you are already1976rich, it is harder to get rich. This paternalistic approach1977from government limits individual freedom to invest your own1978money. It is supposed to protect investors, but the reality is,1979in practice, it protects deal flow for the donor class. For1980simplicity, current law equates wealth with sophistication.1981    The problem is especially acute for entrepreneurs who need1982to access capital to grow their businesses. Generally,1983businesses have no ambition to build the sort of scale that it1984takes to access traditional capital markets. An initial public1985offering, as Ms. Pinedo highlighted, costs millions and can1986take millions more in compliance and recurring costs.1987    It is entirely unsuited to small and mid-market firms,1988particularly those who want to remain private. While large1989companies can take on debt outside of banks by accessing the1990bond market, small and mid-market firms generally have no such1991market access.1992    We should make it far simpler to raise equity and debt from1993private capital.1994    All investors take on risk with a rational expectation of a1995risk-appropriate rate of return. Anyone who acknowledges those1996risks and knows what they are investing in should not be1997prevented from doing so via government-enforced restrictions.1998After all, the right to transact is fundamental. It is not a1999permission granted by government.2000    That is what we have turned it into, as a complete2001contradiction of our Constitution, our Bill of Rights,2002recognizing that our rights are endowed by our creator. In2003limiting the government's ability to infringe upon these, we2004act as somehow the government is the giver of our ability to2005transact.2006    My bill for this protects accredited investors, who would2007simply say that they certify to the issuer of securities that2008they understand the risks of investment in private issuers.2009This would have the effect of providing more opportunities for2010all investors.2011    Ms. Pinedo, could you expand on how such a change would2012improve capital formation?2013    Ms. Pinedo. ``Pinedo.'' Yes.2014    I think, again, one has to go back to the fundamental2015purpose of the ``accredited investor'' definition, which is to2016allow investors that are able to fend for themselves to invest2017in opportunities that do not require the protections associated2018with registration. That would be investors that are financially2019sophisticated, and we have to ascertain the financial2020sophistication through some means----2021    Mr. Davidson. You still support the framework that the2022government could be the giver of the rights and----2023    Ms. Pinedo. No.2024    Mr. Davidson [continuing]. if we deem you sufficiently----2025    Ms. Pinedo. No.2026    Mr. Davidson [continuing]. sophisticated----2027    Ms. Pinedo. No.2028    Mr. Davidson [continuing]. using some alternative legal2029criteria, then, okay, we will let you do it?2030    Ms. Pinedo. That might include any of a number of the bills2031that are presented today for the subcommittee's consideration.2032    Mr. Davidson. I believe that will move--be progress, but I2033do not think that you can proceed from that premise.2034    Maybe, Mr. Conwell, when you look at your challenges, what2035are you seeing in the market? What is the challenge that2036venture firms like you are trying to do when you want to2037increase the ability of people that want to participate in the2038markets but also the people that are trying to raise capital?2039What are you confronting?2040    Mr. Conwell. We are confronting a limiting of sources,2041right? As you are raising a fund, right now, if you are raising2042$10 million or less, you can raise from over 250 people, right?2043The moment you go over that, it is only 100 people, so it2044becomes really easy to figure out the math of what is the2045minimum amount you can take from an investment. If I am raising2046$40 million, the minimum check I can take is $250,000.2047    Mr. Davidson. Wow.2048    Mr. Conwell. That means the amount of people I can go to2049raise that capital is very limited and that means I have to fit2050in their framework for my fund to work. That is very limiting.2051    Mr. Davidson. Thank you so much.2052    My time has expired, and I yield back.2053    Chairwoman Wagner. The gentleman yields back.2054    The chair now recognizes the gentleman from Illinois, Mr.2055Casten, for 5 minutes.2056    Mr. Casten. Thank you, Madam Chair.2057    Mr. Barnell, I appreciated your comments because they were2058giving--well, I sort of appreciated them. They were giving me2059flashbacks, because, before coming here, I had raised a couple2060hundred million from private equity and always felt that2061tension where I did not want one more person in my office who2062represented my majority investor telling me what to do--I see2063Mr. Conwell laughing--but we had not quite gotten big enough to2064have the full reporting requirements to go public. I am2065sympathetic to that tension.2066    I also think that every debate we have on this committee is2067fundamentally about the tension between capital market access2068and investor protection. Push more in one direction, you go the2069wrong way on the other. I think that it is healthy to talk2070through it, but I want to try to highlight that.2071    Mr. Conwell, how much did you say you are currently2072managing in your current fund?2073    Mr. Conwell. Currently, it is $9.3 million.2074    Mr. Casten. Okay. Is that your first fund?2075    Mr. Conwell. First fund, yes.2076    Mr. Casten. How many Limited Partnerships (LPs) do you have2077in there?2078    Mr. Conwell. 194.2079    Mr. Casten. Okay.2080    When you make an investment in one of your target2081companies, do they all have to sign off on the investment, or2082do you have a deal arrangement with them that they have agreed2083to be in the fund and then they trust you to make those2084investment decisions?2085    Mr. Conwell. It is an agreement where they fully trust me2086to make the investments----2087    Mr. Casten. Okay.2088    Mr. Conwell [continuing]. in the fund. They are given all2089the documentation up front----2090    Mr. Casten. Sure.2091    Mr. Conwell [continuing]. to let them know how I invest and2092what I----2093    Mr. Casten. Yes, which is fine, and that was my experience.2094My point is that none of those investors essentially get any2095disclosure other than, when you come back to raise your next2096fund, you are going to have to describe your fund performance,2097but you are not providing those investors with disclosure--as2098you should not, because----2099    Mr. Conwell. No, I do. I do. I do provide them with the2100disclosures.2101    Mr. Casten. Compare, if I was doing a public listing, I2102would have to provide 3 years of audited financials. I would2103have to provide details on my management team. I would have to2104do all that stuff. Your----2105    Mr. Conwell. I give them all the infor----2106    Mr. Casten. Your LPs do not--let me move on. Your LPs do2107not have to go through doing that disclosure. Which is fine. I2108am just flagging that there is a question of where the2109protections are for the LPs as accredited investors because we2110trust they have this, and they do not.2111    Ms. Pinedo, there has been a lot of talk by my colleagues2112across the aisle, which is just wrong, so I am hoping you can2113correct it.2114    Can you talk about the trend line in total capital2115available for investments, public and private, over the last2116couple years? Rising or falling?2117    Ms. Pinedo. In my testimony, I have data regarding the2118amount of capital that has been raised in public offerings,2119which has declined by comparison to the amount that----2120    Mr. Casten. No----2121    Ms. Pinedo [continuing]. has been raised----2122    Mr. Casten. Yes, but----2123    Ms. Pinedo. Sorry.2124    Mr. Casten [continuing]. the total available has surged,2125right?2126    Ms. Pinedo. The total available has surged.2127    Mr. Casten. Broadly speaking, that has been because private2128equity has really surged and taken off?2129    Ms. Pinedo. Absolutely. Yes.2130    Mr. Casten. The idea that there is a shift--and just on2131that point, do you know what the total market cap is of all2132private equity funds versus the total market cap of public2133traded----2134    Ms. Pinedo. Oh, it vastly--it vastly is--yes, it----2135    Mr. Casten. Yes, it was like $56 trillion of private--of2136market----2137    Ms. Pinedo. Yes.2138    Mr. Casten [continuing]. cap in public funds----2139    Ms. Pinedo. Absolutely. Yes.2140    Mr. Casten [continuing]. versus 3 1/2----2141    Ms. Pinedo. Private equity and private credit in recent2142years as well.2143    Mr. Casten. Yes.2144    Ms. Pinedo. Yes.2145    Mr. Casten. Essentially, the surge of private equity has2146created pockets of capital that early-stage companies that are2147worth less can access thanks to people like Mr. Conwell----2148    Ms. Pinedo. Yes.2149    Mr. Casten [continuing]. and we still have public markets2150on the back end for exits, which is where the huge value2151creation is.2152    Ms. Pinedo. That is right.2153    Mr. Casten. The story that people are fleeing public2154markets is really a story about, there has been a huge surge in2155alternative types of capital that are available----2156    Ms. Pinedo. Yes.2157    Mr. Casten [continuing]. that people like my company Mr.2158Barnell, you would not have had that--you could not have gone2159public when you were two kids out of college. Nobody would have2160given you money. You found people to give you money. That is2161awesome, right? Thanks to people like Mr. Conwell. Like, that2162is--let us celebrate what that is.2163    Back to my initial question. I have never met a CEO, myself2164included, who does not want dumber money. Dumb money is2165awesome. If you do not have accountability, you can do what you2166want. It is fantastic.2167    Ms. Thornton, should we be concerned that the Trump2168administration is laying off tons of people at the SEC,2169including all of the directors who were responsible for making2170sure that there were appropriate disclosures of Mr. Musk's2171purchase of Twitter?2172    Ms. Thornton. Yes----2173    Mr. Casten. That seems like working backward on investor2174protection, right?2175    Ms. Thornton. Absolutely.2176    Mr. Casten. Should we be concerned that all of my2177Republican colleagues are trying to say that, if you tokenize a2178security, you should not have to--it would have to be regulated2179by the SEC, which is the disclosure-based organization. You2180should just--all of a sudden, you are a commodity, magically?2181    Ms. Thornton. We should be very, very concerned about that,2182because people have an expectation of profit when they invest.2183There are people who are new to this type of investing, and2184they could lose a lot. They could--when Sam Bankman-Fried did2185his thing----2186    Mr. Casten. Yes, and I am----2187    Ms. Thornton [continuing]. we saw----2188    Mr. Casten [continuing]. sorry to cut you off, because I2189have 15 seconds. I just want to get one----2190    Ms. Thornton. Yep.2191    Mr. Casten. Are there any proposals before the committee2192today that would increase investor protection?2193    Ms. Thornton. I do not recall seeing any when I did my2194initial review of the 36----2195    Mr. Casten. That is exactly my point. There is a healthy2196tension. There is an effort going on in the Trump White House2197to fleece the investment in public. I welcome----2198    Chairwoman Wagner. The gentleman's time has expired.2199    Mr. Casten [continuing]. the tension but let us not deny2200what is going on here.2201    Chairwoman Wagner. The gentleman's time has expired.2202    The chair recognizes the gentleman from Indiana, Mr.2203Stutzman, for 5 minutes.2204    Mr. Stutzman. Thank you, Madam Chair.2205    I ask for unanimous consent to submit for the record a2206letter from the American Securities Association regarding the2207hearing today.2208    Chairwoman Wagner. Without objection.22092210    [The information referred to can be found in the appendix.]22112212    Mr. Stutzman. Thank you.2213    First of all, thank you to all of you. This has been a2214fascinating hearing.2215    I was absent from Congress for the last 8 years and was an2216entrepreneur and looking to raise capital to start companies or2217to revitalize companies or to grow companies, and so, Mr.2218Conwell, your story is fascinating. Congratulations, on one2219hand, but I know you have, probably, some scars to show for how2220you got to where you are, as well as Mr. Barnell.2221    I would like to ask a little bit about--and I appreciate2222the gentleman's comments. We are really in that balance between2223access to capital but protecting investors. I have been in many2224meetings where you are trying to explain the project and say,2225this is why we believe it is going to be successful, and we2226would love your participation and investment as well.2227    It really--it is--as he mentioned, there is dumb money out2228there. That is unfortunate but we also--people are wanting to2229participate, because they are doing--they are working on it in2230their daily job, they are raising their family, but they are2231also feeling like, I have a little bit of money here, I would2232like to participate somewhere. How can I do that? What is the2233easiest way to do that?2234    I guess, a question for Mr. Conwell: Could you touch on2235maybe crowdfunding just a little bit and how that is playing in2236today's fundraising and capital formation?2237    Mr. Conwell. If you would not mind, I would like to cede2238that question to Ms. Rebecca. She deals with crowdfunding, and2239she is the expert here.2240    Mr. Stutzman. Okay. All right. That is fine with me.2241    Ms. Kacaba. Could you repeat the question?2242    Mr. Stutzman. Can you talk a little bit about crowdfunding?2243It has been around for a little while, but, with technology and2244easier access, could you talk a little bit about where2245crowdfunding is playing in capital formation in today's markets2246and fundraising?2247    Ms. Kacaba. Yes. It is incredibly important. The technology2248that we have built at DealMaker and that a lot of our2249colleagues have built in this space is foundational to help2250more entrepreneurs get funded in today's day and age.2251    We can do that, especially for jurisdictions that are not2252Silicon Valley or Wall Street, by getting deals like Mr. Andrew2253Barnell's in front of people in all different regions. We can2254draw from the communities, and we can help form businesses that2255are not based in those city centers.2256    Mr. Stutzman. What about investor protections through that2257avenue? What are some of your thoughts on that? Is there enough2258protection? Is there enough information disclosed for----2259    Ms. Kacaba. The legislation is incredibly well-designed. We2260have Form C. We have the 1-A.2261    What we have actually seen is that, with that standardized2262disclosure, more junior investors can become more2263sophisticated, because every deal they look at, there is the2264same format, where they can read the same information. It is2265actually desirable that the whole exempt markets move in that2266direction.2267    Mr. Stutzman. Yes. Okay.2268    Mr. Barnell, Congratulations on your success. I know that,2269as an entrepreneur, you are always looking forward. Sometimes2270it is good for us to always just take a glance back and look at2271how far we have come, but there is always more work to do.2272    Could you talk a little bit--you mentioned in your remarks2273about the difficulty of raising funds in the Midwest. I guess I2274am just curious, because I come from Indiana, and I would agree2275with that comment, but I am kind of curious about your2276experience and why you mentioned that in particular. Do you2277have any ideas, what could be done to change that?2278    Mr. Barnell. Yes, absolutely.2279    There is one stat I always like to cite. It is not that2280there is an absence of industry or capital to deploy, right? I2281think sometimes it is that the infrastructure does not exist.2282If you look at the data, 20 percent of the GDP in the country,228320 percent of the jobs are in the Midwest, but only 4 percent2284of the venture capital is deployed there.2285    Mr. Stutzman. Yes.2286    Mr. Barnell. It is not an absence of the capital; it is an2287absence of the means to make it happen.2288    Which is why I think things such as making it easier for2289venture funds to form--because we have fewer venture funds per2290capita than other places--easier to crowdfund. Those are the2291ways we solve the solution and make it easier and provide the2292knowledge for people to invest in companies when they want to2293and when they see the opportunity.2294    Mr. Stutzman. Is it just a matter of connecting those who2295have funds to those who have projects?2296    Because, I know that--in the Midwest--Congressman Steil and2297my district are some of the heaviest manufacturing districts in2298the country. A lot of these folks, maybe they came off the2299farm, know how to build a widget, but they do not necessarily2300know how to finance something.2301    Is that something--are there places out there that we try2302to connect people to be able to fund projects like that?2303    Mr. Barnell. I do not know all the solutions, but I could2304speak to some of our experience. We are a colorectal cancer2305screening test. Early on, we had a lot of doctors and2306gastroenterologists say, ``I want to invest in this. I have2307never done it. How do I do it? Is this like buying a stock?''2308Right?2309    I think it is the education; it is the funds. I think there2310are a lot of things that we need to do to make it happen, but I2311think, if you move in that direction, over time, you are going2312to be in a much better place from a capital-formation2313perspective.2314    Mr. Stutzman. Yes.2315    Thank you, Madam Chair.2316    Chairwoman Wagner. The gentleman's time has expired.2317    The chair now recognizes the gentleman from Wisconsin, Mr.2318Steil, who is also the Chair of the Subcommittee on Digital2319Assets, Financial Technology, and Artificial Intelligence, for23205 minutes.2321    Mr. Steil. Thank you very much, Madam Chair. Thanks for2322holding today's hearing.2323    I would like to start with you, if I can, Ms. Pinedo.2324    Emerging growth companies. How do we get companies on-2325boarded, navigating through the capital raise and particularly2326in early formation?2327    As we look at the number of companies that are choosing to2328go public, we continue to see that decrease. Emerging growth2329companies and the regulatory environment in that space are2330trying to lighten that burden to encourage early-stage2331companies to move forward, to access the public markets, and to2332use the public markets as a vehicle for growth.2333    I know you are familiar, broadly, with this space. I would2334love you to comment on it. In particular, what types of2335industries are uniquely utilizing this?2336    Mr. Stutzman correctly noted both of our districts have a2337history of capital-intensive manufacturing. There are also a2338lot of tech companies, whether or not it is biotech or other2339areas. What type of industries or companies might be uniquely2340interested in emerging growth companies?2341    Ms. Pinedo. Almost all of the companies that have gone2342public since the JOBS Act was adopted have qualified as2343Emerging Growth Companies (EGCs). The JOBS Act has been a2344resounding success.2345    It would be--I take issue with the subcommittee member who2346said that the bills under consideration today would eviscerate2347investor protection. That is simply not true. The framework for2348disclosures by EGCs is robust. There are some disclosure2349accommodations that are made for EGCs, but there are strong2350investor protections. The EGCs----2351    Mr. Steil. Are there certain industries that are uniquely2352inclined to look to the emerging growth company?2353    Ms. Pinedo. It is a wide array of industries that have2354utilized the IPO on-ramp, and that includes tech companies,2355life-sciences companies, industrials, consumer products2356companies. It is a very broad representation, and it has been2357very dependent on the market and what the market is receptive2358to.2359    Mr. Steil. Should Congress extend the IPO on-ramp, the EGC2360threshold?2361    Ms. Pinedo. Absolutely. Without question, it has been a2362success. It will continue to be a success, and it will continue2363to attract companies.2364    Mr. Steil. I appreciate you saying that. I have legislation2365that would do just that.2366    Ms. Pinedo. Yes.2367    Mr. Steil. A final comment on this. Is there stuff--are2368there rules, regulations, adjustments that should be made at2369the SEC, without acts of Congress, as it relates to emerging2370growth companies?2371    Ms. Pinedo. The Acting Chair referenced in his speech that2372the SEC intends to look at rightsizing regulation and looking2373at the disclosure accommodations for different size companies--2374smaller reporting companies and other companies--and looking at2375the disclosure burdens that are applicable to different2376companies.2377    Among the bills under consideration today are looking at2378the definition of ``smaller reporting company, accelerated2379filer, large, accelerated filer.'' All of those things are2380appropriate measures and good things for capital formation----2381    Mr. Steil. Thank you very much. I just want to be cognizant2382of the time, because I want to come back over to Mr. Conwell2383and Mr. Barnell in particular.2384    As Mr. Stutzman referenced, I am from Wisconsin, he is from2385Indiana--a manufacturing base, but a long way from Silicon2386Valley, New York City, or other traditional VC hubs.2387    In your testimony, Mr. Conwell, you referenced some of the2388challenges you face in obtaining capital.2389    Mr. Barnell, you have talked about this as well.2390    Are there specific policy changes or adjustments that you2391would like to see?2392    I will start with you, Mr. Conwell.2393    Then I will come to you, Mr. Barnell.2394    Mr. Conwell. For me, I am very focused on this limited2395partner, limit in funds. Currently it is 100, which, including2396yourself, makes it 99.2397    In the JOBS Act, when they increased the limit for funds2398that were $10 million or less to have up to 250, that is what2399allowed me to raise my funds. If not for that, this does not2400happen. In the 47 companies I invested in, probably more than2401half of them would not exist, right?2402    Now that I am going to higher than a $10 million limit,2403those individuals are--I can no longer raise from them, and, if2404they feel like I have done a good job, they can no longer2405participate with me.2406    Mr. Steil. Thank you very much.2407    Fifteen seconds, Mr. Barnell. Anything jump to mind?2408    Mr. Barnell. Just very briefly, for us, it really was2409investors like to invest locally, right, especially at an2410early-stage. Facilitating that, I think, is important.2411    Mr. Steil. The answer is, everyone should move to Wisconsin2412and, as a backup plan, Indiana.2413    Thank you very much. I appreciate your being here.2414    Madam Chair, I yield back.2415    Chairwoman Wagner. Do not leave St. Louis, Missouri, out,2416Mr. Steil.2417    The gentleman yields back.2418    The chair now recognizes the gentleman from New York, by2419the way, Mr. Lawler, for 5 minutes.2420    Mr. Lawler. Thank you, Madam Chair.2421    I have a letter to submit, without objection, on behalf of2422the Innovation Coalition.2423    Chairwoman Wagner. Without objection, so ordered.24242425    [The information referred to can be found in the appendix.]24262427    Mr. Lawler. Thank you.2428    It is ingenuity in the generations of entrepreneurs and2429innovators utilizing emerging technologies that have built2430America and will be crucial looking forward. Entrepreneurs and2431small businesses drive the American economy. In 2019, the Small2432Business Administration calculated that close to 44 percent of2433our GDP was a result of small businesses.2434    We should be doing everything we can to promote investment,2435promote entrepreneurship, and foster small-business growth,2436whether it be cutting red tape, providing additional access to2437capital, or simply getting government out of the way.2438    That is why I introduced the Helping Angels Lead Our2439Startups (HALOS) Act to promote access to investment capital2440for small companies and ensure that startups can continue to2441generate interest and connect with investors.2442    This would ensure that demo days, pitch competitions, and2443community economic development events where there is no2444specific investment offering are not considered general2445solicitation under Reg D.2446    The HALOS Act, which is noticed with this hearing, is one2447of a number of commonsense legislative reforms we should be2448taking to ensure that startups and businesses have the2449resources they need to develop, to grow, and thrive.2450    The JOBS Act directed the creation of regulation2451crowdfunding to build on crowdfunding as a new and innovative2452way for startups and small businesses to raise capital,2453typically over the internet. The number and size of regulation2454crowdfunding offerings has continued to increase over time.2455Noticed with this hearing is proposed legislation from my2456colleagues including a measure that seeks to build on that2457success.2458    Ms. Kacaba, I know you touched on this briefly, about the2459benefits, but how would enhancements to regulation crowdfunding2460help small businesses raise capital? Would it be beneficial to2461expand the number and range of investors that can participate2462in crowdfunding offerings? Are there additional enhancements2463that you believe we should make to improve the utility of it?2464    Ms. Kacaba. Yes, absolutely, and thank you for the2465question. I agree with what you said. The JOBS Act, since its2466inception, has helped so many small businesses form and so many2467jobs be created.2468    There are very simple, small adjustments that we can make2469so that the online crowdfunding space can flourish to allow2470more growth and more jobs to get funded. Those are in our2471written statement that we advocate for. The HALOS Act is an2472incredible step in that direction.2473    Mr. Lawler. I appreciate it.2474    Any of you care to comment as well?2475    No? Okay.2476    I think, from the standpoint of additional enhancements,2477Ms. Kacaba, what would you say are the necessary steps?2478    Ms. Kacaba. I think it is important to remember that non-2479accredited investors are looking to build wealth. Studies show2480that younger generations do not believe they are going to build2481their wealth from their direct jobs. They are looking for other2482ways in the gig economy, and they are looking to make2483investments.2484    If you regulate them out of a space where we are doing bad-2485actor checks, we are doing background checks, we are doing2486disclosure documents, you are just forcing them to put their2487money into other sectors, like crypto, like Non-Fungible Tokens2488(NFTs), like the public markets, and there are no caps in those2489spaces.2490    Under the JOBS Act, there is a cap on how much they can2491invest in every single offering, and so the JOBS Act is well2492designed that way. If we remove the cap on Reg A, we can grow2493the space, we can grow online offerings, and we can grow the2494ecosystem and communities of people that want to invest in2495businesses they love.2496    We have a customer, Monogram. It was started by two2497doctors. They saw the need for a robotic knee replacement2498surgery arm. VC was not interested in funding that business but2499there are a lot of people out there that know someone that has2500had knee surgery that thought that was a really interesting2501business. Now that company is public on National Association of2502Securities Dealers Automatic Quotation System (NASDAQ).2503    If we can grow the online capital formation space by2504increasing the caps and streamlining the way Reg A and Reg CF2505work together, we can get more businesses funded.2506    Mr. Lawler. I appreciate it.2507    With that, I yield back.2508    Chairwoman Wagner. The gentleman yields back.2509    The chair now recognizes the gentlelady from Michigan, Mrs.2510McClain, for 5 minutes.2511    Mrs. McClain. Thank you, Madam Chair.2512    Before I get started, I would like to enter for the record2513a letter from Engine, which is a nonprofit group advocating for2514tech startups.2515    Chairwoman Wagner. Without objection.25162517    [The information referred to can be found in the appendix.]25182519    Mrs. McClain. Thank you.2520    I am going to piggy-back a little bit off my colleague from2521New York, Mr. Lawler, in what we have been talking about.2522    I love economic growth. It is the backbone of our great2523country in which we live in. We must remember that it is our2524economic system that gives us our social programs. I find it2525sometimes ironic that some Members across the aisle from us are2526for growth, they are just not for public growth--they are only2527for public growth. They are not for growth in the private2528sector.2529    We have to do more to incentivize growth in the private2530sector, right? Not just the government, but--private sector is2531good. Entrepreneurship is good. That is what this country was2532built upon, so I am here to advocate for more private-sector2533growth that all Americans can participate in.2534    I have a little bit of experience. I have had a business2535for 35 years in the financial-planning sector. Just out of2536curiosity, with all of the departments that I had, anyone wants2537to guess where I had the most resources, in terms of people and2538money, what department maybe that was?2539    Think of maybe the processing. We did about 13 billion.2540Maybe the processing sector?2541    Ms. Pinedo. Legal and compliance.2542    Mrs. McClain. Compliance. Spot-on. Every year, right?2543    Now, I do agree regulation is needed. I would say2544guardrails are needed, right? At some point in time, we have to2545let the businesses run, right? We have to have a little bit of2546faith in people, and over-regulations do more harm than good on2547the consumer, because we want competition. Competition is good,2548right? It lowers the prices.2549    In order to achieve this economic growth and development,2550though, we need a strong and healthy capital formation. We have2551to get this, ideologically. If we are not allowed to invest in2552our future, my company would have never been able to survive.2553We have to reinvest. It is critical.2554    Ms. Pinedo, what are some of the most burdensome2555regulations that prohibit capital formation, in your opinion?2556    Ms. Pinedo. It is not so much that they prohibit capital2557formation as that they make being public less appealing than in2558past times. A lot of that is related to Sarbanes-Oxley 4042559attestations so that is certainly something. One of the bills2560under consideration which addresses SOX attestation for low-2561revenue issuers would be very helpful.2562    Another would be looking at the disclosure burdens and the2563standards for disclosures as it relates to different types of2564companies or companies of different sizes----2565    Mrs. McClain. Sure.2566    Ms. Pinedo [continuing]. so that disclosures are more2567rightsized, if you will. That would address whether companies2568that are smaller reporting companies or accelerated reporters2569and so on could address the disclosure burdens depending on2570their size. That would be another issue.2571    Likewise, a different but related issue that is not under2572consideration but probably ought to be is bringing back some of2573the ecosystem that once existed for companies that are public,2574and that would be addressing the regulation of research and2575addressing the regulations and the rules related to offering-2576related communications.2577    I mentioned that our smaller public companies and our2578medium-size public companies no longer benefit from being2579public. A large part of that is because of the lack of research2580and the lack of liquidity in their stocks.2581    Mrs. McClain. I think we would all agree that we have to do2582more to incentivize as opposed to disincentivize.2583    In my last few seconds, what can we do, in your opinion, to2584ease some of the compliance and disincentives? What could we do2585immediately, in your opinion?2586    Ms. Pinedo. Extending some of the JOBS Act benefits, which2587these bills do, would be a great start.2588    Mrs. McClain. Thank you.2589    With that, Madam Chair, my time has expired. I yield back.2590    Chairwoman Wagner. The gentlelady yields back.2591    The chair now recognizes the gentleman from Montana, Mr.2592Downing, for 5 minutes.2593    Mr. Downing. Thank you, Madam Chair.2594    First of all, I have a letter from Carta that I would like2595to submit for the record.2596    Chairwoman Wagner. Without objection.25972598    [The information referred to was not submitted prior to2599printing.]26002601    Mr. Downing. Thank you, Madam Chair.2602    I am really excited about the work we are doing on this2603committee. My previous job, I was the securities commissioner2604for the State of Montana, and one of our charges was capital2605formation. It was always an interesting project, because we2606have so much talent, so many entrepreneurs, and we also have2607money to try to find investments. Figuring out how to put the2608two together and do it within the regulatory framework, it was2609exciting work but obviously had its challenges.2610    Now, Mr. Conwell, according to the Small Business2611Administration, 99.3 percent of businesses in Montana are2612classified as small businesses and employ about 67 percent of2613Montanans.2614    Being a rural State and talking about the challenges that I2615had as a regulator, can you explain the challenges for rural,2616small businesses to find potential investors when they are2617located in places that lack any kind of capital-raising2618networks?2619    Mr. Conwell. That is a compounding issue. It is one of--if2620you are in a community like that, there are going to be less2621funding companies already, so there is less information, there2622are less people you can go to learn from.2623    When you are getting started, you start off just kind of2624fumbling off in the dark, running into walls, trying to figure2625out where to go, what is an investor.2626    Once you figure that out, then you start going out in your2627community like, ``Well, where are they?'' Then you realize at2628some point, ``I have to go to New York or California, and that2629is what it is.'' That is what we see time and time again.2630    Even though we talk about the coast--I am from Baltimore.2631My founders leave and go to New York all day, every day, all2632right? It is something that we see in all of these communities.2633    A lot of it is because--well, some of it is because the2634information is not as widely out there of, like, these are the2635other ways you can get capital, people sharing that in their2636communities. You need more demo days, those accelerators, all2637of that.2638    Then, also, incentivizing the folks there locally to2639participate, really the angel investors, at the early stages,2640getting people started. Having those individuals in your local2641community who know you, who believe in you, who have seen you2642grow, who have affinity with you, being able to put money2643behind you but with an incentive--tax credits, something like2644that--something to make people start thinking, ``Oh, like, this2645is a viable thing.''2646    I believe something like that will start to buoy2647communities and rural communities, and we have seen something2648like that in Maryland. We have an economic development2649corporation, TEDCO, that does outreach into our rural areas2650specifically to do things like this.2651    Mr. Downing. Right. Right.2652    Moving on, I have struggled in a life, raising money2653basically under Reg D exemptions, alternative investments, and2654with the ``accredited investor,'' criteria. It has always--it2655bugged me when I was on that side of it because it did not seem2656to really correlate to your ability to make a decision on2657taking risks.2658    I would think, if you were somebody inexperienced and2659uneducated who had a windfall, maybe you inherited some money,2660you are an accredited investor, but you could be a Ph.D. in2661economics and finance with $100,000 and you cannot invest that.2662It really limits folks that can participate in these.2663    I am going to go to Ms. Kacaba.2664    The current accredited investor standard limits investments2665in the private markets to individuals with an annual income of2666at least $200,000 or a net worth of over a million dollars. The2667median income in Montana is nearly $71,000, with only 8 percent2668of households making $200,000 or more.2669    We have discussed throughout this hearing that the overly2670restrictive ``accredited investor'' definition denies small2671businesses access to a large pool of investors. It is no2672surprise that the investors that typically meet this standard2673live in urban areas. I am coming from a very rural district.2674    Do you believe rural investors can be just as sophisticated2675as urban investors and should be allowed to more freely2676participate in private markets?2677    Ms. Kacaba. Absolutely, yes, and thank you for the2678question. I think that is a really important point.2679    They are looking to generate wealth creation. The rules2680that we have in front of us already prevent them from investing2681too much in any one offering, so the rules are properly2682structured for them already. We need to realize that, if we do2683not let them into the private markets, their money is going to2684go elsewhere. The private markets are well-regulated, and so2685they should be allowed to participate.2686    Mr. Downing. Thank you.2687    Can you maybe elaborate on or discuss how the current2688accredited investor standard unfairly denies rural investors2689growth in their retirement accounts, like a normal hardworking2690Montanan?2691    Ms. Kacaba. Yes, because they are limited in the offerings2692that they can get access to. Even some of the changes that we2693have advocated for--removing common control--would allow them2694access to investment in VC companies.2695    For example, there might be a VC with a portfolio of 102696companies, and they want to do follow-on investment in 1. Nine2697of those companies are excellent companies. They do not hit a269850-percent growth rate that a VC requires for follow-on2699investment, but maybe they are doing 35 percent. Lots of people2700in Montana could invest in that and make a good bit of money.2701    Mr. Downing. Awesome.2702    Thank you. I have run out of time but thank you for your2703responses.2704    Chairwoman Wagner. The gentleman yields back.2705    The chair now recognizes the gentleman from New York, Mr.2706Garbarino, for 5 minutes.2707    Mr. Garbarino. Thank you, Chairwoman. Thank you very much2708for holding this hearing today.2709    Before I start my questions, I would like to offer this2710letter from Scroobious, which talks about a virtual platform2711designed to connect early-stage founders, investors, and2712partners, for the record.2713    Chairwoman Wagner. Yes, so ordered.27142715    [The information referred to can be found in the appendix.]27162717    Mr. Garbarino. Thank you. Thank you, Chairwoman.2718    Business development companies, or BDCs, are an important2719source of capital to Main Street businesses, having a statutory2720mandate to invest in U.S.-based small and midsize companies.2721    However, the SEC has applied a rule, known as the acquired2722fund fees and expenses, to BDCs that presents a misleading2723picture of the true costs of investing in a BDC. Because of2724this, BDCs were excluded from certain indices--indexes, causing2725an outflow of institutional investor dollars in BDCs.2726    I am saying ``BDCs'' a lot.2727    I have put forward a bill recently that would fully exclude2728BDCs from the acquired fund fees and expenses (AFFE)2729requirement to fix this problem.2730    Ms. Pinedo, can you explain how the SEC's posture on AFFE2731has impacted BDCs, their investors, and portfolio companies?2732    Ms. Pinedo. Sure.2733    Just as you said, BDCs are filling an important gap. BDCs2734provide venture debt and other funds that banks are not2735providing to smaller and medium-sized businesses.2736    When the SEC changed its policy in 2006 to require the2737presentation of AFFE, it now requires the presentation in the2738fee table of an artificial and kind of inflated percentage of2739fees over a period of time, over a 1-, 3-, 5- and 10-year2740horizon. As you indicated, when that change became applicable,2741it triggered BDCs from falling out of a number of indices.2742Because so many institutional funds are index trackers, it2743meant that institutional investors moved out of investing in2744BDCs.2745    That meant that BDCs lost a tremendous amount of investor2746interest--in particular, institutional investor interest. We2747should be promoting investor interest in BDCs again, because2748BDCs provide capital to Main Street and provide capital and2749fill this gap that is no longer being served by banks. We2750should also be considering other important steps to modernize2751the regulation of BDCs.2752    I wholeheartedly support reversing the AFFE policy and in2753my written testimony provide a number of suggestions for2754modernizing the regulatory framework relating to BDCs.2755    Mr. Sherman. Will the gentleman yield?2756    Mr. Garbarino. I have to get through this. I am sorry.2757Thank you.2758    Mr. Sherman. Okay.2759    Mr. Garbarino. In your view, exempting BDCs from the AFFE2760requirement would result in more accurate disclosures to2761investors?2762    Ms. Pinedo. Yes, it would.2763    Mr. Garbarino. Okay. Great.2764    Alternative investments, which can include private credit2765real estate infrastructure, have shown value in recent memory.2766These vehicles help balance debts in portfolios, spur job2767growth, facilitate capital formation, and help provide more2768uniform investment returns for individuals.2769    What role do you see, Ms. Pinedo, the alternative2770investments playing in capital formation?2771    Ms. Pinedo. Alternative investments, including BDCs,2772interval funds, tender offer funds, target date funds--all of2773these different funds can provide an important role in capital2774formation in terms of supporting investments in other private2775funds and investing in securities of private companies.2776    Again, we should be looking at ways to enhance and promote2777retail investment opportunities in private funds and in2778modernizing the regulation of these regulated funds, as well as2779in looking at ways in which we can further extend the reach of2780a lot of these regulated funds so that they can offer fund2781interest not just to qualified clients but also to a broader2782range of investors.2783    Mr. Garbarino. Thank you.2784    You talked about regulatory modernization in your answer2785before about BDCs. Would you agree that regulatory2786modernization is necessary to provide greater options to2787qualified and accredited investors as well?2788    Ms. Pinedo. I do. I do think that is absolutely necessary.2789    I think we have talked a little bit about potential changes2790to the definition of ``accredited investor'' during today's2791hearing. Many of the measures I do support. In the context of2792BDCs in particular, the AFFE change is important.2793    I think many of the changes that--much of the relief that2794the Securities and Exchange Commission provided for BDCs during2795the pandemic, which did not sacrifice investor protection,2796should be extended and was important. Again, to the extent that2797BDCs are significant for capital formation, it would be helpful2798to extend it.2799    Chairwoman Wagner. The gentleman's time has expired.2800    Mr. Garbarino. Thank you.2801    Mr. Sherman. Madam Chair, I ask unanimous consent to put2802into the record a letter from the North American Securities2803Administrators Association.2804    Chairwoman Wagner. Without objection, so ordered.28052806    [The information referred to can be found in the appendix.]28072808    Mr. Sherman. I would also like to add to the record that2809the Business Development Company (BDC) bill is one that I2810introduced in the 116th, 117th, and 118th Congress and look2811forward to introducing----2812    Chairwoman Wagner. I love it when we can play well2813together----2814    Mr. Sherman. Yes.2815    Chairwoman Wagner.--across both aisles. Lovely, lovely.2816    I believe our last person to come forward with questions is2817our member, the gentleman from Tennessee, Mr. Ogles.2818    You are recognized for 5 minutes, sir.2819    Mr. Ogles. Thank you, Madam Chair.2820    Thank you to the witnesses. I know sitting here through the2821hearing is arduous, but we appreciate you being here, because2822the information you provide is valuable to us but also to the2823American people.2824    Mr. Barnell and Mr. Conwell, would you agree that over-2825regulation is a major barrier to entrepreneurial capital2826formation for American investors?2827    Mr. Barnell. Yes.2828    Mr. Conwell. Yes.2829    Mr. Ogles. I want to put a pin in that for a moment.2830    As we see the current Trump administration aggressively2831moving to try to rightsize government, as we see the Department2832of Government Efficiency (DOGE) initiative under Elon Musk2833digging and looking for areas of waste, there is only so much2834the American Government, the U.S. Government, can do to cut2835waste in spending. We have to do our jobs and that is tough but2836the future of our economy, the future of combating the $372837trillion in debt, and growing, is the American economy.2838    As we look at capital formation, the purpose of this2839committee, I want to ask the question: As we look to the2840future, capital formation, entrepreneurism, the future of2841saving the Republic, what role does the regulatory regime play2842in hindering that growth, that entrepreneurism, and, quite2843frankly, our future?2844    I will start with you, Mr. Barnell.2845    Mr. Barnell. What I will highlight--and I wholeheartedly2846agree that I think the foundation of our economy, job creation,2847innovation, it is all driven by startups.2848    I think one of the things that I highlighted in my written2849testimony is, ultimately, we do see, as we continue to grow,2850the requirement potentially ultimately to access to public2851markets. One thing I highlighted a little bit earlier was that2852the disclosure requirements, the regulatory requirements that2853go along with that, is a challenge. It is a real challenge from2854a cost perspective as well as from a compliance perspective.2855    That would be one thing that I would highlight that, as we2856continue to grow, would certainly be something that we would2857not want to hinder our ability to continue to save lives2858through our innovative technology and also drive job growth.2859    Mr. Ogles. Madam Chair, we saw in the last administration2860the weaponization of the government, whether it is the Justice2861Department or the regulatory agencies, against the American2862people, against industry, against businesses.2863    Again, I just to emphasize this role of getting regulation2864out of the way of the economy, getting regulation out of the2865way of those who want to start the next--the next whatever,2866right? The next Tesla, the next Facebook, the next whatever.2867Whatever is over the horizon that we cannot see and anticipate2868yet may very well be hindered by this regulatory regime that2869was put in place that is literally targeting the consumer by2870getting in the way of business.2871    Mr. Conwell.2872    Mr. Conwell. As I mentioned in my testimony, when I raised2873my fund, I raised $10 million, but I had been oversubscribed. I2874had gotten north of $30 million worth of interest. I turned2875away more than 200 investors who wanted to invest in my fund2876due to the limits, and I invested in 47 companies. Had I raised2877$30 million, I would have invested in over 100.2878    Because I am one of the earliest investors, I am typically2879the first investor in many of the companies. Like a company out2880of Memphis, Tennessee, Blank Beauty. It was a little company2881making this cool robot that would make custom nail polish.2882Their first customer was Walmart. What they did is they created2883a vending machine that will make you a custom nail polish.2884    Walmart also has this issue of people stealing things, and2885so they are putting stuff behind glass. They are looking to2886replace that glass with this really cool, fun, innovative robot2887that is increasing sales and getting more people in the door2888from a little company out of Memphis, Tennessee, that nobody2889had ever heard of or seen. I was the one to seed them and made2890sure that this could be a thing.2891    Mr. Ogles. As someone who is a Congressman from Tennessee,2892we thank you for investing in our economy and the job growth,2893et cetera.2894    I am running low on time, so I will catch the next two2895ladies really quickly.2896    Ms. Kacaba.2897    Ms. Kacaba. Yes.2898    Mr. Ogles. Go ahead.2899    Ms. Kacaba. Yes, I think the points you are raising are2900incredibly important. There are so many companies like Mr.2901Conwell highlighted that DealMaker backs and funds in rural2902jurisdictions.2903    The written submission that we have submitted is just to2904get some of the regulations out of the way so that we can do2905more. If there are different nuances made--if the caps are2906improved, if 5110 is removed--there are different ways that we2907can get more entrepreneurs funded, more jobs created.2908    Mr. Ogles. Madam Chair, imagine that: Less government is2909better.2910    Ms. Pinedo, the last word.2911    Ms. Pinedo. For all the reasons we discussed today, I2912support the bills that have been introduced.2913    Mr. Ogles. Madam Chair, we thank you for your time, your2914leadership, and I yield back.2915    Chairwoman Wagner. The gentleman yields back.2916    Last but not least, just under the wire, the gentleman from2917Massachusetts, Mr. Lynch, is recognized for 5 minutes.2918    Mr. Lynch. Thank you, Madam Chair. I appreciate it.2919    As Mr. Barnell mentioned in his opening statement, he2920talked about the fact that 90 percent of startups fail. As2921Congress sees it, we question, should we allow more people to2922get into that--to invest in something where 90 percent fails?2923Should we allow small pension funds or individuals who might be2924investing their life savings or their retirement in an area2925where we are going to see 90 percent failure?2926    That is what troubles us. We do want to energize and2927finance startups, because, as the ranking member has said, all2928you need is that 10 percent that succeeds, and you can change2929the world, right? We are trying to manage this balance.2930    Ms. Thornton, are we doing that properly now? Are we2931protecting small investors? Would an expansion of ``accredited2932investor'' and opening up to a wider group be in the best2933interest overall of American investors?2934    Ms. Thornton. I think your concerns are well-placed, about2935expanding who can invest in the private markets, because of a2936couple of things.2937    First of all, there is no mandated disclosure in private2938markets, so even if you were a sophisticated investor, you2939would not know that much about these companies. In addition, in2940the public markets, information is disclosed publicly, a lot of2941information, and market participants analyze it, and there are2942all kinds of other market participants that help investors2943understand that company.2944    The other big thing that I would be very concerned about is2945just that, if you expand it beyond the current people who2946invest in the private markets, you could be talking about2947people who have investment savings that they are planning on2948using for retirement. You could have pensions that have their2949rules replaced with allowing them to invest more in alternative2950investments. You could really see--these are very highly risky2951markets, and you could really see harm to people's retirement2952savings. It could be truly harmful to them.2953    Mr. Lynch. Yes.2954    The other thing I worry about, as you have mentioned, is2955pension funds. I think 67 percent of investments in private2956equity come from pension funds. It is the same thing with the2957hedge fund investors, I think somewhat less. Maybe 30 percent2958of the inflow on hedge funds is coming from pension funds as2959well.2960    We have seen some situations where in recent collapses--I2961think it was one of--I think it might have been Silicon Valley2962Bank where California Public Employee's Retirement System2963(CalPERS)----2964    Ms. Thornton. Yes.2965    Mr. Lynch [continuing]. the California pension fund, was2966significantly invested in that, and it went south.2967    The level of transparency that we would like to see and2968availability of that information to the public is just not2969there. It is just not there at all.2970    Ms. Thornton. Yes.2971    Mr. Lynch. Are there steps that we could take to rebalance2972this in a way that does not choke off investment, meaningful2973investment, to startups and other high-risk but worthy2974investments and yet give people an opportunity to, over the2975long term, earn sufficient interest on their pension fund2976savings?2977    Ms. Thornton. I really think that the main thing is to get2978the big companies out of the private markets, to force them to2979comply with the public disclosure framework. There will then be2980more diversity in the public markets, by the way. Then the2981private markets will be better equipped for what they are2982appropriate for, which is small companies, small businesses and2983startups, that need long-term capital that is quiet, that are2984not worried so much about losing all their money.2985    Mr. Lynch. What was your position on the private fund2986advisor rule that the SEC had proposed?2987    Ms. Thornton. I thought that was a very well-done rule. I2988thought it was really important, because----2989    Mr. Lynch. Okay.2990    Ms. Thornton [continuing]. right now, investors are not2991getting good advice. They cannot be sure that they are. Let us2992put it that way, I thought there was some--they may be paying2993higher fees. They may be paying hidden fees that they are not2994aware of.2995    Mr. Lynch. Okay.2996    Madam Chair, thank you for your courtesy, and I yield back.2997    Chairwoman Wagner. The gentleman yields back.2998    I just want to thank all of our witnesses for their2999testimony today. We certainly had very robust participation by3000our members, which I am always glad and heartened to see.3001    Without objection, all members will have 5 legislative days3002to submit additional written questions for the witnesses to the3003chair. The questions will be forwarded to the witnesses for his3004or her response.3005    Witnesses, please respond no later than March 31, 2025.30063007    [The information referred to can be found in the appendix.]30083009    Chairwoman Wagner. This hearing stands adjourned.30103011    [Whereupon, at 12:19 p.m., the subcommittee was adjourned.]30123013                                APPENDIX30143015                              ----------30163017                   MATERIALS SUBMITTED FOR THE RECORD30183019[GRAPHIC(S) NOT AVAILANLE IN TIFF FORMAT