Navigating Regulations: Alternative Pathways to Investing in Small Businesses (House Small Business subcommittee hearing, March 12, 2024)

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Transcript of the March 12, 2024 hearing Navigating Regulations: Alternative Pathways to Investing in Small Businesses, before the House Small Business Subcommittee on Oversight, Investigations, and Regulations, Small Business Committee Document Number 118–044. Beth Van Duyne presided and gave the opening statement, saying small businesses are struggling to access capital and that access to private credit is critical. Witnesses were Parag Shah of Vemos, Mary Kennedy Thompson of Neighborly and Jeremy Kress of the University of Michigan Stephen M. Ross School of Business. The appendix carries prepared statements, questions from Velázquez answered by Kress, and a letter from Engine. The subcommittee adjourned at 11:01 a.m.

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NAVIGATING REGULATIONS: ALTERNATIVE
PATHWAYS TO INVESTING IN SMALL BUSINESSES

HEARING
BEFORE THE

SUBCOMMITTEE ON OVERSIGHT,
INVESTIGATIONS, AND REGULATIONS
OF THE

COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION

HEARING HELD
MARCH 12, 2024

Small Business Committee Document Number 118–044
Available via the GPO Website: www.govinfo.gov

U.S. GOVERNMENT PUBLISHING OFFICE
54–984 WASHINGTON : 2024
HOUSE COMMITTEE ON SMALL BUSINESS
ROGER WILLIAMS, Texas, Chairman
BLAINE LUETKEMEYER, Missouri
PETE STAUBER, Minnesota
DAN MEUSER, Pennsylvania
BETH VAN DUYNE, Texas
MARIA SALAZAR, Florida
TRACEY MANN, Kansas
JAKE ELLZEY, Texas
MARC MOLINARO, New York
MARK ALFORD, Missouri
ELI CRANE, Arizona
AARON BEAN, Florida
WESLEY HUNT, Texas
NICK LALOTA, New York
CELESTE MALOY, Utah
NYDIA VELÁZQUEZ, New York, Ranking Member
JARED GOLDEN, Maine
KWEISI MFUME, Maryland
DEAN PHILLIPS, Minnesota
GREG LANDSMAN, Ohio
MARIE GLUESENKAMP PEREZ, Washington
SHRI THANEDAR, Michigan
MORGAN MCGARVEY, Kentucky
HILLARY SCHOLTEN, Michigan
JUDY CHU, California
SHARICE DAVIDS, Kansas
CHRIS PAPPAS, New Hampshire

BEN JOHNSON, Majority Staff Director
MELISSA JUNG, Minority Staff Director

(II)
CONTENTS
OPENING STATEMENTS
Page
Hon. Beth Van Duyne ............................................................................................. 1

WITNESSES
Mr. Parag Shah, Co-Founder & Chief Technical Officer, Vemos, Washington,
DC .......................................................................................................................... 3
Ms. Mary Kennedy Thomposon, Chief Operating Officer, Neighborly, Waco,
Texas ..................................................................................................................... 5
Mr. Jeremy Kress, Assistant Professor of Business Law, University of Michi-
gan, Stephen M. Ross School of Business, Ann Arbor, MI ............................... 7

APPENDIX
Prepared Statements:
Mr. Parag Shah, Co-Founder & Chief Technical Officer, Vemos, Wash-
ington, DC ..................................................................................................... 19
Ms. Mary Kennedy Thompson, Chief Operating Officer, Neighborly,
Waco, Texas ................................................................................................... 25
Mr. Jeremy Kress, Assistant Professor of Business Law, University of
Michigan, Stephen M. Ross School of Business, Ann Arbor, MI .............. 33
Questions and Answers for the Record:
Questions from Hon. Velázquez to Mr. Jeremy Kress and Answers from
Mr. Jeremy Kress .......................................................................................... 42
Additional Material for the Record:
Engine Letter .................................................................................................... 45

(III)
NAVIGATING REGULATIONS: ALTERNATIVE
PATHWAYS TO INVESTING IN SMALL
BUSINESSES

TUESDAY, MARCH 12, 2024

HOUSE OF REPRESENTATIVES,
COMMITTEE ON SMALL BUSINESS,
SUBCOMMITTEE ON OVERSIGHT,
INVESTIGATIONS, AND REGULATIONS,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:04 a.m., in Room
2360, Rayburn House Office Building, Hon. Beth Van Duyne [chair-
woman of the Subcommittee] presiding.
Present: Representatives Van Duyne, Alford, Crane, Bean, and
Gluesenkamp Perez.
Chairwoman VAN DUYNE. I will now call the Subcommittee on
Oversight, Investigations, and Regulations to order. Without objec-
tion, the Chair is authorized to declare a recess of the Committee
at any time.
I now recognize myself for my opening statement.
I want to welcome all of you here today. This hearing will high-
light how small businesses across the nation are struggling to ac-
cess capital because this administration continues to impose undue
restrictions. Access to private credit is more critical today than it
has ever been, and I want to thank our witnesses for joining us to
have a robust conversation on this topic. I am eager to hear from
you and to discuss how we can empower our job creators to access
the investment sources they need to grow.
Small businesses across America are continuing to navigate eco-
nomic challenges in a post-pandemic world, alongside the repercus-
sions of reckless government spending that has given us decades
high inflation and crushing interest rates. Coupled with stifling
regulations implemented by this administration, it is now more ex-
pensive and strenuous to do business than ever before. Our job cre-
ators rely on access to capital to keep their doors open, and without
stable access to capital, our small businesses don’t have the cer-
tainty that they need to grow, or in some cases, just to survive.
Along with limited access to small business investment options,
bank lending standards have grown stricter and loan growth has
slowed significantly, making it much harder for mom and pops
shops to stay afloat.
Instead of lenders being able to make decisions based on busi-
ness models and risk assessment, this administration is forcing
them to base investment decisions on demographic quotas. Entre-
(1)
2

preneurs, job creators, and employees at small businesses are much
more than demographic boxes to check. Small businesses are crit-
ical to communities across our country and are the result of innova-
tion and hard work. And as I have heard from a constituent who
is a community banker, capital is sitting there unused and her
hands are tied. Our small businesses are getting left behind be-
cause this administration continues to impose new regulations and
direct investment where they think is best, rather than allowing
meritocracy to prevail.
Over the next decade, compliance with President Biden’s regula-
tions will cost Americans more than $1.5 trillion. Since the day
President Biden took office, he has burdened our job creators with
more than 287 million hours in additional paperwork. As regu-
latory complexity grows, so do costs to do small business that are
already burdened by this administration. As we’ve heard time and
time again, over regulation can shutter the doors of any small busi-
ness. These regulations make it difficult or even impossible for
businesses to comply, to compete and survive, let alone make a
profit.
Private credit, which comes from nontraditional investors, has
long been a lifeline for entrepreneurs across the country. But it is
especially important now given this administration’s agenda. As
the federal government attempts to regulate our small businesses
out of existence, private investment is stepping up to fill the void.
More than 80 percent of investments made by private equity sup-
port small businesses. In my district, more than 130,000 jobs are
supported by private equity. The bottom line is private financing
has grown because it is needed, useful, and is successful at helping
American businesses in every sector, from healthcare and bio-
sciences to energy production and consumer services.
I am grateful to our small businesses and I am grateful that they
have this option. I am also glad to be able to hold this hearing
today to put the needs of our job creators first and push back on
the Biden Administration’s destructive regulatory environment.
We are going to go ahead and move forward to introducing our
witnesses that are here today. I want to thank each and every one
of you. Our first witness is Mr. Parag Shah. Mr. Shah is the Co-
Founder and CTO for Vemos, which is located in Minneapolis, Min-
nesota. Vemos is a mobile payments and analytics company that
serves the hospitality industry by creating personalized digital ex-
periences. Prior to founding Vemos, Mr. Shah founded Fidelity
LLC, bringing technology ideas to the market, working with him
and working with creating other technology companies. While still
in college, he found MX app building a product called Lunchbox, al-
lowing customers to order from restaurants using their phones. He
was named a finalist in the 2009 Global Student Entrepreneur
Awards. Mr. Shah graduated from the University of Minnesota’s
Carlson School of Management, where he earned his degree in en-
trepreneurial management. Thank you for joining us today and we
look forward to the conversation ahead.
Our next witness here today is Ms. Mary Kennedy Thompson.
Ms. Thompson is the Chief Operating Officer for Neighborly, a
holding company of 29 brands focused on home services located in
Waco, Texas. At Neighborly, Ms. Thompson oversees all business
3

operations within the company and works with 17 brand presi-
dents, leading the execution of strategies and initiatives. Prior to
being appointed COO, she served as Executive Vice President of
Neighborly and President of Mr. Rooter. Prior to her experience
franchising, Ms. Thompson served 8 years in the U.S. Marine
Corps as a logistics officer. She is the recipient of the International
Franchise Association’s Bonnie Levine Award. The highest award
for women who have made an impact on franchising. Ms. Thomp-
son graduated from the University of Texas at Austin with a Bach-
elor of Arts in English. She then went on to complete the Mini
MBA Program in franchise management from the University of St.
Thomas College of Business. Thank you for your service and thank
you for being with us today.
Our final witness is Professor Jeremy Kress. Professor Kress is
an Assistant Professor of Business Law, at the University of Michi-
gan’s Stephen M. Ross School of Business. Before entering aca-
demia, Professor Kress was an attorney in the banking regulation
and policy group at the Federal Reserve Board of Governors here
in Washington. He served as counsel to the Assistant Attorney
General for Antitrust at the U.S. Department of Justice, focusing
on bank merger policy. Professor Kress is an expert on banking pol-
icy and capital formation issues and has previously testified before
Congress on these matters. Professor Kress graduated cum laude
from Harvard Law School and from the Harvard Kennedy School,
where he was a presidential scholar. He holds a BBA from Michi-
gan Ross. Professor Kress, thank you again for being here today.
Before recognizing the witnesses, I would like to remind them
that their oral testimony is restricted to 5 minutes in length, and
if you see the lights turn red in front of you, it means your 5 min-
utes have concluded, and you might hear a little bit of a gavel. But
you should wrap up your testimony. So I now recognize Mr. Shah
for his 5 minutes opening remarks.

STATEMENTS OF MR. PARAG SHAH, CO-FOUNDER & CHIEF
TECHNICAL OFFICER, VEMOS; MS. MARY KENNEDY THOMP-
SON, CHIEF OPERATING OFFICER, NEIGHBORLY, AND MR.
JEREMY KRESS, ASSISTANT PROFESSOR OF BUSINESS LAW,
UNIVERSITY OF MICHIGAN, STEPHEN M. ROSS SCHOOL OF
BUSINESS

STATEMENT OF PARAG SHAH, CO-FOUNDER & CTO, VEMOS
Mr. SHAH. Thank you. Chairwoman Van Duyne, and Members
of the Subcommittee, thank you for inviting me to testify today re-
garding the experience of alternative financing for small busi-
nesses. My name is Parag Shah and I am the Co-Founder of
Vemos, a Minnesota based company that creates personalized expe-
riences between hospitality businesses and their guests. Using our
app, consumers can view a personalized menu tailored to their al-
lergies and dietary needs, quickly view and pay their bill, and get
rewarded from their favorite spots. Simply put, our software helps
restaurants better understand their customers and provide more
personalized guest experiences, which in turn allows them to grow
their business.
4

I have spent my entire career dedicated to starting and scaling
businesses. Prior to Vemos, I have been the founder of several tech-
nology companies, many of which have failed, but a few have suc-
ceeded. I am also a mentor for rising tech entrepreneurs and I am
a proud member of ACT, the App Association, a trade group for
representing small tech companies like mine.
When most people hear the words entrepreneur or tech startup,
they think of successful unicorns featured in the media. But the re-
ality is, building a company is extremely difficult and the outcomes
are not guaranteed, no matter the background, the effort of the
team, or funding received. And for those of us that are crazy
enough to choose this, it is vital for there to be an opportunity to
succeed, not just for the founders, but for every single person in-
volved in the journey.
While there are many types of small businesses, my entrepre-
neurial story has centered around technology and software, where
some level of funding is typically necessary to grow. The funding
can come in many forms and isn’t limited to venture capital. Al-
though we have raised venture capital, I have more experience
with widely used investment rounds such as friends and family,
angel, and seed. The reality is most entrepreneurs don’t have con-
nections to investors and capital, while businesses like ours strug-
gle with traditional options like bank loans, even ones backed by
the SBA, because we don’t have traditional assets. Therefore, out-
side private capital is very important to us.
One of the best parts about being in software is how quickly you
can build and test an idea with limited upfront capital. It is scaling
the business that comes with the funding hurdles. In 2007, when
I started my first company while attending the University of Min-
nesota, this is exactly what happened. A few of us came up with
an idea, started writing code, and tested our product with real cus-
tomers. It turned out that we had a winning product on our hands.
That is when the real work started, and that is when the funding
was necessary. At the time, there weren’t as many resources for
founders as there are today. Plus, much of the capital was con-
centrated on coasts. Even after gaining traction, we struggled to
raise capital locally, and as first-time founders and students, we
had no capital ourselves and a resume that did not help investors.
We were fortunate to close a small round of angel investors to grow
our business, but at the time we were not educated to find addi-
tional capital elsewhere. After a lot of struggle and sweat equity,
we were able to exit, but far less than what I believe we should
have achieved if we were given the right resources.
Today, early stage tech entrepreneurs are fortunate to have more
funding resources at their disposal. Another funding option that
has gained recent popularity is crowdfunding, which can be a
means of distributing equity or essentially a donation with a prom-
ise to provide a product or service later. For us, dealing with a
large number of shareholders, as well as the time and cost to raise
this round, was far too high to be worth it, and this is generally
why we’ve raised capital from accredited investors. However, I
want to see more options for access to capital rather than fewer.
In that vein, it might be worth seeing if the accredited shareholder
5

threshold could be reworked to be more flexible depending on the
cost of living.
I understand that some regulation is important to make sure in-
vestors and entrepreneurs are held accountable. However, over-
regulation leads to stagnation, decreases in new company forma-
tions, and limits deployment of new capital. We have seen that
play out over the past few years as regulations have made it hard-
er for businesses to exit. For a company like ours, being able to exit
is fundamental to our business plan and affects everything from
raising capital to hiring great people. An exit, whether it be a
merger, acquisition, or IPO, allows employees to be rewarded for
their hard work, investors to be compensated for taking a risk, and
founders to capture the capital they need to build the next great
company. But most importantly, it is one of the keys to sustainable
economic growth.
Early stage investment is critical for building a highly competi-
tive economy. Entrepreneurs already face long odds and we need
to avoid adding unnecessary costs and overburdensome government
rules. You are in a key position to make sure America continues
to be a place for new ideas and innovation. Ensuring the path is
clear for entrepreneurs to access alternative financing options is an
effort I am honored to be a part of. Thank you for this opportunity
and I look forward to your questions.
Chairwoman VAN DUYNE. Thank you very much. I now recog-
nize Ms. Kennedy Thompson for her 5 minute opening remarks.
STATEMENT OF MARY KENNEDY THOMPSON, COO,
NEIGHBORLY
Ms. KENNEDY THOMPSON. Good morning, Chairwoman Van
Duyne, and distinguished Members of the Committee. My name is
Mary Kennedy Thompson and I am the Chief Operating Officer of
Neighborly, a family of home services companies with more than
5,800 franchises serving 12 million customers across six countries.
We specialize in repairing, maintaining, and enhancing people’s
homes and properties worldwide. It is my honor to be here today
to give you my perspective on the impact alternative areas of fi-
nancing can have on small businesses, especially franchisees,
franchisors, and their employees.
I appear before you today on behalf of the International Fran-
chise Association, or IFA. IFA members include franchise compa-
nies in more than 300 different industries and individual
franchisees that support nearly 8.7 million direct jobs. Today, I will
tell you more about Neighborly and franchising in general. I will
also share how some of the ways non traditional financing, such as
through private equity, helps grow brands and companies faster
and smarter. I believe franchising is the greatest democratization
of wealth creation that exists today.
I have spent more than three decades in franchising, both as a
franchisee and a franchisor. Before my career in franchising began,
I served 8 years in the Marine Corps as a United States Marine
Corps Officer, including being the first female Platoon Commander
for my unit. When I returned home to Texas after serving time in
the Marine Corps, I wanted to own my own business. I wanted to
take control of my own destiny and serve my community. But I had
6

no business experience and I knew I needed help if I was going to
make my dream come true. In 1994, I got my start as a franchisee
in the Cookies by Design system and I have grown in franchising
ever since. The franchise model empowered me, someone with no
business experience, to start my own business with the guidance,
resources, and assistance I needed to be successful. With that suc-
cess, I was able to create hundreds of jobs in my community.
With my role in Neighborly, I now help new franchisees under
all 30 of our brands achieve their business dreams of owning their
own destiny, just as I did 30 years ago. Our mission at Neighborly
is to teach our principles and systems of personal and business suc-
cess so that all people we touch live happier, more successful lives.
We do that by teaching the franchise system, including how to run
a business well, how to take care of customers, serve the commu-
nity, and create jobs. Now, we don’t employ, hire, or fire our
franchisees employees. It is not the role of the franchisor to get be-
tween a franchisee and their employees. Rather, our role is to
share with franchisees our knowledge and experience to ensure
that they are doing it the best possible way and that they are grow-
ing their businesses.
I have lived the American dream of being an entrepreneur and
helping grow and scale businesses, but it would not be possible
without alternative forms of capital. Private equity, for me, has
been a catalyst for growth and for many of our franchisees and
Neighborly. In the past years, small business owners like me, when
I was wanting to franchise, we could depend on our local bankers
and community banks to be a willing partner, providing capital at
reasonable interest rates and an ally throughout the many steps of
growing a business.
But in the era of consolidation and mega mergers, this breed of
bankers faded away, and they are less concerned with growing
their local neighborhood Glass Doctor, for example. Many of our
franchise owners don’t speak the language of high finance. They
are small business owners. Many without college degrees. There is
a divide in the business world between the elite and these small
business owners who are important part of their communities.
They may not know where to go to get financing, to grow their
businesses, or to secure favorable rates.
This is where private equity has become an asset to our franchise
owners. Private equity brings their experience across various sec-
tors to help franchise owners make informed decisions and stay
ahead of the curve. Most importantly, private equity can serve as
an effective liaison to the banks, to financing, and to other inves-
tors. They give our franchise owners instant credibility and connec-
tions. Private equity shops can serve as translators for our owners,
connecting those with capital to those who need it. The benefits of
private equity networks also extend well beyond financial backing.
They open doors for our franchise owners and help them connect
to potential clients, suppliers, and other businesses within the port-
folio. These relationships can supercharge in terms of new partner-
ships, joint ventures, and new market opportunities. They are ef-
fective thought partners helping grow these small businesses.
Now, private equity nor additional working capital isn’t the sil-
ver bullet. I tell all my franchise owners they need a strong founda-
7

tion and a vision for the future to maximize what private equity
can do in their business. When a franchise owner gets the right
thought partner, private equity can be the rocket fuel that takes
their business into the stratosphere. And with that growth comes
increased jobs in their communities. Madam Chair, thank you
again for the invitation to speak on behalf of small business owners
everywhere. I look forward to answering any questions you may
have.
Chairwoman VAN DUYNE. Thank you very much. I now recog-
nize Mr. Kress for his 5 minute opening remarks.

STATEMENT OF JEREMY KRESS, ASSISTANT PROFESSOR OF
BUSINESS LAW, UNIVERSITY OF MICHIGAN, STEPHEN M.
ROSS SCHOOL OF BUSINESS
Mr. KRESS. Chairwoman Van Duyne, Members of the Sub-
committee, thank you for inviting me to testify at today’s hearing.
By way of background, I am an Assistant Professor of Business
Law at the University of Michigan, Stephen M. Ross School of
Business. My research focuses on bank regulation. Prior to entering
academia, I was an attorney at the Federal Reserve Board, where,
among other things, I worked on implementing the Dodd-Frank Act
and the initial Basel III capital rule.
Small businesses are the lifeblood of the American economy. In-
deed, small businesses create more than two thirds of new jobs in
the United States and account for almost half of U.S. GDP. On a
personal note, one of the things I love most about my hometown
of Ann Arbor is the thriving community of small businesses like
Zingerman’s Deli and Argus Farm Stop that give the city its
unique college town feel. In light of the essential role small busi-
nesses play in local communities and the national economy, it is
critical that policymakers ensure that entrepreneurs have access to
funding to establish and grow their businesses.
I will make four points in my testimony today. First, policy re-
sponses to the 2008 financial crisis have helped promote small
business credit availability by enhancing the resilience of the bank-
ing system. Since Dodd-Frank and Basel III were enacted, small
business lending has grown at a robust pace. Indeed, the imple-
mentation of these new safeguards coincided with the longest U.S.
economic expansion on record. This experience confirms that strong
bank capital requirements are consistent with long term credit cre-
ation, economic expansion, and small business growth.
Second, the Basel III Endgame capital rule, proposed last year
by the Federal Banking Agencies, will further bolster the banking
system and will not impair small businesses access to credit. There
are two specific reasons why Basel III Endgame will not harm
small businesses. First, the proposal applies to only the 37 largest
U.S. banks with more than $100 billion in assets. These banks
focus far less on small business lending than local community
banks, which tend to specialize in small business lending and
which are unaffected by the Endgame proposal. Second, most of the
capital increase in the Basel III Endgame proposal is associated
with large banks’ trading and fee generating business lines, not
their lending activities. The rule could, in fact, encourage large
8

banks to put relatively greater emphasis on small business lending
as they reorient toward less capital intensive activities.
Third, when small businesses have trouble obtaining bank fi-
nancing, bank consolidation and lax merger oversight often are to
blame. The U.S. banking system has experienced dramatic consoli-
dation over time. Regrettably, small businesses suffer when banks
consolidate. Since larger banks tend to favor larger borrowers,
bank mergers create barriers to entry for new entrepreneurs. Nu-
merous empirical studies have documented a reduction in small
business lending associated with bank mergers. For small busi-
nesses that are able to obtain loans following a bank merger, credit
becomes more expensive, average loan size declines, and non-price
loan terms, such as collateral requirements, become more onerous.
Despite the harmful effect bank mergers have on small businesses,
policymakers have to date done little to stem the tide of bank con-
solidation.
Fourth, alternative sources of small business financing, such as
private equity, private credit, and venture capital may benefit cer-
tain small businesses, but they also pose potential risks and must
be overseen accordingly. When structured with appropriate guard-
rails, private capital can create new pathways for small businesses
to grow. However, policymakers and small business owners should
approach private capital with caution.
Based on the minimal data available, private investors appear to
focus on the same types of businesses that already have access to
capital. Thus, private markets may be ill suited to reduce barriers
to financing for underserved small businesses, including minority-
and women-owned companies. In addition, the interests of private
investors are not necessarily aligned with those of a small
business’s owners, its employees, or its community. Since private
investors typically have a limited time horizon, they may pursue
short term profits by liquidating a business’s assets, reducing long
term capital investments, loading up the company with debt, or
paying out profligate dividends. While these strategies may be det-
rimental to a small business’s long term prospects, they are often
profitable for the private fund that intends to exit its investment
after just a few years.
In closing, I am grateful for the opportunity to discuss these im-
portant issues with you today. Thank you, and I look forward to
your questions.
Chairwoman VAN DUYNE. Thank you very much. We will now
move to the Member questions under the 5 minute rule, and I will
now recognize myself for 5 minutes.
Mr. Shah in the private equity space, merger and acquisition
transactions are a vital tool to help businesses expand into new ge-
ographic markets. They also help fuel innovation and lower prices.
While most mergers do not require additional information once a
premerger notice is filed with the FTC and DOJ, a small percent-
age are subject to additional review out of fear of possible antitrust
harm. In your testimony, you mentioned that you are concerned
with one of the newer FTC proposals that would subject every
premerger notice to additional review, which would force small
businesses to spend a lot more time and money on providing likely
9

unnecessary documentation. So do you believe that this will affect
one’s ability to find alternative financing, and if so, how and why?
Mr. SHAH. Thank you for that question. Yes, I do. I believe that
because when you are starting a business, specifically small busi-
nesses that are in technology and software that are very high fast
growth companies, and it is required to go after private financing,
such as, like I said, angel investing, venture capital, it is important
that we have an exit strategy. And if that exit strategy by any
means is compromised or could be compromised even the eyes of
an individual, a fund, society in general, then it definitely impacts
us for the ability to raise that capital.
Any additional regulation—we don’t know as entrepreneurs
when this exit is going to happen. We can’t predict that. I wish I
could. And we don’t know where it is going to come from. And if
we have the opportunity for an exit that meets the requirements
of all of our shareholders as well as our employees, and it is then
come to where additional paperwork is required. And from that ad-
ditional paperwork, it may even mean that we are not allowed to
merge or allow to be acquired due to antitrust laws. It can have
a ripple effect in our business plan and the ability for us to con-
tinue to raise additional capital to run our business.
Chairwoman VAN DUYNE. What I have heard over and over
again is that businesses are happy to play by the rules, but they
need to know what they are.
Mr. SHAH. Absolutely.
Chairwoman VAN DUYNE. When they are continuously chang-
ing, it is very difficult to have an exit strategy or build a business
model around that. Can you kind of expand a little bit on what you
are seeing in that industry, in that area?
Mr. SHAH. Yes. I think a lot of people might think we’re a lot
smarter than we are and the reality is we’re not. We find a prob-
lem in the world, we go out and solve it, and sometimes that solu-
tion works and sometimes it doesn’t. But when that solution works,
we need the ability to go after it with all of our might and power
to see if it is successful. And because of that, we don’t know where
that financing is going to come from.
We know how to grow the business. We know the right talent to
bring on a lot of times, but we don’t know how to get that exit. And
that exit is critical, again, to the way that we raise capital. A lot
of the private markets require us to have an exit because that is
how that capital goes back into the economy and grows more small
business owners. And I include employees in this, and I think a lot
of people forget employees because, especially in the tech sector,
employees have stock options and they are tied to the business.
And when the business exits, they are able to also get a substantial
reward and help new small businesses.
Chairwoman VAN DUYNE. Thank you. Ms. Kennedy Thompson,
in April last year, the SBA under the Biden Administration made
a number of rule changes to some of its biggest lending programs,
including the 7(a) and 504, which franchises heavily utilize. Among
those changes was the elimination of the franchise directory in an
effort to simplify affiliation determinations. Can you speak to how
the SBA’s rules change to eliminate the franchise directory has or
could impact access to capital for franchisers?
10

Ms. KENNEDY THOMPSON. Yes. Well, anytime—you talked
about this earlier, anytime there is change, and it creates uncer-
tainty. And the first thing it does is it makes the business owners
decide maybe not to grow anymore where they are. They think, you
know what? There is so much work, I have taken so much work
to get to here, to get to the next place. I am not sure I understand
it, and I am not sure I am willing to take that risk. And so, change
puts this uncertainty in the business owner, especially the small
business owner’s mind, that causes them to not grow, to not create
more jobs, to not be able to serve the customer in the best possible
way. So that is the first thing.
The second thing is that when it changes, it is not like there is
a big edict that goes out to everybody and says, this is how it is
changed. This is what you need to do. This is how you get here.
This is what you need to do next. They do not understand it. They
do not know who to talk to. They do not know what to do next. And
it just slows down growth completely. And for what I look at, and
I grew up in a very small community. Every small business we
have in that community, every franchisee in that community, is an
important part of creating jobs for what we do. And if we cannot
grow them, because they do not know with the changes in how the
SBA is lending, one of the things that we see is SBA is pretty good
at getting somebody the funding when they are just opening. But
when they go to expand, the rules are so onerous, they cannot fig-
ure out how to get more funding to expand.
Chairwoman VAN DUYNE. Thank you very much for that. We
are now going to go on and recognize some of our other Members
who’ve got questions. And I now recognize representative Crane
from Arizona for five minutes.
Mr. CRANE. Thank you so much for holding this hearing today,
ma’am. Thank you guys for coming. Ms. Thompson, thank you so
much for your service. We appreciate it. Have you guys noticed
that because of the uncertainty of some of the regulations that
have been coming down from this administration, a lot of entre-
preneurs will just completely go around or forego even talking to
some of your more traditional resources for gaining capital? You
were talking about seed investing, angel investing. Have you no-
ticed that a lot of entrepreneurs will just go straight to those
sources instead of going to banks and the SBA?
Mr. SHAH. Yes, I have definitely noticed a lot more of that. I can
say from my perspective and the type of businesses that I have run
in the technology sector, where it is software based, it is extremely
difficult, if not almost impossible to go get traditional lending be-
cause we do not have physical assets, such as a physical location,
physical assets, they do not really deem software as something that
is able to be collateralized. So, it is very, very difficult. And so
therefore, private equity, whether it is angel investors, seed
rounds, or venture capital, is just the route you have to take, and
there isn’t really a lot of other financing options.
Mr. CRANE. Yes. Thank you. Ms. Thompson, how is it in the
record high inflation that we are seeing right now? How is that af-
fecting your franchises that you represent?
Ms. KENNEDY THOMPSON. It is affecting them on just about
every single level. Their supplies have gone up dramatically. They
11

cannot pass those costs on to the customers in the right price in-
creases that they need to access to capital is costing them more.
That is why I am here talking to you about private equity, because
it is proven to be a good source of finding capital for our
franchisees. It is costing them more on how they are engaging and
hiring employees. It is costing them on what their rent is.
Mr. CRANE. Yeah.
Ms. KENNEDY THOMPSON. And in every way, it is affecting
their profitability.
Mr. CRANE. Have you seen it stopping growth within the fran-
chises that you represent?
Ms. KENNEDY THOMPSON. Yes, I have. I have seen it in peo-
ple wanting to expand because the interest rates are too high or
the cost of the supplies are too high for them. And so right now
they are holding. They are holding and waiting to see what is going
to happen next.
Mr. CRANE. So a lot of people do not understand the trickle-
down effect in a business because they have never owned a busi-
ness. When business owners start to feel pinched, how does that af-
fect the people that many of us here represent, you know, the aver-
age American citizen. Does it mean they do not get raises anymore?
Does it mean they get laid off? How does that affect the little guy
out there?
Ms. KENNEDY THOMPSON. Well, when you see things like the
inflation we are seeing now, first of all, it means fewer jobs, be-
cause probably one of the best job creators out there are small busi-
nesses, and they stop hiring. And then if the costs get too much
and they think they have to pull back, then they actually do layoffs
as well, and they cannot do the raises for everyone the way they
would need to, and they cannot put money back in their commu-
nity. Small businesses are probably some of the best groups of indi-
viduals that give back to their communities, both philanthropically
and in other ways, and they cannot do that either. But I think the
biggest thing is it means fewer jobs out there.
Mr. CRANE. What about crime, Ms. Thompson? Have you seen
crime heavily influence and affect the franchises that you rep-
resent?
Ms. KENNEDY THOMPSON. Yes, we have. It is interesting.
Most of my franchise owners will have between three and seven
vans that go out and service customers. We used to see, per fran-
chise owner, maybe one van every couple of months that would be
broken into. It is a weekly occurrence for our franchisees now. They
have to have extra security, which, of course, costs them. They
come in and their van is broken into, all their equipment is gone,
and then the new equipment they have to buy costs even more
than what they originally had.
Mr. CRANE. Yeah. Besides imposing regulations that prevent ac-
cess to capital, what other regulations are you guys seeing out
there on the ground from this administration that are affecting
small businesses?
Ms. KENNEDY THOMPSON. The one that really worries me is
the Congressional Review Act. It has the potential to completely
undermine the franchise business model. The National Labor Rela-
tions Board, or the NLRB, has issued a final rule on a joint em-
12

ployer standard that would reverse this course back to the harmful
2015 version. This takes away the equity and the independence of
the small business owners. And I would like to remind most that
many of our small business owners are women, people of color, and
veterans. While the average business, small business in the United
States has 17 percent, people of color running that or owning their
business in franchising is 26 percent.
Mr. CRANE. Thank you for bringing that up, ma’am. I appre-
ciate it, and I yield back.
Chairwoman VAN DUYNE. All right, we are going to go ahead
and go into a second round of questions I wanted to ask you, Ms.
Kennedy Thompson, if you would mind just, kind of, following up
a little bit. You have talked about some of the experiences that you
are seeing in general. But specifically for your experience, how has
private equity helped grown your business, your franchise? What
have you seen?
Ms. KENNEDY THOMPSON. Yes. So, on the franchisor level, we
also have private equity sponsorship. And I can tell you, when I
started in this company, we had six brands, and today we have 30
brands. We went from doing 400 million to 4 billion. And it is a
direct relationship to the sponsorship, thought-partnership, and
help that we have gotten from private equity. They put the right
resources to help us find great talent; the right resources to get us
the right capital to be able to acquire companies and grow and bet-
ter serve our customers. Because you can imagine in the home
services, I might not always need a plumber, but I do need a
plumber, and a maid, and I need my sidewalks cleaned, and I need
my windows cleaned. And so, it allowed us to better take care of
our customers by being able to build this company that has all the
things to repair, maintain, or enhance their home or property. And
then for us, you are only as good as the people that you have on
your team. And they have helped us really find great talent to be
able to serve our franchisees in the best possible way to support
them and help them grow their businesses.
Chairwoman VAN DUYNE. Thank you very much. Mr. Shah,
have you had to make any adjustments to your business operations
or strategy to comply with regulatory requirements, either with
private equity or with private credit?
Mr. SHAH. We haven’t done too many adjustments yet. However,
because of new regulation, we have seen a number of new types of
private financing occur. Different types of debt financing, convert-
ible note financing, just different type of private markets to make
it easier to raise capital in the financing markets without having
to potentially provide all of the information at the level we are at.
Providing a lot of this information and data, it is a lot of cost early
on to a small business, a lot of legal fees that we cannot afford.
And so, we have had to have, kind of, become smart and raised
capital in different ways.
Chairwoman VAN DUYNE. We have heard from business own-
ers that geographic location is a major limiting factor when trying
to access venture capital financing. Have you encountered this
issue, and if so, what do you think can be done to expand these
options outside of Silicon Valley?
13

Mr. SHAH. Absolutely. I have faced these issues lots of times. I
lived in the Midwest my whole life, and I love the Midwest. But
it is very difficult to raise capital for software tech companies there
compared to the coast, especially in Silicon Valley. We have, thank-
fully, successfully raised financing from Revolution Rise of the Rest
here in D.C., and their entire mission is around making it more ac-
cessible for venture capital throughout the non-Silicon Valley, Bos-
ton, New York, sort of hotspots.
One of the things that we can do is by making it—adding regula-
tion that allows for more credits to occur or matching programs to
occur between investors and entrepreneurs that are starting busi-
nesses. As I mentioned earlier and in my written testimony, it is
very difficult for us to get traditional financing, whether it be SBA
or via a traditional bank. And so, to offer alternatives to allow for
that to be easier and risk to occur to start these small businesses,
I think would be a long way forward in helping more cities gain
exposure.
Chairwoman VAN DUYNE. Excellent. Thank you very much. I
now recognize Rep. Gluesenkamp Perez from Washington for five
minutes.
Ms. GLUESENKAMP PEREZ. Thank you, Chairwoman, and
thank you to our witnesses for being here today. Professor Kress,
we know that 40 percent of the nation’s small business lending
originates from community banks. These banks are an incredible
asset for our communities. They know their customers inherently.
They know the people around them. But I hear from the small com-
munity banks in my district that they can no longer compete given
the competition from the big guys. You mentioned that these com-
munity banks, which we know serve our small businesses very
well, have borne the brunt of banking consolidation trend. You also
note that research from the Federal Reserve Bank in Philadelphia
has documented that large acquiring banks divert small business
lending from their target communities to the acquirers commu-
nities, leaving the target communities worse off. So, I wondered if
you could talk about the impact of banking consolidation on our
small businesses and what should be done to stave off these effects.
Mr. KRESS. Absolutely. Thank you for the question. And I note
that Ms. Kennedy Thompson mentioned in her testimony that she
and her businesses have felt the effects of bank consolidation as
well, because, as you noted, community banks tend to focus much
more heavily on small business lending. They engage in what is
known as relational lending because small community bankers
know their communities. They know the businesses in those com-
munities, they know the local business environment, and so they
have the soft information that they are able to use to more accu-
rately underwrite small business loans.
I attribute a lot of the problem to bank consolidation and lax
merger oversight; 7500 community banks disappeared due to merg-
ers between 1984 and 2011. Those are 7500 community banks that
are no longer able to provide small business loans to entrepreneurs
in their areas. The White House issued an executive order on com-
petition in 2021, urging the Department of Justice and the banking
agencies to develop a plan to revitalize bank merger oversight.
Progress on that front has been slow, but there are encouraging
14

signs. I think Assistant Attorney General Kanter has outlined a
framework for how he might think about promoting competition
and focusing in particular on small business lending and protecting
that as part of the bank merger oversight process. But maintaining
a robust community bank system is absolutely critical to ensure
small businesses access to credit.
Ms. GLUESENKAMP PEREZ. Thank you. I am also interested
in hearing directly from our small businesses about the options
available to both of you. Ms. Kennedy Thompson and Mr. Shah, a
question for both of you. You have chosen private equity, venture
capital, and other private investment strategies over the course of
your career rather than utilizing an SBA structured product. And
I wondered, why did you choose a private investment over SBA’s
guaranteed loans? What barriers or difficulties did you see in work-
ing with the SBA?
Mr. SHAH. Thank you for that question. For us, it was simple.
We didn’t have the collateral that the banks or the SBA required.
You have to be either individually wealthy and provide those as-
sets, or you have to have a business that has assets for it to work.
And we didn’t have either. And therefore, it wasn’t an option for
us.
Ms. KENNEDY THOMPSON. And for us, it was the speed to
market. How fast could we move? How fast could we take care of
our franchisees, and how fast could we take care of our customers?
And private equity, frankly, allowed us to move faster.
Ms. GLUESENKAMP PEREZ. Hmm, okay. How can the SBA
process be improved so more small business owners choose to uti-
lize and view it as a viable option?
Mr. SHAH. I think Ms. Thompson just said it as well, is speed
for businesses. Small businesses do not have the time and the lux-
ury to wait, you know, years to figure this out and go through a
process of denial where private investors are giving you responses
pretty immediate. Even if it is no, it is still pretty immediate. And
I think that, again, we need to change the collateral requirements
to be more in line with the new economy versus the old economy.
Ms. KENNEDY THOMPSON. One of the reasons that speed is
so important as a small business owner is you have to be able to
pay yourself. There are three things you have to do. You have to
pay yourself. Pay down debt. Put it back in the business. And if
you cannot pay yourself, you are not going anywhere. And so, if it
takes months and months, you end up having to go do something
else.
Ms. GLUESENKAMP PEREZ. Mm-hmm. Yeah, I bought a build-
ing. I own an auto repair shop with my husband, and we bought
a building with a 504 loan. The only reason it worked was because
the sellers, they were committed to seeing that property remain in
the trades. And so, you know, God bless them for that. But that
is so rare. And we shouldn’t—we cannot let our small businesses
be at the mercy of someone’s good intentions. So, thank you both
so much for being here. I yield back.
Chairwoman VAN DUYNE. Thank you. I now recognize Rep.
Bean from Florida for five minutes.
Mr. BEAN. A very good morning, Madam Chair. And good morn-
ing, Small Business. To our witnesses, welcome. We are glad to
15

have you here. How bad is it on a scale from 1 to 10, 10 being atro-
cious, zero, not at all a problem, the regulatory environment?
Madam Chair, in her brilliantly debated opening statement, really
nailed it with the amount of the regulations that are, that she says
strangling small business. Is she on, or is that just made up, all
the regulations? So, give me—is it really bad, a scale from 1 to 10,
how bad is it, new regulations on small business? Mr. Shah?
Mr. SHAH. I think it is different for every type of small business.
We work with a lot of independent restaurant owners, bars, brew-
eries, and I think it is extremely bad for a lot of them.
Mr. BEAN. You would say over what number?
Mr. SHAH. Probably over seven.
Mr. BEAN. Okay.
Mr. SHAH. They are absolutely feeling it right now. For tech
companies like ourselves, we also, I would say, are probably a little
bit lower just because we have access to different financing options.
Mr. BEAN. Yeah.
Mr. SHAH. But in the last few years, as I have said in my testi-
mony, that has also shrunk. The access to capital has shrunk. With
interest rates being as high as they are, there is less capital being
deployed in the private markets as well.
Mr. BEAN. Seven.
Mr. SHAH. And so——
Mr. BEAN. Seven.
Mr. SHAH.—that is affecting us a lot——
Mr. BEAN. Ten-four.
Mr. SHAH.—at the moment.
Mr. BEAN. Ms. Thompson, what say you?
Ms. KENNEDY THOMPSON. Well, I was thinking a seven.
Mr. BEAN. Seven.
Ms. KENNEDY THOMPSON. And I say the only reason it is not
an eight is because we found other ways to work around it. Other-
wise, it would be an eight-plus to a nine.
Mr. BEAN. Ten-four.
Ms. KENNEDY THOMPSON. We have got to find ways to get
them to move faster.
Mr. BEAN. Gotcha. Mr. Jeremy, what do you say?
Mr. KRESS. I would just note from an access to capital stand-
point, that from a data driven perspective, and with all due respect
to colleagues who run small businesses, but Fed data show that the
growth of bank loans to partnerships and proprietorships has been
positive for every year from 2011 to 2021, and it only dipped nega-
tive as a result of the pandemic.
Mr. BEAN. What does that mean in a number? On our Bean
scale from 1 to 10.
Mr. KRESS. The Fed researchers characterize small business
loan growth as robust.
Mr. BEAN. Yeah.
Mr. KRESS. So, looking at it solely through the lens——
Mr. BEAN. Taking that number——
Mr. KRESS.—of that data, I would put it below five.
Mr. BEAN. Below five. All right. Ten-four. I will accept that an-
swer. Why not just go to the bank? Mr. Shah, why can’t you just
16

go to the bank? There is a bank on every corner. Is a bank an op-
tion or not an option for capital?
Mr. SHAH. For us, it is not an option because we don’t have the
traditional capital required. We don’t have physical assets. Our as-
sets are code written on a computer. They don’t deem that as worth
it in terms of loaning against it. Also, in our business, there is a
lot of private companies that will loan against revenue or cash
flow. But businesses traditionally, or banks traditionally, do not
loan against that; they loan against collateral. So, for us, it is real-
ly never been an option.
Mr. BEAN. Ten-four. Now, Ms. Thompson, you are in the fran-
chise. I see a hater behind you. You are in the franchise world.
Ms. KENNEDY THOMPSON. I am.
Mr. BEAN. Why can’t you go to a bank? Is it, Mr. Shah on that?
Ms. KENNEDY THOMPSON. No. Sometimes we do go to a bank.
Sometimes, especially when they are beginning out. What happens,
though, is with the mega mergers, those relationships that the
local community that we just talked about earlier, they are just not
there anymore. And so, they do not go because they do not know
where to go and they do not know who to talk to.
Mr. BEAN. Mm-hmm.
Ms. KENNEDY THOMPSON. And they have to find a way to
have a relationship with somebody that will help them build their
business. And the megabanks, they are not looking at how your
profitability and how you are growing. They are just looking at, are
you paying the loan down? Whereas private equity, it matters to
them where your profitability is because they are not going to be
able to exit without a strong profitability. So, there is high align-
ment.
Mr. BEAN. Gotcha. Is it much more expensive, private equity,
Mr. Shah, would you say, is it much more expensive or you just
need the capital? We got to go. You got a great idea, you are ready
to go. And I sense that time is money to you. Is that correct?
Mr. SHAH. Yeah, but I don’t think it is actually more expensive
because there is a lot of things, if you choose the right partners in
the private equity world, they can actually accelerate your busi-
ness. Banks, for the most part, aren’t going to provide you with ad-
vice, expertise, access to other capital, connections in your industry
to grow your business. They are just going to provide you the cap-
ital, typically.
Mr. BEAN. So it is kind of like Shark Tank. You get somebody
that is going to be there and they are going to hopefully work with
you.
Mr. SHAH. Exactly. They understand us. A lot of them are
former founders. They get that we are going to go through ups and
downs, and they are going to be there for us the entire way. Again,
you have to find the right partners, but those partners exist.
Mr. BEAN. Gotcha. Ms. Thompson?
Ms. KENNEDY THOMPSON. Mr. Shah said something earlier
about how you can also help your employees. What I like about pri-
vate equity is every single time they have helped us help our em-
ployees as well. When we exit, they exit with a strong exit, too. So,
we actually get to transform lives.
17

Mr. BEAN. Ten-four. No, I appreciate that. As a small business
owner, formally, it is hard enough when in a perfect environment,
let alone when the government continues to put new and harder
regulations. So, thank you for being here today. Madam Chair, I
yield back.
Chairwoman VAN DUYNE. Thank you. I now recognize Rep-
resentative Alford from Missouri for five minutes.
Mr. ALFORD. Thank you, Chairwoman Van Duyne, good to see
you. Thank you all for being here on your own time and own dime,
as I like to say. It is a great investment in Main Street America
for you to be here. Small businesses are the fabric of America, and
I am proud to be a part of this committee where we are trying to
make sure that people have the capital and the resources needed
to not only start new businesses, but to maintain them in America.
As you well know, today, businesses are already struggling under
rampant inflation, ongoing supply chain issues, workforce short-
ages, burdensome regulations. On top of these issues, the Biden ad-
ministration is pursuing antigrowth policies such as Basel III, fur-
ther shrinking access to capital. President Biden also vetoed par-
tisan legislation that would undo the CFPB’s Section 1071 report-
ing requirements that would further burden small businesses’ abil-
ity to access capital. With the shrinking availability of capital from
the banking industry, small businesses have turned to alternative
sources of capital, such as private equity. Private equity is an es-
sential tool for small businesses looking to access capital and actu-
ally grow. In our district alone, there was $1.4 billion of private
credit investment in 2022.
Unfortunately, the Biden administration cannot abide any path-
way for main street to grow and has released a new merger guide-
lines through the FTC and DOJ that curtails private equity’s abil-
ity to invest. By the FTC’s own estimate, the new merger guide-
lines would lengthen the process for filing by 300 percent. I feel
that is unacceptable.
Over the next decade, compliance with President Biden’s regula-
tions will cost Americans more than $1.5 trillion. Let that sink in.
Ms. Kennedy Thompson, thank you for being here today, and I like
your pink.
Ms. KENNEDY THOMPSON. Thank you.
Mr. ALFORD. Can you please speak about how securing capital
from private equity impacted your business?
Ms. KENNEDY THOMPSON. Certainly, I would be most happy
to. There is many levels that has impacted us so from the
franchisor side. We are in our fifth hold period with private equity.
When I came into the company, we were doing 400 million with six
brands. Today we are doing 4.1 billion with 30 brands. And it is
a testament to the private equity investment that our PE sponsors
have made with us and helped us. And along the way, as we have
grown, we have been able to grow our franchisees as well because
we have had the right resources at the right time to bring in the
right talent to be able to have the right access to capital, so we
could buy some of those companies to be able to provide our cus-
tomer the right and best experience.
And then to our franchisees, we have many that are ready to
grow, and they are finding access to capital quite difficult. And the
18

smaller PE companies are coming in and being thought partners to
them. Introducing them to the right partners, and to the right sup-
pliers, and helping them grow their businesses as well.
Mr. ALFORD. Very quickly, where would you be today if it
weren’t for those investments?
Ms. KENNEDY THOMPSON. That is a great question. I cer-
tainly don’t think we would have 30 brands doing 1 billion. I don’t.
I was there at the early days, and we are a completely different
company with really great resources at our fingertips. And what is
most important is it is helping us grow our franchisees.
Mr. ALFORD. Mr. Shah, in your remarks, you spoke about how
SBA loans are a key avenue for many businesses to access capital.
However, you noted that the majority of these loans require some
form of physical asset to secure. How can the SBA better support
small businesses in the tech space, such as your own?
Mr. SHAH. That is a great question. I think something needs to
change on that side. What they can do is, I think they can use the
private markets to understand collateral. So, for example, if you do
receive private equity, the SBA can come in and provide additional
capital on top of the private capital to further grow that business.
There are also ways that we can look at collateral differently today
than what historically has happened. You can use revenue growth
or traction or other metrics that are not physical assets in the eyes
of what I would say is a traditional physical asset. So, I think a
lot of those avenues need to change as well.
So, I would say the biggest part for us is the private markets,
and allowing us to use the private markets to help with the SBA
loans.
Mr. ALFORD. Thank you so much. Thank you again to our wit-
nesses, and with that, I yield back, Madam Chairman.
Chairwoman VAN DUYNE. Thank you very much. I would also
like to thank our witnesses for your testimony and for appearing
before us today. Without objection. Members have five legislative
days to submit additional materials and written questions for the
witnesses to Chair, which will be forwarded to the witnesses. I ask
the witnesses to please respond promptly. If there is no further
business, without further objection, the committee is adjourned.
[Whereupon, at 11:01 a.m., the subcommittee was adjourned.]
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