Empowering Entrepreneurs: Removing Barriers to Capital Access for Small Businesses (February 8, 2023)
Summary
Transcript of the hearing Empowering Entrepreneurs: Removing Barriers to Capital Access for Small Businesses, before the Subcommittee on Capital Markets of the Committee on Financial Services, U.S. House of Representatives, on February 8, 2023 (Serial No. 118–4). The witnesses came from RareBreed Ventures, Ellenoff Grossman & Schole LLP, WorkTorch, KCRise Fund and the Center for American Progress. Material submitted for the record includes written statements of the National Venture Capital Association (NVCA), the Small Business Investor Alliance (SBIA) and the Center for American Entrepreneurship. Written responses to questions for the record from Deborah Gladney and McKeever E. Conwell II are also included.
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“Empowering Entrepreneurs: Removing Barriers to Capital Access for Small Businesses (February 8, 2023).”
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EMPOWERING ENTREPRENEURS:
REMOVING BARRIERS TO CAPITAL
ACCESS FOR SMALL BUSINESSES
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
FEBRUARY 8, 2023
Printed for the use of the Committee on Financial Services
Serial No. 118–4
(
U.S. GOVERNMENT PUBLISHING OFFICE
52–359 PDF WASHINGTON : 2023
HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK MCHENRY, North Carolina, Chairman
FRANK D. LUCAS, Oklahoma MAXINE WATERS, California, Ranking
PETE SESSIONS, Texas Member
BILL POSEY, Florida NYDIA M. VELÁZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
ANN WAGNER, Missouri DAVID SCOTT, Georgia
ANDY BARR, Kentucky STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas AL GREEN, Texas
FRENCH HILL, Arkansas EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio JUAN VARGAS, California
JOHN ROSE, Tennessee JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York RITCHIE TORRES, New York
YOUNG KIM, California SYLVIA GARCIA, Texas
BYRON DONALDS, Florida NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska WILEY NICKEL, North Carolina
MIKE LAWLER, New York BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee
MATT HOFFMANN, Staff Director
(II)
SUBCOMMITTEE ON CAPITAL MARKETS
ANN WAGNER, Missouri, Chairwoman
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California, Ranking
PETE SESSIONS, Texas Member
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
FRENCH HILL, Arkansas DAVID SCOTT, Georgia
TOM EMMER, Minnesota JUAN VARGAS, California
ALEXANDER X. MOONEY, West Virginia JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin VICENTE GONZALEZ, Texas
DAN MEUSER, Pennsylvania SEAN CASTEN, Illinois
ANDREW GARBARINO, New York, Vice WILEY NICKEL, North Carolina
Chairman STEPHEN F. LYNCH, Massachusetts
MIKE LAWLER, New York EMANUEL CLEAVER, Missouri
ZACH NUNN, Iowa
ERIN HOUCHIN, Indiana
(III)
CONTENTS
Page
Hearing held on:
February 8, 2023 .............................................................................................. 1
Appendix:
February 8, 2023 .............................................................................................. 35
WITNESSES
WEDNESDAY, FEBRUARY 8, 2023
Conwell, McKeever E. II, Founder and Managing Partner, RareBreed Ven-
tures ...................................................................................................................... 5
Ellenoff, Douglas, Partner, Ellenoff Grossman & Schole LLP ............................. 6
Gladney, Deborah, CEO and Co-Founder, WorkTorch ......................................... 8
Howe, Darcy A., Founder and Managing Director, KCRise Fund ....................... 10
Thornton, Alexandra, Senior Director, Center for American Progress ............... 11
APPENDIX
Prepared statements:
Conwell, McKeever E. II .................................................................................. 36
Ellenoff, Douglas ............................................................................................... 41
Gladney, Deborah ............................................................................................. 49
Howe, Darcy A. ................................................................................................. 51
Thornton, Alexandra ........................................................................................ 53
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
Wagner, Hon. Ann:
Written responses to questions for the record submitted to Deborah
Gladney .......................................................................................................... 60
Garbarino, Hon. Andrew:
Written statement of the National Venture Capital Association (NVCA) ... 61
Written statement of the Small Business Investor Alliance (SBIA) ............ 63
Houchin, Hon. Erin:
Written responses to questions for the record submitted to McKeever
E. Conwell II ................................................................................................. 65
Lawler, Hon. Mike:
Written responses to questions for the record submitted to Deborah
Gladney .......................................................................................................... 70
Meuser, Hon. Dan:
Written statement of the Center for American Entrepreneurship ............... 72
Written statement of the U.S. Chamber of Commerce .................................. 74
Waters, Hon. Maxine:
‘‘An Iowa Farmer Tried to Dodge Stock-Market Turmoil. It Cost Him
$900,000.’’, dated January 13, 2023 ............................................................ 78
North American Securities Administrators Association (NASAA) Report
and Recommendations for Reinvigorating Our Capital Markets,’’ dated
February 7, 2023 ........................................................................................... 84
Written statement of Public Citizen ............................................................... 138
Ellenoff, Douglas:
U.S. Securities and Exchange Commission’s Office of the Advocate for
Small Business Capital Formation’s Annual Report Fiscal Year 2022 .... 143
(V)
EMPOWERING ENTREPRENEURS:
REMOVING BARRIERS TO CAPITAL
ACCESS FOR SMALL BUSINESSES
Wednesday, February 8, 2023
U.S. HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON CAPITAL MARKETS,
COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:05 p.m., in room
2128, Rayburn House Office Building, Hon. Ann Wagner [chair-
woman of the subcommittee] presiding.
Members present: Representatives Wagner, Lucas, Sessions,
Huizenga, Hill, Emmer, Mooney, Meuser, Garbarino, Lawler,
Nunn, Houchin; Sherman, Vargas, Gottheimer, Casten, Nickel,
Lynch, and Cleaver.
Ex officio present: Representative Waters.
Chairwoman WAGNER. The Subcommittee on Capital Markets
will come to order.
Without objection, the Chair is authorized to declare a recess of
the subcommittee at any time.
Today’s hearing is entitled, ‘‘Empowering Entrepreneurs: Remov-
ing Barriers to Capital Access for Small Businesses.’’
I now recognize myself for opening remarks.
Eleven years ago, the Jumpstart Our Business Startups (JOBS)
Act of 2012 was enacted into law by a divided Congress, with the
intention of increasing access to capital for small businesses and
entrepreneurs in the United States. The purpose of the JOBS Act
was to provide greater opportunities for small business owners and
entrepreneurs to grow their companies and create jobs in their
communities.
Despite the successes of the JOBS Act, there are still significant
regulatory barriers that impede the growth of small businesses and
hinder the competitiveness of job growth in the United States.
Small businesses, which make up 99 percent of all enterprises and
employ almost half of the U.S. workforce, are disproportionately af-
fected by these barriers. The lack of access to capital makes it chal-
lenging for small business owners to grow and expand their compa-
nies, which can limit job creation and, of course, economic growth.
For this reason, I am thrilled to convene this hearing today and
to discuss policy reforms that will reduce the obstacles and improve
access to capital for small and private businesses and entre-
preneurs across the country, not just in the financial centers on our
nation’s coasts but in every State.
(1)
2
The decline in small business loan approval rates from 81 per-
cent before the COVID-19 pandemic to 68 percent in 2021 under-
scores the importance of maintaining and enhancing our private
markets as a viable option for small business capital needs.
If we limit access to capital in our private markets, as SEC Chair
Gensler intends to do, where will small businesses turn for fund-
ing, considering the decrease, in particular, in loan approval rates?
The need for access to capital is critical, and small businesses must
have options available to them to secure the funding they need to
grow and create jobs.
Republicans on this committee believe that entrepreneurs and
founders should raise money with as little friction as possible. As
a result, Congress and regulators must adopt common-sense, for-
ward-thinking policies that reduce barriers and increase access to
capital, raising opportunities for American entrepreneurs.
The proposed legislation that we are discussing today will lead
to increased competitiveness and more opportunities for companies
on Main Street to thrive. Healthy public and private markets can
coexist, and we should work together to pursue policies that make
both markets attractive places to raise capital and spur economic
growth.
As the Chair of this subcommittee, I am eager to tackle these
regulatory barriers that prevent small businesses and entre-
preneurs from accessing capital. Today’s proposals will enable all
entrepreneurs, including those who have been overlooked and un-
derserved, to create jobs and grow their businesses, regardless of
their background or location. Our goal is to ensure that small busi-
ness owners and entrepreneurs have the resources they need to
succeed and create jobs in their communities.
In conclusion, the JOBS Act of 2012 was a step in the right di-
rection, but there is still much work to be done to improve access
to capital for small businesses and entrepreneurs. The regulatory
barriers that exist must be addressed and policy reforms must be
implemented to reduce these obstacles and enhance access to cap-
ital. This will enable small businesses to grow and create jobs, con-
tributing to the overall economic growth and competitiveness of the
United States.
I am committed to working with my colleagues in this sub-
committee to achieve these goals and to make the American Dream
a reality for entrepreneurs.
The Chair now recognizes the ranking member of the sub-
committee, Mr. Sherman, for 5 minutes for an opening statement.
Mr. SHERMAN. I’m glad we are having this hearing, our second
hearing today. I am a little jealous of Chairwoman Wagner, for she
is in a situation where she is allowed to hold two hearings in one
day. Sometimes, you are not allowed to hold two hearings in the
same month, under some circumstances.
We are talking about removing barriers to private placements
and small businesses. Keep in mind that sometimes barriers are
good, and sometimes they are not. We are always told the barrier
prevented you from investing in Apple. Maybe it prevented you
from investing in Pear, Banana, or Kumquat.
And when a barrier successfully prevents an investor from in-
vesting in a bad or fraudulent investment or an investment where
3
there is not enough information to evaluate it, that is not just good
for that one investor, it is good for our overall capital markets. The
willingness of Americans to invest is dependent upon the protec-
tions they enjoy.
And our present system is not working all that poorly when the
private placement market raised $4.45 trillion from July 1, 2021,
to June 30, 2022, and it did so without the biggest frauds and dis-
asters that we are aware of coming to mind. I remember when the
biggest failures were WorldCom and Enron. Today, the biggest fail-
ures or most famous ones that come to mind are FTX and Luckin
Coffee, not subject to U.S. regulation. If you send your money to
China, or you send your money to the Bahamas, you cannot then
complain that Gary Gensler did not protect you.
We should be drafting statutes that help genuinely small busi-
nesses. When people in my district think of small businesses, they
think of Casa Vega on Ventura Boulevard, not some company with
a $2-billion capitalization. That doesn’t mean we shouldn’t draft
statutes that help medium-size businesses, but we shouldn’t paint
a picture of a pizzeria and then draft a bill for a $2 billion enter-
prise. We need the right picture when we are drafting the bill.
As I think all of you know, I am old. Even before I came to Con-
gress, I was in the business world as a CPA and attorney. And
back then, banks lent money to small businesses even when there
was a chance of failure and without taking a note on the owner’s
home. They would make a prime plus 3, a prime plus 4, or a prime
plus 5 loan, and that was a fair loan because that loan had a 4 or
5 percent chance of a default. The business might have a 4 to 5
percent chance of failing. And if that were to happen, the bank
might recoup only half of the money that it lent.
Today’s bank examiners won’t let you do that, so banks, the tra-
ditional way a small business gets financed, aren’t available. I
made that point in this room, not at our hearing but at our Finan-
cial Institutions and Monetary Policy Subcommittee hearing this
morning. What we need is for our banks to able to have a portion
of their loans, a portfolio with some risk of default and some risk
of loss.
A second source of capital is a small business investment com-
pany. Last year, along with Mr. Huizenga, I introduced a bill that
would help those companies get capital and then put their capital
into small businesses. Due to a quirk, investment index mutual
funds can’t really invest in business development companies
(BDCs) because of the way the SEC defines the expenses of the
mutual fund that is making the investment.
BDCs are a vital source of capital to the genuinely small busi-
ness. We are going to reintroduce this legislation. We are looking
for cosponsors who want to be originals. We will probably reintro-
duce it tomorrow. It is the Access to Small Business Investor Cap-
ital Act.
I am told that between the two hearings today, and the one we
will do in early March, that we will be considering 30 bills, includ-
ing discussion drafts. As far as I know, the Access to Small Busi-
ness Investor Capital Act will be the only one that has an official
Democratic chief author, although I am thrilled to have Mr.
Huizenga working with me on the bill. And I am hoping that we
4
won’t just be talking about 30 bills, but even more with Democratic
chief authors.
I look forward to working with you both in the morning and the
afternoon to have a balanced approach to making more rational our
private offerings, not with the goal of reducing or increasing regu-
lation, but making it more rational.
I yield back.
Chairwoman WAGNER. Thank you, Ranking Member Sherman.
We have offered, after the notification of this hearing, bills to be
put forward for consideration. I am sure there will be a lot of Dem-
ocrat co-leads on many of our bills. So, we look forward to working
together. And I promise I will make you work morning and after-
noon, but rarely nights. So, here we are.
I want to welcome our witnesses. First, we are going to hear
from Mr. Mac Conwell. Mr. Conwell is the founder and managing
partner of RareBreed Ventures, an emerging venture capital (VC)
fund located in Baltimore, Maryland. Mr. Conwell is a former soft-
ware engineer and two-time founder. When he started his first
fund, he did not have a network of limited partners, so he raised
money on Twitter under the Rule 506(c) reforms implemented by
the JOBS Act of 2012. Welcome.
Second, Mr. Doug Ellenoff—a regular here, I believe—is a part-
ner with Ellenoff Grossman & Schole LLP. His practice focuses
mostly on business transactions, mergers and acquisitions, and cor-
porate financings. During his career, he has represented numerous
broker-dealers, venture capital investor groups, and many corpora-
tions involved in the capital formation process. Welcome.
Third, Ms. Deborah Gladney is the CEO and is co-founder of
WorkTorch. Ms. Gladney is an entrepreneur with more than a dec-
ade of experience designing communication strategies and pro-
grams. Prior to co-founding WorkTorch, an education tech company
in Wichita, Kansas, she managed stakeholder engagement, media
relations, reputation management, and strategic positioning for cor-
porations and nonprofit organizations. Welcome.
Fourth, Ms. Darcy Howe—who now hails from Kansas City, Mis-
souri, but she used to be a constituent of mine in Kirkwood, Mis-
souri—is the founder and managing director of the KCRise Fund.
Ms. Howe has been an angel investor for 20 years. She is a found-
ing member of a private banking and investment group of Merrill
Lynch in Kansas City, which grew from 30 advisers to 350, with
$240 billion in assets under management and over $1 billion in
revenue before her retirement in 2015. She started KCRise Fund
after recognizing the need for local economic growth in middle-in-
come areas in the greater Kansas City region. Welcome.
And finally, Ms. Alexandra Thornton is the senior director of Tax
Policy with the Center for American Progress. Prior to joining the
Center for American Progress, she worked as the executive vice
president for policy, planning, and business affairs at the Jane
Goodall Institute, and was a tax policy adviser to a U.S. Senator
who served on the Senate Finance Committee, where she provided
counsel on trade, banking, and securities issues.
I want to thank all of you for taking the time to be here. Each
of you will be recognized for 5 minutes to give an oral presentation
5
of your testimony. We are going to have a tight gavel here today,
so pay attention to the clock, please.
And without objection, each of your written statements will be
made a part of the record.
Mr. Conwell, you are now recognized for 5 minutes for your oral
testimony.
STATEMENT OF MCKEEVER E. CONWELL II, FOUNDER AND
MANAGING PARTNER, RAREBREED VENTURES
Mr. CONWELL. Thank you. Chairwoman Wagner, Ranking Mem-
ber Sherman, and members of the subcommittee, thank you for the
opportunity to testify today on the importance of creating better ac-
cess to capital for both entrepreneurs and those who fund their
amazing companies.
My name is McKeever Edward Conwell II, and I am the founder
and managing partner of RareBreed Ventures, or RareBreed, which
I am representing today. RareBreed is a venture capital, or VC,
firm that invests in and supports innovative startups in the ear-
liest stages.
I want to first say that I am here to address the much-needed
Improving Capital Allocation for Newcomers (ICAN) Act, due to my
personal experience in raising a fund and my expertise, but I am
in full support of all seven bills being addressed today.
In 2020, I launched RareBreed Ventures as a response to the
lack of access to capital for founders of color and founders outside
of major investment hubs, as well as a response to a lack of cul-
tural competency from many VCs when it came to investing in
founders who didn’t look like them or didn’t come from similar
backgrounds.
These two issues came to me in the form of Shawna Stepp-Jones,
a Black single mother from Baltimore who was creating a dryer for
wigs. I immediately got what she was creating, but other investors
didn’t. So after 3 years of getting noes from folks who didn’t look
like her, she decided the only way for her to get access to capital
was to become a surrogate mother, even knowing that Black
women are 3 times more likely to die from pregnancy-related
causes.
This is why I started RareBreed Ventures, but I didn’t have a
network of wealthy folks to raise the funds from, so it forced me
to get creative and use two regulations to help. The first was Rule
506(c) of Regulation D, which allows for public solicitation of a
fund’s offering, but requires that every investor in that fund be an
accredited investor. And the second was an amendment to Section
3(c)(1) of the Investment Company Act of 1940, which allows a fund
of $10 million or less to have up to 250 investors instead of 100.
The first regulation allowed me to use social media, Twitter
mainly, to meet with many potential investors. Thanks to this, I
was able to have 1,128 meetings in my first 90 days and more than
4,000 meetings in total. The second regulation allowed me to offer
investors to invest as little as $10,000, compared to the $100,000
I would have had to ask them to invest before the amendment.
This led to me having 194 investors in RareBreed. Of these in-
vestors, 83.5 percent invested $50,000 or less. Many of these inves-
tors are people of color and/or first-time investors in a fund, be-
6
cause they hadn’t had access to make such an investment or
couldn’t risk the high minimum threshold for funds. This means
that before, they were limited to investing in companies either di-
rectly, where there is a much higher risk of them losing all of their
money, or investing in stocks of publicly-traded companies, which
the average venture fund has historically outperformed, according
to the Harvard Business Review.
But unfortunately, without the ICAN Act, almost all of these
small-dollar investors, who make up 83 percent of our investors,
will not be able to invest in RareBreed Ventures Fund II, that is
162 out of 194 investors, since our new minimum will have to be
at $250,000 or more.
The current rules limit the amount of capital and sources of cap-
ital for small and new investment funds, leading to less capital to
help drive innovation, economic growth, and job creation, especially
when we are talking about companies started by founders of color,
because we know that, in particular, Black-led funds are 4 times
more likely to invest in Black-led companies. Also, keeping in mind
that almost all of the Black-led venture funds in America would fit
under the new rules of the ICAN Act, because most of us have
funds that are less than $150 million.
With the ICAN Act, such limiting factors would be greatly re-
duced, allowing more accredited investors to have opportunities to
participate in the asset class. With lower minimums, investors can
potentially invest smaller amounts of money into more VC funds
to spread out their risk and better diversify their investments.
Today, many funds have to turn away investors because of these
current limits. This results in the loss of millions of dollars in po-
tential funding for future innovation and job creation, while also
excluding investors from being able to truly diversify their own in-
vestments and limiting their ability to wealth creation.
Even more so, those who do have enough wealth to continue to
participate in the venture asset class are almost exclusively from
a non-diverse population. This only serves to further widen the ra-
cial and gender wealth gap here in America and puts limits on the
types of innovation we see in this country.
In conclusion, I am excited to see Congress working through
issues that impact access to capital and drive innovation. As some-
one who has spent my entire career in venture capital as an advo-
cate for access to capital and reducing barriers, I look forward to
supporting and assisting this committee in any way possible.
Thank you for the opportunity to testify today, and I look for-
ward to your questions.
[The prepared statement of Mr. Conwell can be found on page 36
of the appendix.]
Chairwoman WAGNER. And we thank you.
Mr. Ellenoff, you are now recognized for 5 minutes to give your
oral testimony.
STATEMENT OF DOUGLAS ELLENOFF, PARTNER, ELLENOFF
GROSSMAN & SCHOLE LLP
Mr. ELLENOFF. Good afternoon, Chairwoman Wagner, Ranking
Members Sherman and Waters, and members of the Capital Mar-
7
kets Subcommittee. It is a pleasure to be a part of this important
hearing.
I was last here in front of this subcommittee on September 11,
2019, for the hearing examining private market exemptions as a
barrier to IPOs and retail investment. There have been significant
developments in the capital market since, and we are now back to
an environment where entrepreneurs need further assistance from
Congress. I trust that you will seriously consider the proposed bills,
all of which I support.
My name is Doug Ellenoff. I am a partner in the New York-based
law firm of Ellenoff Grossman & Schole. I am a corporate and secu-
rities lawyer and have been practicing for over 35 years. My law
firm has been in business for more than 30 years, has nearly 130
lawyers, and we are regularly one of the top 10 IPO law firms in
the country, and we do an equal number of other types of
financings. We are market leaders in several alternative finance
programs, including crowdfunding, special purpose acquisition com-
panies (SPACs), private investments in public equity (PIPEs), and
registered directs.
I have spent nearly 10 years after the passage of the JOBS Act
working with the leadership of the crowdfunding movement, trav-
eling extensively domestically and abroad, including dozens of trips
to D.C., to provide our views on the proposed and final Regulation
Crowdfunding and various JOBS Act rules and regulations.
I am legal advisor to the Association of Online Investment Plat-
forms, the leading voice in D.C. for the industry. I am also a co-
founder of two legal technology companies catering to the broader
crowdfunding industries, one called LawCloud and the other called
GUARDD.
My comments are my own and not on behalf of my firm, my cli-
ents, or the associations with which I am affiliated.
Given today’s volatile market conditions where capital is scarce
for entrepreneurs, not unlike the period right before an overwhelm-
ingly-bipartisan congressionally-enacted JOBS Act, the timeliness
of today’s hearing is more important than it has been in the last
decade.
According to the data published by Crowdfund Capital Advisors,
from the inception of crowdfunding in 2015, to 2019, my last testi-
mony here, there was $193 million raised in the aggregate. From
2019 until today, $1.4 billion has been raised. That is a sevenfold
increase, which clearly demonstrates the commercial acceptance
and viability of what Congress collectively put into motion in 2012
with the JOBS Act.
There have been over 4,300 funded transactions, 3,500 just since
2019. We have empowered a nationwide footprint of entrepreneurs
to access capital to fund their American Dreams and create jobs,
several of whom are with us. And it is exciting to meet them and
see their vision come into reality, quite frankly.
We have created 225,000 jobs. Although the studies are limited,
the data indicates that of these funded transactions, 55 percent of
them have at least one woman or minority founder, have an 81 per-
cent success rate, and represent nearly 48 percent of all capital
raised.
8
We can all be very pleased with the results of crowdfunding,
which would not have been implemented without the support of all
constituents represented here. Regulators were decidedly uncom-
fortable with the idea of crowdfunding, and many of their stated
concerns did not materialize.
Had we not proceeded and acted together, our economy wouldn’t
have benefited and, more importantly, these entrepreneurs would
not have been funded and been able to hire employees. It is a won-
derful example of Congress taking action that has had a very posi-
tive real world impact.
On a personal note, since my last testimony, my fellow panelist,
Renee Jones, left her professorship at Boston College Law School
to be appointed Director of the Division of Corporation Finance at
the Securities and Exchange Commission; and Mike Piecek finished
his time as head of the Department of Financial Regulation of the
State of Vermont to be elected as the State’s Treasurer.
As you might suspect, I am a little disappointed that my status
remains unchanged, but I remain hopeful that my testimony here
today may have a similar impact on my professional resume as it
has for my esteemed colleagues.
I look forward to sharing my views on many of the proposals that
will be discussed at today’s hearing, and I thank Chairman
McHenry for hosting this important hearing today. Thank you.
[The prepared statement of Mr. Ellenoff can be found on page 41
of the appendix.]
Chairwoman WAGNER. And we thank you.
Ms. Gladney, you are now recognized for 5 minutes to give your
oral testimony.
STATEMENT OF DEBORAH GLADNEY, CEO AND CO-FOUNDER,
WORKTORCH
Ms. GLADNEY. Chairwoman Wagner, Ranking Member Sherman,
and members of the subcommittee, thank you for the opportunity
to appear here today.
My name is Deborah Gladney, and I am the CEO and co-founder
of WorkTorch. We are a career platform for service workers based
in the heartland of Wichita, Kansas. I am honored to be here today
with my sister and co-founder sitting right behind me, Angela
Muhwezi-Hall, and to be present for such a critical agenda that im-
pacts entrepreneurs like us from across the country.
When we started our company at the peak of the pandemic, we
had no idea our company would take us to the places we have
been, help the people we have helped, or allow us to see the things
we have seen, things such as the extreme disparities in access to
resources and capital amongst entrepreneurs.
Last year, startups with all-women founding teams like ours re-
ceived just 1.9 percent of all venture dollars. And as Black found-
ers, we received just a mere 1 percent. As if the odds aren’t stacked
up against us enough, 75 percent of all venture capital investments
go to just three metro areas, and I can promise you that Wichita,
Kansas, isn’t one of them.
According to the data, my sister and I, as Black women founders
in Kansas, should not be here in front of you today. What made
the difference, you ask? We had our first example of hard work
9
from our parents. They came to this country from Uganda and
worked hard to obtain their doctorate degrees, all while raising
their five children, with no support or generational infrastructure
built in this country.
They were our first example of what it means to be an entre-
preneur, to build something out of nothing, to be scrappy and resil-
ient, even if you are told no a hundred times a day, to take risks,
even if it means leaving what feels comfortable, for the chance at
building something big, even if it means me walking away from a
comfortable salary while 8 months pregnant to build WorkTorch, or
even if it means my sister leaving an esteemed university in beau-
tiful Los Angeles to live in my basement with her husband as we
built our company.
We did it because we knew building WorkTorch not only had the
power to change our lives but the lives of service workers and their
families. Every single day, our company helps people find fulfill-
ment in life while being rewarded for what they do. But without
our parents’ example, I don’t think my sister and I would have
made it this far.
When we started WorkTorch, we had no connections or family or
friends we could lean on for capital. We cold-pitched 379 investors,
and we received 379 noes. We had to pull money from our own
401(k)s to build our product. But with our little money, we created
a platform that garnered over 1,000 users in the first few weeks
without receiving a dollar from anyone.
The scrappiness our parents taught us is what got us to the point
of eventually becoming the first Black women in Kansas to raise
over $1 million in venture funding. But we also had to come to the
table with twice as much to often receive twice as less.
It is also hard for us to be proud of the fact that in 2023, we are
still seeing a lot of firsts for minority and rural entrepreneurs. Ac-
cess to capital is literally stunting the ability of many businesses
like ours to grow, and this is why today’s proposed bills are so im-
portant.
Wouldn’t it be great if more people who looked like me could in-
vest in more people who look like me? The simple fact of the mat-
ter is that who gets funded depends a great deal on who is doing
the investing. As a nation, we know the benefits of encouraging en-
trepreneurship across backgrounds. We create jobs, we spark inno-
vation, and we allow America to maintain its position as the most-
competitive nation on the planet.
So it is in our nation’s best interest to foster more firsts like my
sister and I and create more seconds and thirds and fourths and
beyond to where we won’t even have to count anymore. It is my
hope you will be on the right side of entrepreneurial history today,
and I look forward to your questions.
[The prepared statement of Ms. Gladney can be found on page
49 of the appendix.]
Chairwoman WAGNER. Thank you, Ms. Gladney. I am so glad
that you and your sister are here with us today. Congratulations.
Ms. Howe, you are now recognized for 5 minutes to give your oral
testimony.
10
STATEMENT OF DARCY A. HOWE, FOUNDER AND MANAGER
DIRECTOR, KCRISE FUND
Ms. HOWE. I have heard this story a lot, and I am still
verklempt.
Chairwoman Wagner, Ranking Member Sherman, and distin-
guished members of the Subcommittee on Capital Markets, I am
Darcy Howe from America’s heartland, Kansas City, Congressman
Cleaver’s territory—go Chiefs—and I have seen barriers to capital
access firsthand.
As Deborah said, 75 percent of the venture capital to invest in
technology startups comes from three States: California; New York;
and Massachusetts. There are bold, innovative ideas to solve busi-
ness and societal challenges in every county in this country, and
they have gone unfunded, and that was a contributor to the slow
economic growth of my region in Kansas City.
In 2015, Kansas City business leaders realized that after the
2008 downturn, we did not bounce back as well as peer cities like
Indianapolis and Nashville. Many in our community set out to
bring solutions to the region. And my volunteer assignment was to
understand what was happening in entrepreneurship.
What I learned was that 70 percent of all net new jobs in the
Kansas City area come from someone who is starting a business:
70 percent. But those starting high-growth technology businesses
were leaving the area because capital was on the coast. Further,
I learned that most rural entrepreneurs, people of color, and
women were not getting funded at all.
So, what did we do to bring inclusive capital to Kansas City?
With friends, we started an angel investing group to invest in
women-led businesses called Women’s Capital Connection. Then, I
decided to retire from a successful 32-year career as a wealth man-
ager and devote these past 6 years to raising capital and funding
amazing innovators like Deborah and Angela in our region through
the KCRise Fund.
Illustrating success when capital and innovators are connected,
in 6 years, the 46 portfolio companies in our fund have created
more than 1,000 jobs at an average wage of $98,000. And, by the
way, the average wage in Kansas City is $45,000, which is our
starting wages. If our 46 companies were one company, we would
now be the 40th largest company in our region, and virtually none
of these thousand jobs even existed 7 years ago.
In the past 3 years, 62 percent of our investments included at
least one founder from at least one underrepresented demographic.
Fifty-one percent of the employees—people think about founders,
but think about the employees’ generational wealth that they are
building in skills—of our portfolio companies came from an under-
represented demographic. These inclusive statistics far exceed
coastal venture-backed businesses.
You have now met one of our amazing founders, Deborah
Gladney, and can see why investing in WorkTorch was not a hard
decision for me and my partners, Ed Frindt and Liam Reilly.
KCRise Fund invested $400,000 and made introductions to venture
capital firms in other parts of the country, which led to 4 more
firms investing, for a total of $1.1 million. And I will add par-
enthetically, Steve Case from here in D.C. was one of them.
11
As the eyes and ears of our region for VCs around the U.S., our
support was validating to other venture firms in our network,
which made her raise successful.
So, tell me again why we need these seven bills if all of this is
working so great. I can speak to the DEAL Act, SEED, HALOS and
ICAN.
ICAN is the bill which would unlock the most access to capital
for small venture funds like KCRise. Our first fund was $19 million
and it took me 2 years to raise. Limited to 99 accredited investors,
I had to find people willing and who had the resources to invest
an average of $200,000.
For Fund II, we wanted to increase capital in the region so we
set out to raise $40 million, and now our investors had to have
$400,000, on average. Not every small venture fund manager has
a network like I have built over 30 years, and even I had trouble
raising for startups, a type of investment that most people in the
Midwest had never done before.
Please don’t confuse us with the big-time private equity bunch
with mountains of money. There are hundreds of small funds like
ours springing up in smaller markets, and we would all benefit
from raising the limit on our total number of investors.
It would accomplish three things—I realize I am getting close on
time. First, it would allow more folks to participate. Funds could
take smaller investors, really bring democratizing capital and be
more inclusive. Second, being able to take more investors, we can
more easily build a larger fund. And third, more people would get
off the sidelines like me to do it. Funds are expensive. We have
back office, we have rent, we have audits. Making a fund a little
bit larger would make it possible to have a small team to help en-
trepreneurs.
More-inclusive capital is the lifeblood of new jobs in all counties
over this country. And we are seeing already in our region in Kan-
sas City that generational prosperity is broadening due to our focus
and increased capital.
[The prepared statement of Ms. Howe can be found on page 51
of the appendix.]
Chairwoman WAGNER. Thank you, Ms. Howe, very, very much.
Ms. Thornton, you are now recognized for 5 minutes for your oral
testimony.
STATEMENT OF ALEXANDRA THORNTON, SENIOR DIRECTOR,
CENTER FOR AMERICAN PROGRESS
Ms. THORNTON. Chairwoman Wagner, Ranking Member Sher-
man, and esteemed members of the subcommittee, thank you for
the opportunity to appear before you today to discuss capital access
for entrepreneurs and small businesses.
My name is Alexandra Thornton. I am a senior director focusing
on financial regulation and tax policy at the Center for American
Progress, an independent nonpartisan policy institute dedicated to
improving the lives of all Americans.
Today, more businesses have raised more money from borrowing,
selling equity, and selling debt securities than ever before. In fact,
banking regulators are worried about a collapse, securities regu-
lators are worried about the proliferation of frauds, and investors
12
are worried that many private company valuations are unjustifi-
able and unsustainable.
In addition to seeking a loan from a bank, small businesses today
can turn to the capital markets. After decades of deregulation by
Congress and the SEC, a company can raise an unlimited amount
of money from an unlimited number of sophisticated investors
without making any meaningful disclosures about its financials,
governance, operations, or risks.
Moreover, unlike banks and their employees, private equity and
venture capital firms that raise capital and invest in businesses are
generally not expected to follow regulator-mandated standardized
documentation requirements and regulatory oversight of their cap-
ital allocation decision-making or the fees that they charge.
Venture capital and private equity funds are larger than at any
time in history. Small businesses ought to have no problem obtain-
ing capital in this environment. The problem is not that the rules
prevent small businesses from obtaining capital. It is that the rules
today allow companies with billion-dollar valuations, billions in
revenues, and thousands of investors to continue raising private
capital without providing basic information to investors, regulators,
or the public, and private funds to raise billions of dollars from un-
derlying investors without basic information about their procedures
around capital allocation and portfolio management or the fees
they charge.
SEC Chair Gensler said very recently that there may be as much
as $250 billion in fees in private funds each year, and much of that
money isn’t going to portfolio companies, including small busi-
nesses. There is also no regulatory requirement that these billion-
dollar companies and funds provide investors with basic audits to
ensure that financial information is accurate and reliable.
When Congress established the Federal securities laws in the
wake of the Great Crash of 1929, it concluded that without basic
information about a company, capital will be misallocated and
wasted. So, it established the fundamental bargain that companies
that want to raise capital from the public must first provide basic
information to investors and the public, including the company’s fi-
nancials, governance, operations, and risks.
Today, these disclosures, along with robust audits, improve price
discovery, make markets more fair, more orderly, and more effi-
cient, and protect investors from abuses.
It goes without saying that even the most-sophisticated investors
can’t exercise their superior knowledge and expertise if they don’t
have reliable information about a company’s financials, operations,
and risks.
For decades after the securities laws were first adopted, offerings
to even a single person or to a small number of employees were
deemed to be public offerings in need of registration. But beginning
in 1982, with the promulgation of Regulation D, Congress and the
SEC began expanding the number of exemptions from the public
disclosure framework, often with the stated intention of providing
more access to capital for small businesses, just as many of the
bills before the subcommittee today are saying.
But in reality, those exemptions, along with a few other provi-
sions in the law, have enabled virtually any company of any size
13
to obtain capital from the public without complying with the public
disclosure framework. A growing number of companies are choosing
to remain private, and the majority of capital today is exempt from
the public disclosure framework.
Today, more than 650 U.S. private companies are worth more
than a billion dollars each in the private markets, and they too rely
on these exemptions. They compete with similar publicly-traded
companies and sell products and services to a broad swathe of the
American public without making meaningful disclosures. They can
pose huge risks to their investors, who include the teachers, fire-
fighters, municipal workers, students, professors, and many others
who have a significant amount of their hard-earned college and re-
tirement savings invested in the private markets. Failure of any of
these unicorns could have catastrophic consequences for these in-
vestors.
Expanding exemptions from public offerings will only make the
wealthiest private investors richer, and it certainly won’t help truly
small businesses in underserved communities.
There are many steps that Congress and the SEC can take to re-
balance the public and private markets and make more room for
capital for small businesses. I look forward to discussing those with
you. And thank you again for inviting me to testify today.
[The prepared statement of Ms. Thornton can be found on page
53 of the appendix.]
Chairwoman WAGNER. Thank you, Ms. Thornton, very much.
And thanks to all of our witnesses for your testimony today.
We will now move into the questioning portion of the hearing,
and I will recognize myself for 5 minutes.
Mr. Ellenoff, as I am sure you are aware, Democrat SEC Com-
missioner Crenshaw gave a very concerning speech last week in
which she cited growth in our private markets as a reason to in-
crease disclosure and impose other regulatory obligations on pri-
vate companies. In our view, her comments demonstrate how
Democrats would rather force companies to go public than reduce
barriers to capital formation for all, all companies.
Mr. Ellenoff, if the Democrat-led SEC moves forward with and
eventually finalizes proposals that increase burdens on private
companies, as it likely will in its forthcoming proposed rulemaking
to revise Regulation D and Form D, can you explain how that
would harm the millions of businesses that remain private?
And what I am really trying to get to is, would it make it harder
for them to raise capital, create jobs, raise potential, or would these
policies considered today, on the other hand, make it easier for
small businesses to grow?
Mr. ELLENOFF. It is a troubling coordinated narrative that we
are hearing. I think there is no doubt that increasing disclosure
and pre-filing submission requirements on those issuers would be
very problematic for a marketplace that has been around since
1982 and has operated efficiently, and successfully, by the numbers
that we heard from Representative Sherman earlier, a $4 trillion
marketplace.
I don’t know why we would even consider going about regulating
it in a similar manner to what we did with our public company uni-
verse. These companies chose, tactically, to not go to the public
14
markets because of the overregulation within the public market
sphere and particularly over the last year.
I think you would end up seeing a reduction in the capital-rais-
ing process. I think the securities offering supply chain—yes, I will
take credit for that term—would become bogged down. I think it
would be unwise, and I would steer clear of it.
And the thought process that somehow you can—as a securities
lawyer, it would be a boon for me. So, when a securities lawyer is
telling you not to do something, even though it would benefit me
personally, I think you should take that under advisement.
I think to force large companies that choose to remain private,
which is the same conversation we had in 2019, so the question is,
how do you incent them to become public? And the thought process
to burden private companies more is the incentive to get them to
become public seems misguided to me and quite troubling.
Chairwoman WAGNER. Thank you very much.
Ms. Howe, as an angel investor, you have helped countless early-
stage companies in my home State of Missouri and beyond raise
the capital that they need to grow. In doing so, you have supported
founders and their communities. You have also witnessed some of
the barriers that exist which prevent startups from reaching their
potential.
From your experience, could you provide examples showing how
the policies considered today would benefit the early-stage compa-
nies in which you invest?
Ms. HOWE. First, maybe going back to Ms. Crenshaw’s report,
and maybe addressing Ms. Thornton, I hear a lot of, ‘‘unicorn,’’ and,
‘‘billion dollars.’’ These are companies that we are investing in
them at $5 million to $10 million or $15 million, and they will
probably sell somewhere between $50 million and $400 million as
a bolt-on to some other business.
The kind of businesses that we invest in tend to start smaller
and they exit smaller as well. And so it is a different mindset than
maybe some of the understandable concerns about regulating
much-larger companies.
I would also say that we turn down investors. We had investors
who were much more diverse, frankly, both in age and gender and
ethnicity, because they couldn’t afford to invest in a fund that had
an average need of $400,000 per investor. So by broadening it out,
I think we would have much more inclusive capital.
And I would also say that one of the things that is troubling to
me and I agree with the protections for—I was in the financial
services business for 32 years. We need protections. But a fund for-
mat like we have, like all of these small funds that are being
formed—by the way, and we have audits as well. But a fund format
is a more diversifying, derisking way for people to invest and to
participate in their neighbors, their kids, the people they want to
invest in who are in their own local community.
Chairwoman WAGNER. Thank you very much, Ms. Howe.
I have a fantastic question for you, Ms. Gladney. I am going to
submit it for the record since my time has expired.
I now recognize the ranking member of the subcommittee, Mr.
Sherman, for 5 minutes.
15
Mr. SHERMAN. Some have said that sometimes the system
doesn’t fund somebody’s business idea. I would say that is actually
a good thing. Most ideas shouldn’t be funded. I have a dozen ideas
every day, most of them bad. And if you take a look at the bills
submitted here in Congress, most of them shouldn’t be passed.
The chairwoman says that there are millions of companies that
are private that should stay private. I couldn’t agree more. But
there are a few dozen, just a few dozen that we should encourage
to become public that are large enough to easily deal with the cost
of being a public company.
If these companies become public, then we get more information
about them, both in terms of trying to look at our society but also
for investors. They can afford to do it. And then, the retail investor
can get the liquidity of a publicly-traded company, the information,
the analysis of a publicly-traded company.
We are here trying to decide whether to in some cases liberalize
or in some cases tighten the rules for what it is to be a private
placement or a non-public offering. We dealt with one of those this
morning, changing the definition of, ‘‘accredited investor’’—we had
a whole hearing focused on that.
Doug, can you identify one other proposal that you would have
to liberalize or to make tighter the rules here for private place-
ments?
Mr. ELLENOFF. For private placements, I think there are several
proposals before us in terms of increasing the caps. If you are ask-
ing about me to freewheel and come up with a new idea on rules
to make private placements better—
Mr. SHERMAN. It doesn’t have to be your original idea. Pick one
idea you like, even if it is—most ideas are stolen from someone
else.
Mr. ELLENOFF. I think we all can take a collective pat on the
back for what we did in the JOBS Act in 2012. I think that is direc-
tionally what we ought to be doing.
Mr. SHERMAN. I now want to go to Ms. Thornton. You might
have opposed the JOBS Act. I voted for it. I didn’t think it was per-
fect, but I think it has done relatively well.
Can you identify one or two specific ways in which we should
tighten it a bit without eliminating its basic concept?
Ms. THORNTON. Sure. Thank you, Congressman Sherman. I think
one of the most important things would be to change the holder of
record definition, because in the JOBS Act it was increased from
500 to 2,000. And when Section 12(g) was enacted in 1964, there
wasn’t a whole lot of difference between shareholders and holders
of record.
But over time, because of technology and so forth, holder of
record can now mean—one holder of record could be an inter-
mediary that holds tens of thousands of shares from thousands of
investors. And that is one holder—
Mr. SHERMAN. Now, it is one thing if you have an investment
fund. Berkshire Hathaway might own a piece of a company, and we
would count that, I would think, as one shareholder of record, be-
cause they are really making the decisions, even though I might
own a share of Berkshire Hathaway stock.
16
But in a circumstance where, say, I have an account at Merrill
Lynch, and so do 100 other people. They have all invested. We are
all making our own individual decisions. And you are saying that
if 100 Merrill Lynch customers are all in a stock, that it could be
identified as one holder of record?
Ms. THORNTON. I believe that is right. And the thing about this
threshold is that once you go above 2,000 holders of record, the
company has to make significant public disclosures. And that is as
it should be, because they are obviously a big company. This is the
way that Facebook remained private for so long.
Mr. SHERMAN. And we might just set dollar amounts, say, we
don’t care if you only have 50 owners, if you are worth half-a-tril-
lion dollars, you can afford it. We want the information. Your
shareholders might benefit from it. And also, we are trying, in
some cases, to push public companies in the right direction.
I know what is controversial is ESG. What is probably less con-
troversial is an idea I proposed on the House Floor yesterday, and
that is for companies to disclose and analyze how they would be
affected if we had a breakdown of our relationship with China, be-
cause there are a lot of companies out there who are—what should
I say?—pre-balloon in their thinking.
So, there is a benefit to companies going public when they are
big enough to deal with the cost.
And I yield back.
Chairwoman WAGNER. The Chair now recognizes the gentleman
from Arkansas, Mr. Hill, who is also the Chair of our Sub-
committee on Digital Assets, Financial Technology and Inclusion,
and the Vice Chair of the full Financial Services Committee.
Mr. Hill, you are recognized for 5 minutes.
Mr. HILL. Thank you, Madam Chairwoman.
And thank you again for continuing this theme of how we en-
hance capital formation for businesses of all sizes. I thought this
was such an interesting group of legislative proposals and such an
informed, excellent panel. Thank you all for being here.
Before I was in Congress, I spent a lot of time doing Reg D in-
vestments, and I thought many of these reflected some of the
things that we have seen over the last decade, after the JOBS Act,
of what we could tweak and fine-tune even better.
And on the subject of going public, look, it has just gotten so ex-
pensive to be a public company, and the liability is so high that,
sure, the market cap has just gone up and up and up. When I first
started my career, if somebody had a $250-million market cap, they
could easily be public and bear the cost, and we had more than
double the public companies that we have now.
That is why you see so many enormous market caps, and I think
that is why you see a big incentive for so many growth companies
to stay private longer. I don’t know if it is a chicken and egg thing.
I take Ms. Thornton’s point. I started my career in 1979, so I re-
member the 1982 amendments and I know where she is coming
from, but I don’t think that is a chicken and egg thing. I think
that, really, it is the cost that has driven market caps up and the
number of public offerings down, personally.
Entrepreneurs and small business folks are the backbone of all
of our small towns, and I am so glad we have Missouri so well-rep-
17
resented here. I represent Little Rock, Arkansas, and I work with
our venture ecosystem throughout central Arkansas.
And it is frustrating when you recognize that the top 20 metros
in the country get 88 percent of the venture capital funding in the
country, but due to the Kauffman Foundation in Missouri, and
Steve Case’s evangelism, this idea of making sure that we have a
venture ecosystem open to all investors of all types has really seen
a renaissance in the last decade.
The best ideas in this country are not reserved to the salons of
Palo Alto or New York. Last year, Arkansas companies raised $107
million in venture capital funding, 3 times higher than 2020. And
while that is dwarfed by many States, it is indicative of the fact
that our angel investor groups and our venture ecosystem is grow-
ing and growing successfully around the University of Arkansas at
Fayetteville, and certainly in Little Rock, in and around The Ven-
ture Center, and accelerator programs that we have in Conway,
Little Rock, and North Little Rock.
Unfortunately, entrepreneurs in many parts of the country face
challenges to raising the capital they need. We just had a bill on
the House Floor last week that we all supported which enhanced
the SEC’s studying, what are the barriers to rural capital-raising
for people who are not even in a metro area? And I think your com-
ments on that have been very, very helpful.
So, Ms. Howe, with your 2 decades of experience both in the bro-
kerage business and now as an angel investor, how do these ideas
today directly help a start-up dreamer in Kansas City or Little
Rock?
Ms. HOWE. Our networks are only so large to be able to raise
capital from our own personal network. And one of your—if you are
speaking to the fund of funds bill as one example, I can give you
an example.
Bringing Steve Case back up, 6 years ago, Steve Case and his
whole Rise of the Rest came out to the Midwest and invited 20 of
us who were brand-new fund managers to D.C. to learn from one
another and support one another. And he asked us, how can we
help you? And every one of us—by the way, nobody had ever raised
more than $30 million. That was our ceiling in our markets. And
all of us said, ‘‘Steve, if you would just invest in our funds, you
would give the Good Housekeeping seal of approval. And then,
other people would understand and they would believe it and then
we would get people who have never done this before, who were ac-
credited investors, of course, off the sidelines.’’
So, this idea of the fund of funds would be really dreamy for all
of us, because there will be investors that are in other parts of the
country who would probably love to invest in WorkTorch, but they
can’t find them. And the way they could find them is through funds
like us, who are boots on the ground finding—
Mr. HILL. Thank you very much.
Ms. HOWE. —and helping entrepreneurs.
Mr. HILL. I am glad to see a Morgan State Bear here. That is
good. I co-Chair the Historically Black Colleges and Universities
(HBCU) Caucus here in the House, so it is good to see Morgan
State represented.
18
These ideas to expand crowdfunding—any thoughts on how you
think that would benefit entrepreneurs in your world?
Mr. CONWELL. There are a lot of entrepreneurs who don’t have
networks, especially entrepreneurs who look like me. When I start-
ed my first company in 2010, I didn’t know what an investor was.
I didn’t know where to go. I didn’t know where to meet them. And
when I did, I didn’t know how to talk to them.
But that has no bearing on an entrepreneur’s ability to execute.
An entrepreneur can go to crowdfunding and say, hey, I have exe-
cuted. I have done well. Who would like to take part in what I am
building?
Mr. HILL. Great response. Thank you so much. And I thank all
of you for being here today.
I yield back.
Chairwoman WAGNER. The Chair now recognizes the gentleman
from California, Mr. Vargas, for 5 minutes.
Mr. VARGAS. Thank you very much.
Madam Chairwoman, what are we doing after dinner? We have
had two hearings so far, one after breakfast, and one after lunch.
I assume we will have one more meeting after dinner. It has been,
again—
Chairwoman WAGNER. I will buy.
Mr. VARGAS. Okay. Great.
And I hate to challenge my good friend, Mr. Sherman, but Mr.
Sherman used a term that he didn’t define, and I think it would
be very hard to define at the moment, and that is, ‘‘pre-balloon.’’
We don’t know exactly how long the balloons have been flying over
our country, so we don’t know exactly when the pre-balloon era
started.
Mr. SHERMAN. If the gentleman would yield, I will point out we
are now post-balloon.
Mr. VARGAS. We are post-balloon now. Okay. That makes more
sense to me.
Again, this has been very exciting, actually, to listen to all of
you, and I appreciate it very, very much. I do have some questions
obviously.
Ms. Thornton, you said we should re-balance the public-private
market, I believe. And how should we do that?
Ms. THORNTON. One way is the way that I mentioned to Con-
gressman Sherman about modifying Section 12(g) to say that hold-
er of record is actual shareholders, beneficial owners of securities.
Another, of course, would be what he alluded to, which is to say
that large companies that have a certain value are subject to the
public disclosure framework, or you could say that companies that
have a certain number of employees would need to comply with the
public disclosure framework.
And aside from that, I think that it is really important for policy-
makers, for Congress, and for the SEC to look at the existing ex-
emptions and consider whether they really are doing what we
think they are doing and what we want them to do.
When you look at what is going on right now, just because an
exemption is expanded to allow retail investors who are less
wealthy to participate and to invest in these funds, doesn’t guar-
19
antee that there will be more investment in businesses run by
women and minorities.
Doubling down on a system that—we have had, I think I counted
14 expansions of the different exemptions since 1982, including the
1982 Reg. D. And doubling down on a system that is already shown
not to promote women and minorities is unlikely to help. So, I
would encourage you to think about that and to look at the dif-
ferent exemptions and consider how they might be scaled back.
Mr. VARGAS. Mr. Ellenoff, I think it would be appropriate to give
you an opportunity to respond to that. What would you think about
those?
Mr. ELLENOFF. I appreciate the opportunity. I have in front of me
the Annual Report from the SEC’s Office of the Advocate for Small
Business Capital Formation, and they have two bubbles in
crowdfunding that I think may be instructive and responsive to
that comment.
Forty-one percent of crowdfunded issuers that raised $1 million
or more had minority founders. Another thought bubble: 46 percent
of crowdfunded issuers that raised $1 million or more had women
founders.
And I would encourage everybody on the committee to go and re-
view this annual report, and I think you will see outstanding sta-
tistics that support not only that underrepresented people raise
money much more effectively, pursuant to these JOBS Act exemp-
tions, including Reg A+, 506(c), but if you look at the geographic
dispersion in their charts, along with what is on Crowdfund Cap-
ital Advisors site, you will see that almost every State in the Union
is represented, as opposed to what happens with 506(b) venture
deals.
Mr. VARGAS. Thank you.
I do want to challenge one premise that I think is underneath
all of this—or not challenge it, but ask about it, and that is the
issue of returns, that the private markets have better returns, in
general, than the public markets. Back in 2019, we had Professor
Elisabeth de Fontenay testifying that that is not the case, to my
understanding.
Could you comment on that, Ms. Thornton?
Ms. THORNTON. Sure, I would be happy to. When you look at the
private markets, private market participants don’t have to disclose
information. So, that should be a red flag right there. Even the fi-
nancials that they do disclose are not necessarily audited by inde-
pendent auditors. And the information often isn’t timely. There is
information given to some investors that is not given to others.
What does this create? This creates an environment where valu-
ations can be inflated. And there is copious evidence that valu-
ations are inflated in the private markets.
What happens is these companies, when they go public, that be-
comes—they stay in the private markets for a long time because
they can raise a lot of capital now that there are all these exemp-
tions. But when it comes time to cash out, when the original inves-
tors want to cash out, they do an IPO, and the retail investors in-
vest, and they are the ones who lose out because the company was
overvalued.
20
There is evidence—I think Goldman Sachs did a study which
showed that something like 28 percent of the companies that went
through IPOs like this declined in value tremendously.
Mr. VARGAS. My time is up. Thank you very much.
Thank you, Madam Chairwoman.
Chairwoman WAGNER. The Chair now recognizes the gentleman
from West Virginia, Mr. Mooney, for 5 minutes.
Mr. MOONEY. Thank you, Madam Chairwoman.
Nearly 20 percent of the U.S. population lives in rural areas, and
yet businesses in rural areas raised under 2 percent of the total
capital over the last 3 years. In my home State of West Virginia,
no city even has a population greater than 50,000 people, in the en-
tire State.
So, Ms. Howe, can you elaborate on some of the capital-raising
trends for small businesses in rural areas versus those in big cit-
ies? And as a followup to that, why is there such a large discrep-
ancy in the trends?
Ms. HOWE. I’m sorry. Can you repeat the follow-up question?
Mr. MOONEY. The second part of that is, why is there such a
large discrepancy in the trends?
Ms. HOWE. First, my brother played basketball for West Virginia.
Mr. MOONEY. Okay.
Ms. HOWE. I am not sure I completely understand the question
about the trends, but the trends clearly, in our market, when—and
what I see in my other fellow small-fund folks who are building
small funds in other States, because we are co-investment models,
so we have to have another venture investor in our realm in order
to invest.
And what I have seen is it has broadened out who—people like
me—I am 66-years-old, female—are starting funds. They are not
all young, White males. So, we all have different experiences, and
I think these smaller funds are being started by people who then
are broader in thinking in how they look at the kinds of deal flow
they might look at.
There is one proposal I have seen regarding angels and demo
days, and I would like to address that in some of those smaller
areas.
The reason why Silicon Valley became Silicon Valley is because
of the network effect. They knew each other. They were in a small
community. It was like a small town where the investors and the
entrepreneurs got together and helped one another, funded one an-
other. We need that in our smaller towns. And demo days are a
very important way for angel investors, curiosity seekers, people
who want to help these entrepreneurs, again, who are their neigh-
bors, or their kids, or their friends’ kids, or whomever, to help
them.
So, I think the basket of proposals that I see here each help in
a little different way. I don’t think you could prioritize them, be-
cause I think a place like West Virginia, where you have demo
days—a demo day in a small town where you have two or three en-
trepreneurs who are starting something who just want to get a
forum and get their idea out there and see if there is somebody
who can help them is critical to them getting funded and finding
resources and advisors and people who will help them.
21
Does that answer your question?
Mr. MOONEY. Yes. Thank you very much. I was just trying to get
an idea of what you think the trends are and what is happening.
My next question is for Ms. Gladney. What are some of the
unique challenges rural small businesses face and what can be
done to address them?
Ms. GLADNEY. Thank you for the question, Congressman.
The biggest thing that I have experienced and I have witnessed
is that this is a relationship-based industry. So, if you are living
in an area that does not have an established ecosystem or estab-
lished network, then you have no network.
And unfortunately, the way that the system is currently set up
right now, it doesn’t bring people in; it keeps people out. And that
is what is happening to rural entrepreneurs. If you are not con-
nected to the ecosystem, if you don’t have that within your commu-
nity, then it is extremely difficult for you to infiltrate the system.
Mr. MOONEY. Thank you.
I assure you, rural poverty is real. It is not just in the big cities.
Internet connectivity is an issue, especially the high-speed internet.
The bases of population where you can crowdfund may be harder
to find.
Last week, the House—and thank you for the bipartisan sup-
port—passed my bill, the Expanding Access to Capital for Rural
Job Creators Act. It simply requires the Securities and Exchange
Commission’s Small Business Advocate Office to identify and re-
port the challenges that rural small businesses face when trying to
access our capital markets.
That is only one step. We must do more. So, I look forward to
working with this committee to make sure rural small businesses
aren’t left behind as we face these challenges in West Virginia.
Thank you, Madam Chairwoman. And I yield back.
Ms. HOWE. May I add to that about the State Small Business
Credit Initiative (SSBCI)? Thank you so much for SSBCI, because
SSBCI coming down to the States—the State of Kansas, as an ex-
ample, is using that. There is a lot of rural Kansas, right? They
have 105 counties of rural everything, and they are using the
SSBCI money to do all of the things to find and to support entre-
preneurs in each county. So, thank you all very much for that
money.
Chairwoman WAGNER. The gentleman has yielded back.
I now recognize the gentleman from Illinois, Mr. Casten, for 5
minutes.
Mr. CASTEN. Thank you, Madam Chairwoman. And thanks to all
of our witnesses.
Ms. Howe, I have been sitting here reading your resume and
thinking that in another life you and I might have run across each
other. Before coming to Congress, I raised a lot of capital for pri-
vately-held companies.
When you were—I just want to understand a little bit about your
background—at Merrill Lynch’s private banking practice, was that
primarily for—I assume that is like wealthy families and family of-
fices who were your clients, is that right?
Ms. HOWE. Yes. My investors were families of wealth.
22
Mr. CASTEN. Okay. And was there a minimum size that you were
targeting or a typical size? Just help us understand who your cli-
ents were, typically?
Ms. HOWE. Back then, my minimum size was $10 million and up.
Mr. CASTEN. Okay. And were they investing primarily equity, or
were you advising them across the whole capital structure, debt,
mezzanine instruments, and everything else?
Ms. HOWE. The entire capital structure, including their philan-
thropy and multi-generationally.
Mr. CASTEN. Okay. And if they were investing in debt or mez-
zanine, were you actually negotiating debt deals, or was this where
you would be negotiating covenants, or were you primarily backing
into other, previously-syndicated deals?
Ms. HOWE. No. Merrill Lynch was pretty much a distribution of
other people’s investment ideas, so—
Mr. CASTEN. Okay. And did you make many direct investments
outside of the public? Were you doing real estate? Would you ever
advise them to make a direct investment in a new business like we
are talking about here today?
Ms. HOWE. I made none on behalf of our clients, but I made per-
sonal angel investments.
Mr. CASTEN. Okay. I am thinking of this from the perspective of
a family that has minimum $10-million wealth. I am assuming
they have some direct investments, whether through funds of
funds, or they have a buddy they went to college with who is—the
things you do as a private wealth manager.
Would you help with the diligence on those investments for
them?
Ms. HOWE. Did I help with diligence?
Mr. CASTEN. Yes.
Ms. HOWE. Absolutely.
Mr. CASTEN. If you have a wealthy family saying, I need to do
this, but I don’t understand the financials and should I trust this
auditor, those sorts of things that one gets into where they need
a neutral party?
Ms. HOWE. Happily, it gave me 32 years of education to read fi-
nancial statements because I am now on 11 boards of our portfolio
companies, so yes.
Mr. CASTEN. I sometimes say that the best preparation I ever
made for running for Congress was running a private equity-
backed company because I learned to live with the fact that I was
going to be surrounded by really smart 20-somethings telling me
how to do my job. That is the nature of this line of work.
I ask all of those questions because I don’t know how somebody
who has $10 million in personal wealth makes an informed judg-
ment about how to invest in a privately-held company without hav-
ing someone of your talents. It is just too complicated. Right? And,
yet, now we are having this conversation saying, should we make
it easier for people who can’t afford to hire someone like you to run
through those investments?
My question for Ms. Thornton is, as we talk about expanding ac-
cess in private markets to people who can’t afford to hire Ms.
Howe, who are not worth $10 million, who don’t pass anybody’s ex-
isting definition of a sophisticated investor, is it not our obligation
23
as Congress to provide them with the protections that they would
otherwise get from someone like Ms. Howe?
Ms. THORNTON. Absolutely. In fact, I would submit that probably
they shouldn’t be going into the private markets. But if one is
going to expand exemptions, it is really critical that that informa-
tion be provided. And the bigger the exemption, the more informa-
tion should be provided.
There is a reason why we have the public markets and why we
have the disclosures. In the private markets—I’m sorry, did I say
private? I meant to say the reason why we have public markets is
for disclosure.
But what happens in the private markets is that there is no in-
formation. Values are inflated. The original people, Ms. Howe’s cli-
ents, who originally came in and put money into that investment,
whatever it is, can actually cash out, because we are also seeing
an expansion of secondary markets in the private markets. They
can cash out, and all those new retail investors who came in, who
really couldn’t afford to lose their money and, have bills to pay and
can’t afford a catastrophic loss, they are the ones who lose out.
They don’t get the benefit of the high valuation.
Mr. CASTEN. In the 25 seconds I have left, there are a number
of bills that have been noticed and you have reviewed for this hear-
ing. All would seem to make it easier for companies to access
money from smaller investors.
Are there any of those bills, in your judgment, that provide
greater protection along the lines that Ms. Howe used to provide?
Ms. THORNTON. I skimmed through them. I didn’t have a lot of
time between when I saw them and this hearing to go into detail.
I guess I would just say that, basically, the committee should
look very carefully at what they are going to accomplish, actually,
for small businesses.
Mr. CASTEN. Thank you. I yield back.
Chairwoman WAGNER. The Chair recognizes the gentleman from
Oklahoma, Mr. Lucas, for 5 minutes.
Mr. LUCAS. Thank you, Madam Chairwoman, for holding this
hearing, and thank you to the witnesses for testifying.
Businesses use both private and public markets to raise capital,
and the committee is dedicated to ensuring both avenues are
healthy for both companies and investors.
Public markets have enormous benefits to a wide range of inves-
tors and I will continue to support policies that strengthen public
markets and encourage businesses to utilize public offerings. I also
recognize that healthy private markets support our robust public
markets and benefits both companies’ investors.
That said, Mr. Ellenoff, could you discuss the advantages to com-
panies’ investors of having access to both public and private mar-
kets?
Mr. ELLENOFF. The democratization of access to deal flow, which
is what the JOBS Act really did, established a mechanism by
which investors from around the country could invest in deals in
other parts of the country that they would never otherwise had the
social networks to know that those deals were looking for money.
And they post those deals on websites called funding portals that
are staffed by investment professionals who do extensive due dili-
24
gence on the deals and respond to some of the concerns that were
raised previously. And those deals are vetted so the investors can
have access and invest in those deals.
Having access to early valuations, like is being suggested, is a
problem in that if you don’t get in on the earlier deals while they
are private, you won’t benefit from the increased valuations over
time.
I think retail investors having access to both the public markets,
which they do through their Merrill Lynch or E-Trade account,
where they don’t have other people doing diligence for them nec-
essarily, is equally important to learning how to invest.
What is great about the crowdfunding provisions generally is
there are caps in Reg CF that limit the amount of exposure that
retail investors have. And as far as I know, after a decade, neither
regulators nor commercial participants have been upset by the re-
sults over the last decade, which is a reason why we continue to
liberalize.
Mr. LUCAS. Continuing along that line, Mr. Ellenoff, we are 10
years from the passage of the JOBS Act. Could you give us your
perspective on what we are seeing in the economy that should en-
courage Congress to revisit provisions of the JOBS Act?
Mr. ELLENOFF. I will give you a statistic. I spoke to Sherwood
Neiss, who is the godfather of crowdfunding, if you remember him
traipsing through these halls in 2012. When we increased Reg CF
from $1 million to $5 million, which we had wanted from the begin-
ning, $5 million, 435 companies in the last few years have now
raised more than the $1-million cap, which increases jobs, funding
for entrepreneurs, helps individual States across the country and,
again, minorities and women. Forty-five of those companies raised
the $5 million max.
So, why would we not increase it further in order to get more
companies to raise more money to carry out the empowerment of
the American Dream for entrepreneurs?
Mr. LUCAS. Thank you. Very insightful comments.
I yield back, Madam Chairwoman.
Chairwoman WAGNER. The gentleman yields back.
The Chair now recognizes the ranking member of the full Finan-
cial Services Committee, the gentlewoman from California, Ms.
Waters, for 5 minutes.
Ms. WATERS. Thank you very much.
I would like to address Ms. Thornton.
Ms. Thornton, when most Americans think about our capital
markets, they think of the New York Stock Exchange and stocks
sold by large companies like Apple, Ford, or GE. However, many
would be surprised to learn that the private markets now dwarf
the public markets. And as I understand it, historically, the private
markets were where small businesses raised capital. But today,
even the largest companies now raise much of their capital there.
Can you provide a little more context as to how these changes
have affected small businesses trying to raise capital and the im-
pact on public markets? What do you think Congress should do or
should encourage the SEC to do to support small businesses
through capital markets?
25
Ms. THORNTON. Thank you, Ranking Member Waters. I appre-
ciate the question.
I think that, historically, for about 5 decades after the securities
laws were enacted, after the stock market crash of 1929, we had
a situation where the courts interpreted, ‘‘public,’’ very broadly. So,
sometimes in situations where there was one shareholder, a few of
those companies were required to make public disclosures.
Then, with all of these proliferations of exemptions, the private
markets grew. And as you said today, the private markets raise
more annually than the public markets do. And the problem with
that is there is no incentive for a company to go public, and that
has serious ramifications for not just the people who invest in a
company that is private, a company that doesn’t disclose financials
that are independently audited, and so forth, but it also has rami-
fications when that company gets large and it sells products to
American consumers. And if it runs into financial difficulties be-
cause it hasn’t been overseen by regulators, that can actually cause
systemic problems in the capital markets.
That is another big part of the SEC’s mission. So in addition to
ensuring that investors and companies have adequate information
when they invest in those companies, the SEC also needs to be
aware of the potential for systemic problems.
And we need to consider whether the situation we have gotten
ourselves into needs to be rolled back a little bit. I think it makes
a lot of sense to look at these exemptions and consider how they
can be trimmed back, whether we really need or want big compa-
nies in the private markets, and whether we shouldn’t have a lot
more disclosure for much of what goes on in the private markets.
Ms. WATERS. Let me continue.
Today, large private equity firms and multibillion-dollar tech
companies have taken advantage of exemptions originally meant
for small businesses. For example, between 2009 and 2017, pooled
investment funds, most of which are private equity funds, have
raised $8.9 trillion of new capital through Regulation D offerings
compared to $1.42 trillion raised by non-funds.
What are your views on the uses and misuses of the exemptions
originally meant for small businesses? Should multibillion-dollar
private firms and private equity firms be able to use them?
Ms. THORNTON. Absolutely not. It is basically an abuse of the
system, if you will, when these really large—when these unicorns,
who have so much in assets and so much ability to raise capital,
are using something like Reg D to raise funds. And I think Com-
missioner Crenshaw just a week ago mentioned this as well, how
much of Reg D is actually unicorns seeking additional capital. It
just creates risks for, as I said, the markets and also for the many
people who invest.
Ms. WATERS. Thank you.
I am going to go to Chairwoman Wagner before I continue with
these questions.
I would like to ask unanimous consent to submit a report for the
hearing record that was released by the North American Securities
Administrators Association entitled, ‘‘Report and Recommendations
for Reinvigorating Our Capital Markets.’’
Chairwoman WAGNER. Without objection, it is so ordered.
26
Ms. WATERS. I have a few minutes left here, and I just have a
statement I would like to make.
Constantly, all that we hear from small businesses is, ‘‘I just
don’t have access to capital. If only there was a fair way to get ac-
cess to capital, I know I could do well. I could expand. I could pro-
vide more goods, more services. I could do all of these things.’’ And
so, as we confront this issue, we have to find out what we can do.
Quickly, during the pandemic, with PPP, in that small period of
time where we raised that money to get to small businesses, I want
to tell you how helpful it was, how thankful they were, and how
they were able to keep their employees, on and on and on.
With that, I yield back, because I could talk about that all day.
Thank you.
Chairwoman WAGNER. The gentlelady yields back.
I now recognize the gentleman from Pennsylvania, Mr. Meuser,
for 5 minutes.
Mr. MEUSER. Thank you very much, Madam Chairwoman.
Madam Chairwoman, first, I would like to request unanimous
consent to enter into the record several letters: a letter from the
U.S. Chamber of Commerce; and a letter from the Center for Amer-
ican Entrepreneurship.
Chairwoman WAGNER. Without objection, it is so ordered.
Mr. MEUSER. Thank you.
And thank you very much to our witnesses. It is quite inform-
ative. I appreciate it.
But I also appreciate our Chair of this Subcommittee, as well as
our Chair of our Full Committee, Mr. McHenry, for this focus on
and prioritizing of capital formation, especially for small busi-
nesses, and really working to build off of the JOBS Act.
I spent most of my life in small business, growing small busi-
nesses into a large business, and working with customers that were
all small businesses, or virtually all of them. And I also sit on the
House Small Business Committee, so these topics are extremely
important to me.
Access to capital, cash flow is the lifeblood of a business, as we
all know. Yet, all data continues to show, even this morning in a
hearing, that only 13 percent of households of those who want to
invest have the ability to be an accredited investor, and as well,
only 19 percent of small businesses would state that they have ade-
quate access to capital. So, we clearly have work to do.
And as well, last year, there was an enormous decline in IPOs,
as you know. The numbers I have show 74 IPOs. Now, granted, the
year before was quite high, but that is 3 times less than the typical
average over the last 10 years.
So, what is going on? We need to remove these barriers or we
can begin to start thinking about how many new-growth busi-
nesses, technology businesses, what have you, will not be created
here and could be created elsewhere.
Ms. Howe, I would just like to ask you first, the Developing and
Empowering our Aspiring Leaders (DEAL) Act of 2023, that was
introduced last year, decentralizing investments, is this something
that you think is very important?
Ms. HOWE. I’m sorry, that is the fund of funds act, right?
Mr. MEUSER. It is.
27
Ms. HOWE. I am getting all of these confused.
Mr. MEUSER. Yes.
Ms. HOWE. I think I addressed that a little bit earlier. The funds
of—we are the most entrepreneurial country on the planet. How do
we figure out how to continue to keep in our genius zone? And that
is by broadening the access.
Broadening access in our world, in Kansas City and Kansas and
Missouri, is to have other people know what kind of great entre-
preneurs we have here. And having fund of funds have the ability
to find—they won’t invest directly into WorkTorch, but they would
invest in our fund. And our little fund could use the extra capital.
We have turned away hundreds of other investors.
Congressman Sherman is correct that there are a lot of deals
that shouldn’t get funded. But there are a lot that should, that
don’t get funded because we don’t have the capital and we don’t—
we build syndicates of folks from outside our region. And the best
way for us to build syndicates is what we do now, we just go out
and we find other VC firms that might be interested, and we go
out and sell the deal to other folks.
But in this case, for fund of funds, it would be so much easier
for people to develop a fund because you get the Good House-
keeping Seal of Approval of a Steve Case, or whomever else, that
would say, yes, this is a venture firm that has a good track record,
they know what they are doing.
Mr. MEUSER. Okay. Thank you. So, you are positive about that.
And the Improving Capital Allocation for Newcomers (ICAN) Act
of 2023, expanding the eligibility for capital contributors?
Ms. HOWE. We are on our third fund. We have raised $27 million
of the $40 million that we would like to raise, and we are already
up to 70 investors. And we have a list of folks who would love to
get in for $50,000, but I don’t know that we can take them, because
we don’t have room for them under the 99. So, if we had more room
for investors, we could take much smaller investors.
And in a fund format, by the way, that is de-risking the riskier
part of the capital stack. I believe strongly in smaller investors
should be in funds.
Mr. MEUSER. There is no question, VCs—there is a saying: It is
easy to count the seeds in an apple but not so easy to count the
apples in a seed. So, I definitely commend the work that you are
all doing. And we are very interested in hearing more from—I am
just about out of time—all of you on what else this committee
needs to do. I appreciate your time.
And I yield back, Madam Chairwoman.
Chairwoman WAGNER. The gentleman yields back.
The Chair now recognizes the gentleman from North Carolina,
Mr. Nickel, for 5 minutes.
Mr. NICKEL. Thank you, Madam Chairwoman.
And thank you so much to the witnesses for being with us here
today.
Small businesses are the backbone of our economy and of my dis-
trict. In Congress, I am doing everything I can to ensure that they
have adequate access to capital. Additionally, retail investors need
the protections of our securities laws to ensure they have access to
vital financial information. If a company is underperforming, these
28
non-professional investors would likely have a hard time accessing
this information.
Ms. Thornton, how would removing disclosure requirements
harm retail investors that our small businesses, especially our mi-
nority-owned small businesses, rely on for capital?
Ms. THORNTON. I think it is important to remember that if you
are a small business, you are actually going to prefer having just
a handful of really sophisticated, really experienced investors that
you can go to when you need more capital. Having a lot more inves-
tors, retail investors, people who don’t really know as much and
really can’t afford to lose their funds, can actually be harder for the
small business if they have to respond directly to them, and also,
if those retail investors need to pull out of their investment; typi-
cally, in the private markets, investments are locked up for some
time. So, it is very difficult for retail investors in that case, and it
is bad for the small business.
I think that the disclosures that we are talking about, making
more disclosures is actually good good for the both the small busi-
ness and the retail investors.
Mr. Ellenoff referred to democratization and how much due dili-
gence is being done and all of that in his firm or the firms he works
with. But, in reality, that is not required at all. It is not mandated.
It is not overseen by the SEC. The SEC doesn’t have that informa-
tion.
But, also, if companies are doing this due diligence anyway, if
funds are, if companies are providing the information to the funds
that hold them or whatever, there shouldn’t really be any problem
with adhering to the public disclosure framework. They should be
able to disclose more information.
Mr. NICKEL. Thanks.
Ms. Thornton, as you said in your testimony, if a company can
raise all the capital it needs in the private markets without making
disclosures, developing robust operational safeguards, subjecting
itself to audits, or subjecting itself to SEC oversight and potential
class-action plaintiffs, why would it go public?
Does the current exemption framework incentivize companies to
stay private, therefore depriving investors of information that is
important and meant to protect them?
Ms. THORNTON. Absolutely. It definitely, definitely encourages
companies to stay private, to grow in the private markets and, real-
ly, never to go public unless, for example, the founders or original
investors want to cash out.
And so, basically, we have a perverse, distorted system where
capital now is being invested with no information, which is basi-
cally the situation we had before the stock market crash of 1929.
Mr. NICKEL. Thank you so much. And I yield back.
Chairwoman WAGNER. The gentleman yields back.
The Chair now recognizes the gentleman from Iowa, Mr. Nunn,
for 5 minutes.
Mr. NUNN. Thank you, Madam Chairwoman. And I am privileged
to have another Midwesterner sitting up here. Your appreciation
for capital outside the venture capital bubbles of certain commu-
nities is much appreciated, and I think is something that we would
like to talk about today.
29
As we sit here today, roughly 11 years after a divided Congress
passed the Jumpstart Our Business Startups (JOBS) Act of 2012,
we are still faced with similar challenges to help all entrepreneurs,
many of you here in this room, as well as our Main Street shops,
our small farmers, and the small businesses that grow off of them.
And, unfortunately, my perspective time and time again, is that
D.C. has added costly bureaucratic red tape that interferes with my
constituents’ abilities to come here and serve well in this.
The House is determined to reduce regulatory burdens for small
businesses and entrepreneurs at home. In my great State of Iowa,
a record number of more than 33,000 new businesses were started
in the last year alone, post-COVID. It is our responsibility to pro-
vide adequate funding opportunities for those who take this amaz-
ing leap of faith, as you have on this panel today.
Mr. Conwell, I would like to begin with you. When the JOBS Act
was passed, one of the things that critics were most afraid of was
that the law would dramatically weaken investor protections and
increase fraud in the securities market. But 11 years on in the
JOBS Act, those predictions have not come to pass. Congress has
continued to work on bipartisan issues to build upon the JOBS Act.
In your view, how would a small business and entrepreneurs
today in a State like mine, in Iowa, benefit from some of the new
bills we are considering today?
Mr. CONWELL. One, you are now allowing for angel investors to
be more active. And when you are talking about rural parts of the
country, are you talking about States outside of the major tech
hubs?
Mr. NUNN. Right.
Mr. CONWELL. They are all funded and backed and supported by
those local individuals. It is so important for the angel investors to
have the ability to do more.
Then, when we talk about the ICAN Act, it allows for more new-
comer investors to have more opportunities to raise capital.
I wouldn’t be able to raise capital if it wasn’t for the JOBS Act
and the 506(c) designation. And because of that, I now have inves-
tors in my fund from all over the country, and I am investing in
companies from all over the country. Every investor is not going to
do that, but it gives us the opportunity to have more investors with
more ideas and more different ways to go about investing.
Mr. NUNN. I love that innovative spirit. Well done, and com-
pliments on everything you have done there.
Ms. Gladney, I would like to speak with you on this as well. Ac-
cording to the SEC’s Office of the Advocate for Small Business Cap-
ital Formation, small businesses have accounted for 66 percent of
the employment growth over the past 25 years. However, 89 per-
cent of entrepreneurs claim that access to capital is limiting their
small business. In fact, 78 percent claim it is limiting their day-to-
day operations, which is very scary for a small entrepreneur.
Could you please talk about your experience during your early
stages with WorkTorch? And specifically, in Kansas, what was one
of the most difficult parts for you to able to be start WorkTorch?
Ms. GLADNEY. Congressman, thanks for your question. And I was
born in Ames, Iowa, so fun fact.
Mr. NUNN. There you go. Cyclone territory.
30
Ms. GLADNEY. Yes. And I appreciate that question, because I
think so much—we talk about startups and small businesses once
they are past that zero-to-one phase. That zero-to-one stage is so
difficult.
So when my co-founder and sister, Angela, and I decided to start
WorkTorch, we had so many barriers when it came just to even
knowing or understanding. It was very clear that we were out-
siders. We didn’t even know there was an ecosystem that existed.
So, of course, we didn’t know the players. We didn’t understand the
language. We didn’t understand any of that.
Even trying to get from zero to one was so challenging, which is
why we had to do something so risky as taking our money out of
our 401(k)s, because we were seen as outsiders.
The more that we can support entrepreneurs in those earlier
stages, I think a lot of—unfortunately, a lot of businesses, they die
in that zero-to-one ideation stage.
Mr. NUNN. I would agree with you on that.
Let me be quick on this, because I think this is an important
thing for entrepreneurs like you across the country. As you know,
Reg A or the Mini-IPO offering process is less-intensive and less-
costly than the traditional initial public offering.
Do you think, based on your experience, it is time for Congress
to revise Section A? Specifically, House Republicans are advocating
that we raise the amount to $150 million from the current $50 mil-
lion and include an inflation adjuster.
Would this have helped you?
Ms. GLADNEY. Absolutely. Just increasing the access, of course,
absolutely, it would help.
I see that the time is running out, so I just want to keep it brief.
Mr. NUNN. Thank you for your service.
I yield back.
Ms. GLADNEY. Thank you.
Chairwoman WAGNER. The gentleman yields back.
I now recognize the gentleman from the Kansas City, Missouri,
area, the soon-to-be Super Bowl champs, the Kansas City Chiefs,
my fellow delegation member, Mr. Cleaver, for 5 minutes.
Mr. CLEAVER. Thank you for that opening objective analysis of
the coming game.
I was going to ask Ms. Howe, before you said anything about the
game, it doesn’t mean we are bragging about anything. If you win,
you are not bragging. And we are hoping that the rest of the com-
mittee members will come in and celebrate, at the next hearing,
the Kansas City Chiefs as world champions.
I am glad we have some folks who have taken advantage of this.
I have been on the Financial Services Committee for 18 years, but
this is my first time on the Capital Markets Subcommittee. So in
trying to get up to speed on it, I thought people are going to run
away. A shareholder of record does not denote the current owner
of stock. Instead, it suggests who owned it 2 days prior.
Now, if you tell somebody who is wanting to participate and go
into business, won’t they start getting a headache? Am I inter-
preting that correctly? Is that correct?
Mr. ELLENOFF. May I?
31
I think there is a misunderstanding here. Shareholder of record
for public companies, it is true that often on a central ledger sys-
tem called CD, multiple shareholders are centralized as one share-
holder for purposes of calculating for proxy rules under the public
company laws. For private companies, that is not really accurate.
It is one-to-one.
I think if you ask any of the entrepreneurs or venture people
here, you will find that the shareholders that are listed are their
record holders. And while I can’t say that is true in all cases, I can
say it is in the predominance of cases.
The concern that I have when I hear questions like that is if the
route the SEC intends to use to force private companies to go pub-
lic is by playing games with 12(g), I think that is problematic.
Mr. CLEAVER. I appreciate that. Thank you.
Ms. Howe, and Ms. Gladney, can you speak to the challenges in
fundraising for start-up companies, particularly those who are pre-
revenue, thereby making bank capital largely inaccessible?
Ms. GLADNEY. Thanks for the question, Congressman. Definitely,
the pre-revenue stage was the most challenging stage for us. And,
again, not being an insider, you go to the websites of a lot of these
investment firms that will say, hey, we invest at day zero. So we
think, hey, we are at day zero, and we try pitching. And come to
find out, more than likely they definitely—they don’t, or it is not
for people who look like me or people who don’t have that existing
connection.
So, it is extremely challenging, which is why it tends to put a lot
of founders like Angela and I in a corner, where it is either we let
this idea die or we pull out money that we probably shouldn’t pull
out to make it work.
Once we get the revenue in, at least we can start saying we have
traction, and it mitigates some of the risk, and you will start to see
more people come. But it is still even challenging at that point for
founders like myself.
I will let Darcy kind of chime in before time runs out.
Ms. HOWE. Pre-revenue companies are the purview of angels. An-
gels are more predominant in markets where they have already
made money and they are, ‘‘on house money.’’ So, they can afford
to take the risk of giving $20,000 or $30,000 to Angela and Debo-
rah.
I don’t think that is the right place for early, early investors,
frankly. That is the place for people who are more sophisticated
and who can help these young, young, young companies, if that an-
swers the question.
Mr. CLEAVER. It does. Thank you.
Madam Chairwoman, I yield back.
Chairwoman WAGNER. The gentleman yields back.
The Chair now recognizes the Vice Chair of the subcommittee,
the gentleman from New York, Mr. Garbarino, for 5 minutes.
Mr. GARBARINO. Thank you, Madam Chairwoman, and thank you
very much for hosting this important hearing today. And thank you
to our witnesses.
Madam Chairwoman, before I ask questions, I request unani-
mous consent to enter into the record several letters: a letter from
32
the Small Business Investor Alliance; and a letter from the Na-
tional Venture Capital Association.
Chairwoman WAGNER. Without objection, it is so ordered.
Mr. GARBARINO. Thank you very much.
Mr. Ellenoff, I am going to start discussing Regulation A with
you. Title IV of the JOBS Act directed the Securities and Exchange
Commission to adopt rules examining securities offering up to $50
million within a 12-month period from Securities Act registration
requirements.
Upon implementation, the SEC created two different tiers: Regu-
lation A, Tier 1, caps at $20 million; and Tier 2 allows for the sale
of $50 million, which was later raised to $75 million.
The benefit of having Regulation A is that it provides an oppor-
tunity for small and medium-sized private companies to access cap-
ital on a scale more appropriate for their needs with limited disclo-
sure requirements.
Despite these benefits, you mentioned in your written testimony
that Regulation A still needs to find its footing.
Can you explain why Regulation A has been underutilized? And
how would amendments to Regulation A help small businesses
raise capital? And would more companies benefit if Regulation A
raised its offering cap?
Mr. ELLENOFF. First off, we have to recognize the great State of
New York together, okay. If everybody else can do it, we should be
doing it just because we are a big urban center.
Reg A+ is a more-involved disclosure document, not unlike a tra-
ditional IPO on an S-1. It is on what is called a Form 1-A, and it
has extensive legal work, and accounting work involved. It takes
months to prepare or weeks, in many cases, if it is an earlier stage
company.
The good news—and I spoke to one of the founders of the big
platforms this morning—is in the last few years, $5 billion has
been raised in Reg A+. So, it is an exemption that is getting trac-
tion. It is just not as much as I think regulators would like it to
be.
And many of the major investment banks, the Mini-IPO, don’t
tend to follow in that direction. I think increasing it to $150 mil-
lion, which is the proposal from $75 million, would be advan-
tageous in that it may attract a higher quality number of Silicon
Valley-based companies that may choose to use it.
The cost of doing a Reg A+ deal and the time and the sophistica-
tion kind of necessitate larger deal sizes in order to pay for the dili-
gence that is being questioned here about whether or not these
deals are providing enough disclosure so that investors can make
an informed decision.
When you are targeting retail investors, which Reg A+ does, you
need more involved disclosure. What has not been discussed today,
and the reason large companies shouldn’t be required to put disclo-
sure—and it has been conventional wisdom in the capital markets
for 70, 80, 90 years—is that you have the largest institutions who
do the due diligence with people like Ms. Howe at their side. So,
you don’t need that level of disclosure or diligence because some-
body is doing it.
33
There have only been a few hundred deals that have been done
on Reg A+, and its average raise size is $2.2 million, but we do not
need to utilize it more and find a utility for it.
Mr. GARBARINO. And you think raising the cap could get more
companies involved?
Mr. ELLENOFF. I spoke to several of the platform managers, and
they agreed that there are times when they speak to some of the
companies who feel that the $75 million as a top limit makes it un-
attractive to them, so they won’t do a deal on Reg A+.
Mr. GARBARINO. I have some more questions, but they are much
more detailed—
Mr. ELLENOFF. Oh, one last thing, if I may?
Mr. GARBARINO. Sure.
Mr. ELLENOFF. It has not been discussed, and I am not really
supposed to go here, but I think that if crypto was to become a reg-
ulated vehicle, as has been suggested by our regulator community,
Reg A+ is the perfect onramp for it. So far, the regulators have not
been accommodating for that conversation. But had they been, then
$75 million would definitely be utilized on a regular basis.
Mr. GARBARINO. Thank you. And I do have other questions about
this, but I will have to send them to you.
I do want to ask you also about finders. Right now, there is no
suitable framework for finders which, because of this, they are
treated as broker-dealers by the SEC.
Is this a problematic framework for those seeking to make con-
nections between investors and private companies? If so, can you
expand upon that? And would changing this and creating a frame-
work benefit rural and underserved areas?
Mr. ELLENOFF. Yes, yes, and yes. It has been sitting out there
for 25 years and it is just getting fumbled all the time. And there
is no good reason not to have finders be able to qualify under the
old, ‘‘Paul Anka’’ sort of test or some expanded no-action letter like
that.
Mr. GARBARINO. So, this is really affecting access to capital and
we need to fix it?
Mr. ELLENOFF. Without question. Small businesses need people
to help them identify appropriate investors.
Mr. GARBARINO. Thank you very much. I yield back, Madam
Chairwoman.
Chairwoman WAGNER. The gentleman yields back.
I think we have completed our questioning time period. I would
like to thank all of our witnesses for their testimony today. So
much of it was just absolutely inspiring, and I thank each and
every one of you, as does our committee.
The Chair notes that some Members may have additional ques-
tions for this panel, which they may wish to submit in writing.
Without objection, the hearing record will remain open for 5 legis-
lative days for Members to submit written questions to these wit-
nesses and to place their responses in the record. Also, without ob-
jection, Members will have 5 legislative days to submit extraneous
materials to the Chair for inclusion in the record.
The hearing is now adjourned.
[Whereupon, at 3:49 p.m., the hearing was adjourned.]
APPENDIX
February 8, 2023
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