0001
 1    THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 2   
 3   
 4                SMALL AND EMERGING COMPANIES
 5                   ADVISORY COMMITTEE            
 6   
 7                Wednesday, February 15, 2017
 8                        9:30 a.m.
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23          U.S. Securities and Exchange Commission
24          100 F Street, NE
25          Washington, D.C.  20549
0002
 1   APPEARANCES:
 2   Michael S. Piwowar, Acting Chair 
 3   Kara M. Stein, Commissioner 
 4   Sara Hanks
 5   Shelley Parratt
 6   Betsy Murphy
 7   Robert L. Aguilar
 8   Brian Hahn
 9   Jenny Kassan
10   Catherine V. Mott
11   Jonathan Nelson
12   Patrick A. Reardon
13   Lisa Shimkat
14   Annemarie Tierney
15   Laura Yamanaka
16   Michael Pieciak
17   Michele Schimpp
18   Sebastian Gomez
19   Julie Davis
20   Richard I. Alvarez
21   Martin A. Hewitt
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0003
 1   APPEARANCES(CONT):
 2   James A. Hutchinson
 3   Glen Giovannetti
 4   Yanev Suissa
 5   Joanne Rutkowsky
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0004
 1                      P R O C E E D I N G S
 2             MS. HANKS:  Okay.  Good morning and welcome.
 3             Welcome to the Advisory Committee on Small and
 4   Emerging Companies.  And first I need to ask Sebastian if we
 5   have a quorum for the meeting.  Are we quarried?
 6             MR. GOMEZ:  We do, Sara.
 7             MS. HANKS:  Okay, excellent.
 8             I am Sara Hanks and I am here without my co-chair,
 9   Steve Graham, this morning.  He is by the side of his wife,
10   Joanne, who is recovering successfully from a major surgery.
11             Steve, if you're watching this, know that everybody
12   in this room is thinking of you and sending thoughts and
13   prayers for Joanne's continued recovery, and we are looking
14   forward to seeing you next time.
15             We have a wide-ranging agenda today.  We are
16   starting this morning with a discussion on the limited
17   liquidity in secondary markets for holders of shares of
18   smaller companies.  We want to focus in particular on two
19   types of companies, companies that are providing annual and
20   semiannual reports following a Regulation A, Tier 2 offering;
21   as well as SEC registered and reporting companies who are
22   filing quarterly reports but are not listed on any exchange.
23             We have asked two preeminent blue sky lawyers to
24   present to the committee in order to help us navigate these
25   issues, because as you know one of the problems in this area
0005
 1   is that there is no state preemption for resales of these
 2   securities.
 3             Following that, we are going to return to a topic
 4   of long-held interest to many of us, the broker-dealer status
 5   of finders; that is, people who help small companies find
 6   sources of capital.  During our October meeting, we received
 7   an update on this topic from Stephen Luparello, the then-
 8   director of the Division of Trading and Markets.  It was
 9   clear at that time that there was nothing in the immediate
10   works in terms of rulemaking or other division action to
11   redefine the definition of broker-dealer.  So we are going to
12   spend some time this morning discussing whether we'd like to
13   reiterate, once again, a recommendation for action in this
14   space.
15             After lunch, we're going to take up a question that
16   many have been asking, which is why are more companies
17   choosing to stay private.  Or, to put it a different way, why
18   aren't more companies choosing to do an IPO.  We are going to
19   be joined by a lawyer, accountant and a venture capitalist
20   who have lots of direct experience with companies making
21   these decisions and it's going to tee up a very interesting
22   discussion.
23             Finally, I am hoping that we are going to finalize
24   our recommendation to the Commission regarding diversity on
25   corporate boards and the ways that the SEC's disclosure
0006
 1   requirement in this area could be improved.
 2             But before we move into the agenda for the day, we
 3   are pleased to have with us this morning for opening remarks
 4   Acting Chairman Mike Piwowar and Commissioner Kara Stein.
 5             Chairman Piwowar.
 6             COMMISSIONER PIWOWAR:  Thank you, Sara.  Good
 7   morning, everyone.  And, Steve, if you're listening, as Sara
 8   mentioned, all of us are sending our best wishes your
 9   direction.
10             I've always enjoyed these advisory committee
11   meetings and I am pleased to be here in my new role as acting
12   chairman.
13             I'd like to extend a special welcome to our newest
14   committee member, Michele Schimpp, who is representing the
15   Small Business Administration.  We very much appreciate
16   having the SBA's insights and we look forward to working with
17   Michele.  Welcome.
18             No matter where you are in the United States, small
19   and emerging companies raise the tide for so many people to
20   succeed.  The freedom to innovate and grow has always been
21   fundamental to American success.  And we, as regulators, must
22   constantly assess how our work meets the needs of today's
23   innovators.  That's why this committee is so valuable.
24             Committee recommendations put forward in early 2012
25   about lifting the ban on general solicitations, expanding
0007
 1   Regulation A and raising the Section 12(g) registration
 2   thresholds helped lead to the enactment of the JOBS Act.  In
 3   2015, the committee recommended that the Commission modernize
 4   Rule 147 to help facilitate interstate offerings and I'm
 5   pleased the Commission did just that.
 6             As of last month, the related rule -- amended Rule
 7   504 is now in effect, and the new Rule 147A will go into
 8   effect in April, providing more options for companies looking
 9   to raise capital.
10             The committee also recommended raising the
11   financial thresholds in the smaller reporting company
12   definition to expand the number of smaller companies that
13   qualified for scaled disclosures.  In line with that
14   recommendation, the Commission proposed amendments to raise
15   those thresholds last year.  
16             The list of your valuable recommendations and
17   discussion topics goes on and on.  And it seems Congress was
18   so impressed with your efforts that in December it codified
19   the committee into law.  The bipartisan Small Business
20   Advocate Act of 2016 put into the Exchange Act two new
21   provisions.  The first establishes the Office of the Advocate
22   for Small Business Capital Formation, headed by a new
23   advocate for small business capital formation.  The second
24   establishes a Small Business Capital Formation Advisory
25   Committee.  These are parallel provisions to the Dodd-Frank
0008
 1   act that established the Office of Investor Advocate and the
 2   Investor Advisory Committee. 
 3             I am proud to say that we are already taking steps,
 4   including working with our appropriations committees, to
 5   stand up the new office.  I anticipate that we will begin the
 6   search for a new advocate for small business capital
 7   formation in the near future.  The law requires that the new
 8   advocate be someone who is not a current SEC employee, so I
 9   hope you all will encourage good candidates that you may know
10   to apply.
11             In the meantime, we want you to continue down this
12   exciting path.  The charter of this advisory committee
13   doesn't expire until September and I know that between now
14   and then you will continue your efforts to bring forward
15   ideas to facilitate capital formation for small and emerging
16   companies.
17             Your agenda today, as Sara mentioned, secondary
18   market liquidity, finders and why companies are not going
19   public reflect important topics facing small and emerging
20   companies.  Secondary market liquidity for shares being held
21   by investors in Reg A securities is becoming an increasingly
22   important issue.
23             Between June 19, 2015, the day when amendments to
24   Reg A took effect, and January 31 of this year, there were
25   181 offerings filed using Regulation A.  One hundred and
0009
 1   three which have been qualified by SEC Staff for the issuer
 2   to begin making sales; 28 issuers have reported selling
 3   approximately $259 million in the aggregate.
 4             I look forward to any recommendations on ways to
 5   remove frictions that may stand in the way of investors being
 6   able to readily exit their investment.
 7             I'm also pleased that you are discussing why more
 8   companies are choosing not to go the route of an IPO.  While
 9   the menu of capital raising choices available today for small
10   businesses presents more flexibility and more alternatives
11   than ever before, there is always more we can do to provide
12   robust public capital markets.
13             I look forward to your input on these and the other
14   topics on your agenda today.  
15             Thank you again for your service on this committee
16   and your continued commitment to facilitating capital raising
17   by small businesses.
18             MS. HANKS:  Thank you.
19             Commissioner Stein.
20             COMMISSIONER STEIN:  Thank you.  I also want to
21   extend my thoughts and good wishes to Steve and his wife. 
22   Welcome, Michele.
23             Good morning to everyone else.  In this dynamic
24   environment, I think the ability to work on consensus topics
25   is even more important.  This committee remains focused on
0010
 1   fostering and supporting healthy marketplaces for fledgling
 2   smaller companies while protecting investors.  And this is a
 3   focus that we can all stand behind.  And your commitment and
 4   work towards this goal, as always, is much appreciated.
 5             Today's agenda reexamines topics that have been
 6   previously discussed.  But we now have the added benefit of
 7   the inflow of initial information and data about how certain
 8   JOBS Act regulations are working in practice.  
 9             One aspect of your discussion concerns secondary
10   market liquidity for smaller companies that are using the new
11   Reg A Plus reg, you know.  And secondary market liquidity, I
12   think, from my perspective, is a rather complicated topic. 
13   For example, our Equity Market Structure Advisory Committee
14   has also looked at this issue.
15             One of the things that's been most interesting to
16   me is the availability of more data and current research that
17   seems to be informing us on the role of information and
18   transparency and the relationship to secondary market
19   liquidity and firm value for OTC firms.
20             While your discussion today may be primarily
21   focused on state securities laws and their impact on
22   secondary market liquidity, I don't think it needs to end
23   there.  Blue sky requirements that apply to secondary sales
24   of Reg A securities also are intended to provide a layer of
25   protection for investors against fraudulent activities within
0011
 1   each state in which the transactions occur.  I think from my
 2   perspective, state laws have often provided a protective
 3   guardrail in an attempt to balance efficient capital
 4   formation with robust investor protections.
 5             That said, I mean, I think it's fair to examine
 6   whether the current blue sky regime may negatively be
 7   affecting secondary market liquidity.  I'm particularly
 8   interested in learning more about how compliance with state
 9   securities laws is working for Reg A, non-exchange listed
10   securities.
11             I look forward to the discussion of the pros and
12   the cons of blue sky laws and what if any improvements need
13   to be made.  
14             Finally, if there are inefficiencies with blue sky
15   compliance regimes, how can the current regime be adjusted? 
16   For example, is there a means by which NASAA, working with
17   the states, can improve the availability of manual exemptions
18   across more states?
19             The other item on your agenda that I'm sure will
20   generate significant discussion concerns the relative lack of
21   IPOs as compared to prior periods.  What does the data
22   reveal?  What are the current observations and explanations?
23             I can tell you again from my perspective, depending
24   on what market participant you talk to, they have very
25   different explanations.
0012
 1             One thing I'm interested in is has the JOBS Act
 2   provisions that changed the registration thresholds or
 3   basically that have allowed for greater private capital
 4   raising contributed in any way to companies remaining private
 5   for a longer period of time?  And I think that's another
 6   thing we should be thinking about, is how different JOBS Act
 7   provisions interacted with one another.
 8             I look forward to the discussion and I hope we'll
 9   delve into the very factors that are changing this whole
10   ecosystem of our markets for capital formation, including the
11   effects of the economic environment and the regulatory
12   structure.
13             Finally, you will also consider recommendations on
14   broker-dealer finders and board diversity.  I very much look
15   forward to the discussion and those recommendations.
16             And thank you again for your time and commitment to
17   helping us think through these issues.
18             MS. HANKS:  Thank you, commissioner.
19             Now we are going to quickly turn to the SEC Staff,
20   from the Division of Corporation Finance.  We send our best
21   wishes to Keith Higgins, who has moved on after more than
22   three years as the division's director.  I am reliably
23   informed that he left just in time to enjoy staying up late
24   on a school night to watch the New England Patriots win the
25   Super Bowl, which I am equally reliably informed is something
0013
 1   to do with American football.  Who the hell knows.
 2             (Laughter.)
 3             MS. HANKS:  The division is now in the capable,
 4   skilled and steady hands of Acting Director Shelley Parratt,
 5   and we are very pleased to have her this morning.
 6             Shelley.
 7             MS. PARRATT:  Thank you, Sara.
 8             Good morning.  Good morning Acting Chairman
 9   Piwowar, Commissioner Stein, and the committee members.  I am
10   very happy to be here with you this morning.
11             This is my first time speaking at one of your
12   advisory committee meetings and, as part of the leadership of
13   the division's disclosure review program, I have always
14   appreciated your thoughtful discussions and have carefully
15   watched you develop recommendations.  I am pleased to have
16   this opportunity to thank you in person for your time and for
17   sharing your experience and insights with the Staff, the
18   Commission and the public.
19             Each and every Staff member in the Division of
20   Corporation Finance takes seriously the agency's charge of
21   facilitating capital formation while at the same time
22   protecting investors.  We will be listening closely to your
23   discussion this morning on ideas to improve secondary market
24   liquidity for investors which, in turn, should help
25   facilitate capital formation for issuers.  We also look
0014
 1   forward to your afternoon discussion and welcome any ideas
 2   you may have that would promote further activity in the IPO
 3   market.
 4             Before closing, I want to acknowledge the other
 5   members of the Corporation Finance Staff at the table with
 6   me.  To my right, Betsy Murphy, a very important member of
 7   the division's senior leadership.  Next to Betsy is Sebastian
 8   Gomez, the chief of the Office of Small Business Policy.  And
 9   to his right is Julie Davis, the senior special counsel in
10   that office.
11             As you are all well aware, I need to give the
12   standard disclaimer for any Staff member speaking today,
13   which is that any remarks made by any of the SEC Staff
14   members reflect his or her own views and not necessarily
15   those of the Commission or any other member of the Commission
16   Staff.
17             And with that, I'd like to thank you for letting me
18   join you this morning and I look forward to listening to your
19   discussions.
20             MS. HANKS:  Thank you, Shelley.
21             So we're going to move on to the secondary market
22   liquidity.  As you've known, over the course of the last few
23   years in a variety of formal and informal ways, this
24   committee has taken up issues surrounding the lack of
25   sufficient liquidity in the securities of small companies. 
0015
 1   Today, we would like to focus more narrowly on the topic of
 2   secondary liquidity in the context of issuers that are
 3   subject to ongoing reporting requirements and thus have
 4   updated information available in the marketplace.
 5             In the case of a company that's done a Regulation A
 6   offering, they are obligated to file on EDGAR annual and
 7   semiannual ongoing reports and current reports.  Companies
 8   that have done a public offering, i.e., registered public
 9   offering, they are subject to the ongoing disclosure regime
10   which includes quarterly reports.
11             The availability of these ongoing updates means
12   there is available information to help establish pricing and
13   transparency in the secondary market.  Yet, as we have heard
14   in our previous discussions, investors in Reg A securities
15   are likely to have a difficult time when they are ready to
16   resell their shares.  One key factor in this space is the
17   friction that comes with having to find state exemptions for
18   each trade, since blue sky -- state blue sky laws do apply to
19   secondary sales.
20             We have invited today two highly regarded attorneys
21   who specialize in blue sky matters and can help educate us on
22   the current legal framework.
23             First, I would like to introduce Richard Alvarez,
24   principal of the Law Office of Richard Alvarez.  Richard
25   currently serves as vice chair of the State Regulation of
0016
 1   Securities Committee of the ABA, American Bar Association.
 2             And next to him is Martin Hewitt.  Martin is chair
 3   of the same state regulation securities committee of the ABA. 
 4   Martin may look familiar to you because he often attends
 5   these meetings and the SEC staff think maybe he's a member of
 6   the advisory committee fan club.  
 7             (Laughter.)
 8             MS. HANKS:  We're very happy to have both of you
 9   here to share your expertise and help us delve further into
10   this very important topic.  
11             And I think Richard, you're going to go first?
12             MR. ALVAREZ:  Yes, I will.  Thank you, Sara.
13             MS. HANKS:  Thank you.
14             MR. ALVAREZ:  Unfortunately, I didn't bring my own
15   membership key for the advisory committee.  Martin decided
16   not to share that with me.
17             MS. HANKS:  We're designating you a member right
18   now.
19             MR. ALVAREZ:  Thank you, Sara.  That's very
20   gracious.
21             (Laughter.)
22             MR. ALVAREZ:  Good morning, everyone.  Thank you
23   for inviting Martin and I to speak with you today on the
24   topic of blue sky compliance that is applicable to Reg A
25   Plus, Tier 2 offerings and, more broadly, to the securities
0017
 1   of nonlisted, nonreporting, publicly traded companies.
 2             I would like to particularly thank acting
 3   Commissioner Piwowar and Commissioner Stein for their
 4   comments and certainly for their continued support in
 5   promoting the work done by this advisory committee.
 6             Our presentation this morning will offer our views
 7   on the effects of state blue sky regulations on promoting or
 8   hindering secondary market liquidity for Reg A Plus, Tier 2
 9   offerings.  And our discussion will hopefully be in the
10   structure of a point, counterpoint presentation.  We're not
11   quite Kudlow and Cramer, for those of you who have long
12   memories, but hopefully providing countervailing viewpoints.
13             Let me start basically at the end.  I believe that
14   secondary market liquidity for Reg A Plus offerings, and for
15   securities of nonlisted, nonreporting public companies will
16   never be fully achieved unless the blue sky laws and
17   regulations that are applicable to secondary market
18   transactions in these securities are preempted by federal
19   law, either through congressional action or through SEC
20   rulemaking, to revise and enhance existing provisions dealing
21   with transactions in these securities in the secondary
22   markets.
23             For the reasons I will explain in detail further on
24   in our presentation, it is clear to me from the vantage point
25   of over 30 years having dealt with blue sky -- state blue sky
0018
 1   law issues, that while likely unpopular with many state
 2   regulators, the existing state regulatory framework that is
 3   applicable to secondary trading activities for certain types
 4   of securities and market participants has become overly
 5   burdensome, rooted in a view of a national securities market
 6   that defers to larger, more mature companies at the expense
 7   of newer and untested companies.  This bias has the effect of
 8   stunting growth and innovation and is not, in my view,
 9   responsive to both the rapid evolution of the markets
10   resulting from technological innovation, and to the shifting
11   imperatives of Congress reflecting the desires of their
12   constituents for greater opportunities for capital formation
13   and investment opportunities.
14             This is not to say, of course, that these
15   imperatives demand that investor protection, which is one of
16   the principal mandates of state regulators, should be
17   diminished or eliminated.  However, to me, it does mean that
18   as securities markets evolve and the objectives of the
19   markets overall change by emphasizing the importance of
20   capital formation and job creation through more robust
21   marketing opportunities for issuers and investors alike,
22   existing regulation should also evolve.  Oftentimes,
23   evolution cannot be incremental.  Disruptive change is
24   sometimes necessary.
25             At this point, I would like to sidebar for a moment
0019
 1   to give a brief overview of the state of play regarding state
 2   regulatory secondary market trading exemptions.  As we all
 3   know, the securities of companies who are listed on a
 4   national securities exchange enjoy full preemption. 
 5   Certainly, the listing standards and the abundance of
 6   available real time information for those companies offers
 7   the basis for reducing the amount of needed regulatory
 8   scrutiny.
 9             Preemption is also available for securities that
10   are the subject of nonissuer secondary market transactional
11   exemptions under Section 4(a)(1), that is for transactions by
12   a person other than an issuer, underwriter or a dealer, and
13   for broker transactions executed in reliance on 4(a)(3) of
14   companies who report under 13 and 15d of the Exchange Act.
15             We should note here that for securities that are
16   sold in reliance on 4(a)(3), while enjoying covered
17   securities status, there are a handful of states that
18   obligate an issuer to file a notice to claim preemption, if
19   you will, for securities to be eligible to be traded in their
20   state in reliance on that preemptive provision.
21             There is also a federal preemption of state
22   regulation enjoyed by transactions in securities made in
23   reliance on Section 4(a)(4) of the '33 Act, which deals with
24   unsolicited broker transactions.  It would seem obvious that
25   that exemption has some limitations, particularly in the
0020
 1   context of a desire to create and develop a robust secondary
 2   market in -- in outstanding securities.  Certainly, if a
 3   broker cannot solicit its customers, it cannot create a
 4   market.  And certainly if a -- if a broker seeks to share its
 5   research for a particular company with its clients, that will
 6   also defeat an assertion that the transaction, if it were
 7   initiated by the client, would be wholly unsolicited, making
 8   that exemption unavailable.
 9             There is also an institutional investor exemption,
10   which all of you are familiar with.  Again, that focuses on
11   the nature of the investor as opposed to the type of
12   transaction.  Although transactions with institutional
13   investors don't enjoy covered security status, it is a
14   universal exemption at the state level.  The trouble, of
15   course, in mentioning that exemption in the context of Reg A
16   Plus, Tier 2 offerings or for the securities of small
17   emerging growth companies is that that category of investor
18   is not normally found making investments for those -- in
19   securities of those issuers.  So I question whether, in the
20   discussion about developing a robust secondary liquid market
21   for Reg A Plus, Tier 2 issuers and securities of
22   nonreporting, nonlisted public companies, whether the
23   institutional investor exemption has any real validity.
24             Last but certainly not least is the exemption that
25   Sara mentioned, the so-called manual exemption.  Most of you
0021
 1   are familiar with the state exemption that is currently
 2   available in, depending on who you speak to, 39 or 44 states. 
 3   And there, that simple statement demonstrates why this is
 4   such a problem area.  There is not even unanimity on which
 5   states actually offer an exemption that us usable for
 6   secondary market purposes.
 7             Well, what does the manual exemption provide?  It
 8   offers an exemption for secondary trades in -- by -- by
 9   nonissuers through a licensed broker-dealer, provided that
10   the issuing company has financial and other information
11   published in a -- in a designated standard manual.  Up until
12   the middle of last year, the two main reporting manuals were
13   Emergence and Standard and Poor's.  Standard and Poor's has
14   given up the ghost and is no longer involved in this space. 
15   However, I do understand that the OTC Markets has been
16   developing its own manual to replace -- I suppose to replace
17   the Standard and Poor's manual.  And that is their Best
18   Markets.  And, as I understand it, with Vermont -- Michael --
19   his state leading the way, it is now an accepted manual in 19
20   jurisdictions.  I think that's right.  With two others on
21   board to adopt the manual as part of its manual exemption.
22             The obvious problem for purposes of our discussion
23   this morning with the manual exemption is the, A, the lack of
24   complete coverage in all 54 U.S. jurisdictions of that
25   exemption.  And, further, the fact that even among the states
0022
 1   that have adopted a manual exemption, there are substantive
 2   differences in how those exemptions are applied, focused on
 3   the -- the type of uniform securities act that the state
 4   follows.  There are, for those of you who don't know, two
 5   uniform acts that the states generally model their statutes
 6   after.  One is a 1956 vintage act, that has been around for
 7   quite some time, obviously.  And the second is a more
 8   current, updated version adopted in 2002, which about 20
 9   states have adopted.
10             But again, the exemptions under both of those model
11   acts differ.  Perhaps not substantially, but sufficiently
12   that the lack of uniformity doesn't lend itself to promoting
13   a national secondary trading exemption that is usable for
14   companies that don't enjoy federal preemption.
15             A secondary market that must rely on these
16   disparate exemptive provisions at the state level will, of
17   course, be fragmented and far from the liquid secondary
18   markets enjoyed by larger capitalistic companies.  The
19   question then is why are robust liquid secondary markets for
20   smaller companies important?  Whether owning securities in
21   large or small companies, investors generally don't want to
22   hold their investments indefinitely.  A liquid secondary
23   market allows investors to realize gains, minimize losses,
24   generally make decisions to manage their portfolios and
25   investments.  A liquid secondary market also helps issuers
0023
 1   since even the prospect of a liquid secondary market makes it
 2   more likely that they will attract needed investment capital
 3   from potential investors, who are assured of an exit ramp for
 4   their investment, thus providing capital to foster job
 5   creation and entrepreneurial innovation.  Regulatory
 6   impediments to a robust secondary market frustrate those
 7   objectives.
 8             This picture is not all wine and roses, however. 
 9   An unchecked market will undoubtedly offer opportunities for
10   unscrupulous operators to game the system, to the financial
11   disadvantage of the groups that would benefit the most from a
12   less rigid regulatory scheme, smaller companies and their
13   investors.  
14             So how to balance these equally important but
15   competing interests?  A robust and liquid secondary market as
16   currently exists for exchange-listed and SEC reporting
17   company securities must be based on realtime availability of
18   information about a company.  The ability of an investor to
19   find, examine and rely on information that he or she deems
20   critical to an investment decision foster investor confidence
21   in the markets, as much as the knowledge that regulators are
22   standing by to protect their interests.
23             Certainly, though not ideal, the states' manual
24   exemption recognizes this fact, since it relies on the
25   availability of accurate, current information about an issuer
0024
 1   as the basis for the availability of that exemption. 
 2   However, the lack of uniformity, as I mentioned before,
 3   between and among the states in applying this exemption,
 4   coupled with the fact that more than a dozen states don't
 5   even recognize the exemption, frustrates investor efforts in
 6   many states to make investments based on what should be a
 7   coordinated, consistent regulatory environment.
 8             Here then are my suggestions for addressing the
 9   lack of a meaningful secondary market liquidity for Reg A
10   Plus, Tier 2 securities.  I'll address that first.
11             In my view, federal preemption should be extended
12   to include all secondary market trades in securities for the
13   securities of a Reg A Plus, Tier 2 issuer.  This can be done
14   through SEC rulemaking, by refining the definition of
15   qualified purchaser under Section 18 to include any person
16   who, in a secondary market transaction, buys or sells a
17   security of a Tier 2 issuer that is current in its reporting
18   obligations.  This would result in any such security being a
19   covered security under Section 18 of the '33 Act, thereby
20   allowing a secondary market for such securities to develop
21   without the regulatory burden of having to ensure compliance
22   with state law requirements for secondary market trades.
23             The current definition of qualified purchaser which
24   is any person to whom securities are offered or sold in Tier
25   2 offering contains a limitation on the amount of Tie Two
0025
 1   securities a nonaccredited investor can purchase in a Tier 2
 2   offering.  It's my belief that that QP definition should be
 3   revised to make clear that this limitation would not apply to
 4   investor purchasing Tier 2 securities in a bona fide
 5   secondary market transaction.
 6             To continue to allow disparate state regulatory
 7   requirements to apply to secondary market transactions in
 8   what are at the initial offering covered securities
 9   frustrates the objectives of promoting creation and growth of
10   vibrant, small emerging companies by continuing to impose
11   restrictions on the secondary market for these securities. 
12   While taking the step to grant full preemption of state
13   securities laws to all transactions for Tier 2 securities is
14   significant, the impediments imposed by continued regulation
15   of secondary market transactions in Tier 2 securities to the
16   ultimate success of Reg A Plus will, to a large extent, be
17   tied to relieving the duplicative and nonuniform state
18   regulatory structure that exists today with a more market and
19   investor-friendly approach. 
20             Each Tier 2 issuer has substantial initial
21   disclosure and ongoing reporting requirements which should
22   work to relieve concerns of inefficient -- insufficient
23   information available in the market for these issuers, which
24   is vital to the success of a robust secondary market.  
25             I also have a proposal that I'd like to share with
0026
 1   the committee for facilitating secondary market trading by
 2   nonreporting, nonlisted publicly trading companies.  For
 3   these issuers, available information may not be as fulsome as
 4   the type of ongoing reporting required under Title IV and
 5   certainly under the Exchange Act.  State concerns over the
 6   type and quality of information for these companies argues
 7   for an increase in the reporting that should be required of
 8   these non-Reg A, Tier 2 nonreporting issuers.
 9             The possible solution, in my mind, lies ironically
10   in the very regulatory structure that impedes the formation
11   and maintenance of liquid secondary markets for these types
12   of issuers.  A standard disclosure system comprised of a 
13   national standard securities manual modeled after the
14   disclosures currently required to included in the manuals
15   that are accepted under state manual exemptions as the basis
16   for supporting preemption of state law requirements over
17   secondary market trading of securities of nonreporting,
18   nonlisted, non-Reg A Plus, Tier 2 issuers.  By requiring
19   these issuers to include information that is consistent with
20   what existing manuals currently require, state concerns about
21   a lack of current available information should be addressed,
22   particularly if the states are partners in the development of
23   such a national standard manual.
24             An example of a model that may be useful here,
25   which I had mentioned earlier, is the recent success enjoyed
0027
 1   by the OTC Best Markets manual.  Though I'm not endorsing
 2   this particular vendor, my intention is to mention it as an
 3   example of a disclosure delivery system that offers a way for
 4   nonreporting companies to deliver the breadth and depth of
 5   information that will help investors while also demonstrating
 6   to the states that their concerns about disclosure as a basis
 7   for assuring that investors can make fully informed decision
 8   about companies they seek to invest in are being met. 
 9   Rulemaking that requires nonreporting public companies to
10   publish information as required under current standards and
11   including securities of issuers that meet these heightened
12   disclosure and reporting requirements could be added as a
13   category of covered security in connection solely with
14   secondary market trading of those securities.
15             I certainly recognize that this proposal would
16   increase the cost to small issuers.  Of course, they would
17   have to pay fees in order to have their information included
18   in this new standard manual.  However, on balance, the cost
19   would be significantly less than would be incurred if such an
20   issuer were to become a reporting issuer.  Moreover, the
21   preemption problem for the states is, in my view, addressed
22   by having the states participate in setting the standards for
23   disclosure.  Since a majority of states already offer a
24   manual exemption, assuming the new national manual provides
25   the same or greater information, the regulatory concerns of
0028
 1   most states should be satisfied. 
 2             In closing, I would urge the advisory committee to
 3   recommend to the Commission that each of these proposals be
 4   seriously considered as a means of starting or restarting the
 5   conversation around market liquidity for Tier 2 and
 6   nonreporting company issuers.
 7             MS. HANKS:  Thank you. 
 8             MR. HEWITT:  First of all, I would like to thank
 9   Acting Chair Piwowar and Commissioner Stein and all of you
10   for having us here today.
11             I want to take a different view of this and step
12   back from the P word, preemption, for just a moment.
13             The question that I think is really important is
14   what are the concerns of regulators generally, and
15   specifically the states?  And what I believe the problem is
16   at this point is -- is a concern by the states and others
17   that there is not sufficient information available to the
18   small investor on the buy side.  The sell side, obviously
19   they hopefully know, although that's questionable, too, and
20   I'll bring that up in a moment.  That there isn't sufficient
21   information for somebody to make an educated investment
22   decision.
23             And I believe, as someone pointed out -- I've been
24   here at just about all the meetings -- a while back, I
25   believe that Acting Chair Piwowar made an interesting
0029
 1   observation.  I hope I have this right.  And you were talking
 2   about the fact that in some ways, we are no longer looking at
 3   capital formation and investor protection, but protection
 4   from fraud and prohibition of investing.  And that is
 5   something that sort of got me thinking back then and I've
 6   been thinking of since.  And to me, the question could be
 7   further refined of not investor protection, because investors
 8   I don't believe have to be protected, per se.  What they need
 9   is to be empowered.  And by that, I mean have sufficient
10   information to make intelligent investment decisions.
11             I think that there are concerns from the states
12   that when you do not have sufficient information, there are
13   certain various things that can take place.  And although not
14   necessarily in the Reg A Plus market, although I think to a
15   certain extent it could be, in publicly traded, nonlisted
16   REITs and BDCs, what often happens -- and again, it's a
17   similar sort of lack of liquidity situation, you end up with
18   what's called a mini tender, where vultures of some sort or
19   other -- I'm probably not picking the best word -- would make
20   an offer to unsuspecting investors to sell their securities
21   way below the value of whatever it is at that time, even if
22   it's depressed from the actual purchase price.
23             That is troubling on many levels.  Because, yes,
24   there are disclosure requirements under Reg A Plus.  But are
25   they as robust as they would be for a listed company?  That
0030
 1   is a question that I think has to be considered.
 2             Also, to the extent that when you have a private
 3   offering, if somebody is interested in buying, to get
 4   information on a company, what you end up having is the
 5   bigger players have access to information that the small
 6   investor doesn't have.  So in fact if what we're concerned
 7   about is a level playing field and investor empowerment, I
 8   think before we get to a discussion of preemption, we have to
 9   first think about what it is that is needed as a minimum for
10   investors to be able to, in fact, make that intelligent
11   decision.
12             And I think to a certain extension -- to a certain
13   extent, 4(a)(7) was a good indicator of that, which Sara
14   knows that better than anyone.  That had had the backing of
15   NASAA because it had certain informational requirements,
16   including knowledge of the, you know, who's running the
17   company, is it a going concern, you know, up-to-date
18   financials.
19             So my concern is more a shift away from how we
20   normally look at the situation and trying to look at this in
21   a slightly different way which is, instead of concentrating
22   on preemption, we should all be discussing, together, not
23   separately as in leave the states out of it with preemption,
24   what is it that we can all agree on as information required
25   at a minimum, as I said, to make a cogent investor decision? 
0031
 1   At this point, there are plenty of times where in fact you
 2   have situations in which the investor has very little
 3   information.  Reports to be filed are one thing, but if they
 4   just have the most basic of information, is that really what
 5   they need to make the decision?  And I suspect it is not, at
 6   least not in all cases.
 7             So one thing that we would have to consider, and I
 8   know I'm saying it a few times, but when -- when -- another
 9   way of looking at it is this way.  What is it that all of us
10   would like to see before making an investment decision?  And
11   doesn't every investor have a right to have that which we all
12   think we need to see personally, sitting around this table? 
13   And to the extent that we do, the question isn't necessarily
14   preemption.  And I'm not sure the states would even have a
15   problem with preemption to the extent that their concerns
16   about the information required is actually addressed.
17             Now, as Richard said, if you want to -- you know,
18   whether you have a more far-reaching manual exemption, that
19   is -- that is acceptable to all parties, I don't think that's
20   a bad place to -- to start.  I think that in many ways, it
21   has worked, except for there are a few holdout states.  And
22   for whatever reason.  But to the extent that there has to be
23   preemption, I think it has to be more not as in removing
24   people from the table, but making sure that everyone is able
25   to see -- to say what it is that their concerns are.
0032
 1             I know that one of the states has one time said to
 2   me that we want to facilitate investment, not speculation. 
 3   With that information, it can only be called speculation. 
 4   And I think that really drives home the point.
 5             So I think that if there's any recommendation I
 6   have, it isn't so much to worry about preemption, per se. 
 7   It's to worry about addressing the concerns of the states as
 8   to information that, at a bare minimum, we should have in
 9   some sort of manual, et cetera.  But how we get there is a
10   matter of discussion.
11             I just think everyone rushes too quickly to
12   preemption, to go to preemption, without considering several
13   things, including what is it that the states are concerned
14   about.  So I won't take up too much time, because I know
15   we've both plowed through a lot of it already.
16             MS. HANKS:  Thank you both.
17             If I could just sort of kick off the questions
18   here, since we're focusing on the information that's
19   available before we get to the P word, does anyone here have
20   any experience in how different disclosure under Reg A
21   ongoing reporting is to what's in a manual?  And I've got to
22   confess, it's been a long time since I looked in manuals. 
23   Maybe I was a junior associate sometime back in the '80s when
24   I last looked at these things.
25             Seems to me, and I'm hoping someone can challenge
0033
 1   this, that when you look at the disclosure that's made under
 2   Regulation A, and we've had now several companies go through
 3   a year's worth of disclosure, you've got ongoing reporting,
 4   you've got annual reporting with audited financials, you've
 5   got semi-annual with unaudited financials, you've got 1Us. 
 6   You've got a lot of companies filing 253G2s, supplement
 7   information to keep the information rolling.
 8             How do those compare?  Is there anything in -- is
 9   there any way in which Reg A is not what you would want to
10   see in a manual?  Because I remember those manuals, you just
11   go through and it was kind of unreadable.  Can we compare and
12   contrast those two sources of information?
13             MR. HEWITT:  I'm actually glad you brought up the
14   fact that they're unreadable.  That's the other problem, is
15   that whatever information is available has to be in plain
16   language, which I know is always a goal.  But it seems the
17   more that we try to make plain language the goal, the
18   document becomes thicker and thicker, which is great for
19   killing trees but that's about it.
20             The comparison between the two, I couldn't tell you
21   to the nth degree.  But I think what you also have to look at
22   is obviously Reg A Plus, these offerings are of companies
23   with little or no history.  And of course, if you're just --
24   if somebody is flipping out of that in six months to a year,
25   where is that investor during the interim report supposed to
0034
 1   get the information to the purchaser?  And I think that's the
 2   concern that, although there may be information out there, is
 3   it of sufficient detail and also of sufficient
 4   comprehensibility to be of any use to the investor?
 5             MS. HANKS:  But would that be any different under
 6   the manual requirements?  I am totally not up to date with
 7   manual requirements.
 8             MR. ALVAREZ:  Sara, I think that it's fair to say
 9   that the reporting requirements that Tier 2 issuers are
10   subject to, while something less than '34 Act reporting, is
11   something more than what is included in a manual.  The manual
12   includes things like balance sheets, officers and directors,
13   description of business, things that you would normally see
14   that is a synopsis of a company.  And I think part of the
15   thinking on the manual exemption is that that is certainly a
16   starting point for an investor.  It is a collection of
17   information that, if an investor wants more information, then
18   they can -- they can go and find it either on EDGAR or
19   wherever else.
20             But I think it's fair to say that Reg A Plus, Tier
21   2 issuers fall somewhere greater in their -- in their
22   reporting responsibilities, and of the information that they
23   -- that they are required to report under Reg A Plus than
24   they would need to under -- in a manual.  I would perhaps
25   defer to Michael who may have more intimate experience with
0035
 1   what his manual requires.
 2             MS. HANKS:  Well, we'll go to Michael and -- 
 3             MS. TIERNEY:  I'm potentially in a unique
 4   situation, which is I actually got a security qualified under
 5   the manual exception three years ago.  I think that I'm not
 6   mistaken but they no longer publish the information in a
 7   book.  What they do is they will only allow you to qualify
 8   for the manual exemption, at least S&P, while they were still
 9   doing the business, if the information was being disseminated
10   by a regulator.  So the only entities who could qualify for
11   the manual exemption at all were banks, thirfts, entities
12   that were required to publicly provide information through a
13   regulator, or companies that were qualified to trade on OTC
14   Markets under the alternative reporting standards.
15             So you can't just qualify for the manual exemption;
16   you actually have to be regulated in order to qualify for the
17   manual exemption.  So I think that's a really important point
18   to understand.  You can't just put out Reg A Plus, Tier 2
19   materials to the SEC and qualify for the manual exemption,
20   unless the manual exemption has been amended to make that
21   clear.
22             So secondly, I think that, at least the alternative
23   reporting standards under OTC required more information than
24   Reg A Plus, Tier 2.  But that was to provide, you know, a
25   trading market.  It also has a $20,000 a year cost that some
0036
 1   companies might not be able to bear.  Where the manual
 2   exemption under S&P, I think, the initial fee was maybe like
 3   5,000, so it was much less expensive to be qualified under
 4   Standard and Poor's than it is to do qualification under the
 5   alternate reporting standards, but you do get a trading
 6   market.
 7             So I think it's really important to understand it's
 8   not just that you put information out and it's in a book
 9   someplace.  That's no longer the case.  It is literally it
10   has to go out through a regulator and that is how they track
11   that information has been updated.  And there is a cost
12   associated with that.
13             MS. HANKS:  Michael?
14             MR. PIECIAK:  Thank you, Sara.  And good morning,
15   everybody.
16             So I think to that question, specifically about
17   what the differences are, when you're talking about the
18   reporting requirements in the manual, I think, probably the
19   Reg A, Tier 2 reporting, the things that are reported are
20   pretty equal if not greater, as Richard had said.  You know,
21   I think some of the other requirements, getting beyond what's
22   in the manual as components of the manual exemption, like the
23   fact it goes through a broker-dealer, that would be a
24   distinction and difference.  
25             To Annemarie's point, I mean, there is -- you know,
0037
 1   there is sort of a baseline in terms of what type of company
 2   can qualify for the manual exemption.  And I believe, I had
 3   to -- you know, I had to look back at our statute but, you
 4   know, there's a period of time in which it has to be
 5   operating and there's a period of -- there's an asset value
 6   which has to be on its balance sheet.  So there is sort of a
 7   minimum standard.  But I'm not familiar with the requirement
 8   that has to be either bank holding company or an insurance
 9   company, but -- 
10             MS. TIERNEY:  It wasn't that.  It was that the
11   information had to be disseminated by a regulator.  It
12   couldn't just be on the company's website.  That was very
13   clear to us from S&P.  We had a public website, we said can
14   we put the information on the website to qualify?  And they
15   said, no, you have to be -- that information has to be
16   disseminated through a regulated entity.  So it was OTC, it
17   was the banking regulators and it was OTC Markets were the
18   only options that would satisfy that condition, according to
19   S&P three years ago.
20             MR. ALVAREZ:  But we're talking about the access to
21   the information under the manual exemption?
22             MS. TIERNEY:  So again, and this is three years
23   ago, and S&P I don't believe is doing this anymore.  What S&P
24   said to us is, send us your offering document, we'll review
25   that.  But you have to have a system for disseminating
0038
 1   information on an ongoing basis, and it needs to be through a
 2   regulator; it could not just be our website.
 3             MR. ALVAREZ:  But the -- but the exemption, the
 4   manual exemption at the state level, is predicated on an
 5   independent third party publication containing information
 6   that is provided by the issuer, plain and simple.  Right? 
 7   The problem, of course, in the context of the discussion on a
 8   liquid trading market for these types of issuers is the fact
 9   that not all states cover the -- recognize a manual
10   exemption.  And even in those states that do recognize the
11   manual, we have a variety of different requirements, whether
12   it's a 90-day waiting period or restricting trading to
13   securities by nonaffiliates.
14             So having the manual, the existing state manual, be
15   the basis for creating a robust, secondary liquid market in
16   these kinds of securities, I don't -- I'm not confident is
17   achievable.  Which is why I suggested that the P word or why
18   the P word has again raised its ugly head.  Anyway -- 
19             MR. HEWITT:  However, I think one of the things we
20   have to consider is we're talking about the manual exemption
21   right now, which is all well and good, and perhaps there is
22   one that can be the gold standard.  But in the meantime part
23   of what happens, part of what I think the states are
24   concerned about, you know, obviously part of the thing about
25   being an empowered investor is also having the ability to get
0039
 1   guidance from an adviser of some sort.  
 2             But there is a push for preemption and removal of
 3   the broker-dealer or adviser so that, at the end of the day,
 4   it's a one-on-one transaction.  And the question is, the
 5   person who is selling, there's no oversight there whatsoever. 
 6   They are not -- they are not a representative of the company,
 7   they are not part of the issuer.  They are selling and there
 8   is very little that, at this point, as far as I am concerned,
 9   that an unsuspecting and uneducated investor can rely upon in
10   that situation.  At least if there is a broker-dealer
11   involved, you would hope that there is a minimal amount of
12   guidance.
13             So I think that while we're talking about the
14   manual exemption, we have to also consider a slightly
15   different point which is, if it's on a one-to-one basis, how
16   is that investor being protected by the seller?  
17             MR. ALVAREZ:  Counterpoint?
18             MR. HEWITT:  Go ahead.
19             This is Jane Curtin and Dan Aykroyd sort of stuff
20   going on here, but that's okay.
21             (Laughter.)
22             MR. ALVAREZ:  The one-to-one transaction is already
23   covered under 4(a)(1), all right?  And that -- and we have
24   federal preemption for those kinds of transactions.  I mean,
25   you know, the one-to-one transaction doesn't concern me, and
0040
 1   I don't think is impacted by the problems that we've spoken
 2   about relating to blue sky law.  I think the challenge is
 3   trying to figure out how to fit the current federal/state
 4   regulatory scheme to facilitate a liquid secondary market
 5   where, you know, people come and go into the market, whether
 6   through market participants or otherwise, without any
 7   significant impediment, which is what we see today.
 8             We see smaller companies struggling to convince
 9   their investors that they will have an exit strategy, because
10   there is no comprehensive, uniform way for a company to -- to
11   tell a broker or to tell investors that their securities can
12   be bought and sold in Iowa, as an example.  And I don't mean
13   to pick on Iowa if Iowa is listening.
14             (Laughter.)
15             MR. HEWITT:  Pick on Vermont instead.
16             MS. HANKS:  Patrick.
17             MR. REARDON:  I can't remember.  Tier 2 requires
18   you to have a transfer agent?  Does it require the company to
19   have a transfer agent?
20             MR. HEWITT:  Yes, I think so.  Isn't that -- 
21             MS. HANKS:  Only in certain circumstances.  Let's
22   assume that -- 
23             MR. REARDON:  If you had a transfer agent, I mean,
24   you could condition execution of the transfer that the
25   transfer agent gets some sort of proof or representation that
0041
 1   there was an exemption.  So that is a thought that I've had,
 2   and you see that under Rule 144, that the transfer agent
 3   won't transfer the trade -- won't register the trade unless
 4   there's an opinion or a form, or used to be.  I'm not sure
 5   what exactly they require now.  But that seems to me to be
 6   something you should think about.
 7             But I want to add this general observation and then
 8   make another observation.  First of all, illiquidity creates
 9   a discount.  So if you can't go and sell, then the value of
10   your company is less.  And so we all need to keep that in
11   mind.  
12             And the second thing is that my observation has
13   been that when regulation steps up and says you cannot do
14   something, and it's something that business people want to
15   do, and you can't do it, or it's very difficult to do it,
16   that's when you get noncompliance.  That's when people start
17   looking, sneaking off from their lawyers or whoever their
18   broker is, and they go and they go around the law and do the
19   deal.
20             And I've said this before.  I think our policy,
21   state and federal, is that we facilitate compliance.  I mean,
22   we shouldn't make compliance so hard that people opt to
23   violate the law just because it's difficult to do.  Or
24   impossible to do.  In some cases, you're just saying
25   impossible.
0042
 1             MR. HEWITT:  Well, because you have conflict of
 2   laws between states or state and federal.
 3             MR. REARDON:  Yeah.  I mean, it's just got -- you
 4   know, there needs to be -- there needs to be something there.
 5             And the other thing is that I think -- I don't mean
 6   to pick on you, but I think maybe the blue sky people are --
 7   you know, we have two conflicting interests here.  We have
 8   investor protection and we have capital formation.  And I
 9   think when you go into any securities regulator, SEC, FINRA,
10   state securities law, and you ask, okay, how many people here
11   have ever signed the front of a business check, have you run
12   a business, and you're going to get very few hands raised.
13             So you need to educate the people in these
14   regulatory agencies that capital formation is part of their
15   goal.  Just saying no and protecting the investor is not --
16   is not -- at the end of the day, if you do that, there's no
17   business in all your trade or treasuries.
18             MR. HEWITT:  But here's the thing to respond to
19   that is first of all you said that they are conflicting.  And
20   I don't necessarily agree with that statement.  Because if
21   there's not sufficient -- not investor protection, because
22   again I think it's investor empowerment.  If there isn't
23   sufficient empowerment if there's all just the emphasis on
24   capital formation, then there would be some nefarious people
25   out there, they are there.  Then what happens is the
0043
 1   integrity of the market fails and people won't invest and
 2   there goes your capital formation.
 3             The point being is it's a balancing act and it's a
 4   very delicate one at that.  But I don't think anyone is
 5   saying that these people shouldn't be able to invest.  I
 6   don't think the states are saying that.  I think the issue is
 7   really one of information and education.  How you get there
 8   is what the discussion has to be about with all the
 9   regulators -- all the regulators in the room.  That's
10   basically what I'm saying.  But I don't think you can say
11   that those are conflicting at all.  Because without one, the
12   other is going to fail either way.
13             MR. REARDON:  Ultimately, you're right, yes.
14             MR. HEWITT:  Thank you.
15             MS. HANKS:  We'll get to Jonathan in a second.
16             I just wanted to respond on behalf of transfer
17   agents, who probably all turned white when you said -- 
18             (Laughter.)
19             MS. HANKS:  We're looking at trying to make
20   something less friction -- we're trying to reduce friction. 
21   And I think taking free trading securities and requiring the
22   transfer agent to do something, I think that's going to
23   reintroduce friction.  So I just wanted to make that point.
24             MR. ALVAREZ:  Right, and isn't that a broker's job,
25   too?
0044
 1             MS. HANKS:  To reduce friction or to increase it?
 2             MR. ALVAREZ:  No, I mean, to the point of asking
 3   for -- 
 4             MS. HANKS:  Yes, I think, you know, if you're
 5   looking at who in this transaction has a role in doing the --
 6   is there information, it's got to be brokers as opposed to --
 7   and they do have those requirements -- as opposed to imposing
 8   these new rules on transfer agents.  
 9             We'll go to Jonathan.
10             MR. NELSON:  Is -- one of my experiences in a
11   heavily regulated industry when I was a nurse and I worked in
12   five different states, and every state had a specific
13   licensure that you had to maintain as a nurse.  But a number
14   of states had actually gotten together and they had said, you
15   know what, we're going to give each other reciprocity.  Where
16   if you actually qualify in this state as a nurse, it's a
17   relatively simple process to go through and get licensed in
18   another state.  There is also a series of states called
19   compact states, I think there's about 23 states where they
20   said, we will just honor everybody else's licenses.
21             I think one of the interesting things about, you
22   know, the SEC and government is, you know, yes, we regulate. 
23   But I also think that we have the ability to ask for -- to
24   convene.  Do state securities regulators get together on a
25   regular basis?
0045
 1             MR. ALVAREZ:  Absolutely they do.
 2             MR. NELSON:  Okay.  I mean, has there been
 3   discussion?  And, I mean, forgive my ignorance.  Is there
 4   discussion about can we create a program where there is
 5   reciprocity across these states?
 6             MR. ALVAREZ:  No.  Plain and simple.  With all due
 7   respect to Mike and NASAA -- 
 8             MR. HEWITT:  What there is, is a -- I'm going to
 9   botch the words because I just can't think of it at this
10   point -- there's a uniform process, at least on the
11   registration level, with the states now, when you go through
12   a Reg A Plus, Tier 2.  So it's not like -- Tier 1, excuse me. 
13   It's not like there's just a morass.  I think that the states
14   are certainly working towards the goal of more uniformity.
15             And, of course, the punch line to the '56 Act and
16   the 2002 Uniform Securities Act is nothing is uniform by the
17   time the legislators get done with it.  That's part of the
18   problem.
19             The one thing I just wanted to address very quickly
20   though is, when it came to the one-to-one transaction, I
21   still think that there is a potential there, preemption or
22   not, for the small investor to be taken advantage of by
23   somebody who just wants to dump their stock.  And I think
24   that's probably a concern of the states, although I can't
25   speak for them.
0046
 1             But in terms of what you're saying, especially with
 2   the nurses' licenses, in fact, now lawyers, there's a common
 3   bar exam, much to my chagrin, having studied for a couple of
 4   them.  So there is more and more reciprocity in various areas
 5   within the states now.  Has it gotten -- has it risen to the
 6   blue sky law area yet?  Not to that level.  But that doesn't
 7   mean that they are not working or trying to get, you know,
 8   the states together to make it more uniform or more user
 9   friendly.
10             Because, again, I don't think the states are trying
11   to prohibit capital formation.  I think, as you said,
12   sometimes -- or I think Patrick said, sometimes you can
13   actually protect the investor ultimately by just not letting
14   him invest, and therefore there will be no problem.  But that
15   doesn't really solve the issue.  Which is why it's a true
16   balancing act.
17             And again, although I keep on drumming this point,
18   is that we have to make sure that those issues -- those
19   scenarios that have resulted in investors being defrauded are
20   addressed.
21             I mean, we can't do away with all fraud.  The key
22   is to minimize it as much as you can.  It's like a
23   perfectionist isn't perfect, they just try damned hard not to
24   make as many mistakes as everyone else.
25             MR. ALVAREZ:  But counterpoint, in answer to your
0047
 1   question, I mean, as the discussion about the standard manual
 2   illustrates, that exemption has been around from the
 3   beginning of time.  Okay?  It's an accepted exemption.  But
 4   there are 54 different jurisdictions.  Each one of them has
 5   their own view about what that exemption means.
 6             Yes, I get that investor protection is a
 7   significant interest that needs to be -- that needs to be
 8   recognized.  But I question whether this lack of uniformity
 9   as a basis for regulation is protecting anyone.
10             I mean, certainly the states continue to retain
11   their fraud authority.  And if there is a bad actor and an
12   investor is harmed, they will complain to their state
13   regulator.  And that regulator has the full -- the full
14   breadth of its -- of its securities law arsenal to go after
15   those fraudsters.  But different to, you know, your
16   experience with nursing licenses, the states jealously guard
17   their own interests, particularly by insisting that they
18   alone understand the specific needs of investors in their
19   particular jurisdiction.  Which I don't doubt.  But -- and
20   perhaps has validity in the context of primary offering
21   review.  I get that.
22             In the case of a secondary market transaction,
23   particularly for companies where there will be information
24   available, for example a Reg A Plus, Tier 2 issuer, which has
25   fulsome disclosures under the new law, or nonreporting public
0048
 1   companies that have information included in a national
 2   manual, okay, the needs, the particular needs of the state, I
 3   think, need to take a backseat is the wrong word, but a
 4   backseat to the interests of developing a market, a liquid
 5   market in securities that benefits everyone, not just the
 6   people in Iowa, not just the people in Vermont.
 7             MR. NELSON:  I just -- every single lawyer that
 8   I've ever talked to about if you're going to actually sell a
 9   security and go under the blue sky laws, they're just like,
10   dude, don't.  That's just the third rail.
11             MR. ALVAREZ:  Give them my number.
12             MR. HEWITT:  No, give them mine, actually.
13             (Laughter.)
14             MR. NELSON:  No, but it essentially -- I do not
15   think that there is an efficient market at all, because you
16   just can't create it.  And I think ultimately that this ends
17   up hurting the smaller, less wealthy states, and it
18   essentially starts concentrating business in large, wealthy
19   cities because it tends to become who you know and it tends
20   to be who you went to school with and if you went to a school
21   with a bunch of wealthy people, then you can essentially go
22   and start a business and create a security and end up selling
23   it.  And if you're poor and you want to start a business, you
24   really can't start a business unless you can completely
25   bootstrap it without any capital.
0049
 1             I'm just saying it feels very, very, very broken to
 2   me.  And can we convene these state regulators and just say,
 3   dudes, let's just sit in a room and let's just work it out?
 4             MR. HEWITT:  Well, you've got to understand, first
 5   of all NASAA has several meetings throughout the year of the
 6   states.  But again, you put all of us in this room, we have
 7   different ideas slightly, or greatly.  But I think one thing
 8   you have to understand, I've been in the securities industry
 9   now for 35 years, which frightens me on many levels.  But,
10   you know, there was a day when there was an us-versus-them
11   mentality between the states and practitioners and issuers. 
12   But over time, I have seen that shift dramatically.
13             And, you know, one thing that NASAA is trying to
14   do, and they do meet with several groups throughout the year
15   and, you know, we're always trying to talk about, quote, low-
16   hanging fruit, what can we accomplish.  And this is one of
17   those areas where I don't think anyone is saying that there
18   shouldn't be more information or there shouldn't be more
19   easily understood information.  I think it's a matter of
20   having that discussion.  But not everyone in their own little
21   corner but, you know, out in the open and having the robust
22   discussion.  But I don't think the states are all sitting
23   there going, oh, wow, how can I make myself so different as
24   to totally derail anyone trying to either sell a security or
25   raise funds to build a business?  I don't think that's the
0050
 1   mentality.
 2             MR. ALVAREZ:  But wasn't that discussion had during
 3   the lead-up to the adoption of Title IV?  And, you know, my
 4   recollection is that there was -- there was -- 
 5             MS. HANKS:  That's fine.  I just want to get to
 6   Laura.  She's been trying to get a word in.  Between the who
 7   of you, sort out who goes first.
 8             MS. TIERNEY:  I just want to take this back to I
 9   think something the committee has talked about several times,
10   which is what is the public policy benefit of requiring a
11   Tier 2 reporting company to also qualify for a manual
12   exemption or to list under the alternative reporting
13   standards on OTC Markets?  That prohibition means, as
14   Jonathan is saying, there's no opportunity for another market
15   to develop, there's not an opportunity for another broker-
16   dealer or an ECN or any other party in the market to try to
17   create an efficient trading system for what are generally
18   publicly offered and should be publicly traded securities.
19             So I think we go back to the original conversation
20   I think back around the JOBS Act, there was a real push to
21   get preemption for Tier 2 securities where the information
22   being made publicly available.  That ended up coming off the
23   table in the final vote.  But we've had, you know, some time
24   now to look at how the market is adjusting.
25             I've made the comments before at least one or two
0051
 1   times that we did a real deep dive and look at Reg A Plus
 2   after it got enacted.  And all of the banks that we spoke to
 3   for the most part said that they would not be touching Reg A
 4   as an offering option for their client companies, because
 5   their investors cared about liquidity.  Unless there was
 6   clear liquidity for those securities, people are not going to
 7   invest in the securities.
 8             And idea that right now, if you're investing in one
 9   of the 103 companies that have been qualified to issue Reg A
10   Plus securities, there is no trading market for those
11   securities.  How is that beneficial to the people who are
12   investing in them?  They're stuck in securities unless the
13   company goes through a process.  And I fully support and
14   respect OTC Markets, they are providing a great option.  But
15   they are the only option for trading these securities.  And
16   you have to go through a process, you have to pay a, you
17   know, not insubstantial annual fee, and you have to provide
18   more disclosure than is actually required in an offering or
19   in the ongoing voluntary reporting.  It just doesn't seem
20   like there's a public policy or an investor protection
21   benefit that I see that's being provided by that kind of
22   activity.  And it's a detriment to Reg A Plus and to the
23   market developing, and I don't see why that is beneficial to
24   the market or to investors.
25             MS. YAMANAKA:  So I actually really agree with you,
0052
 1   Annemarie, but I'm putting a little comment about the
 2   insurance and the state just to educate people.
 3             I did a stint in dealing with insurers, regulatory
 4   compliance for insurance companies in all 50 states.  And
 5   just from a cost perspective, regulatory compliance --
 6   because each of the states are different, very much like
 7   we're talking about here, only they're a little bit more
 8   advanced in their compliance.  They've gone through all the
 9   thing, we're going to get together, we're going to, you know,
10   work together, and they come up with this common thing and
11   they put it together and they put it on top of all their
12   existing requirements.
13             So it's fine.  It created jobs.  It's great.  It's
14   a cost that gets passed on to the consumer, a cost of
15   operating for the company.  So in the company that I worked
16   at, I probably had about 15 percent dedicated only to state
17   compliance reporting.  So think about what that means, 15
18   percent of that body count that we had.  And if we are
19   actually only making a 6 percent bottom line in some bad
20   years, because it's insurance, at best maybe 20, that
21   compliance component, even though it's not for the whole
22   company, was costing.
23             So therefore what happens?  If you want a company
24   to do business in all 50 states, you've got to be big.  And I
25   worked with a big company and they said, we just wanted to be
0053
 1   able to say that we were listed in all 50 states.  It gave
 2   them additional market branding, et cetera.  Or you had small
 3   companies, insurance companies, and they only specialized in
 4   one.  Sounding familiar here?  Right.  And so therefore,
 5   anybody in the middle, it's economically unfeasible.
 6             So we want to tilt at that windmill, I think it's
 7   great.  But, you know, better people probably have tried
 8   before.  So unfortunately, as much as it pains me to say
 9   this, federal is probably the only way to go with that point
10   in time.
11             However, the second point that I want to get to is,
12   we're talking about increasing the availability of -- just
13   increasing the market, right?  So we don't worry about the
14   institutional investors out there, they can take care of
15   themselves.  We don't worry about the small people, you know,
16   that are doing the one-offs who actually know the business
17   they're investing in.  And again, now we're talking about the
18   mid.  And the mid just disappears, right?
19             And so to Annemarie's point, I want to reiterate,
20   before we get down into the details and whatever, if we have
21   our goal to accelerate the investment at the mid level, which
22   means they're theoretically much more knowledgeable than the
23   individual investor but don't have the funds and scalability
24   of the larger investor, there's probably something in between
25   regarding a regulatory perspective that we could take, which
0054
 1   I totally understand about working within the context we
 2   have, because I don't think we're going to be able to change
 3   things wholesale.  
 4             So whatever we can do to increase the potential for
 5   market, because Patrick, I think, I agree with your point. 
 6   If businesspeople feel that it's a viable investment
 7   alternative, they will figure out a way to create that market
 8   offline with its own inherent set of risks.  Or -- which will
 9   probably -- it could be 90 percent of the time, it really
10   works.  The 10 percent that fail spectacularly will be enough
11   to kill it eventually.  And then as an economy, all we do is
12   hurt.  So that's my only comment.
13             MR. REARDON:  If I could add to that, I think if
14   you're looking for something to sell preemption on, I think
15   increased role for the states in fraud, in chasing fraud, in
16   coordination with the SEC and the Justice Department, I don't
17   know how you would do that.  But I think everybody agrees
18   that there is plenty of fraud out there to go and chase those
19   people.
20             Are the Russians doing this?
21             (Laughter.)
22             MR. REARDON:  Anyway, I think -- that's my only
23   comment.  I don't have anything really to add.  But I mean,
24   that does seem to me we're belly button gazing and thinking
25   deep thoughts, that is one I've thought.  Put the states in
0055
 1   fraud and get them out of regulating transactions.
 2             MS. HANKS:  Thanks, Patrick.
 3             We'll go to Michael and then Jenny.
 4             MR. PIECIAK:  Thank you, Sara.  I just wanted to
 5   address quickly a point that was made by Patrick and
 6   Jonathan, just to give some information about what the states
 7   do and whatnot.  And in the insurance regulator context, you
 8   know, I mean, the state regulators are the only regulator of
 9   the insurance market and the states do coordinate quite
10   efficiently on the insurance side, in my opinion.  There's
11   accreditation for states.  They have to have certain
12   requirements or they're not part of the NIAC.  
13             And similarly on the NASAA side, you know, we have
14   two annual meetings a year, we have a board of directors, we
15   have a whole structure that works up issues through
16   committees up to the board, you know, disseminated out to the
17   membership.  And I encourage you to come to a NASAA meeting,
18   you know, when you have an opportunity to.  And I'm sure we'd
19   appreciate inviting you.
20             But you know, again, sort of on the same vein and
21   to Patrick's point, I mean, you know, the states have been,
22   in my opinion, have been very responsive in this capital
23   formation arena in the last few years and we take to heart
24   this issue of the balance, you know, the balance between
25   investor protection and capital formation.  Because, you
0056
 1   know, on the one hand, as you mentioned, you know, what
 2   happens if you focus too much on capital formation.  But if
 3   you focus too much on investor protection, you know, the
 4   opportunities to invest, the opportunities to grow your
 5   retirement, to create jobs, that goes away too, which is not
 6   good for the investor.  So that balance is very important.
 7             Martin alluded to the coordinated review that the
 8   states implemented in Tier 1 Reg A.  This, in our opinion,
 9   takes the burden off the individual issuer, puts it on the
10   states to coordinate and get specific comments out to
11   issuers.  We've created a capital formation roundtable that
12   meets once a year.  We bring in industry, listen to ideas,
13   listen to what, you know, is achievable and what we can push
14   forward.  And there's a number of initiatives just in the
15   last couple years that have come out of those discussions. 
16   We've worked more collaboratively with the SEC in recent
17   years, Rule 147A and other initiatives, and I hope we can
18   continue to do that.  So the states have been very proactive
19   in this area.  
20             And we have been, you know, very engaged.  I mean,
21   the OTC Markets, just to comment, you know, OTC Markets came
22   to us in March or April last year to Vermont and said, you
23   know, the S&P manual is going away, there's only Emergence
24   now.  We looked at that as state regulators and said, there
25   should be more options.  We were concerned about that.  We
0057
 1   were the first movers.  They came to us in March, we had a
 2   rule implemented in July of that same year.  Nineteen states,
 3   as Richard has said, have followed suit.  Three others have
 4   announced they're going to.  So the states do act and we do
 5   communicate regularly and, you know, try to lead these
 6   initiatives in a quite ongoing basis.
 7             MS. KASSAN:  I have a question about state and
 8   regional secondary markets.  I know in the past, we had a lot
 9   of more local exchanges, state level exchanges.  Gone. 
10   They're gone, right.
11             But I'm just curious, yes it's a wonderful thing to
12   have a national trading market.  But, you know, there is some
13   benefit to being able to buy and sell securities in your own
14   state.  So I'm just curious if that has been tried at all. 
15   You know, what was the success of that?  Is that something we
16   could consider reviving?
17             MR. ALVAREZ:  I think the demise of the regional
18   exchanges was clearly an economic issue.  I mean, you know,
19   it costs a lot of money to do that stuff.  And while there
20   may be some theoretical benefit to reviving a concept of a
21   regional exchange, I mean, Reg A Plus, Tier 2 is billed as a
22   platform for national securities offerings.  Right?  So at
23   least in the context -- and correct me if I'm wrong.  But at
24   least in the context of Reg A Plus, Tier 2 offerings,
25   regional exchanges I don't think would necessarily solve the
0058
 1   problem.
 2             You know, and then I suppose the one way that you
 3   could implement that is to designate whatever regional
 4   exchanges are formed as national securities exchanges under
 5   Section 18.  But if I remember my Section 18 provisions
 6   correctly, any national exchange has to meet the same
 7   standards or similar standards to the NYSE and NASDAQ.  So,
 8   you know, I wonder whether we could ever get back to what
 9   used to be the Midwest Exchange, the Pacific Exchange, the
10   Cincinnati and the like.
11             MS. KASSAN:  I'd love to hear Michael's comments on
12   that, too.  And also whether this has been discussed at
13   NASAA.  And maybe it doesn't have to be an exchange.  Maybe
14   it could be some kind of, you know, bulletin board or
15   something like that.
16             MR. PIECIAK:  Yeah, I mean, I guess my initial
17   reaction is to sort of piggyback on Richard's is to say the
18   economic component, not just of running the exchange but, on
19   the other side, I mean, the supply, the demand, I mean, the
20   business element, I mean, the illiquidity, the lack of people
21   wanting to buy these securities.  And I don't think -- I
22   think that's probably a discussion that we should have in
23   terms of secondary trading now in this larger discussion as
24   well.
25             Because regardless of, you know, the regulations or
0059
 1   whatever in place, I mean, is there actually a demand?  You
 2   know, people want to achieve liquidity and sell their
 3   investment.  But is somebody willing to buy it?  And when
 4   we're talking about, you know, what we're talking about
 5   today, we're talking about smaller companies, small
 6   investors, mom and pop investors that are doing the initial
 7   buying and doing the subsequent buying and selling, so these
 8   are not institutional investors, they're not largely
 9   sophisticated investors.  And I think that's why the investor
10   protection elements, you know, are important to
11   consideration.  So, you know, I think it's economic.  And,
12   you know, and business, in terms of the supply and the demand
13   of those securities.
14             MS. TIERNEY:  Just a couple points.  One is, and I
15   think that Richard mentioned this in passing when he was
16   talking about the different exemptions for secondary trading
17   at the state level.  There is a complete disconnect between
18   the secondary trading exemption at the state level for
19   broker-dealers and at the federal level.  So the context of
20   IPOs, for example, and I think Reg A Plus original offerings,
21   a broker-dealer who has a preexisting relationship, and I
22   think I've said this to the committee before, a broker-dealer
23   that has a preexisting relationship with a client, has done
24   suitability, understands their investment criteria, has
25   confirmed the status of the investor, can market any
0060
 1   opportunity in the primary context to their clients as long
 2   as they believe that they're suitable for them.  
 3             It is the exact opposite in the secondary context,
 4   because of the state law blue sky requirements, which are
 5   that a transaction through a broker-dealer must be
 6   unsolicited.  That means that if I am a broker-dealer, I can
 7   go out to every one of you if we have a relationship, say
 8   would you like to buy Reg A Plus primary offering?  But I
 9   can't touch any of you to ask you if you want to buy those
10   securities in secondary market.  That doesn't make any sense. 
11   It has never made sense to me.  These are clients of broker-
12   dealers.
13             And again, preemption solves that problem. 
14   Preemption allows a broker-dealer to go out and touch their
15   existing clients -- not in a personal way, but in a
16   figurative way -- 
17             (Laughter.)
18             MS. TIERNEY:  -- and ask them, are you interested
19   in investing in these securities?  That is the only way we're
20   going to develop a robust secondary market around these types
21   of securities.  Brokers have to be able to do their job, they
22   have to be able to locate buy side interest, they have to
23   make sure that the investment is suitable for their
24   investors.  That's how you get the investor protection.  You
25   have the disclosure point already out there, then you have
0061
 1   the broker-dealer protection.
 2             And to Jenny's point, I don't think you're going to
 3   see national exchanges come back into the fray.  As a result
 4   of electronic trading -- sorry, regional exchanges.  Because
 5   of electronic trading, the cost structure is just not there,
 6   I think, to support regional exchanges, which is why most of
 7   them were acquired, you know, as a matter of financial
 8   interest.  
 9             Yeah, but I think what you are seeing is maybe an
10   increased proliferation of platforms, web-based platforms
11   that are in the primary space that could be in the secondary
12   space for Reg A Plus securities, crowd funding portals. 
13   There are a multitude of players who are out there who would
14   be able to create a business model around this if it made
15   economic sense, if they had the preemption for the secondary
16   trading.
17             MS. HANKS:  I think we're saying on that point, if
18   you look at how many ATSs there are at the moment, I was just
19   counting them the other day from the most recent update, I
20   think there's like 41.  And some of those -- and some of
21   those are out clients -- are looking to be secondary markets
22   for Reg A securities as well.
23             MS. TIERNEY:  And they can't, because of the blue
24   sky preemption on -- 
25             MS. HANKS:  It is more difficult for them because
0062
 1   of that.  Yeah.
 2             MS. TIERNEY:  And to the extent that like when we
 3   -- when I worked on getting the security approved for, you
 4   know, for blue sky manual purposes, it's a big deal that you
 5   can't do it in all 50 states.  We should not underplay that. 
 6   That's a big deal.  What if you're an issuer in a state that
 7   doesn't have a manual exemption?  You can't actually -- why
 8   would anybody buy your securities if they know for sure you
 9   can't ever get secondary liquidity?  It is a big deal that it
10   is not in every state.  It is a big deal that it's a
11   patchwork of requirements that it takes significant
12   expertise, such as these gentlemen, to hire a lawyer to walk
13   you through the requirements in every single state.
14             We did that when I was at Second Market.  We did a
15   big deep dive into the secondary markets.  You guys have seen
16   me.  I presented to NASAA.  It is a patchwork of
17   unintelligible requirements that are driven by legislation,
18   securities commissioner interpretations, that sort of thing. 
19   It is not consistent across all 50 states.
20             So again, don't underplay the fact that OTC is only
21   approved in potentially 19, you know, states.  That's a big
22   deal and that is a real friction impediment to a market being
23   created around Reg A Plus securities.
24             MS. HANKS:  Michael?
25             MR. PIECIAK:  So I think, I mean, I just wanted to
0063
 1   address the one point on the unsolicited broker.  And I'm not
 2   an expert in this arena.  But there's certainly securities,
 3   as you've probably heard the phrase, that are not bought but
 4   are sold, you know?  And I think that's sort of the driving
 5   impetus behind the unsolicited portion of the broker-dealer
 6   unsolicited exemption.
 7             I mean, on the OTC piece, I'll just mention, you
 8   know, those 19 states -- three more are within the last seven
 9   or eight months -- 
10             MS. TIERNEY:  Fifty percent -- 
11             MR. PIECIAK:  Yeah, but I mean, you know, the speed
12   in which we've done it, I think, is pretty rapid.  And
13   particularly when you look at some other historical context. 
14   So, you know, I think that's an element to take into place.
15             And then I think the other point, I just don't want
16   us to lose -- I made this point already, but I don't want us
17   to lose this idea about the information requirements that
18   these investors need to make an intelligible investment
19   decision.  You look at the SEC.  Joshua White, I think it
20   was, had an interesting report recently, study, that looked
21   at the OTC, and I would encourage everybody to read it.  But
22   essentially he looked at the three tiers.  And as you move
23   down in the tiers, the outcome for the investor and also the
24   liquidity, you know, decreases.  And I won't put an adjective
25   there.  I won't say if it's rapidly decreasing.
0064
 1             But there's a -- there's a corresponding decrease
 2   in investor outcome when there's less information.  There's a
 3   corresponding decrease in liquidity when there's information. 
 4   So I think, you know, the requirements and the framework that
 5   we're talking about are not all just for investor protection. 
 6   I mean, they're investor protection.  But, you know, they're
 7   also for the efficiency of the capital markets and ensuring
 8   there's sufficient information there for the flow of funds,
 9   flow of information, flow of securities.
10             MR. HEWITT:  So what you're saying is information
11   drives the markets?
12             MR. PIECIAK:  That's what this report would
13   suggest.
14             MR. HEWITT:  Yes, exactly.  And that's why, as I
15   was saying earlier, it has to do with making sure that the
16   investor is empowered to be able to make those decisions. 
17   Without that information, they're not going to buy anything.
18             MR. ALVAREZ:  And doesn't that argue for preempting
19   the nonuniform current state regulatory scheme with a -- with
20   a category of covered securities specific to Reg A Plus, Tier
21   2 issuers who are subject to fulsome information
22   requirements?  I mean, would you be satisfied as a regulator
23   that the information that Reg A Plus, Tier 2 issuers are
24   required to provide under statute sufficient for purposes of
25   allowing a secondary market transaction in your state, if
0065
 1   they were -- let's assume that they were included in your
 2   manual.  They would -- they would meet that requirement and
 3   it would be fine?
 4             MR. PIECIAK:  Yeah, I mean, speaking as a solely
 5   Vermont regulator, you know, our manual exemption, you know,
 6   requirements are self-executing, as I think they are
 7   everywhere.  So, you know, what that means for those on the
 8   committee is that they don't file a notice filing with us,
 9   they don't get a prior approval, they don't -- you know, they
10   don't contact us.  They look at the requirements, they meet
11   them, they execute the transaction.  Which, you know,
12   provides efficiency on the transaction side.
13             So, you know, for Vermont, if those guard rails
14   stayed in place, you know, whether it's in our statute or
15   federal statute, you know, the guard rails are in place and
16   the investors are protected, the information is out there. 
17   But, you know, there are certain -- you know, that's the
18   Vermont standard.  And I can't say the same for even those in
19   New England or those in another part of the country.
20             MR. HEWITT:  But that's all the more important fact
21   that that -- in coming up with whatever that federal fix
22   might be, it has to be in consultation with the states that
23   there is a standard upon which the states can agree.  And
24   then there's really no need at that point; you're satisfied
25   with the information being provided and you take it from
0066
 1   there.
 2             But I don't -- as you said, these are self-
 3   executing, point one.  But point two is, the -- the -- I
 4   don't think the issue is preemption or not, as I said
 5   earlier.  I think it's making sure that there is consistent
 6   information.  If that takes the form of preemption, I would
 7   think as long as it's in consultation with NASAA and the
 8   states and something they could get behind, well, at least
 9   that's an easier road to take, I think.
10             MR. ALVAREZ:  But the framework already exists. 
11   The informational framework already exists at the state level
12   in a majority of states.  And the effort here would be to --
13   to unify what is a fragmented regulatory scheme.  Right?  And
14   if the only way to achieve that is through preemption, well,
15   you know, it's an unfortunate situation, I suppose, if you're
16   a state regulator.  But the majority of state regulators
17   currently offer exemptions for secondary market trades,
18   provided there is information available, 39, 44, whatever the
19   number is.
20             So in order -- in order to get to that goal line of
21   full compliance, 54 jurisdictions, so that you can then give
22   the secondary markets for these kinds of issuers a fighting
23   chance to survive, well then perhaps preemption is the fix.
24             MS. HANKS:  Can we stay on the point of preemption
25   and the secondary markets here?  Because a point you made
0067
 1   earlier, Richard, was if we do preemption, we should do
 2   preemption on the basis of qualified purchasers being just
 3   someone who buys a Reg A, period, no restrictions on the
 4   investment levels as there are on primary markets.  
 5             And this is a question for both of you.  Is this
 6   secondary market -- why would you make that distinction?  Is
 7   there less pressure in a secondary trade?  And I don't think
 8   I'm hearing that from Martin.  Or is the information somehow
 9   more sufficient in a secondary trade than it is in a primary
10   trade?  Why make that distinction and how is the secondary
11   trade different than the primary?
12             MR. HEWITT:  Well, I think with the secondary
13   trade, at that point, you know, you're one generation, so to
14   speak, removed from the issuer and from the IPO.  And the
15   need for -- for more robust disclosure I think is probably
16   more critical on the secondary trade, if I understand your
17   question correctly.
18             MS. HANKS:  So you would need more information -- 
19             MR. HEWITT:  Not necessarily more, but equal to. 
20   Because what happens is, you know, as -- once you're done
21   with the IPO, the company, the issuer, has their money.  Now
22   we're just talking about moving money and securities between
23   investors.  And the question is, since you can't go -- the
24   investor cannot go and call up the chief financial officer of
25   the issuer, you know, and kick the tires, so to speak, in the
0068
 1   same way, for instance, an institutional investor might, I
 2   think what you're saying is you need sufficient information. 
 3   What that is, again, is obviously up to discussion and
 4   disagreement.
 5             But I think that's why it's important at the
 6   secondary level to make sure that while you may not have
 7   disclosure equal to that which is on a national exchange,
 8   although to me that's the gold standard.  I understand
 9   there's a lot of expense involved with that and it could be
10   prohibitive to produce that information.  There still has to
11   be sufficient information such that the investor is going in
12   with his or her eyes wide open as to the risks and the
13   rewards.
14             MS. HANKS:  And that's different than in the
15   primary situation?  I'm trying to sort of drill down on the
16   one on one thing here.
17             You've got a buyer who has just gone out there and
18   posted some securities and said -- I'm sorry, a seller, who
19   has posted securities.  I'm selling securities.  And then
20   there's a seller who comes along -- and there's no broker
21   involved, so they're searching.  They're going, oh, this is
22   an interesting company.  Is there a different dynamic there
23   in the secondary market than there would have been in the
24   primary?
25             MR. HEWITT:  Go ahead.
0069
 1             MS. TIERNEY:  You would police that, right?
 2             MR. HEWITT:  What's that?
 3             MS. TIERNEY:  If there was a prohibition in the
 4   secondary market, right now, you know, an issuer has an
 5   obligation, I think, to make sure that -- it's unclear, I
 6   think, under Reg A who has the obligation to make sure that
 7   the cap is not exceeded.  But how would you do that in a
 8   secondary sense -- 
 9             MS. HANKS:  I mean, it's self-certification anyway.
10             MR. ALVAREZ:  Right, but the question is whether or
11   not, as you said, there's a difference.  I would venture to
12   say that in a primary distribution, the investor is relying
13   on the issuer to provide the information that it needs to
14   make that -- to make that investment.  And in the secondary
15   market, it's just, you know, a normal contract.  And, you
16   know, you have a good to sell and I can decide whether or not
17   to buy it based on whatever information is out there.  The
18   fact that I am or am not a qualified purchaser or a suitable
19   purchaser should not matter, because those funds are not
20   going to the issuer, which is where suitability requirements
21   are normally found.
22             MS. HANKS:  You think that makes a difference from
23   the investor protection point of view?  And that's actually a
24   question for Martin.
25             MR. HEWITT:  I think there's -- at that point,
0070
 1   there has to be some watchdog, some minimal amount of -- and
 2   I hate to use the word protection -- of empowerment of the
 3   investor, so that they -- at that point, they're really just
 4   left to their own resources.  If they can find the
 5   information, great.  If they can't, that's too bad.
 6             And to the extent that they decide to buy from this
 7   person, well, why are they buying?  Is it because they've
 8   done thorough research or is it just because they're -- you
 9   know, it's a dartboard investment?  And for the small
10   investor, a dartboard investment can be devastating to their
11   retirement.  So my concern is that, as you move further away
12   from the issuer, the investor really is going at it
13   haphazardly and not necessarily getting all the information
14   that could be out there, whether it's accurate or not.  I
15   mean, they're getting this from the seller at that point.
16             So there is only so much due diligence the small
17   investor can do for his or herself.  And I think that's the
18   concern to me, which is why a universal manual exemption,
19   which I don't think we disagree on necessarily, is certainly
20   a step in the right direction.  Now, whether or not that
21   takes the form of preemption, you know, that depends.  Again,
22   as long as if you can get the states on board -- 
23             There are some areas in which, look, even Bill
24   Beatty in his testimony before Congress on May 1, 2014,
25   clearly stated there are some times, there are some instances
0071
 1   in which it is not a priori wrong that there is preemption. 
 2   It's not that it should never occur.  The thing is to make
 3   sure that what you are doing is well thought out and
 4   addresses the issues that the states, if they were not
 5   preempted, would address.
 6             And I think that's one of the key considerations
 7   here, is to figure out exactly how much information, what
 8   sort of information, how it's verified for the small
 9   investor.  The larger investor can get all the information he
10   or she wants.  That's not an issue.  The question is, what is
11   the smaller investor getting, from whom and how can they rely
12   on it.  That's my concern.  And I suspect that might be the
13   concern of the states.  But I'm not speaking on their behalf.
14             MS. HANKS:  Is it Annemarie or Laura who is -- 
15             MS. YAMANAKA:  Actually, I just wanted to just
16   bring in a comment.  No matter what we do or we choose not to
17   do, I think we really need to understand what the implication
18   is to the general economy and all the states.  So right now,
19   as how it's -- in my opinion, how it's laid out, it favors
20   certain economic areas.  So even if we stay status quo, we
21   don't do anything else, to Jonathan's point and, frankly,
22   everybody here, the money is going to stay where the money
23   knows, has the relationship, in certain economic centers. 
24   And what we will do is continue that process as we go along.
25             And then actually to the point, Martin, you know,
0072
 1   when you were asking Sara about that secondary -- you know,
 2   what's the difference between the first and secondary,
 3   Annemarie and I were talking.  We're going, well,
 4   statistically, the longer a company has been in business,
 5   isn't that a sign in and of itself that it has a higher -- 
 6             MR. HEWITT:  But the question is, how long are
 7   these companies necessarily in business before somebody flips
 8   out of the stock?  That's what I'm talking about.
 9             MR. ALVAREZ:  We don't ask those questions about
10   listed company securities.
11             MS. YAMANAKA:  Exactly.
12             MR. HEWITT:  And it should be noted that during
13   2008, during the crash, almost a third of the stocks on the
14   New York Stock Exchange went away.  So it's not that there's
15   any guarantee there either.  And that's something that's
16   important for people to understand.  The small investor, I
17   mean, not all of us; we get this.  Is that an investment is
18   not a guaranteed rate of return.  And the problem is a lot of
19   investors think that they invest, they sit there and the
20   money rolls in.  So that is another educational standpoint.
21             MS. YAMANAKA:  So the question to me occurs, are we
22   here -- and are we really just trying to protect a certain
23   layer of investor?  Or what about the balance on the other
24   side, too, to encourage business?  I really -- 
25             MR. HEWITT:  I think it's a balancing act.
0073
 1             MS. YAMANAKA:  It is both.  That's what I'm saying.
 2             MR. HEWITT:  Right, right.
 3             MS. YAMANAKA:  So I think that when we're talking
 4   about -- and I could be wrong, Martin, totally wrong.  I want
 5   to protect the investor to the extent that the investor
 6   should be protected.
 7             MR. HEWITT:  I don't disagree with that.
 8             MS. YAMANAKA:  A part of me says that -- you made
 9   the comment -- and I really don't mean to sound adversarial
10   about this.  But, hey, if someone is taking their whole
11   investment portfolio -- 
12             MR. HEWITT:  Shame on them.
13             MS. YAMANAKA:  -- and they're buying stock in the
14   secondary market, we've got a bigger issue.  Right?
15             So really, the realistic, where we're trying to
16   target our efforts here is to that middle layer of investor
17   that has funds, okay, that is knowledgeable and can actually
18   flow a lot of capital into that to grow companies.
19             MR. HEWITT:  Well, that's not growing the company
20   on the secondary market.
21             MS. HANKS:  I'll let Jenny get a word here.
22             MS. KASSAN:  I just thought of an idea.  So I just
23   thought, you know, we've created a regime where there's this
24   new type of platform, under Title III of the JOBS Act.  What
25   if there was a platform for secondary trading of Reg A
0074
 1   securities that, if things were traded, you know, in the same
 2   way with the, you know, the platform for Title III, there is
 3   preemption.  But the platforms have to meet certain
 4   requirements, they have to do certain kinds of investor
 5   education.  Could that be a potential solution?
 6             MR. ALVAREZ:  Yeah.  But on the crowd funding side,
 7   there are very, very discrete and particular requirements on
 8   who can operate a portal.  You know, that's -- and I think
 9   that that -- 
10             MS. KASSAN:  It's not that hard to become a portal,
11   believe me.
12             MR. ALVAREZ:  Okay.
13             MS. KASSAN:  You should see some of the portals out
14   there.  Sorry, no offense.
15             (Laughter.)
16             MR. ALVAREZ:  I don't know.  I -- I guess I'm
17   biased.  I view crowd funding a little differently than I
18   view standard securities offerings.  And in the context of
19   Reg A Plus and Reg A Plus, Tier 2 specifically, as I -- as I
20   commented earlier, I think the expectation is that this new
21   regulatory scheme will promote a national type of a
22   securities market.  And it should look more like what we are
23   accustomed to seeing, exchange listed, reporting company
24   securities, rather than what is currently in place for crowd
25   funding which is, in -- at least for me, a blue sky lawyer, a
0075
 1   totally different animal.
 2             MR. HEWITT:  And I think crowd funding for a lot of
 3   blue sky attorneys is -- yes, thank you -- it's a scary area
 4   because there's so much potential for chicanery there, as
 5   opposed to Reg A Plus.  But that doesn't mean that there are
 6   not issues to address there as well.  But I think the crowd
 7   funding platform is not necessarily -- although it's a good
 8   idea, I don't know how it would actually work because, again,
 9   it's apples and oranges in terms of the caliber of what is
10   being offered.
11             MS. KASSAN:  Right, I'm making the analogy of a
12   platform that has to be qualified by the SEC and, in exchange
13   for meeting a bunch of requirements, there's preemption of
14   state level filings.
15             MR. ALVAREZ:  Right.  But Sara mentioned, there are
16   a boatload as ATSs out there that could serve as that
17   platform.
18             MS. TIERNEY:  They're already registered broker-
19   dealers.
20             MR. ALVAREZ:  They're registered broker-dealers,
21   right.  And then the question becomes, if you're looking to
22   use that as a vehicle to preempt state law, under Section 18,
23   there are particular criteria that have to be met for these
24   ATSs and these exchanges to be able to have securities listed
25   on them be deemed covered securities.
0076
 1             MS. HANKS:  Jonathan, you had a question?
 2             MR. NELSON:  I also think a great way to lose a lot
 3   of money in a private market investment is to make like two
 4   investments or one.  And the proper way to do it is to
 5   actually build a portfolio of 20 to 25 companies, so you have
 6   things like angel groups and that sort of stuff that actively
 7   encourage a lot more of this type of investment.
 8             And so I think that the current regulatory scheme,
 9   not only does it not foment capital formation, but with the
10   very, very, very low, almost nonexistent volume of secondary
11   transactions, investors are actually really hurt because they
12   can't build portfolios.  And one of the frequent comments
13   that I hear from angel investors who are actively building
14   these portfolios is liquidity.  
15             And so we're essentially dependent on a very active
16   merger and acquisition market, which ends up consolidating
17   companies, which ends up decreasing the number of jobs,
18   because the merger and acquisition process is about
19   consolidation, making large companies much more profitable.
20             And so the current way that we have is investors
21   aren't making money.  When they can make these sorts of
22   investments, they're at very high risk to actually lose the
23   money.  We're not having capital be formed for small
24   businesses.  And we're having a lot of these really large,
25   massive corporations be formed and we're having less and less
0077
 1   public companies.  
 2             You know, and if the Angel Capital Association, how
 3   much money is actually invested on an annual basis by angels? 
 4   Do you guys have that data?
 5             MS. MOTT:  Last year, it was around 27 billion. 
 6   Right, 27 billion?
 7             MR. NELSON:  And I think venture is about 50
 8   billion a year.  So that's about 75 -- but the lottery is a
 9   $65 billion a year business.  And I know that the lottery is
10   targeting poor people and they are losing a ton of money at
11   that.
12             I don't know, it feels like something is very
13   broken.  And if we're expecting these small businesses to
14   create these jobs, especially in non-urban areas, I really
15   think that something's just got to change.
16             I would be interested, like on the committee, you
17   know, preemption versus not preemption, I'm just interested
18   in going around the table, what do people think should be
19   done.
20             MS. HANKS:  That was going to be my next question. 
21   Because we've got like 10 minutes left and I would like to
22   see if we could make this into a recommendation.  Are we
23   interested in giving a recommendation?
24             Bear in mind that the people that we give
25   recommendations to here is the SEC, not to the states.
0078
 1             MR. ALVAREZ:  Sara --
 2             MR. PIECIAK:  Before the recommendation, could I
 3   just make one statement?  Which is that, you know, I
 4   mentioned this in my earlier statements.  But the SEC and the
 5   states have had a really collaborative, productive
 6   relationship, I think for a long time.
 7             Go ahead, Sebastian. 
 8             MR. GOMEZ:  I second all that.
 9             (Laughter.)
10             MR. PIECIAK:  And particularly as of late.  And we
11   very much enjoy working with Betsy and Sebastian and when
12   Keith was here.  And, you know, so when you are considering
13   the recommendation, you know, looking for ways for the states
14   and the SEC to collaborate on this issue together I hope will
15   be part of the consideration?
16             MR. ALVAREZ:  Sara, if I could just make one other
17   editorial comment?  Recall that the original Regulation A
18   died on the vine principally because of concerns relating to
19   burdensome state requirements.  Okay?  No one used that form
20   and it went away.  So this latest iteration should be given a
21   chance to grow.
22             And to Mike's point, I mean, as I suggested in my
23   comment about perhaps a solution being the establishment of a
24   national manual, the states certainly have a role to play in
25   that.  They need to have a seat at the table, because they
0079
 1   are the policemen.  Those are the folks who are going to be
 2   enforcing the fraud actions when these investors lose their
 3   money.
 4             And, you know, if it involves a recommendation to
 5   preempt Tier 2 securities in secondary market transactions,
 6   well the states should be involved in that discussion as
 7   well.
 8             MR. HEWITT:  So we are in complete agreement now.
 9             MS. HANKS:  Duly noted, regarding the state/SEC
10   dynamic we want to encourage.
11             But can we just go around the table and hear what
12   people have to say, especially the people we haven't heard
13   much from this morning?
14             MR. AGUILAR:  Sure, I'm all for having a
15   centralized information portal, I guess, for lack of a better
16   word, that would allow these secondary transactions to
17   happen.  I think definitely the states should be involved in
18   that, in what the standard is.  But there needs to be some
19   sort of regulation on it.  And if we're -- if we're taking
20   the states out of that decision and then having them regulate
21   it, that's not a very good solution.  So I guess my answer
22   is, yes, I'm all for having a central information repository.
23             MR. HAHN:  I don't think we're going to get
24   anywhere without state involvement.  I do like the preemption
25   for the Reg A Plus, Tier 2.  But I do think, you know,
0080
 1   anything is going to have to have state involvement with
 2   that.  You know, coming from a small company like that,
 3   worrying about trying to -- trying to raise money in
 4   different states, it is a big concern from our standpoint. 
 5   And it would be very, very difficult to have to go state to
 6   state to state to go through this.  But again, it's going to
 7   have to be a joint effort here.
 8             MS. HANKS:  Jenny, preemption, not preemption?
 9             MS. KASSAN:  I don't know, I think -- I think there
10   is room for a lot of creativity here.  I like the idea of
11   some kind of a pilot program, maybe just within a single
12   state.  I think Jonathan and I would volunteer to help out
13   with that in our state, California.  And look at -- you know,
14   because California is a huge economy.  If we limited
15   secondary trading to just California, we might learn a lot
16   from that without having to do preemption and then maybe go
17   from there.
18             MS. MOTT:  Sara, I'm in favor of the preemption. 
19   One of the things I think about, again coming from, you know,
20   investors' point of view, is I look at the impact on the
21   economy, what happens when we get a liquidity event.  And we
22   put that money into play, into other companies, other startup
23   companies.  Or we put it into play buying a piece of real
24   estate.  Or we put it into play to buy other things.  So what
25   you get is the multiplier effect on the economy.  
0081
 1             And when you can't -- when you don't have
 2   liquidity, you impact the economy.  And we don't know what
 3   that impact is.  So I'd be very much in favor of something
 4   that's capital efficient.  It's a balance.  It includes the
 5   states.  And it's another opportunity for us to have a very
 6   vibrant economy.
 7             MS. HANKS:  Thank you.  Jonathan.
 8             MR. NELSON:  I think the best way to create a
 9   market is to make it as big as possible and have as many
10   buyers at the table and as many sellers at the table as
11   possible.  The last time I talked to someone about doing a
12   California state exemption, the California state regulators
13   said that they were ready to do dozens of these approvals
14   every single year.  That just doesn't feel like a very large
15   volume.  
16             And it's not saying that they're not doing an
17   amazing job and that it's not a very hard job, and it's a
18   thankless job, because if there's fraud you get spanked and
19   if there's capital formation, no one cares that you did your
20   job.
21             But I think that these markets need to be as big as
22   possible and they need to be as liquid as possible, otherwise
23   the investors get spanked.
24             MR. REARDON:  Michael, I don't know who first said
25   that a genius is somebody who sees a trend coming and runs to
0082
 1   embrace it.  I mean, we're dealing with ancient laws.  I
 2   mean, 1933.  Even I wasn't born back then.
 3             (Laughter.)
 4             MR. REARDON:  But they don't fit where we are right
 5   now, okay?  And it seems to me that there are two choices,
 6   either preemption, which your group doesn't want, and I
 7   understand, or we've got to have something that does work
 8   that involves the states.
 9             My approach would be that there's some period of
10   time -- two years strikes me as reasonable -- that NASAA,
11   your organization, gets together and comes up with something
12   that's 50 states -- or 53, is that the number of agencies, 54
13   -- buy into and you're willing to live with.  And then we all
14   get hand in hand and go walking up to Congress and do
15   whatever we can to make it happen.
16             But I think if your organization doesn't do that,
17   preemption is coming and then you won't have any jurisdiction
18   over it at all.  We have to have some sort of liquidity for
19   these investors.
20             And I hate fraud.  I really do.  I mean, I've
21   thrown away many clients that were coming to me that they
22   weren't going to do the right thing and I've said, hit the
23   bricks.  So, I mean, believe it or not, I seem like a
24   ruthless businessman, but I'm not; I'm on your side.  But
25   that's what I see the trend as being and you all just have to
0083
 1   run and embrace it.
 2             MS. SHIMKAT:  I'm not quite as eloquent as Patrick,
 3   but I think throughout the entire discussion though, and
 4   being from Iowa, or the typical flyover Midwest, I want to
 5   make sure that as we move forward with the recommendation
 6   that we take into consideration that a lot of these
 7   regulations and items that we've been discussing, many were
 8   based upon a reactionary -- or a fear of fraud and
 9   protecting.  So we need to make sure that, you know, is it
10   protection or is it elimination?
11             So we need to make sure that as we take that next
12   step, that we are looking at everything.  And so I don't mean
13   to sound like on the fence or Switzerland or anything like
14   that, but I do have to agree with Catherine and that would be
15   where I stand.
16             MS. TIERNEY:  I think it's really important for the
17   committee to remember that Reg A Plus has three options,
18   right?  You have Tier 1, where there's no information being
19   disseminated after the offering takes place.  There's Tier 2,
20   where there is no information voluntarily disseminated after
21   the offering takes place.  In both of those situations, I
22   would love to see the states come up with some kind of common
23   approach to information requirements that allows for
24   secondary transactions to occur in all 50 states, a hundred
25   percent.  With respect to Tier 2, voluntary reporting, going
0084
 1   to Robert's point, the centralized information portal is
 2   EDGAR.  Those companies are filing public information with
 3   the Securities and Exchange Commission that is available on
 4   the SEC's website.  So that information is out there.  As
 5   long as those companies are voluntarily reporting, I don't
 6   see how the states' interest to require information
 7   dissemination through a manual is more efficient or effective
 8   than dissemination through the SEC's EDGAR website with SEC
 9   oversight, enforcement and everything else to create fraud
10   prevention and investor protection.
11             So my vote would be preemption for Tier 2
12   securities that are voluntarily reporting on an ongoing
13   basis.  Once that voluntary reporting stops, then they fall
14   into the other buckets and they have to satisfy the state
15   requirements.  But again, I want to reiterate my point about
16   the fact that broker-dealers cannot create secondary markets
17   in these securities and also that the manual exemption is not
18   available in every jurisdiction, so it could definitely be
19   detrimental to capital formation for small companies in
20   states where they cannot actually legally provide secondary
21   transactions, even under Tier 1 or Tier 2 nonreporting.
22             MS. HANKS:  I just want to point out that with
23   respect to the word "voluntarily," I mean, there is an
24   obligation, in most circumstances, to keep going.
25             MR. GOMEZ:  Actually, as Sara said, it's not just
0085
 1   the first year.  It's an obligation in which there's an
 2   ability to suspend that reporting obligation or terminate
 3   that reporting obligation on the specific categories.  So I
 4   think when we say "voluntarily," I think it's in a different
 5   sense as voluntarily, just because I want to.  The rules do
 6   require them to do it.
 7             MS. TIERNEY:  That's what I meant.  To the extent
 8   the company is disseminating information through the SEC,
 9   they should be in the preemption bucket, yeah.
10             MS. HANKS:  I just didn't want to get any of -- 
11             MS. TIERNEY:  I'm using the wrong terminology -- 
12             MS. HANKS:  Yeah, I didn't want to let any of my
13   clients get the wrong idea when I tell them they have to do
14   this.
15             (Laughter.)
16             MS. HANKS:  Laura?
17             MS. YAMANAKA:  Well, first off, I want to say I
18   don't think we're going to do anything without the states,
19   and I do appreciate their job.  I have family members who
20   work for the states.  So I think it's a very important
21   function, actually, that occurs.  And we're stronger when we
22   work together, right?  And I'm glad the SEC and the states
23   have been working actually much better than the insurance
24   people, so that is very -- so kudos and props.
25             So with all said and done, I think when I look at
0086
 1   our perspective and what we need to do from an overall basis,
 2   unfortunately, because I hate to put down regulation on top
 3   of regulation -- market that is controlled, that protects the
 4   investors, while encourages investment, you know, at that
 5   next level.
 6             Because that's the gap we're missing.  You know,
 7   when we see -- you know, Jonathan gave a great example of how
 8   it's supposed to work.  And unfortunately, I think we have a
 9   little bit of a gap here, because use of capital -- number of
10   companies that are forming are down, the number of people who
11   are going -- organizations that are going IPO is down, the
12   number of large entities actually is down through
13   consolidation.  The actual numbers look really good, but it's
14   not just a matter of dollars, right?  Sometimes it is a
15   matter of law, large numbers.  So -- preemption.
16             MS. HANKS:  Thanks, Laura.
17             Mike, I'm not going to ask you whether you approve,
18   but is there anything that you and Michele, too, would like
19   to add before we move on?
20             MR. PIECIAK:  Well, I do want to thank Richard and
21   Martin.  They did a nice job presenting the points and
22   counterpoints.  The only other -- the only other thing I
23   wanted to mention which I didn't get to bring up was the
24   relative newness of this general concept of allowing
25   investors to invest in smaller what would previously be
0087
 1   privately held, potentially, or private offerings or private
 2   companies.  And I think we see it on the primary market side
 3   and I assume it's the same thing on the secondary market
 4   side, that from an investor demand perspective, these
 5   exemptions are so new that, you know, investors are saying,
 6   wait a minute, I didn't think I could invest in something
 7   like that, or I've always been told this is the case.  Or
 8   they don't know what a Reg A offering is, they, you know,
 9   don't know what a crowd funding offering is.  So I think
10   there's some element of investor education and further sort
11   of maturity in these arenas that need to happen as well.  And
12   in terms of secondary liquidity ever happening, regardless of
13   what the regulatory framework is around it.  So I just want
14   to put that out as an additional point.
15             MS. HANKS:  Thanks.  Michele, anything you'd like
16   to add there?
17             MS. SCHIMPP:  Thank you very much.  Really
18   fascinating to walk into this, and I feel like it's part of
19   an ongoing dialogue and trying to catch up on this.
20             Completely persuaded on the side that this would be
21   filling an important gap area in our economy.  We see that
22   the area where access to capital is most needed is in that
23   area of like one million and below EBITDA.  And so, despite
24   all of our efforts on SBA's side to encourage investors to
25   get more early stage, more local, we're still not meeting the
0088
 1   market.  So I'm very much persuaded by a uniform platform of
 2   information in order to try to put more vibrancy and
 3   predictability into this segment of the market.
 4             In terms of preemption, I really would like to
 5   defer to all of you.  My gut instinct is that there is
 6   something very inefficient about all 54 units trying to get
 7   to this uniformity, but hesitant to move in the preemption
 8   direction prematurely.
 9             MS. HANKS:  Thank you.
10             Okay, all right.  So with that I think I'm going to
11   put some thoughts together and we'll discuss this afternoon
12   whether we move on with a recommendation.  I'll try and pull
13   all of these things together and see whether you agree with
14   the way that I've summarized it.
15             We're going to move on to the discussion of the
16   broker-dealer status of finders.  And so thank you to Richard
17   and Martin.  Really appreciate it.
18             So moving on to the broker-dealer issue, we've
19   talked many times about the finders issue, urging the
20   Commission to take steps to clarify the current ambiguity in
21   broker-dealer regulation for people who act as intermediaries
22   in private placements or find potential investors.  And one
23   of the reasons we care so much about this is the fact that,
24   to the extent a small company uses someone to help find
25   capital and that person should have been registered as a
0089
 1   broker-dealer and wasn't, then that deal is, by its nature,
 2   rescindable, which is a terrible source of uncertainty for
 3   small companies to have to live with.  But they do it and
 4   they do it all the time, and we've talked about this, just
 5   because they are so desperately in need of capital.
 6             So the prior iteration of this committee made a
 7   recommendation to the Commission along those lines just
 8   before the committee was renewed in September 2015.  I think
 9   you've all got a copy of that at your desks.  Shout if you
10   don't have it.
11             Some of us were members during the development of
12   that recommendation and others have joined since then.
13             I would also note that the American Bar Association
14   Task Force on Private Placement Brokers has existed for some
15   like 17 years now.  It has also urged clarity in this area,
16   with some progress.  The M&A broker no-action position, which
17   was very much appreciated.  But there are still areas of
18   significant uncertainty.
19             Knowing the importance of this issue to so many of
20   us, we wanted to do a sort of bring-down, to see whether we
21   wanted to reissue this recommendation, since we have a new
22   chairman and senior leadership coming in to the SEC, new
23   Congress in session.  It seems that if we're not satisfied
24   with the status quo -- and I think I hope I'm not jumping the
25   gun in saying that many of us are not satisfied -- that we
0090
 1   want to make sure that this issue is not overlooked.
 2             So with that, does anybody want to reiterate some
 3   of the points they've made?  And I don't know if -- we have
 4   representatives here from Trading and Markets.  Do you guys
 5   want to say anything?
 6             MS. RUTKOWSKY:  It's Joanne Rutkowsky from Division
 7   of Trading and Markets.  I know Steve Luparello, our former
 8   director, spoke to you last fall and he just pointed out that
 9   we totally hear you but there are also two competing
10   regulatory concerns.  One is capital formation and the other
11   is the protection of investors, particularly retail
12   investors.
13             And so I think the one thing we would ask you as
14   you go forward is to sort of address, if you could, the
15   protections for the retail investors.
16             And with that, I mean, we're here to answer
17   questions if we can.
18             MS. HANKS:  Thank you.
19             MR. REARDON:  I'll be happy to speak.  Jenny --
20   I'll defer to you.
21             MS. HANKS:  I think Jenny and then you, if that's
22   okay.
23             MS. KASSAN:  I just had a quick question on the
24   fourth point before the recommendation.  It says, deal only
25   with accredited investors.  But I don't think the
0091
 1   recommendation actually says that.  So I personally would be
 2   very concerned about limiting this to people that deal only
 3   with accredited investors.  So I just wanted to see if we
 4   could get some clarity on that, because it looks like it's in
 5   the preamble but not in the recommendation itself.
 6             MS. HANKS:  I think the thinking there was to the
 7   extent an exemption were to be developed, then it would be
 8   appropriate to take the investor's status into account.  But
 9   I'm interested to hear -- and again, to answer Joanne's
10   request, I mean, to the extent we were to encourage a broker-
11   dealer -- a limited broker-dealer exemption and it were not
12   to have -- be depending on the investor's status as
13   accredited or sophisticated, how would you protect the
14   investor?
15             MS. KASSAN:  This kind of goes back to our
16   discussion about accredited and, you know, whether the
17   definition of accredited is actually protecting investors. 
18   But I just think it's something we should think about.
19             I think limiting -- you know, most of my clients, I
20   work with small businesses to raise money.  And most of my
21   clients raise money from both accredited and unaccredited
22   investors, usually under Rule 504 and state-level exemptions. 
23   And I think if this recommendation only applies to companies
24   raising money from accredited investors, I think it really
25   limits the applicability to companies that, you know, want to
0092
 1   talk to more than just accredited investors.
 2             MR. REARDON:  Commissioner Stein, I want to direct
 3   this to you particularly, because I think this is -- at the
 4   Commission level is where this belongs.  
 5             We had, as far as I'm concerned, a very
 6   unsatisfactory conversation with Mr. Luparello at our last
 7   meeting and, as I told him, I think this is the worst case of
 8   bureaucratic waiting for Godot I've ever seen.  They've been
 9   sitting on this for 16 years, 16 or 17 -- I count 19.  I
10   don't know.  But it's a long time.  And it's obviously
11   they're dissembling and wasting taxpayer time and they have
12   no intention of ever moving on this.  That is, the Division
13   of Trading and Markets.  I don't know if that comes from the
14   Commission or not.
15             But I do know this, that a tremendous amount of
16   taxpayer time has been wasted on this and if they could have
17   just said, we're never going to act on this and we're just
18   playing you, stringing you along, it would have been very,
19   very helpful and we could have done something else, or gone
20   and licked our wounds and forgotten about the idea.  But
21   instead we've had this constant teasing and even today we're
22   hearing more from the Division about what do you want to talk
23   about and we understand your concerns.  I don't think they
24   are about our concerns over there, frankly, ma'am.  I think
25   that you've got your own agenda and the public and the
0093
 1   taxpayer be damned.
 2             And I -- I have no -- as far as my recommendation
 3   for the Division -- I'm not speaking to the commissioners but
 4   to the Division -- I'm trying to think of a recommendation
 5   that's not obscene.  I mean, I am -- I am so frustrated with
 6   this.  I -- I don't think anybody over there really cares. 
 7   They're pretending to be listening.  And I'm convinced that
 8   if anything is going to be done on this, it will come from
 9   Capitol Hill.
10             MS. HANKS:  Patrick, if we could -- I'm glad we
11   skipped the bit about the -- the obscene bits, so thank you
12   for that.
13             But to address this, I mean, I think there are some
14   legitimate concerns.  I mean, we see, and we have raised this
15   every time, we're concerned about the small companies who are
16   absolutely desperate.  And there's the guy at the golf club
17   who knows some folks and can introduce them.
18             Do you have an answer to that, though?  What if the
19   guy at the golf club is like, well, I know some folks and
20   they're all part of my -- my Elks Club or whatever, and I
21   know they're pretty rich.  What about investor protection? 
22   Are we saying that we don't need it there?  Or is there an
23   alternative way that we can loop into this recommendation?
24             MR. REARDON:  Oh, we've got the recommendations by
25   the American Bar Association that were promulgated 10 years,
0094
 1   roughly 10 years ago.  David Burton over at Heritage
 2   Foundation has recommendations.  
 3             I mean, as far as I'm concerned, we don't need to
 4   till that soil again.  There are recommendations and you can
 5   go and get any number of them.  If you'd like for me to bring
 6   them to the next meeting -- 
 7             MS. HANKS:  I think we actually have them.  And -- 
 8             MR. REARDON:  I mean, I don't see why we need to
 9   put the mental horsepower into making recommendations that
10   will be ignored once again.
11             I mean, I just -- you know, I've been banging my
12   head against the wall for 16 years.  I might decide it's time
13   to stop.  I mean, I haven't been working on this for 16
14   years, but people have.  And I'm not -- I'm not willing,
15   frankly, to do any more head banging.  I'm -- I've given up.  
16             I'm completely dissatisfied that any regulatory
17   action will ever be taken on this; 16 years is enough.
18             MS. HANKS:  I will note that a couple of the
19   members of the ABA task force have celebrated the eightieth
20   birthdays while they were waiting for -- 
21             MR. REARDON:  Yes, and I know two of those lovely
22   ladies and -- 
23             MS. HANKS:  All right.  So nothing other than
24   what's already in the record with respect to -- 
25             MR. REARDON:  What's already in the record.  As I
0095
 1   said too in that meeting, this topic has been studied as much
 2   as anything but the Bible and the Torah, so it's time for
 3   action or just say we're not going to do anything.
 4             MS. HANKS:  And saying we're not going to do
 5   anything, I think part of the problem, one of the reasons
 6   that we do keep circling back to this is that there is a
 7   certain amount of uncertainty.  And there's at least one no-
 8   action letter out there, and we know that no-action letters
 9   only apply to the specific pop star that they apply to.  But
10   to the extent there are still people out there relying on
11   that and saying that statement is still out there, that no-
12   action letter has not been withdrawn, and there are people
13   doing these deals and doing the golf club deals, one of the
14   things that I've said is we're at a point where I don't think
15   it matters so much what the answer is but just that there is
16   an answer.
17             And to make a point that I've made before as well,
18   it's not fair on the guys who are playing by the rules. 
19   There are some, and from my own industry, the online capital
20   formation industry, there are electronic platforms who are
21   not playing by the rules.  And then I've got clients saying,
22   well, they get away with it and nobody has arrested them. 
23   And to the extent -- and I'm always explaining, well, the SEC
24   doesn't have handcuffs, because they are a civil agency, they
25   don't have the right to do that.
0096
 1             But so long as they keep saying, nobody has been
 2   arrested for doing that, you're going to have this dichotomy
 3   where you've got the guys who are playing by the rules and
 4   paying for it, and the guys who are kind of getting away with
 5   it and everyone is saying there's nothing out there.  So
 6   certainty, even if it's bad certainty, to a certain extent,
 7   is helpful.  But that's just my own opinion.
 8             I would be interested to know who else in the room
 9   would like even bad certainty.
10             MS. KASSAN:  I have a quick question going back to
11   the whole question of blue sky law.  Even if there was
12   certainty at the federal level, wouldn't we still have to
13   deal with state-level requirements?
14             MS. HANKS:  You're absolutely right.  I mean, to
15   the extent -- to go back to an earlier discussion, to the
16   extent there's no preemption, and I don't see that.  One of
17   the things that we've seen again in the online community is
18   people saying, well, those platforms have their no-action
19   letters.  But we, state regulators, that's just their silly
20   federal thing; we don't recognize it.  And in State X, as far
21   as we're concerned, they're still broker-dealers.  So we do
22   have uncertainty at the state level as well.
23             MS. KASSAN:  Yeah, that happened with a company
24   called ProFounder in California.  I remember that.
25             MS. HANKS:  It was California and not the feds who
0097
 1   took them down.
 2             MS. KASSAN:  Yeah, exactly. 
 3             MS. MOTT:  When I think about this, you know, how
 4   we're defining the difference is between someone who provides
 5   names versus someone who sells the transaction, right?  A
 6   broker-dealer sells the transaction, a finder simply
 7   introduces -- 
 8             MS. HANKS:  It depends which side of the
 9   interpretation you fall on.  I mean, there are some folks who
10   would say anybody who brings together buyers and sellers of
11   securities and takes money for doing that is going to be a
12   broker-dealer, even if the compensation is not derived --
13   calculated on the amount of securities sold.  There are some
14   people who say so long as it's not a transaction-based
15   compensation, then per se it's not a broker-dealer issue. 
16   But I don't think anyone has ever agreed that.  So you get a
17   wide range of interpretations at both the federal and state
18   level.
19             MS. MOTT:  But how much is the issuer responsible
20   for ensuring that the information is, you know, is provided
21   and that, you know, they're accredited, that kind of thing. 
22   I mean, that really comes down on the issuer at that point,
23   after that point, right?
24             MS. HANKS:  The issuer has got a whole bunch of
25   things to worry about, including if I raise money by using a
0098
 1   non-registered broker-dealer who should have been registered,
 2   that transaction could be rescinded.  And so you've got a put
 3   hanging over your head forever.
 4             MR. REARDON:  -- in securities law -- Division's
 5   position also is that if a lawyer participates with an
 6   unregistered broker, the lawyer is violating securities laws,
 7   too.  So the effect is they're separating the businessperson
 8   from his or her lawyer.
 9             MS. HANKS:  So anyone in favor of more certainty,
10   even if it's wrong?  Or -- because we keep making the
11   recommendations and it would be nice if we could sort of move
12   this ahead in some way.
13             MS. MOTT:  So here I'm struggling with this, and
14   not because I don't think we should move ahead with it.  I'm
15   struggling with this because I think about the situations in
16   which someone gets introduced or hears about the opportunity
17   to invest in something and, I mean, it's going to happen,
18   and, you know, it's -- when I think about the private
19   investor market, there's a good deal of it that is, how can I
20   say, formalized?  But there's still a lot of unformalized
21   capital out there.  So I think we should put -- I think this
22   puts some structure around that unformalized capital.  That's
23   why I like it.
24             MS. HANKS:  Anyone else want to weigh in on this?
25             MS. SHIMKAT:  It's really hard sitting next to
0099
 1   Patrick sometimes.
 2             MR. REARDON:  I noticed they moved me closer to the
 3   door.
 4             (Laughter.)
 5             MS. SHIMKAT:  But overall, and I think -- I feel
 6   like we have opened Pandora's box, and we have had some
 7   really animated debates regarding a lot of the issues that
 8   have come out.  And even when I am going back to the Midwest
 9   and talking to people, it's like, well, you have to do this,
10   this is what the rules are.  Actually, I shouldn't have said
11   the Midwest.  
12             But we need to make sure that there's something,
13   that something moves forward, that we move that needle off
14   zero.  We have to take an action and it needs to be though
15   collaborative.  You can't have a mom versus dad.  Well,
16   here's how I'm going to interpret this, because this works
17   better for us.  Here's how I'm going to interpret this. 
18   Versus, well, what's the worst that could happen?  It only
19   hurts if you get caught.
20             We need to make sure that, you know, are we pulling
21   the protectionism in too far and making so much of it not
22   being able to work together to achieve our goal?  And at the
23   same time, I think we've really shifted on what is our actual
24   goal.  Is it fully regulatory and here's what we want to do
25   so that things fit into our funnel?  Or are we looking at
0100
 1   what the markets are out there and what entrepreneurs and
 2   small businesses are actually defining as the new way of
 3   doing business and how they need to achieve that capital and
 4   get business done?  And I think that kind of leads us into
 5   our debate later this afternoon.
 6             But I want to see -- there needs to be movement
 7   somewhere.
 8             MS. HANKS:  Which direction would you like the
 9   movement to be?
10             MS. SHIMKAT:  So that it works better for our
11   companies.
12             (Laughter.)
13             MS. HANKS:  A vote in favor of workability.
14             Annemarie, since you've got a background in the
15   broker industry.
16             MS. TIERNEY:  I don't know that I'm qualified to
17   comment on what my esteemed colleague said, but I probably
18   agree with her.
19             (Laughter.)
20             MS. HANKS:  One of the questions is whether we
21   would -- whether and to what extent we want to reissue the
22   comments that we made in September, with respect to getting
23   some -- some movement, reducing ambiguity in broker-dealer
24   regulation.
25             I think the one thing we can all get behind is
0101
 1   reducing ambiguity.  But the question then is, in what
 2   direction does the reduction in ambiguity go?  One of the
 3   things that I've said is even having the wrong answer, at
 4   least it's an answer and it gives us some certainty.  What
 5   are your feelings on that?
 6             MS. TIERNEY:  Well, we've talked about this as a
 7   committee.  Patrick is very passionate about this subject.
 8             MS. HANKS:  He reiterated his passion.
 9             MS. TIERNEY:  I heard it.
10             (Laughter.)
11             MS. TIERNEY:  It's very worthwhile listening to.
12             I think the fact is that I was -- and you were
13   talking about Mr. Luparello as I left the room.
14             I was disappointed in his answer to the committee,
15   if we're talking about that.  I think that we know that
16   there's bad practices in the market, we know that there are
17   people who don't understand the rules, we know there are
18   platforms out there that are not registered and following the
19   rules in a way that makes sense to me.  So I think I would
20   definitely like to see the SEC take more specific action in
21   the context of finders and platforms involved in primary and
22   secondary transactions that may not be registered broker-
23   dealers.
24             You know, you've got some no-action letters out
25   there from Trading and Markets to certain platforms that are
0102
 1   helpful but potentially not being followed by the rest of the
 2   market.  So maybe, you know, more obvious disclosure efforts
 3   -- sorry, more obvious enforcement efforts, to the extent,
 4   you know, necessary.
 5             I know Patrick feels like there's not enough
 6   enforcement, obvious enforcement in this space.  I really do
 7   worry about companies hiring people to help them find capital
 8   and then not having that done in a way that's consistent with
 9   the securities laws.  That's not good for the investors, not
10   good for the companies and it's not good for the market.
11             MS. YAMANAKA:  I agree with you, Sara, that having
12   nothing sends the message that if you have no enforcement, to
13   Patrick's perspective, or looking the other way, it sends the
14   message that it's really not an important regulation and it's
15   really not relevant.  So I am of the point that if we have
16   something out there, we probably should -- should be -- you
17   can't selectively apply, right?  You can't selectively
18   enforce.  Because if you do, that takes us down a whole other
19   rabbit hole.  So let's get off the bucket.
20             MS. HANKS:  And any thoughts on what -- what this
21   initiative would look like?  Do we still -- do you still
22   agree with some of the things set out in the 2015 letter?
23             MS. YAMANAKA:  Well, personally, no, there are
24   things in it.  But I'm willing to say let's -- let's just do
25   something.  I think we all don't agree with everything all
0103
 1   the time.  And so it's just -- I don't really understand why
 2   this is happening, to be honest.  And so I just want to
 3   register out there the fact that if we don't do something,
 4   that sends a message out there to people to take the risk and
 5   to take the risk.  And so therefore by, again, nonaction, we
 6   are creating an environment -- we are creating the
 7   environment.  And if we are okay with that -- I know we're
 8   not happy about that, but if we are -- if we accept the
 9   consequences of nonaction, then we need to be prepared down
10   the line for when we do have to pull it back and what that's
11   going to look like -- 
12             MS. HANKS:  So if I -- it's kind of difficult to
13   summarize, because it's clear that not everybody agrees with
14   the exact specifications in the 2015.  But if we were to say
15   that we would like greater certainty, and that certainty
16   could take a number of different shapes, including compliance
17   and disclosure type initiatives, answers to Q&As.  I think,
18   not to put words into the mouths of the T&M guys, but I think
19   there's always been this -- well, there's a slippery slope
20   here and if we let this happen, then what happens next?
21             But Q&A type interpretations of who is a broker and
22   who isn't might be tremendously helpful, even if it doesn't
23   go as far as a no-action letter.  That seems like a very
24   innocent sort of thing to encourage.  And also to encourage
25   that the Staff also talk to the states.
0104
 1             Because one of the things that we are seeing, and
 2   we see this in the Reg A field, we see, for example, Texas,
 3   Florida, Arizona, North Dakota have completely different
 4   interpretations of the issuer-dealer requirements.  And so
 5   some kind of coordination at that level as well would be
 6   tremendously helpful.
 7             MR. NELSON:  It sounds like we're kind of talking
 8   about a speed limit issue, aren't we?  Like what's the speed
 9   limit in your city?  Or on a highway in your state?
10             MS. HANKS:  I have no idea.
11             MR. NELSON:  Like 65?  Do they give you five miles
12   an hour, do they give you 10 miles an hour or 15?
13             MS. TIERNEY:  My cousin is a state trooper.  
14             MR. NELSON:  Um-humm.
15             MS. TIERNEY:  So I get a little bit extra.
16             (Laughter.)
17             MS. HANKS:  The rules do not apply to Annemarie.
18             MS. TIERNEY:  I think it's six, because just for
19   the margin of error.
20             MR. NELSON:  And so what is the actual rule and
21   what is the actual speed limit and what actually gets
22   enforced are sometimes diverse and sometimes I actually think
23   you're getting your answer, Patrick.
24             I love you, but I think what I'm hearing is that
25   the SEC is saying, well, this is the speed limit, but we
0105
 1   might give you five, we might give you 10 over, but at the
 2   same point in time don't be a jerk about it, otherwise we
 3   might, you know, come down and pull you over and give you a
 4   ticket.
 5             MS. HANKS:  I'm not sure we actually do have a
 6   speed limit, even with the Annemarie rider.  And I think
 7   that's the problem.
 8             MR. REARDON:  And that doesn't apply in private
 9   litigation.
10             MS. HANKS:  And I think that is a really good
11   point.  In private litigation, this is what's hanging over
12   the heads of small companies, you do a deal, it was put
13   together by the dude at the golf club who knows some guys,
14   and then it turns out that that was a really bad investment. 
15   And so what happens is a plaintiff's lawyer gets hold of it
16   and goes, okay, we are going to get your money back because
17   that was a broker-dealer and he wasn't registered.  And
18   that's what hangs over the heads of small companies all the
19   time.
20             MS. MOTT:  Sara, I mean, what I was looking at is
21   the document that Greg sent in e-mail, because he couldn't be
22   here.
23             MS. HANKS:  That's the ABA one?
24             MS. MOTT:  Yeah.  So, I mean, what we're doing is
25   we're classifying people to be intermediaries by making an
0106
 1   introduction.  And if they disclose a form that they're
 2   acting as an intermediary, that they are not selling, and
 3   that the issuer says, you know, I understand this, that this
 4   person is not selling and that these people that I'm being
 5   introduced to are accredited investors, I will not take
 6   anyone but accredited investors, what's the problem?  Because
 7   they're not selling.
 8             They're acting as -- and if we define an
 9   intermediary as someone who does not sell, does not provide
10   the PPM, does not provide -- you know, then that person, all
11   they're doing is an introduction.
12             MS. HANKS:  Well, which is what -- but we can't
13   define the law.  And the guys who do interpret the
14   regulations are the guys we need the guidance from.  I mean,
15   that's one of the things that we were encouraging, was this
16   sort of limited purpose introductory -- 
17             MS. MOTT:  I mean, that's what I'm thinking is just
18   what we've done here, to me, works fine.  Because we're just
19   -- we're just putting structure -- so let's define it.  Let's
20   have a form.  Let's just -- 
21             MS. HANKS:  Anybody against a recommendation that
22   that be one of the courses that we would like to see from
23   Trading and Markets?
24             MR. REARDON:  I intend to abstain from any further
25   action from a regulatory standpoint on this.
0107
 1             MS. HANKS:  Even if it's good action.
 2             MR. REARDON:  Sixteen years of good action.
 3             MS. HANKS:  Anyone else want to weigh in on the
 4   form that Catherine -- that's the one that was circulated,
 5   forwarded from Greg Yadley.  That would, at least, be
 6   something.
 7             MR. AGUILAR:  I would like to get the SEC's opinion
 8   on what that -- that letter -- what they would do if a case
 9   came in front of them and somebody had the exemption letter
10   that was referred to in the document?
11             MS. RUTKOWSKY:  I'm sorry, I'm not sure we've seen
12   that.  But I think that there is a vehicle for requesting no
13   action or an exemptive order.  If you wanted some regulatory
14   certainty, some clarity.  So there are established processes,
15   if this is something you'd like to pursue.
16             MS. HANKS:  This is the -- I think it's from the
17   ABA recommendations that you're looking at there.  But it's,
18   right at the moment, I mean, I think the answer is this is --
19   that's just a privately produced piece of paper and then if
20   you took that to the SEC and said, if we did this, would it
21   be okay, then I think the appropriate action would be to
22   request a no-action position.  Which are issued on a case-by-
23   case basis and only apply to the people they are issued to,
24   and we would like it to go a little further than that.
25             Anyone else on the brokers?
0108
 1             MS. KASSAN:  I'm wondering what the reaction was
 2   when, you know, to the recommendations that were made by the
 3   ABA.  What was the response?
 4             MS. RUTKOWSKY:  I think, this is going back, but it
 5   contemplated a limited purpose registration scheme without
 6   FINRA participation.  And the question is then, who -- who
 7   monitors?  Who examines?  
 8             We, right now, are taking on all of the investment
 9   adviser industry.  So we're a little short on resources.
10             So it's a question of you're bringing folks in,
11   you're putting additional regulatory burdens on the SEC and
12   we don't really have a lot of resources.  
13             You know, quite apart from the merits, what you
14   might think on a particular point.  I think that was
15   something that Steve had told the folks from the ABA last
16   summer.
17             MS. KASSAN:  Maybe again, I'll analogize again to
18   Title III of the JOBS Act.  There's this new type of entity
19   that is not a full broker-dealer but is regulated by FINRA. 
20   You know, maybe that could be a solution that, you know, we
21   have this limited type of registration that's not a full
22   broker-dealer but is a finder and does become a member of
23   FINRA but with much more limited regulation.  I would support
24   that.
25             MS. HANKS:  A limited purpose broker-dealer, in
0109
 1   effect.
 2             MS. KASSAN:  Right, similar to the, you know, crowd
 3   funding portals.
 4             MS. HANKS:  And you would, of course, need
 5   regulations to create that, both at the SEC and FINRA.  And
 6   also you'd need -- I mean, one of the things we should point
 7   out is some of those Title III crowd funding platforms -- at
 8   least one has bitten the dust for regulatory reasons already.
 9             So there is a regulatory burden on keeping an eye
10   on those folks.
11             MR. AGUILAR:  Yeah, I'm not one to create more
12   regulation, but I think that I agree with Jenny that I think
13   that would be a good solution.  But there is also the -- the
14   idea of when somebody doesn't do it, I mean, are they being
15   -- are there consequences for that?  It sounds like there's
16   quite a few transactions that are considered securities
17   transactions that are not being monitored and regulation
18   isn't imposed on those.
19             MS. HANKS:  Does anyone else have any other
20   questions or comments on the issue?
21             I just want to say thank you guys for coming by and
22   I know this is the typical Washington parlor game of lining
23   people up and yelling at them.  And we want to say thank you
24   very much for coming back and hearing us and hopefully we
25   don't take it personally, but we do appreciate what you're
0110
 1   doing.
 2             But, you hear us.  I mean, we want some certainty
 3   here.
 4             Thank you, everybody.  We are now going to adjourn
 5   until 1:45.
 6             (Whereupon, at 12:45 p.m., a luncheon recess was
 7   taken.)
 8                 A F T E R N O O N  S E S S I O N
 9             MS. HANKS:  Thanks and welcome back, everybody. 
10   Sorry for the delay to those of you on the webinar; we had a
11   bit of a technical problem.
12             So we are now going to talk about why more
13   companies are staying private, or try and answer that
14   question.  There was an interesting article in the January 6
15   Wall Street Journal focused on the lower number of U.S. IPOs
16   over the last decade, and calling the -- referring to a
17   gusher of private capital.
18             We all know plenty of small companies that would
19   love to benefit from this gusher of small capital and who are
20   not seeing it probably.  But it's absolutely true that the
21   decrease in the number of companies going public is no news
22   to any of us.
23             The article talked about several possible theories
24   as to why the private markets have proven more attractive in
25   recent years for companies that traditionally would have been
0111
 1   candidates for an IPO.  I'm pretty sure everybody here has
 2   got their own thoughts on the topic and we'll be discussing
 3   those.  But it's definitely a topic we want to discuss in
 4   depth and further and see what the trends are that are
 5   influencing companies' decisions to stay private.
 6             We're going to hear from three separate presenters,
 7   each of whom has extremely relevant experience in this area. 
 8   I don't know if this is the order we're going in, but it's
 9   the order I've got.  So first is James Hutchinson or Jamie, a
10   partner in the private equity group of the law firm Goodwin
11   Procter, as well as a member of Goodwin's technology and
12   emerging companies, FinTech and impact and responsible
13   investing practice.  Jamie has extensive experience advising
14   funds and their portfolio companies in a wide variety of
15   transactions.  He's been a key contributor to his firm's
16   online resources for startups, emerging companies and the
17   entrepreneurial community.
18             Next, we have Glen Giovannetti of the global life
19   sciences leader at accounting firm Ernst and Young.  He has
20   close to 30 years' experience with Ernst and Young, the
21   majority serving clients in the biotech and medical device
22   industries.  He has extensive experience -- sorry.  He
23   published a blog in response to the Wall Street Journal
24   article I mentioned earlier, which we all have, so look
25   forward to hearing his thoughts on the topic.
0112
 1             And finally, we welcome Yanev Suissa, founder of
 2   SineWave Ventures.  Yanev was formerly with the large VC firm
 3   New Enterprise Associates, where he focused on early stage
 4   investments in tech and energy companies.  He also helped
 5   form the Department of Energy's loan guarantee program, where
 6   he was engaged in the underwriting of billions of dollars of
 7   debt for issuance to companies within the energy technology
 8   industry.
 9             And please take it from here.  Jamie, are you
10   first?
11             MR. HUTCHINSON:  Glen is going to lead off for us.
12             MS. HANKS:  All right.  Glen, thank you.
13             MR. GIOVANNETTI:  Well, thank you.  And thanks to
14   the entire committee for the invitation.  It's great to be
15   here.  We're hopeful we can at least catalyze some good
16   discussion.  We were talking earlier, I mean, I'm not sure
17   there is a definitive answer on this, but we will put forth
18   some ideas.  And thank you for promoting the blog.
19             That was a bit of a coincidence.  You know, I read
20   that same article heading out to the JP Morgan Health Care
21   Conference every year in San Francisco, kind of kicks off the
22   year for life science companies.  And sat there and said, you
23   know, really, 30 percent fewer public companies?  That can't
24   be the case in biotech.
25             And I think what we'll explore here today is that,
0113
 1   you know, biotech is obviously only one small part of the
 2   entire economy and it may be the exception that proves the
 3   rule for certain -- you know, certain unique attributes of
 4   that particular sector.  And in fact, what I was pointing out
 5   in the blog was that the number of publicly listed biotech
 6   companies is up 40 percent over the same period of time.  So,
 7   you know, the trend is actually reversed.  But we'll explore
 8   the broader issues and then if there's some relevance around
 9   biotech, I'll introduce that.
10             I thought what I'd do is start just with some
11   bigger picture context setting and run through just a number
12   of data charts to hopefully help inform and put some
13   structure around it and then we'll dive into some of the real
14   specific issues around the -- around this question of, you
15   know, why are more staying private.  And we've had a chance
16   to talk a little bit ahead of this session.  So a little bit
17   where I leave off, hopefully Jamie will pick up.  And, of
18   course, stop us at any point.  We don't need to make this
19   presentation; we're happy to entertain questions.
20             So what's here, and may be a little bit hard to see
21   at a distance, there were a couple academic studies that
22   spurred some of this media coverage.  This particular one, I
23   think, was actually quoted in a Bloomberg story about six
24   months before the Wall Street Journal picked up the story
25   there in early January.  And, you know, commenting on the
0114
 1   fact that we've seen this significant decrease in the number
 2   of publicly traded companies and looking at why.  So what
 3   we've done here is just summarized some of the data from that
 4   study itself just in 10-year blocks.  So their data went
 5   through 2012, so it's a little bit dated.
 6             But you can kind of see some of the trend here of,
 7   you know, the rise in public companies up until 1995 and then
 8   a decrease since then.  And just pictorially, the green bars
 9   here are the number of IPOs, the gray bars are the number of
10   M&A transactions where companies effectively delisted via,
11   you know a transaction.  And the red are delistings for
12   cause, right, which you see were pretty significant, you
13   know, leading up to -- in the late '90s, leading up to, you
14   know, sort of the dot com frenzy of, you know, quite a few
15   IPOs, and even in the decade after.  And they've diminished a
16   bit.  So, you know, we can argue whether it's positive or
17   negative, but I think the number of companies going public
18   today are less likely to be delisted.  They're a little bit
19   more substantial, they've been private a little longer, they
20   probably have a little more capital.  Right?  So, you know, I
21   think it's fair to say maybe they're more sustainable than
22   say the average company that was listing in the late -- late
23   '90s.
24             The next slide is just to make the point -- I've
25   got a couple of slides on this, but quickly we want to look
0115
 1   at this from the standpoint of, you know, is this a U.S.
 2   phenomenon, a global phenomenon.  You know, what's happening
 3   here where we have a delisting or not a delisting, I'm sorry,
 4   but a, you know, a decrease in the number of listed
 5   companies.  
 6             You know, this slide is not very interesting
 7   because the data doesn't change very much.  But basically
 8   what it says is 90 percent plus, in fact 94 percent last
 9   year, of IPOs happen on domestic exchanges; only 6 percent
10   are cross-border.  And then if you say, well, does the U.S.
11   have a particular problem?  Because certainly listings are
12   growing at quite a rapid rate in many exchanges around the
13   world, does the U.S. have a problem?  Well, when companies
14   choose to list cross-border, they come here, is what the
15   takeaway here is.  The yellow bar is the number of, you know,
16   foreign private issuers coming to the U.S.  And you can see
17   the other markets, how they compare.  So it suggests that we
18   don't have some unique problem where our companies are
19   finding their way to go public in other places, and that's
20   sort of capped off on this slide, which shows that in 2016,
21   only two U.S. companies chose to list exclusively overseas.
22             So there may have -- there may be others -- there's
23   quite a few others that probably went to dual list.  But they
24   also listed -- had a primary listing here in the U.S.  And,
25   you know, a handful a year say, there's another market for
0116
 1   me, you know, I'm not going to choose to list here in the
 2   U.S.
 3             So then turning more to what's going on with
 4   private companies, this is data from VentureSource.  And I
 5   direct you to the yellow, the yellow line there, and the gray
 6   line towards the bottom.  Those represent seed and first
 7   round.  So by translation, I guess, company formations over
 8   the last many years.  And the numbers you can't read there on
 9   the right are, you know, running around the last several
10   years 1,500 to 1,800 venture-backed companies created.  So
11   that's sort of the inflow of likely IPO candidates.  It's not
12   exclusively what would go public because, you know, family-
13   owned businesses, non-venture backed companies can make their
14   way to the public market.  But this is a pretty big
15   indication of the funnel.
16             And we see since, you know, we kind of cratered
17   after the dot com frenzy back at the beginning of the 2000s,
18   with a little hiccup there around the financial crisis,
19   there's been a relatively steady climb up.  So it's not
20   necessarily that the funnel is not there for companies that,
21   you know, would otherwise choose to seek an IPO.
22             The IPOs haven't increased at the same pace.  And
23   that's a large part of the reason we're having this
24   conversation, and we will get into the larger -- some of the
25   larger dynamics of why that is.  But you can see IPOs prior
0117
 1   to 2000 were running at 400 or 500 a year.  Since the
 2   financial crisis, you know, we're in the 200 to 300,
 3   depending on -- I'm sorry, since sort of the dot com highs
 4   and the recovery there, you know, in the 200 to 300 IPOs a
 5   year.  Last year was quite a bit lower than that.  And so
 6   there's been a different bar set relative to the number of
 7   IPOs.  And what we're experiencing is companies are staying
 8   private longer.
 9             Now the company that gets through, is represented
10   by these numbers and gets public, probably is a little bit
11   more substantial in terms of its time to grow as a public
12   company, perhaps a little better financed.  And hence we see
13   fewer of the delistings.
14             This is the same data.  I won't go over it, other
15   than it excludes the foreign private issuers.  This is just
16   purely U.S. companies going public on U.S. exchanges.
17             And then, you know, the other way companies
18   disappear is they get bought, of course.  And this data is
19   from Deal Logic, and it's acquisitions of all private
20   companies, venture backed, not venture backed, by strategic
21   investors, by PE or financial investors.  It's kind of an
22   all-in number.  So it may be not right on point relative to
23   the population of companies that may go public.  But it gives
24   you an indication that, you know, we're in a robust M&A
25   environment and have been for, you know, quite some time.  As
0118
 1   industries are consolidating, and we see that at the top end
 2   with, you know, the Fortune 500 in terms of the amount of
 3   revenue and assets in the economy they control.  There's also
 4   a trend of greater externalization for larger companies
 5   looking for innovation and being willing to buy it.
 6             So there's an awful lot of deal activity that, you
 7   know, these are companies that otherwise may have
 8   matriculated to the public market that are acquired while
 9   private.
10             Another cut at the data, much smaller numbers. 
11   These are the same -- same data set but deals over $100
12   million.  So this is the group of companies that, you know,
13   might have been IPO ready, if you want to think about it that
14   way relative to their market cap.  You know, whether that's
15   100 or up to $300-, $400 million takeout price.  So, you
16   know, if you're looking at a couple hundred in a year on the
17   IPO side, there's double that number of private companies
18   that otherwise may have considered an IPO that are -- that
19   are selling in M&A transactions.
20             This is just for your information, the number of
21   publicly traded companies that are coming out.  This isn't
22   really germane to the private company story.  This is
23   existing public companies that are being acquired.  You can
24   see that, while pretty steady, it's actually quite a bit
25   lower.  More of that acquisition activity happened much
0119
 1   earlier in the decade and even into the late 1990s.
 2             So that kind of leads us to the question today of,
 3   you know, why are companies staying more private or staying
 4   private longer.  And, you know, not to be flip, but the kind
 5   of short answer we've come up with is because we can, and
 6   we'll talk about what's behind all of that.
 7             But if you look on the left-hand side, you know,
 8   why would I go public, you know, that list there is the
 9   common reasons, you know, that companies would pursue a
10   public offering.  And number one, that their business model
11   really requires it, right?  That they have a highly capital
12   intensive business model and they need to access capital to
13   grow their business.  And public markets, typically,
14   historically, have provided a lower cost of capital.  We can
15   argue whether that's still the case with all the private
16   money out there.  They need public currency to do
17   acquisitions, they're looking for liquidity for their
18   founders, for their investors.
19             Importantly, when we talk about tech and biotech
20   companies, for their employees.  Although Jamie will have
21   some stuff to say about that, because he's been part of
22   creating alternatives for private companies in that respect. 
23   And they -- and/or they just want brand identity, you know,
24   that comes from being a public company.
25             I would say there's one here in particular that's
0120
 1   more biotech focused.  When we get over on the right side,
 2   you know, many companies are staying private because there's
 3   this gusher of private capital, to use Sara's comment from
 4   the article.  There is an unprecedented amount of private
 5   capital out there.  It's not finding its way everywhere.
 6             The kinds of private capital that is going into
 7   some of the large technology companies in, you know,
 8   multibillion dollar rounds, if we go back to the biotech
 9   example for a minute, very few if any investors are going to
10   write that kind of a check for a biotech company and wait
11   five years and turn over a card and see if they get a drug or
12   not, right?  It just doesn't fit -- the financing model
13   doesn't fit the business model.  And that's one of the
14   reasons we see biotech companies go public.  They not only
15   need the capital, they need a wider shareholder base, right? 
16   And that's what a publicly traded stock provides them.
17             So on the why stay private, you know, the biggest
18   issue is because they can.  There's lots of capital out
19   there, right?  And if you can avail yourself to that capital
20   and it's at a reasonable valuation that's not such a large
21   haircut from what a public market might give you, you can
22   still grow your business, it's not as dilutive as it may have
23   been at one point in time.  And certainly with, you know, the
24   new pools of capital, the amount of capital, the pools it's
25   coming from and the valuations, I think we've seen that to a
0121
 1   large degree.  And then it sort of insulates you from what's
 2   the rest of the list there, right?
 3             So obviously as a public company, a lot more
 4   infrastructure needed for disclosure and regulatory
 5   compliance.  Some perception, and this was brought up in the
 6   Wall Street Journal article about, you know, disclosure
 7   leading to loss of competitive advantage, especially for
 8   technology companies trying to build something new.  Just the
 9   general lack of operating flexibility or lower operating
10   flexibility when you're public and you have investors that
11   are much more focused on short-term quarterly profits and
12   your business model might be one of, you know, long-term
13   growth and world domination in a particular category.  Right? 
14   Just that -- that dichotomy.
15             And then a variety of other -- you know, just the
16   risks of being a public company.  Subject to activists and
17   short sellers and shareholder lawsuits and the like.
18             So, you know, we really have, you know, factors for
19   and against.  But the answer that we will set up here, and I
20   will pass the baton here to Jamie, is because they can.
21             MR. HUTCHINSON:  So again, I'm Jamie Hutchinson. 
22   I'm a partner in Goodwin's private equity and tech practice
23   units.  We do a lot of work representing emerging stage
24   companies and the folks that invest in them.  And we've
25   actually kind of had a front row seat over about the past
0122
 1   decade to what we kind of call the large cap growth equity. 
 2   So a lot of the very big rounds into the high-profile tech
 3   companies, sort of the unicorn set.  And a lot of those
 4   transactions come with some interesting dynamics, including
 5   secondary pieces.  And so the press has written a little bit
 6   about private IPOs, which I think is -- is not a good -- you
 7   know, it's probably a misnomer.  But there's certainly a
 8   different type of transaction, much larger, that has
 9   secondary liquidity.  And we've sort of had a front row seat
10   to that.  So I think we should be able to give some ideas of
11   why this is happening.
12             So and certainly during this presentation, we're
13   going to jump in, and if anybody has questions and want to
14   jump in and drill down on stuff, you should do that.  Could
15   make it more interesting than hearing me.
16             MS. TIERNEY:  You should know we're not shy.
17             MR. HUTCHINSON:  Yeah, I've seen that over the
18   years, Annemarie.
19             MS. TIERNEY:  We're not shy.
20             MR. HUTCHINSON:  So, you know, here's a summary of
21   some of the reasons.  There's large amounts of private
22   capital and it's really on a global level.  It's not, you
23   know, just the U.S. anymore.  Employees don't demand a
24   company go public.  There are alternatives to liquidity now
25   that there weren't in the past.  Early investors don't need
0123
 1   an IPO or maybe even want an IPO.  The idea of a clean exit
 2   is something that can be particularly appealing to closed-end
 3   funds that have a life, a life span.  Certain securities laws
 4   have become more flexible, especially the 500 shareholder
 5   rule moving to 2,000 shareholders of record.
 6             There is a new generation of entrepreneurs that
 7   have a different set of priorities.  And, you know, this is
 8   perhaps the case now maybe in a different way than
 9   historically.  We've had direct interaction with a lot of
10   thee folks and they think of the world differently.  And
11   maybe it's a millennial thing.  But they're -- I think we're
12   all seeing in the market, particularly the companies that are
13   going public, the focus is on things like control maybe than
14   immediate sort of wealth creation, changing the world,
15   winning the space, things like that.
16             There's negative -- there's this negative press
17   phenomenon that can occur with public companies.  And we will
18   drill down onto that as a little bit.
19             So cash as the new acquisition currency.  It's
20   shocking, but debt is cheap and a lot of companies, both
21   public and private, are able to tap very deep pools of debt
22   financing to do M&A where, in the past, it might have been
23   best done with a public company security.  M&A equals
24   innovation, strategics are serial acquirers and they do that
25   to continue to innovate, and they are affected by not only
0124
 1   the cash they have on their balance sheet but their ability
 2   to tap into cheap debt.
 3             The high costs of being a public company are
 4   perhaps keeping folks from moving towards an IPO.  And then
 5   there's sort of another set of pitfalls that we'll touch on.
 6             So, you know, first the large amounts of private
 7   capital.  So the capital is coming from different places than
 8   maybe was historically the case.  VC funds themselves, many
 9   have gotten bigger and their investment mandates have
10   expanded.  Where, you know, maybe in the '80s and '90s, even
11   the early 2000s, VCs were really doing early stage sort of
12   startup type investing.  Now their mandates are really across
13   the spectrum, from early stage to late stage.
14             The traditional private equity funds, you know,
15   buyout funds, the Carlyles, the KKRs, they did not
16   historically focus on minority deals, deals that they didn't
17   have control.  And that has changed substantially.  Firms
18   like Silver Lake investing in Zynga and Alibaba, taking
19   minority positions, TPG.  And these are all, you know,
20   publicly available.  TPG in Airbnb and Uber.  KKR just
21   announced a growth equity fund.  So these are -- these are
22   really traditional buyout shops that are moving into growth
23   equity and have deep pools of capital.  
24             Corporate venture capital, Google Ventures, Dell
25   Ventures, they are out there and investing heavily.  That's
0125
 1   sort of a new and different source of capital over the past
 2   decade.
 3             Hedge funds.  Some people refer to them as
 4   crossover funds.  Historically, hedge funds would invest in
 5   public securities.  They were open-ended funds and they were
 6   structured in a way that having the liquidity of public
 7   securities kind of meshed with their structures.  But that is
 8   no longer the case.  A lot of the big hedge funds, Tiger
 9   Global, for example, have been extraordinarily successful and
10   extraordinarily active investing all over the world into
11   private companies.
12             The sovereign wealth funds.  They have over the
13   past sort of five to 10 years -- well, historically, they
14   would invest as LPs in the big venture and private equity
15   funds.  And they sort of have come around, based on their
16   expertise maybe doing that to build their own infrastructure. 
17   They build their own investment teams and they're able to
18   make direct investments.  GIC, Temasek, the Saudi fund that
19   recently invested in Uber, the Abu Dhabi fund that's invested
20   in Spotify, you know, there's a long list of the sovereign
21   wealth funds no longer being passive investors in private
22   equity and venture but investing directly.  And they have
23   very deep pools and they are super patient investors, so it's
24   added things to the market.
25             Mutual fund complexes.  So one of the things in the
0126
 1   Wall Street Journal article, it mentioned how the average
 2   investor doesn't sort of get access to these -- these fast-
 3   growing sort of unicorn companies.  And, you know, as I was
 4   reading that, I was thinking, well, that's actually not true. 
 5   I suspect, you know, a lot of people in this room have
 6   401(k)s in mutual funds and through the public filings, and
 7   you've seen it in the press, the big mutual fund complexes
 8   are one of the most active investors in private companies
 9   these days.  And they, too, are very large pools of capital
10   and they're very patient.  It's a different model.  They
11   don't have an end to their fund life.
12             And we'll talk a bit more about that, because
13   that's been a really dramatic shift that's sort of changed
14   things, particularly with shareholder liquidity.
15             And then family offices.  Just like the sovereign
16   wealth funds, they've built infrastructure to direct invest. 
17   Gates, the Omidyar Network, the founder of eBay, folks like
18   that are now out there making direct investments.
19             MR. SUISSA:  Could I -- since you've gone through
20   this, I might jump in.  I would also note that these are not
21   all smart investors in the venture space.  And what I mean by
22   that is not that they're not smart people, but these business
23   models that they have historically been in are not the same
24   business model as venture.  Right?  We are not typical
25   finance.  I don't do ratios on a daily basis.  Right?  We're
0127
 1   building teams, building strategies, building technologies,
 2   innovating, often being a personal counselor, quite frankly,
 3   and a recruiter.
 4             And you have all these guys moving in and they all
 5   have different motivations.  So for the big banks and funds
 6   and the more financial folks, you have a phenomenon since the
 7   recession, where people -- whether it's true or not, people
 8   believe that the public markets are not a place to make money
 9   or not a place to make money safely.  And you do have this
10   phenomenon of it's hard to get in, so there must be something
11   special about this that this small group of people have
12   access to these set of special deals that you need to be in.
13             And there is that definite like you-need-to-be-in-
14   it mentality, right?  If you're not in Facebook, you're not a
15   relevant investor in the technology space, regardless of
16   whether you think Facebook is a good company or not.  Right? 
17   And so similar for every other -- a lot other of the big tech
18   companies.  So that's where the banks come from.
19             For the sovereign wealth funds, we've seen a
20   phenomenon where technology and innovation, as you guys know,
21   has been promoted much more in the press as a way to -- and
22   venture, for that matter -- as a way to grow jobs, right, and
23   learn new skills and build businesses and build economies. 
24   And a lot of the sovereign wealth funds are doing this not
25   just to make money but because they believe that having
0128
 1   access to the understanding of these tech companies will then
 2   give them the ability to bring that technology to their
 3   country.  This is particularly relevant among the Middle East
 4   sovereign funds, where they say, we're going to invest in
 5   this because we want you to build an office here and train
 6   our people to do this.
 7             So I think -- and then families are similar. 
 8   There's also this phenomenon of I don't want to pay managers
 9   fees; I just want to go at it directly, because I think I'm
10   just as smart.  Right?  So I'm going to go at all these
11   things that I really know nothing about and keep going.  And
12   I do think that's a dangerous phenomenon more generally,
13   maybe not relevant to the going public point that we're
14   talking about today.  But you are seeing this change, I
15   think.  So all the really smart ones came in early, they
16   realized, because they're smart, that they didn't know what
17   they're doing, and they've pulled back significantly.  And
18   then you have the second tier of just as smart, maybe not as
19   smart people, coming in and it will continue to kind of move
20   that direction until people realize it really is a different
21   game and unless they're really focused on it and understand
22   it, they're really just playing with fire.
23             So I think that's part of this dynamic.  It's not
24   -- it's a reaction to, hey, we as financial institutions are
25   not making money right now, and everyone is asking us, like
0129
 1   why aren't you making money?  Why aren't you in this?  So we
 2   need to do something.
 3             MR. HUTCHINSON:  And to your point on sort of the
 4   not wanting to pay fees, we see these things that we call
 5   rifle shot funds.  So it's like a managed account almost
 6   where big investors will aggregate money, it might be led by
 7   a brand name VC, but they'll set up a side -- it looks just
 8   like a venture fund, feels like a venture funds, it's got a
 9   GP, it's got LPs, but invests in a single asset, a rifle shot
10   into one company.  And, you know, Goldman kind of kicked that
11   off in some respects when it did a big common round into
12   Facebook and brought in a bunch of their investors in a
13   special purpose vehicle.  So we're seeing that phenomenon,
14   too, with some of this new money that doesn't want to pay
15   fees but wants to co-invest alongside of some of the more
16   traditional investors.
17             MR. SUISSA:  And in that case wants dibs on the
18   IPO.
19             MR. HUTCHINSON:  Right.
20             MR. GIOVANNETTI:  Just one maybe question or
21   comment to add to what Yanev was saying, because I agree
22   with.  One thing to keep in mind is where do we think we are
23   largely in this wave of private capital?  So if we're on the
24   second wave and, you know, many of these unicorns will make
25   it out and the value will go up, but some won't, right?  So
0130
 1   where does that sort of ebb and flow occur?  And if you go
 2   back to the one slide I showed about venture-backed company
 3   formations, there's a bolus of companies that are now three
 4   to four years into their venture stage development.  And so
 5   one of the dynamics on the pure IPO count could be, hey, we
 6   see a little bit less of this gusher of private money and
 7   we've got a whole load of IPO-ready companies.
 8             So, you know, these things bend, right?  They ebb
 9   and flow with capital availability.
10             MR. NELSON:  So can you guys talk -- you guys keep
11   on talking about this gusher of private capital into small
12   businesses or this gusher of private capital into emerging
13   businesses.  What's the average check size that Tiger Global
14   writes to a company?
15             MR. HUTCHINSON:  I suspect it's not less than 100
16   million.
17             MR. NELSON:  What would be the small check size
18   that a mutual fund would write to a company?
19             MR. HUTCHINSON:  I suspect it's not less than 100
20   -- maybe 50 million.
21             MR. NELSON:  I would just caution putting all of
22   those companies in the same bag and saying that all of this
23   money just is going into -- the market is awash with capital. 
24   Because there's well over 100,000 small businesses in this
25   country and you're talking about dozens if not hundreds of
0131
 1   deals.  So the amount -- the check size in terms of growth
 2   stage private equity -- so the check size is huge, the number
 3   of deal size is smaller.
 4             I mean, we were just talking in the earlier session
 5   -- you weren't here.  But, you know, venture is about $50
 6   billion a year right now, angel is about $25 billion a year
 7   right now, and so that's $75 billion a year right now.  The
 8   lottery is a $65 billion a year business.  So I would -- I
 9   just I guess I take issue with that.  Because I speak with
10   thousands of entrepreneurs who are capital starved.
11             MR. SUISSA:  Well, can I make two quick comments to
12   that?  So I will tell you there are VCs competing with
13   certain one of these names -- names that you would have no
14   idea were doing seed deals.  And that is -- and when an
15   entrepreneur has to choose between a VC who knows how to get
16   their ownership and someone who doesn't because they're just
17   taking dibs on something or just spreading money or just
18   trying to please investors who think they should be in the
19   private markets, it's a different game, right?  
20             And I will also say there are -- so I think a
21   phenomenon that happened with the recession, and I don't know
22   which companies you know and this is going to sound horribly
23   arrogant.  But there are a lot of companies that shouldn't be
24   companies out there.  Like so when the recession happened,
25   you saw a huge surge in the word entrepreneurship, let alone
0132
 1   people who wanted to be entrepreneurs because they got fired. 
 2   My friends got fired from their jobs in the law firms and the
 3   banks and the consulting firms.  And okay, great, we're young
 4   and risky and there's all this stuff, we'll start a company
 5   and it's exciting and it's cool and we'll do that.  And
 6   unfortunately, that phenomenon has been permitted to continue
 7   because of this larger phenomenon we're talking about where
 8   this money is pouring into companies that wouldn't.
 9             I think if you -- and this maybe comes from my
10   background or where I invest from, but if you really look at
11   -- if you had to go through -- and everyone has their own
12   opinion.  If you had to go through and say which one of these
13   companies that are getting funding, period, actually should
14   be, the answer is probably very high that they shouldn't be. 
15   And so I do think there's that phenomenon going on as well.
16             MR. NELSON:  What would you decide a company that
17   should get funding?
18             MR. SUISSA:  Well, so when you invest in a company,
19   right, you're looking for a particular return -- 
20             MR. NELSON:  What would your return be as a VC? 
21   When you invest in a company, what return multiple are you
22   thinking of in your head?  I'm thinking it's about a 2 to 3X.
23             MR. SUISSA:  So VCs, I mean, it's everyone has
24   their own model.  It depends if you're angel, whatever.  But
25   I would say most VCs when they answer this question, because
0133
 1   they have to have an answer even if it's not true, often say,
 2   you know, we won't invest in anything if we can't feel that
 3   we're almost guaranteed a 3X and yet have the potential for
 4   like a 50X or more.
 5             MR. NELSON:  And so how many startups would you
 6   actually talk to before you actually come across one of those
 7   deals?
 8             MR. SUISSA:  I think most -- you know, it depends
 9   on the firm and where you're looking but most of the big VCs
10   will probably look at at least 200 companies and maybe invest
11   in one of those.
12             MR. NELSON:  So it's 0.5 percent of the companies
13   that you look at actually get funding that you think you have
14   a reasonable chance of getting a 50X return on?
15             MR. SUISSA:  Okay.
16             MR. NELSON:  So for every 200 companies, for every
17   200 CEOs or entrepreneurs that are out there that are
18   actually interested in capitalizing their company, about 0.5
19   percent of them actually do.
20             MR. SUISSA:  Right, but when I say the one out of
21   the 200, I mean the 199 shouldn't have the capital, or they
22   should form a different form of capital.
23             So, you know, I'm coming at this from venture
24   money.  There's other money out there that might be looking
25   for a different kind of motive, right, or return profile.
0134
 1             MS. MOTT:  May I shift gears here for a minute
 2   since you jumped in?
 3             MR. NELSON:  Sorry.
 4             MS. MOTT:  So when you think about the rate of
 5   innovation, when you look at the rate of innovation in maybe
 6   10- or 20-year segments, you know, how much of the capital
 7   that's pouring in is more a reflection of the opportunity
 8   because of the greater rate of innovation?  Is that a -- is
 9   that something to be considered or am I off base?
10             MR. GIOVANNETTI:  More investable opportunities,
11   more investable opportunities, is what you're -- 
12             MS. MOTT:  Because of the rate of innovation.
13             MR. GIOVANNETTI:  Yeah.
14             MS. MOTT:  You know, it's not -- I keep thinking,
15   you know, I started my firm 15 years ago and I think about,
16   you know, the companies we had to invest in, quality
17   companies we had to invest in, here in the United States but
18   I'm seeing it all over the world now.  It's very different.
19             I mean, I went to the Netherlands and I walked away
20   looking at some companies I thought were very, you know,
21   great opportunities.  Well, Spotify is a good example of
22   that, too.  You know, so it's not just -- so I'm not talking
23   about -- the rate of innovation that I've seen in the past 15
24   years is much more robust than I think it was 15, 20 years
25   ago.  Other than the dot com.
0135
 1             MR. SUISSA:  I do agree with that.  I absolutely
 2   agree with that.  And I think, you know, I know we've kind of
 3   degenerated a little bit into like where is all the money
 4   coming from.  But I do think that that's the reason that it
 5   is -- if we go back to the bigger topic, right, that there
 6   are more opportunities and they are growing and they're out
 7   there.  But they're still not -- regardless of whether
 8   they're getting financing or not, they're still not turning
 9   to the public markets.
10             MR. GIOVANNETTI:  One last comment and we'll turn
11   it back over.  Different in my space, where it's a lot of
12   capital intensity.  A lot of the innovative companies have a
13   really asset light kind of model with -- especially you're in
14   software and you can avail yourself to cloud and, you know,
15   computing power that's so cheap, your demand for capital is,
16   you know, a small percentage of what it was, you know, 10, 15
17   years ago.
18             MR. SUISSA:  Great point.
19             MR. HUTCHINSON:  Yet I think part of the focus on
20   what we were talking about here is  why are companies, you
21   know, staying private.  And so I think it's right, a lot of
22   younger companies aren't getting the financing they might
23   want and the money isn't moving down, it's pouring into sort
24   of the biggest ones and it's keeping those biggest ones, that
25   otherwise would have gone public, private longer.  And so
0136
 1   that's kind of the -- at least the lens we're looking at
 2   this.  But I take the point that it's not being spread across
 3   equally.
 4             MR. GIOVANNETTI:  Small part.
 5             MR. NELSON:  So it's wealth concentration.
 6             MR. HUTCHINSON:  Yeah.  And that's what's allowing
 7   some of these most successful tech companies to push out an
 8   IPO where, before, these huge pools of capital just weren't
 9   there and so, you know, the Googles and Microsoft, you know,
10   was, I don't know, four or five years old and its market cap
11   was $400- or $500 million when it went public.  
12             Where, you know, let's go to this slide, which is
13   actually pretty interesting.  It's a little hard to see --
14   super hard to see.  But the -- 
15             MR. SUISSA:  Just believe what we tell you.
16             (Laughter.)
17             MR. HUTCHINSON:  The blue is how long they're
18   private.  The little orange dot is when they go public.  And
19   the black dot is when they hit 10 billion.  And what you're
20   seeing is, just looking at it, they are hitting 10 billion
21   before they're going public.  It goes from 1980 to 2015.
22             But it's interesting.  So all those companies up
23   top were private for a shorter period of time, went public
24   when they were smaller, and they rode the public markets up
25   to a much bigger valuation.
0137
 1             And so what we're seeing now is just the opposite. 
 2   Companies are staying private a lot longer.  They're actually
 3   hitting these big valuations even before they go public.  And
 4   one of the -- I think one of the primary reasons that's
 5   happening is really the mutual fund investors.  And they too
 6   have backed off recently.  But for a while there, that's how
 7   they made their money.  They invested in all those orange
 8   dots when they went public.  They didn't used to invest in
 9   private companies the same way, but they still got the same
10   value creation, because they were in at that inflection point
11   and then the company went public and they got to rise that
12   value.
13             Now, they have to get in when it's private or they
14   miss out.  And that's their whole business model, is to sort
15   of, you know, ride the growth.  So we've seen what otherwise
16   would have been an IPO in terms of the size of the round and
17   in terms of the liquidity being offered to the employees
18   happening when it's a private company driven by mutual funds,
19   sovereign wealth funds and the like.
20             MR. SUISSA:  And along with that point, and maybe
21   this ties to what Jonathan and Catherine were mentioning
22   earlier, valuations -- because there is a lot of money for
23   these companies we are talking about, valuations get pushed
24   up very high before they should be.  In almost every case,
25   before they should be.  And it's because there is competition
0138
 1   and you can take money from whoever you want.
 2             There is one company that's likely to go public
 3   this year that in the past two rounds said, we're raising
 4   money in two days and you have no access to any information,
 5   period.  Put your money down.  And they raised several
 6   hundreds of millions of dollars in two days.  So it's just
 7   the dynamic that's happening.
 8             MR. HUTCHINSON:  Yeah, I mean, T. Rowe Price in
 9   Twitter, an $800 million round shortly before they went
10   public, Fidelity in Facebook, Morgan Stanley Funds in Airbnb.
11             MR. SUISSA:  Uber.
12             MR. HUTCHINSON:  Yeah, Uber.  I mean, these are the
13   type of companies getting these big -- doing these big
14   rounds.
15             And then what's happening with them is sort of a
16   secondary component, which is kind of a traditional IPO
17   thing, right?  You have selling shareholders, the employees
18   then are able then to exercise options and get liquidity. 
19             And what we've seen, and these are just some
20   snippets, you know, Yelp did a pretty small primary round and
21   then did a $100 million buyback from employees.  Alibaba,
22   before it went public, probably did the largest private
23   tender offer that -- ever, and certainly that we're aware of,
24   to, you know, thousands of employees, led by Silver Lake and
25   DST Global, you know, well north of a billion dollars.
0139
 1             And Mark Zuckerberg and Facebook were really
 2   innovators in many respects, because they were losing the
 3   talent war.  They were four or five years old.  People were
 4   working for less than market rates in terms of salary.  They
 5   saw their friends, engineers at Google and Apple, able after
 6   a couple years to exercise options and make money.  And, you
 7   know, Zuckerberg and that management team said, we've got to
 8   fix this.  We're not going to be able to attract the best
 9   talent.  How do we do it?  And so back in 2009, when
10   everybody thought it was, you know, crazy, some investors put
11   in a lot of money in a primary at a really high valuation,
12   and put in a lot of money in a private tender offer to the
13   employee base that allowed for the exercise of options and
14   for employees to get a little bit of liquidity.  You know, a
15   little bit.  A million bucks, right?  Which is a lot of money
16   to a 25-year-old engineer.  But just a small fraction of what
17   their value they had on paper.
18             And you see the -- so then we saw -- it went from
19   kind of the wild west of secondary trading that people kind
20   of read about with Facebook, employees selling shares to
21   their dentist and things like that, not a lot of control, to
22   very controlled private liquidity programs that were done
23   purposefully and methodically to allow employees to get the
24   type of liquidity they might otherwise -- and early
25   investors, the type of liquidity they might have otherwise
0140
 1   gotten in an IPO.
 2             So founder liquidity is no longer taboo.  We're
 3   seeing it as early as Series B rounds these days.  And new
 4   technologies, outfits like NASDAQ Private Markets, are able
 5   to allow these transactions to happen the way that -- you
 6   know, better, faster, cheaper.  And so that they have become
 7   sort of routine.  They are periodic private liquidity
 8   programs for these big tech unicorns that allow them to act
 9   like a public company in terms of giving their employees that
10   equity incentive that actually can turn into money.
11             MR. SUISSA:  And I will also say that applies to
12   the investors, too.  So with VCs, we now have other
13   opportunities for getting out in the private markets at these
14   high valuations.  And there are some of these companies where
15   the early VCs are already completely out.  Right?  I mean,
16   people don't realize that, but we are able to get out without
17   it being a signaling mechanism, which matters.
18             And because remember, even with these new big
19   growth rounds, they're not joining the board or advising the
20   CEO.  It's still the early VCs who are doing that.  And so
21   unless we feel the compulsion, it's hard to have the
22   entrepreneur feel the same compulsion.
23             MR. HUTCHINSON:  So, you know, it's an excellent
24   point.  We're seeing early stage VCs sell to the growth
25   equity investors, sell to the mutual funds and the sovereign
0141
 1   wealth funds.  Where, you know, 10, 15 years ago, it would
 2   have been really a bad signal for an early stage investor to
 3   get liquidity before the company was sold or went public. 
 4   And now it's just sort of become a little more routine.  And
 5   there are pockets of capital that will -- the institutional
 6   investors will be able to get liquidity from one another.
 7             And, Julie, move us along if we're -- 
 8             MR. REARDON:  Can I ask a question?  In 1980, I
 9   worked on an initial public offering for a contract drilling
10   company in Houston.  I don't mind telling you the name, it
11   was Drillers, Inc. -- I don't even know exactly what
12   iteration they're in.  It was a $20 million IPO.  And now
13   that's -- that's worth -- I just calculated here, roughly $58
14   million would be the equivalent of doing an IPO.
15             Now, is that size IPO -- because frankly, I don't
16   think our charge here is for the company that does an IPO at
17   a billion dollar valuation.  We're much smaller than that. 
18   We're worried about the guy with two dry cleaners.  You know,
19   is the $58 million IPO just currently off the table?  You
20   would never do that now?
21             MR. HUTCHINSON:  I think my answer is it absolutely
22   wouldn't happen.
23             MR. REARDON:  Wouldn't happen?
24             MR. HUTCHINSON:  Would not happen.
25             MR. NELSON:  Why?
0142
 1             MR. HUTCHINSON:  Because the market has changed. 
 2   Historically, there were investment banks that would do that
 3   sort of deal and then cover it, have coverage on the back
 4   side so that company would actually build and get market
 5   attention.  So those were sort of like the Alex Browns of the
 6   world.  They're gone.  Hambrecht and Quist, they're gone. 
 7   Robertson Stephens, they're gone.  It was the four horsemen,
 8   they called them, and they were these sort of super-regional
 9   investment banks that would take a company like that, also a
10   company like Microsoft, you know, which was kind of a smaller
11   business, public.  And that doesn't really exist anymore.
12             I don't know if you're seeing it -- 
13             MR. SUISSA:  No, it doesn't.  Not going to happen,
14   I agree.
15             MR. NELSON:  Why don't those investment banks exist
16   anymore?  I'm just wondering.
17             MR. GIOVANNETTI:  They got bought up around the
18   late '90s, going into -- so JP Morgan bought Hambrecht and
19   Quist.  They all got bought.
20             MR. HUTCHINSON:  Deutsche Bank bought Alex Brown.
21             MR. GIOVANNETTI:  To try to get into this, you
22   know, innovative high-growth space. 
23             But, you know, other things changed, too.  So there
24   is, you know, the profitability of the whole analyst market
25   in banks, so that's one of the reasons analyst coverage is
0143
 1   hard to get and build your -- and we know that, I'm sure
 2   you're all aware, there is this -- going on around
 3   decimalization.  Right?  So it's a lower -- lower cap, less
 4   liquid stock, it's harder for a bank to make a trading
 5   profit.  So does that deal look as interesting anymore?
 6             Even if H&Q still existed, that would be a problem. 
 7   You know, that deal probably isn't as profitable anymore. 
 8   Even investment banking fees, there is good competition in
 9   investment banking.  The IPO is a 7 percent fee.  But you see
10   a lot of follow-on offerings that get squeezed down to, you
11   know, 3 or 4 percent, because there's enough competition. 
12   Now, that's really happening with the ones everyone wants
13   into.  But generally, that whole banking model is less
14   profitable.  So that is a challenge.
15             And then you have investors who have a lot of
16   capitals to put to work.  And so it's a 25 or now if it's 50
17   with inflation, you know, and you're going to get a 10
18   percent allocation of that, you know, do you want to write a
19   $5 million check?  Some may.  But, you know, a lot of the
20   mutual funds are like, I need to put 40- to 50 million to
21   work at a time, because I just have so much capital.  If I'm
22   going to spend all that time to listen to the banker pitch,
23   understand the company, get excited about it, I can't just
24   put $4- or $5 million to work, I've got to put more to work.
25             MR. SUISSA:  It's an interesting problem.  And this
0144
 1   goes to Jonathan's point.  You know, partially me coming from
 2   the tech world, I think of things.  And everything that is
 3   happening in my world is in California.  Right?  But there
 4   are lots of companies growing in other parts of the company
 5   that a VC wouldn't step foot in and this money is not going
 6   to go to, no matter how well they're doing, right?  And so --
 7   and that probably goes to your broader point.
 8             MR. NELSON:  No, I mean, I'm in California and I
 9   have a 55-company portfolio and in aggregate they're worth
10   about 600 million bucks.  They've raised about $100 million. 
11   But 40 percent of my portfolio have women founders.  And 4
12   percent of venture-funded startups have women executives. 
13   And half of my portfolio is Hispanic founders, which is less
14   than 1 percent; 10 percent of my portfolio have black
15   founders, which is less than 1 percent.
16             And so -- 
17             MR. SUISSA:  And those percentages are probably 500
18   percent of the percent of the other VCs, quite frankly.
19             MR. NELSON:  Yeah, no.  I mean, I've worked with
20   the White House on, you know, diversity sort of stuff.  And
21   we have a blind selection process.  So we just remove
22   people's names and pictures and that sort of stuff.  And I
23   speak Spanish and so that's part of the Hispanic thing.
24             But I just -- it's hard for me -- what I see is
25   there is a broad bottom.  You know, people can get to
0145
 1   accelerators.  They might be able to get to $1- or $2
 2   million.  And there's this huge scrunch.  And then if I need
 3   a $100 million check, that's actually a lot easier to come
 4   by.
 5             MR. SUISSA:  Correct.  That's right.
 6             MR. HUTCHINSON:  Seven to 10 million is tough
 7   money.
 8             MR. NELSON:  And so, you know, which is why we're
 9   talking about secondary liquidity options, why that's an
10   issue, and which is why Catherine was talking about angel
11   investor fatigue, because there's no liquidity for these
12   investors.  And it just -- it feels broken for those small,
13   sub-$100 million businesses. 
14             MS. YAMANAKA:  I think you're right, Jonathan.  And
15   I'm not worried about you guys.  You're going to make out. 
16   The top always makes out.  You keep doing what you're doing,
17   and do it some more.
18             Unfortunately or fortunately, I think what we're
19   here for is to figure out, you know, the 99.9995 percent that
20   don't fit into this model.  So I think your information
21   actually is very interesting.  It helps me understand why
22   that perception.  And, you know, the gushers of capital.  And
23   when we saw it, we're like, where are these gushers?  Other
24   than, you know, up there in the Silicon Valley.
25             MS. HANKS:  Only gushing in the valley.
0146
 1             MS. YAMANAKA:  Yeah, very narrow part, right? 
 2   Within one day's drive, all those stats, whatever.
 3             So I think our challenge is to identify what you
 4   guys are doing really well, why you're doing it, and how can
 5   actually we roll it out to where a greater portion -- in
 6   fact, greater numbers, maybe not in dollars, but the greater
 7   numbers of people are going to participate in this, grow
 8   jobs, grow businesses, grow capital.  It's going to help out,
 9   maybe not to the extent that your, you know, demographics
10   work out.  But is there something that we could take, apply
11   and learn, or is this just like going to the moon versus
12   going to the grocery store?  Does it not apply at all.
13             MR. HUTCHINSON:  I think it's a little off topic
14   from this, but certainly when there is a tremendous amount of
15   competition for very few deals, venture capitalists at their
16   heart are entrepreneurs themselves, and very smart, and
17   they'll seek opportunities that not everyone else is chasing
18   because it's too hard or too expensive.  So Steve Case in
19   Revolution talking about looking into jurisdictions that
20   aren't Silicon Valley.
21             And I think just anecdotally, we're seeing more of
22   that.  Things like companies in New Orleans, in Louisiana,
23   that you know, I've never done a deal there.  And all of a
24   sudden in the past couple months, we're starting to see
25   things.  You know, North Carolina has historically had a
0147
 1   solid base, and we're seeing more activity there.
 2             So I think, because of this phenomenon and the
 3   hyper competition for the best deals, you could see smart
 4   money saying, I don't want to overpay.  There are smart
 5   people in other places in this country, let's go see if we
 6   can find -- unearth some of that.  But you might have a
 7   different perspective.
 8             MR. SUISSA:  No, I agree with that.  And so our
 9   fund, SineWave, because I came from some of the bigger funds
10   like NEA, we only invest with those funds, actually, for
11   financing risk, which is at the heart of what a lot of you
12   are talking about.  And I will say that the really top tier
13   funds are not -- they'll pretend they are and the press will
14   say that and they would deny it to the nth degree, but they
15   are not doing a lot of deals right now, at all.  And I know
16   that, because I'm looking to invest with them.  I invest
17   alongside them.  I monitor and I work with them as partners. 
18   And they're just not doing a lot of deals right now.  But
19   we're more than happy to watch all the others bump up our
20   existing deals.  Right?
21             So that is an important phenomenon, and you see
22   some firms who used to be investing all the time taking on
23   different industries.  All of a sudden, VCs like insurance. 
24   Like no one ever paid attention to insurance before.  All of
25   a sudden, they like -- 
0148
 1             MR. GIOVANNETTI:  FinTech.
 2             MR. SUISSA:  Yeah, FinTech.  So there's trends,
 3   right, and it changes and people will follow where the
 4   opportunities are.
 5             MR. REARDON:  Could I ask another question?  Julie
 6   or Sebastian, in the law that passed last year at the end of
 7   the year, creating the advocate for small business, there was
 8   a definition of small business that was $100 million assets. 
 9   Is that what it was?
10             MR. GOMEZ:  So, Patrick, I think you're referring
11   to the fact that when the bill created the committee portion
12   of the bill that this committee codified, it uses the same
13   definition that this committee has of looking for private and
14   public companies up to 250 million.
15             MR. REARDON:  250 million, okay.  I'm a lawyer; I'm
16   not good with numbers.
17             All right, I've got a company that's worth $250
18   million or it's going to be worth $250 million, but it's not
19   a whiz-bang industry.  It's not, you know, blood testing or
20   anything in Silicon Valley.  It may be a smokestack industry,
21   it may be in Texas, it may be conventional oil and gas. 
22   Where do I go to finance that?  What's the answer there? 
23   Putting aside all the glitzy, glamory stuff that is going
24   public at a billion dollars and is producing two to three
25   times return on money, I mean, just the -- in Iowa or Texas
0149
 1   or wherever you're from, the flyover zone, we've got
 2   companies out there that need money, they employ people, they
 3   pay taxes, they make a decent profit.  Where do we go to get
 4   money for those companies?
 5             MR. HUTCHINSON:  So I think it's hard to finance
 6   them from an equity finance perspective.  I think that they
 7   will be able to tap into debt markets.  But the reality is,
 8   it's harder to finance it than it is to sell it.  There is a
 9   huge part of the private equity industry on the buyout side
10   that's focused on the middle market.  And a $250 million
11   company that's making money in a traditional industry, there
12   will be a line 20 deep to buy that company by private equity
13   sponsors.
14             But if you want to sell 10 percent of it and try to
15   build it, that's a harder one.  Because the buyout shops will
16   take control all day long.  And they'll actually -- it's
17   almost universal in deals right now where the management team
18   will probably be asked to, quote, roll over.  So sell 80
19   percent of the company or 75 percent of the company and keep
20   a minority position from the original founder.
21             But it is hard for those sorts of traditional
22   businesses to find equity financing.  My opinion. 
23             MR. SUISSA:  So this may be a little bit of a
24   tangent, but I think all of this including the bigger topic
25   comes down to marketing.  And the reason -- I think the
0150
 1   number one reason if you ask me why should a company go
 2   public, I don't think any of the ones -- we dismissed a lot
 3   of the ones as not being relevant anymore.  The only one that
 4   I still think resonates is the legitimacy point.  Right? 
 5   Being able to be, I am a public company, I am real. 
 6   Everything else can be done elsewhere.
 7             But when that marketing thing turns against you,
 8   right, like when companies go public and they're already
 9   criticized in the first quarter for not producing -- the
10   number one thing when our companies go public is they're not
11   profitable.  It's because they're throwing all their money
12   into growth, right?  That's what they're supposed to do. 
13   Like we don't look for them to break even, we look for them
14   to grow and grow and grow.  And it ends up killing them.
15             Like, or you have a model -- and I'm not arguing
16   about any particular company's value, but you have a model
17   like Groupon who says, look, the way we do our business is
18   different than the way you think about things, so we're going
19   to approach this a little bit differently, right?  And that
20   may be good or bad or legal or not legal, or whatever the
21   drama was.  But that was a problem for them, right?  And they
22   pulled -- it really hurt them, in a big way.
23             Similarly, with these companies, right, the ones
24   that you're talking about, Patrick, it's a marketing thing. 
25   Right, if I view you as this little company in the middle of
0151
 1   -- why is so much in the valley?  Right?  It's in the valley
 2   and people think you need to come to the valley because you
 3   need that stamp in order to attract capital and you need that
 4   stamp in order to attract talent.  And everybody thinks they
 5   need to go there in order to work at a great tech firm.  So
 6   everything starts to congeal in one place, right?
 7             And if you market -- and so people are really
 8   interested in growth, and that's why venture is really hot. 
 9   But I'll tell you, people are pulling back from that right
10   now, right?  People are interested in stable returns right
11   now.
12             And so there is an opportunity in some of these
13   other places, where there are stable businesses in
14   traditionally stable industries that have stable returns and
15   give you an alternative to -- just give you an opportunity. 
16   A lot of them don't even think there are alternatives.
17             And I don't know what that means.  Right?  But I do
18   think it's about how you spin it, how you market it and how
19   the people who need to hear that marketing hear it.  Right? 
20   So how do you publicize that to the folks who aren't in
21   Dallas or aren't in New Orleans, like Jamie mentioned.
22             MR. REARDON:  Okay, now, let's say I've got this
23   company that I did the public offering for in 1980.  And
24   let's use $60 million as a round number.  This company is a
25   private company, it's got a $60 million value on it.  If I
0152
 1   wanted to get it to be a $250 million company and they don't
 2   have any molecular chemists working for them or anything like
 3   that.  It's something that's, you know, it's one of those
 4   ugly businesses that just makes money, okay?  So what do I do
 5   to finance it to get it to -- maybe it has the potential to
 6   go to a quarter of a billion in assets.  I mean, venture
 7   capital comes to mind, angels come to mind.
 8             I mean, angels are local.  Venture capital, you
 9   know, we do have some financing sources in Texas.  Are those
10   the choices?  I mean, industry partners.  I assume that you
11   can do joint ventures or something like that, even if the
12   company doesn't want to buy you, they may do a JV or
13   something like that.  Are those the options that are
14   available if we can't do a public offering?
15             I'm just trying to figure out.  And I realize I'm
16   outside of your fairway.  I'm a little smaller.  But help me
17   here understand what the financing options are, if I'm not in
18   a whiz-bang, sizzling business but it's just one of those
19   ugly old -- 
20             MR. GIOVANNETTI:  And debt is not an option?
21             MR. REARDON:  Well, I mean, you can only take debt
22   so far.  I mean, at some point, somebody is going to wise up
23   and say, I'm not going to get my money back.
24             MR. GIOVANNETTI:  Well, it depends on how much cash
25   flow is coming into a business, and stabilizes, right?
0153
 1             MR. REARDON:  Right.  But suppose it's all going
 2   back into growth.  I mean, maybe if you're building
 3   smokestack, there's collateral being created there that the
 4   bank gets excited about.  But, you know, we know about banks
 5   and we have banks.
 6             MR. HUTCHINSON:  I mean, I think the quickest way
 7   to 250 million, and we see it all the time, is through a --
 8   sell control to a private equity fund and they invest in you,
 9   so you sell 60, 75 percent of it to, you know, middle market
10   buyout fund in Boston or Chicago and they will then invest
11   into that company to do more acquisitions, to consolidate
12   smaller players.  And that's sort of the path of least
13   resistence.
14             But the quid pro quo is the founder is giving up
15   control.
16             MR. REARDON:  Right.
17             MR. HUTCHINSON:  But they've gotten some liquidity
18   once.  And we've seen it work really well for founders and
19   families to give up that control, turn over, you know, that
20   control to institutional investors, professional boards, go
21   out and do a couple of acquisitions, and the next thing you
22   know you have increased the value to 250 million.  And that
23   second bite at the apple for that rollover piece can be
24   meaningful.
25             MR. REARDON:  Right.
0154
 1             MR. HUTCHINSON:  That's the path of least
 2   resistence.  But, you know, there are joint ventures and
 3   taking debt and trying to find a family office.
 4             We've seen sort of a real expansion of what we call
 5   fundless sponsors.  You know, individuals that are out of the
 6   big private equity shops that don't have committed pools of
 7   capital but know how to do deals.  They will find a company
 8   like that and say, look, I will bring in some private equity
 9   partners and help you build the business.  
10             We're seeing a lot of transactions and those are
11   particularly -- a $50 million tee shirt company in Atlanta,
12   you know, a health care services company in Cleveland.  I
13   mean, those are the sort of things where you're seeing
14   private -- middle market private equity really play a role.
15             MR. REARDON:  I'm sorry, I'll pass on my next
16   question.  I'll let Jonathan speak.
17             MR. NELSON:  If you guys were going to design a
18   system -- okay, we have a magic wand and we're going to
19   design a system for investors to be able to raise $10-, $20-,
20   $50 million, or for companies to be able to raise from $1-
21   to, I don't know, $100 million and then achieve liquidity on
22   the back end, what would that do or what would you tweak
23   about the current system?
24             MR. HUTCHINSON:  That's a hard one.
25             MR. SUISSA:  Depends who you are.  Right?  So as a
0155
 1   VC, I have different incentives than an entrepreneur, who has
 2   different incentives, et cetera, et cetera.  So I'll be
 3   against my interests and talk as an entrepreneur, right?  
 4             And so you already see things developing of this
 5   nature, right?  Like Kickstarter is a very basic example of
 6   an alternative way to raise money that takes us out of the
 7   equation.  Sometimes, I think it's a dumb choice to go on
 8   Kickstarter and sometimes it's a smart choice.  Right?  And
 9   similarly, Angel List is another great example of that.
10             You also have several of these kind of family
11   office networks or middle tier institutional networks,
12   probably ones that are relevant to what Patrick's doing,
13   actually, creating these kinds of groups that deals can post
14   on the platform, when anyone sees it, people can comment. 
15   Kind of like an Angel List, but for all stages of things,
16   including for funds, right?
17             And I do think that it's about the information. 
18   Right?  So it's about if entrepreneurs -- there's a lot of
19   people to finance these things and a lot of people looking
20   for the money.  So it's about making the connection between
21   the two.  Right?  And so I do see the proliferations allowing
22   that.
23             So the answer is, the more information, the more
24   you can connect the parties, the better.
25             For me -- the reason I say it's different for a VC
0156
 1   is because, you know, the less options you have, the more
 2   you've got to go with me, the better it is for me.  Right? 
 3   So that's, you know, a caveat.
 4             MR. NELSON:  So is that basically more efficient
 5   markets?
 6             MR. SUISSA:  To a degree.  It's also why you see
 7   the development of -- so my firm is a great example of this,
 8   as is kind of the phenomenon that Andreessen Horowitz has set
 9   the VC world to which is, you know, the value-added investor. 
10   Right?  Which was kind of a fake term, you know, a decade ago
11   and is now a real term.  If you have a choice, then the model
12   needs to change, right?  We need to find other ways to help
13   our companies and add value or you can't get in.  And so I
14   think that's a similar element, too.  So the more
15   information, the more opportunity, the more I have to do
16   more, which by the way is in all the incentives of what you
17   guys are trying to accomplish, right?
18             MS. MOTT:  So I would like to switch back, please,
19   to liquidity.  One of the things we have been discussing is
20   we want to try to understand the impact on the fact that
21   investors invest and hold things longer.  Therefore, there is
22   less money coming back into the market.  So I see that as,
23   okay, so typically there would be a liquidity event and that
24   money, the profits, would be plowed right back into the --
25   into the economy in some other new startups or maybe they
0157
 1   took it and bought another house somewhere.  So again, it's
 2   fueling the economy.
 3             So what we're trying to understand is what can we
 4   do for or how can we understand this?  Is this a blip?  You
 5   know, at some point in time, and I agree with you, there's a
 6   lot of not-smart money out there.  And at some point, will
 7   they experience investor fatigue and then just get out of the
 8   market and then things settle down a little bit?
 9             So we're trying to work through this other piece
10   that we've talked about is I think there's -- and I'm anxious
11   to hear from the SEC how the tick pilot is going.  So, you
12   know, at one time there was a lower tier public market.  It
13   doesn't exist anymore.  And does that seem like it's
14   something like we should be exploring or considering so that
15   again we can create this -- I'm calling it velocity of money,
16   but that's probably an incorrect term.  That's a Treasury
17   term and I'm probably using it wrong.
18             So what are your thoughts about, you know,
19   liquidity, how that impacts IRR, how it impacts, you know,
20   the flow of money into the economy long term, even though
21   there's a like -- to me, I look at it and I say, supply,
22   demand.  Supply is pretty big right now, so that's impacting
23   what we're seeing, is supply.  
24             So what are your thoughts on liquidity options?  So
25   I'm sort of throwing a whole bunch of questions -- 
0158
 1             MR. SUISSA:  I'll just say one thing and then let
 2   these guys chime in, because I think they know more about it.
 3             I don't think there's a lack of liquidity at all. 
 4   I just think it's in different places than you think it is. 
 5   So -- and that's kind of the point of the conversation. 
 6   Right?  There's other ways to get out, there's other ways to
 7   move money, there's other ways to exit at all different
 8   stages.  And that's actually why less companies are going
 9   public, in my opinion, because it is not the only option for
10   liquidity.
11             MR. HUTCHINSON:  There is more liquidity now than
12   ever.
13             MR. SUISSA:  Yeah, I agree.
14             MR. HUTCHINSON:  And, you know, things like 4(a)(7)
15   to make it a little clearer that, yes, there's a way to do
16   it.  But, you know, in 2000 and before the 2007, you would
17   really never see founders and employees getting liquidity
18   until the venture investors got liquidity.  And now we see -- 
19             MS. MOTT:  Sooner.
20             MR. HUTCHINSON:  Sooner.  Like in a Series B round
21   is sort of the first place we see it, which is pretty early. 
22   You know, the company still has a long ways to go but we're
23   seeing founders and some early employees being able to get
24   liquidity.  And then seeing programmatic, frequent, you know,
25   once a quarter or twice a year type of liquidity for the
0159
 1   larger private companies.  That didn't exist.  And, you know,
 2   things -- technologies that allow that to occur easier, you
 3   know, are sort of all contributing to this additional
 4   liquidity that we have now.
 5             And those people are buying houses.  And, you know,
 6   I think the real estate prices in Silicon Valley reflect a
 7   lot more liquidity.
 8             MR. SUISSA:  It is not without conflict, either. 
 9   People are concerned about it still because, you know, it
10   incentives, right?  So the reason it's happening is because
11   of the talent crunch, right?  People need to be able to keep
12   their talent.  But then it's also when you're giving talent a
13   way out of being locked into the incentive structure, it
14   creates a problem.  So people are still trying to figure it
15   out.
16             I don't think any of the companies have figured it
17   out, you know, to a tee yet.  
18             MR. GIOVANNETTI:  They could have gone public.
19             MS. MOTT:  I was going to say that also for life
20   science biotechs?  I mean, my sense of what they're doing
21   with their capital really has to be in clinical development.
22             MR. GIOVANNETTI:  A hundred percent.
23             MS. MOTT:  I mean, clinical trials.  So that would
24   be different, would you agree?
25             MR. GIOVANNETTI:  Yeah, and they still adopt much
0160
 1   more of a traditional model.  I mean, it might not be
 2   founding, three years to an IPO, it might be five, eight,
 3   depending on, you know, where the market is.  Because they
 4   don't really have a choice because, you know, even to this
 5   point you have to get your employees liquidity, you only have
 6   to get them there because there's masses sources of private
 7   capital that can keep you private and you get to keep control
 8   and there's a benefit for that, right?  If that didn't exist,
 9   you would do an IPO because you still need capital.
10             MR. SUISSA:  That's a good point.
11             MR. GIOVANNETTI:  All of these phenomena are about
12   the larger market forces that are at work.  To the extent
13   that many of those don't apply in biotech, we see more of a
14   traditional model.  And so we don't see founders getting out
15   until after the lockups on an IPO, much the way tech was 15
16   years ago.  It really hasn't changed, you know.
17             I do think, just to the -- you brought up the tick
18   size.  That is interesting to watch and we will see what the
19   results are of that as well.  Whether that will create float
20   for some of these smaller cap stocks and keep banks and
21   analysts in the game so you don't -- you know, you might have
22   a different calculus in going public.  It's not going to
23   change the calculus of I've got private capital, I don't need
24   to go public.  But, you know, if you're a company that
25   otherwise is or that market dries up, I still don't think
0161
 1   it's going to overcome -- anything like that is going to
 2   overcome the fact that a lot of public investors even want to
 3   put big chunks of capital to work and it's got to have enough
 4   of a float to make that work for them, right?  That's just
 5   where a lot of the capital -- the pools that it's invested
 6   from, you know, that's a phenomenon that's going to be
 7   difficult to overcome.  But, you know, this could be helpful.
 8             MS. HANKS:  Can I raise a question that's going to
 9   tie into something that we talked about this morning, which
10   was liquidity in the Regulation A space?  When you talk about
11   companies as early as the Series B round, what size of
12   company are we talking about there?  Because I have a feeling
13   that the companies we were talking about this morning are
14   very much smaller than the guys who are now getting liquidity
15   as early as Series B.
16             MR. HUTCHINSON:  So maybe, you know, a $12- to $15
17   million premoney value, maybe up to 20 million.  And they're
18   raising, you know, sort of $5- to $10 million.
19             MR. SUISSA:  Is that for Series B?
20             MR. HUTCHINSON:  Yeah, on the small side.
21             MR. SUISSA:  Oh, okay.  I mean, that's like what
22   the A is now, because the valuations have gone up.
23             Typical -- I mean, traditionally a Series B company
24   was a company, you know, had maybe 5 million in revenue, 5 to
25   10 in revenue kind of thing, like early revenue.  Around the
0162
 1   like, you know, 30s, 40s, 50s in valuation.  You know, 10X
 2   would be high, right, of that revenue multiple.
 3             Now, like a typical -- an A can get that high. 
 4   More like the 20s, 30s.  But things have just been pushed up.
 5             But traditionally, Jamie is correct, that's the
 6   right size.
 7             MR. HUTCHINSON:  Fenwick does a really nice study
 8   every quarter, showing sort of where the value from the A and
 9   the B is.  And I was actually just looking at theirs.  So I
10   think things -- it definitely is creeping higher for every
11   round.
12             MR. SUISSA:  And size wise, too.  Bs used to be
13   like $15 million infusion and now they can be up to like 40
14   million, 50 million.
15             MR. GIOVANNETTI:  I know biotech is nitchy, but the
16   other thing that really has changed is I can't remember the
17   last time I helped an entrepreneur with a business plan and
18   pitched it to a VC.  VCs create their own companies, they
19   figure out where the science is, they go find the management
20   team, they license it, and it's very much a build your own. 
21   So they're not looking at 200 deals, like the way it is in
22   tech, where you can start something with low capital; you're
23   going to need a lot of capital to begin with.
24             And in the '90s, when it was Hambrecht and Quist
25   and Robertson Stephens, you know, I did a lot of IPOs where
0163
 1   the funds raised were 20 million, 25 million, 15 -- I can
 2   remember a 15 million.
 3             We won't even really look seriously about getting
 4   involved with a company in Series A in life sciences if it
 5   hasn't raised 20 or 25, because it's a couple of years of
 6   burn.  You know, if they've only raised five, it's like, by
 7   the time we get involved, they may not be here, right.  So
 8   the scale is completely different.  But it also comes from
 9   the fact that investors have learned, saying it's too risky,
10   in a way, to go to the entrepreneur, so to speak.  They want
11   to -- they're already walking the halls in the labs to figure
12   out who the potential entrepreneur is and recruiting them
13   out.  So it's a very different dynamic.
14             MR. NELSON:  Can you talk a little bit more about
15   what it was like when you had those smaller investment banks
16   raising smaller rounds for more companies?  Like what were
17   their economics like?  What were their economics like?
18             MR. GIOVANNETTI:  They were doing 7 percent, you
19   know, on the IPO, same.  They were -- they were probably
20   making a little -- and I'm not a banking expert.  They were
21   probably making a little more on the trades after.  And at
22   least in life sciences and a lot in tech, you would count on
23   two or three pretty fast follow-ons at that same 7, 8
24   percent.  So you could see -- you know, even though it was a
25   small dollar to begin with, maybe it was 15, your secondary
0164
 1   was 25 and then you did a 30 down the road, you know, that's
 2   not a bad income stream, right, for a smaller bank.  And you
 3   got some trading out of it.  And you might get an M&A deal
 4   out of one of them.  So, you know, it's not -- they got
 5   pretty good multiples at the time when tech was first really
 6   taking off.
 7             MR. SUISSA:  This might be a switch a little bit,
 8   but I've been thinking about, Jonathan, about your firm and
 9   the numbers and how to -- and also the question of how do we
10   fix some of these things.  A mentor of mine, Steve Koltai,
11   who writes a lot on entrepreneurship has this whole list of
12   things that are required for a successful entrepreneurship
13   ecosystem.  And one of the ones I always remember is
14   celebrating the wins.  And I think that's key.  Right?
15             So when you go invest in the middle of the country
16   -- it happened with New York.  So when New York became a big
17   venture ecosystem, people threw tons of money in and tons of
18   money in, and then it all stopped.  Because everyone is like,
19   where are the IPOs?  Where are the exits?  It's like a nice
20   idea for a few years and we'll all jump on the band wagon,
21   because by nature human beings are lemmings, including
22   investors.  And we'll all do it and we'll all go after it. 
23   But until you see the wins, no one is going to do it.  And
24   when you do see the wins, if no one knows about it, that
25   might be good for you as an investor because you have dibs on
0165
 1   those great opportunities, but it doesn't encourage more
 2   money to come in.
 3             So there is something about, you know, identifying
 4   the wins, identifying the success stories, and being able to
 5   make them more clear.  So in your business, with the
 6   different minorities and women and gender and running things,
 7   you know, show the wins.
 8             We had that at NEA with Care.com, when Sheila took
 9   her company public.  So the more you -- the more you
10   publicize, the more people see that it actually works and,
11   you know, affects their bottom line, the more they're
12   interested.
13             MS. HANKS:  We've only got a few minutes left.  I
14   just wanted to make sure, is there anything from the
15   panelists that you think we've missed?  Any insights or
16   slides?
17             I'm pleased that the conversation has gone exactly
18   the way that we need it to go, but are we missing anything
19   from your point of view?
20             MR. HUTCHINSON:  I think maybe just, you know, one
21   of the points about why companies aren't going public is
22   there is a lot of M&A still, and you're seeing it in the big
23   strategics.  And could you see more of it if the repatriation
24   of cash under the new administration is allowed in a tax
25   efficient way?  You can't underestimate the effect that that
0166
 1   has on a lot of companies.  Just they get big enough and then
 2   Google or Oracle or Cisco comes in and makes a compelling
 3   offer and they sell before they would even get the chance to
 4   go public.
 5             And just recently we're seeing, you know, these
 6   dual track -- where a company will file to go public and
 7   right before they go, a big strategic will snap them up. 
 8   Cisco did that with AppDynamics, Stone Canyon did it with
 9   Mauser.  And those are just in the past couple months.
10             So I think that is -- we touched on it, but that's
11   an important issue why companies are staying private longer
12   or just not even ever getting the chance to go public,
13   because there are deep pools of capital.  The big strategics
14   have a lot of equity cash.  Debt is cheap and they're able to
15   pay, you know, top dollar to take these companies sort of out
16   of play.
17             MR. GIOVANNETTI:  And you're showing the big guys
18   in tech, but this is happening in other sectors.  You know,
19   talk about banking and insurance, they're monitoring the
20   FinTech startups.  We started keeping a database of like
21   5,000 FinTech companies because the banks want to know,
22   should we buy them, are they innovators, are they
23   competition, who's-going-to-eat-our-lunch kind of thing. 
24   It's happening in consumer products. 
25             A lot of companies have set up their own internal
0167
 1   innovation arms, realized that it's hard to create an
 2   innovative culture yourself, and so they're much more looking
 3   externally, saying do I partner it or do I buy it in.
 4             And, you know, it's not always tech but it's often
 5   got a tech feel to it.  But the acquirer is not always a tech
 6   company.  So there are many that I would put in that serial
 7   acquirer category.
 8             MR. HUTCHINSON:  And it's not even a public
 9   company.  I mean, we're just starting maybe to see the tip of
10   the iceberg as, you know, Uber and DD and Airbnb, for
11   example, have recently announced acquisitions, have been able
12   to borrow a bunch of money.  You know, could we see that sort
13   of strategic expand outside of the historically large public
14   companies that did that sort of M&A.
15             And the last issue, it's still expensive to be
16   public.  And, you know, to Jonathan's point, maybe around why
17   we're not seeing some of these smaller public companies is,
18   you know, the compliance makes it -- makes it expensive. 
19   It's real money.  I mean, it's millions of dollars to go
20   public and it's millions of dollars to stay public.  And it
21   has to sort of be economically -- make economic sense to do
22   that and make that investment.  Those are probably the
23   biggest ones we didn't touch on.
24             MR. SUISSA:  I had a subjective one that I think is
25   worth mentioning.  So the mentality aspect of things is
0168
 1   really important.  So, you know, entrepreneurs, Jamie
 2   mentioned this early, they believe in their company, they
 3   want to grow it, they're long term, they don't care about
 4   this stuff and they don't want to hear you telling them that
 5   they're not -- you know, that their, you know, passion is not
 6   real or not working because you don't understand it.  Right? 
 7   And so I think that's what kind of pulls them away.
 8             But the VCs are really important, too.  So VCs,
 9   when they invest in something or they have a bad experience,
10   they wear their scars forever.  They just don't forget.  It's
11   amazing.  We'll have a meeting.  Well, do you remember 15
12   years ago when we did this thing?  It's like, there were no
13   phones, or whatever, Apple didn't exist or whatever, right?
14             (Laughter.)
15             MR. SUISSA:  And they don't forget.  And when they
16   do take the leap back in, which they ultimately do, often, if
17   they get hurt again, it almost kills the opportunity set. 
18   And I would say VCs have been significantly -- I would say
19   they feel scars, whether they will admit it or not, from the
20   most recent IPOs or the past IPOs.  Some recent examples, we
21   already gave examples of.  And all of them have had it with
22   something, because we're all in different deals but all in a
23   lot of the same deals, too.
24             This year is a very crucial year, because there are
25   a lot of tech companies going public this year, or that are
0169
 1   expected to.  And the good news for the bigger point is,
 2   there does get a point in which we say, all right, this is
 3   ridiculous, you need to go public.  Like there is a point at
 4   which everyone is like, this just needs to happen.
 5             I don't have any insider knowledge, but I would bet
 6   Uber is feeling that, I would bet Airbnb is feeling that. 
 7   Right?  So there are these -- there is a point at which it
 8   has to happen.
 9             But if it doesn't go well, it will, especially
10   given all the new opportunities and options and alternative
11   routes, it will kill it.  So, fingers crossed.  And if there
12   is a way to mediate that, that would be a great thing.
13             MS. HANKS:  All right, thank you.  Any follow-up
14   questions, wind-up questions from our panelists?
15             MR. NELSON:  Just my personal stuff is on my
16   sleeve, of course.  But I'm actively looking at taking
17   companies, like doing a Reg A offering and then seeing if the
18   compliance is actually about the same as taking a company
19   public on the London AIM exchange.  For them, $5 million a
20   year, growing 30 percent year over year is actually a nice
21   IPO.  Or even looking at the Australian Stock Exchange and,
22   you know, being public but actively traded on a foreign
23   exchange.
24             MS. TIERNEY:  I think just one thing, to go back to
25   some of the themes that you guys have touched on, there was a
0170
 1   market for small IPOs that does not exist anymore.  These
 2   companies do not belong in the public markets at, you know,
 3   even like sub-billion dollar market cap companies, they
 4   struggle.  You're not going to get research written about
 5   your company, you're not going to have a bank getting you to
 6   your next deal.  The cost of being public, it says 2.5 up
 7   there.  I've talked about being the general counsel of a
 8   public company, Brian has as well.  Those are real costs.
 9             So, you know, it's great to say we want companies
10   to go public, and we do.  There are definitely wonderful
11   reasons and valid reasons for a company to go public.  But
12   until we've sorted out some of the things like tick size
13   instead of decimalization, right, that does provide more
14   spread for research and other sort of things that came with,
15   you know, penny increment trading before that change.
16             But there are enough market forces right now that I
17   think our goal should also be to do what we talked about
18   earlier today, is try to find a way to help create off-
19   public-exchange liquidity for these companies that are very
20   successful, they're just not, you know, tech unicorns.  So I
21   think that has to be part of what we focus on, because those
22   companies are private, they're getting funding, they can get
23   debt, whatever.  They're not the ones we're seeing in the
24   news.  But they probably also shouldn't be in a highly
25   illiquid public market listing.
0171
 1             MS. HANKS:  Anybody else?
 2             Well, thank you very much indeed.  That was really
 3   useful.  Thank you.
 4             MR. SUISSA:  Thanks for having us.
 5             (Applause.)
 6             MS. HANKS:  Julie, can we get the slides sent
 7   round?
 8             MS. DAVIS:  They're on the web, but I'll -- 
 9             MS. HANKS:  Thank you.
10             Okay, guys.  We're going to move on to the final
11   piece of today's program, which is board diversity.
12             We've now had a couple of discussions on the
13   recommendations, spent a good portion of our time on October
14   5, as well as the conference call on December 7.
15             As you will recall, currently Regulation SK and
16   Item 407(c)(2)(vi) requires companies to disclose in their
17   proxy statements whether a nominating committee considers
18   diversity in identifying nominees for the company's board of
19   directors.  The rule also requires that if the company has a
20   policy with respect to the consideration of diversity in
21   identifying director nominees, how that policy is implemented
22   and how its effectiveness is assessed.
23             As we have discussed, the disclosure requirement is
24   soft, diversity is not defined, which means the regulation
25   hasn't been as helpful in generating useful information as it
0172
 1   could be.
 2             Based on our prior discussions, we have come up
 3   with a draft recommendations.  You should all have both --
 4   have received soft and now you've got hard copies of the
 5   recommendation.  And so I think you have also seen the
 6   suggestions that Greg Yadley sent around to make changes to
 7   that wording.  And the changes that Greg had suggested were
 8   to change the recommendation.  The recommendation is at the
 9   bottom of the page.
10             And his -- of course now I've lost his statement.
11             He says instead of saying while generally the
12   definition of diversity should be up to each issuer, issuers
13   should include disclosure regarding race, gender and
14   ethnicity of each member/nominee as self-identified by the
15   individual.  That's in our current draft.
16             The alternative language being suggested is, while
17   generally the definition of diversity should be up to each
18   issuer, issuers should include disclosure whether race,
19   gender and ethnicity of each member/nominee, as self-
20   identified by the individual, are considered.
21             Anybody got any opinions as to -- yeah.
22             So we're looking at the sentence that begins, while
23   generally.  And it -- the alternative that Greg is suggesting
24   is, while generally the definition of diversity should be up
25   to each issuer, issuers should include disclosure whether
0173
 1   race, gender and ethnicity of each member/nominee, as self-
 2   identified by the individual, are considered.
 3             There's a slightly different spin on the -- no, the
 4   race, gender and ethnicity of each member would be still
 5   self-identified.  That is still included.
 6             MS. MOTT:  He just changed the word -- he just
 7   changed the word "regarding" to "whether."
 8             MS. HANKS:  "Are considered."  Yeah.
 9             MS. YAMANAKA:  So it kind of changes -- 
10             MS. HANKS:  It's did you think about this, did you
11   consider it.  That's the big change between the two.
12             MS. SCHIMPP:  From my standpoint, it just strikes
13   me as less useful information.  The answer is, yes/no, and it
14   doesn't give you any granularity on gender, racial, ethnic,
15   you know, representation.  Which is really what the value add
16   of this kind of report could be.
17             MS. HANKS:  The original is more what have you got
18   on your board.
19             MS. SCHIMPP:  Right.
20             MS. HANKS:  And then the new one was, did you think
21   about who you've got on your board.  And apologies to Greg if
22   he's listening in; I'm totally misphrasing that.
23             MS. MOTT:  Yeah, but we discussed that.  And -- 
24             MS. HANKS:  We have discussed these words a lot.
25             MS. MOTT:  I know.  I mean, okay, so we did discuss
0174
 1   it and my preference was for the detail.  I like the original
 2   language that we have.
 3             MS. HANKS:  Any opposing?  All right.
 4             So I think the sense of the panel is that we would
 5   leave the language as it is currently drafted.  Okay.
 6             And what about the last sentence?  Greg is asking
 7   -- this is the sentence.  While disclosure should be the
 8   default, issuers should have the option to opt out.  Do we
 9   keep that sentence?
10             MR. NELSON:  Yes.
11             MS. YAMANAKA:  The way I'm reading it is that we're
12   saying if you don't want to answer, you don't have to. 
13   Right?  Whereas, if you leave it -- if you put it in or leave
14   it out, they're going to be obligated to answer.
15             MS. HANKS:  I'm not sure if you're going to be
16   obligating -- I suppose you would, yeah.  Yes, you're right.
17             MS. YAMANAKA:  If that's the case -- 
18             MS. HANKS:  You want -- if you want them to
19   disclose -- 
20             MS. YAMANAKA:  To Michele's point, if we think the
21   information is relevant, then -- because my opinion is the
22   people who don't want to answer are going to be the ones who
23   opt out.  Right?  So why do we want to put compliance in for
24   people who -- but that's just -- 
25             MS. HANKS:  Any objections to that?  And so what
0175
 1   the proposal is right now is that we keep the language as
 2   disclosed -- as set out in this draft.  We need to take a
 3   vote on that now?
 4             MS. KASSAN:  I thought we were saying that we
 5   wanted to remove the last sentence?  I thought -- 
 6             MS. HANKS:  The suggestion was to remove it.  But I
 7   think -- 
 8             MS. KASSAN:  I thought Laura was agreeing with
 9   that.  And I think I do, too, actually.
10             MS. HANKS:  You agree to remove it?
11             MS. YAMANAKA:  The way I read it -- okay, let me go
12   back again -- is if we leave it in, they can opt out of it. 
13   So do we want them to be able to opt out or not report?  And
14   if the answer is yes, then we leave it in.  If we really want
15   this information -- 
16             MS. HANKS:  You want to force the information -- 
17             MS. YAMANAKA:  You want to force the information, I
18   would remove the sentence.
19             MS. SCHIMPP:  It's not quite relevant here, but on
20   a program at SBA where we run where we have an opt out
21   portion, we're finding that a lot of women-owned businesses
22   opt out because they don't want to be -- they feel like
23   they'll be disadvantaged by being identified.
24             MS. HANKS:  Interesting.
25             MS. SCHIMPP:  The opt out can be used in ways that
0176
 1   one doesn't intend.  And if the information is useful,
 2   eliminating the opt out, I would endorse eliminating it.
 3             MS. HANKS:  Lisa?
 4             MS. SHIMKAT:  We had had a lot of discussion
 5   surrounding that.  And I am more in favor of leaving it
 6   there.  And that's why we put the language in, for the
 7   default to be to answer and put this out there.  Because the
 8   other argument as well is -- was giving everyone the
 9   opportunity to self-identify, which gave us more flexibility
10   there.  And the default being this and then the opt out is a
11   decision on the back end.
12             So my -- my preference is to leave it in as is.
13             MS. HANKS:  Any other thoughts?
14             MS. KASSAN:  I mean, it does provide the option for
15   them to define diversity however they want.  So that kind of
16   allows some flexibility there, if they really don't want to
17   talk about ethnicity, gender and race.  So I think I feel
18   comfortable taking it out.
19             MR. AGUILAR:  Yeah, I think if we look back at the
20   fifth sentence, whether it will fail to generate the
21   information that's useful, if we leave that sentence in, I
22   think the same result -- we're going to get the same result
23   as we're currently getting.  So I would -- I would agree that
24   we should take that sentence out.
25             MS. HANKS:  Can we have a proposal to take this
0177
 1   language and take the last sentence out?
 2             PARTICIPANT:  So moved.
 3             Okay, and a second?
 4             MR. AGUILAR:  Second.
 5             MS. HANKS:  All in favor?
 6             I don't want to force a premature vote.
 7             MR. NELSON:  I'd like it to be kept in.
 8             MS. HANKS:  And Catherine?
 9             MS. MOTT:  I just don't know.  I'm sorry, I'm not
10   sure.  Because I'm trying to think through the implications
11   of leaving it in or taking it out, based on the wording that
12   already exists there.  So maybe our attorney can help us.
13             I mean -- 
14             MR. REARDON:  They are members of the bar.
15             MS. MOTT:  I'm sorry to hold things up.
16             MS. HANKS:  The first part does read "require
17   issuers to describe."
18             MR. REARDON:  Catherine, I mean, I don't know what
19   the -- I don't know what the right solution is here.  I'm
20   trying to defer to you all, and I've talked enough on other
21   things.
22             But I mean, it's a sticky wicket however you do it. 
23   I mean, it's -- I mean, I think just go with your gut because
24   it is -- I mean, I think -- the only thought I had was is our
25   system or the SEC's system, it's not mine, is one of
0178
 1   disclosure.  I don't think we mandate, unless there is a
 2   special statutory admonition about diversity and disclosure
 3   of it, is there -- I mean, we're not mandating you to have a
 4   board that's diverse; we're just saying you disclose it.  And
 5   so, I mean, I think it seems to me to be within the powers of
 6   the SEC to say you need to disclose that.
 7             And so then it becomes a matter of policy and what
 8   we all think is in the best interests.  Corporate America
 9   knows that diversity is a hot button and rightly so, I think
10   some people would say.  And I agree with that to an extent. 
11   And Jonathan and I talked about it at the last meeting, that,
12   you know, there are any number of views on this.  And I'm
13   trying to be sensitive and not step on any toes.
14             So I think it doesn't matter.  At the end of the
15   day, the Commission is going to give it a lot more thought
16   and they'll come to probably a more considered decision than
17   I'm capable of doing.
18             MS. HANKS:  This is, of course, only a
19   recommendation and it's not the actual wording of whatever we
20   think the Commission should adopt.
21             Would it change anybody's mind if the final
22   sentence said something along the lines of, while disclosure
23   should be the default, issuers should have the option to opt
24   out if they explain why?  Make any difference?
25             MR. REARDON:  Then you get into the what is an
0179
 1   adequate explanation.  I mean, this is such -- I have -- this
 2   young lawyer -- you heard me mention the young lawyer who
 3   went to Washington and Lee and I've known since he was a
 4   freshman in college.  Well, I talked to him recently and he
 5   said, well -- and it was about this very issue.  And I said,
 6   Chad, you know, I mean -- and we were talking about it.  And
 7   I think I mentioned on one of the calls that I knew a woman
 8   who was -- had European ancestry but she had grown up in
 9   Zimbabwe and moved to Fort Worth and I met her and she said,
10   well, I'm African American.  Yet she's the color I am.  I
11   mean, this whole thing is rather imprecise.  And my friend
12   Chad, whose parents are -- his father is African American,
13   his mother is white.  He says, I check both boxes.  
14             So there's no precision here.  And, I mean, you do
15   the best you can and we go from there.  We have the similar
16   situation with our former President who -- his father was not
17   African American, he was African.  His mother was white.  He
18   self-identifies as African American.  I mean, it's too
19   complicated for me.
20             MS. HANKS:  So we will leave the box checking for
21   the people who write the rules.
22             Lisa?
23             MS. SHIMKAT:  Yes.  What is our overall intent with
24   the disclosure?  Is it data that we're going to utilize?  Is
25   it data for decisionmaking?  What did we determine from that
0180
 1   originally?
 2             MS. KASSAN:  It's for potential investors.
 3             MS. HANKS:  I mean, I think the summary of the
 4   discussions in the two previous discussions are like after
 5   considering that, I mean, those are I think our objectives
 6   and the aim at which the recommendation looks to underscore.
 7             MS. SHIMKAT:  And I will support whichever way we
 8   go.  And since there is full self-disclosure and we're not
 9   going through and redefining each of the categories, you
10   know, the data could be skewed either way.  That's why I was
11   more in favor of the opt out side of it.  Because you are
12   going to do other due diligence, you are going to do other
13   items that are going to be important, as well.  This is
14   really, really important.  I'm just worried that we won't
15   have as consistent data as we think we would have.
16             MS. HANKS:  I don't think you're always going to
17   get a lot of data from this.  Not that you can put into
18   charts, I think.
19             MS. YAMANAKA:  And I think that's the case. I think
20   that we're always going to have -- my own children, right,
21   they go, mom, which box should I check?  And frankly, I hope
22   we get to the point where, you know, the box is always
23   checked at the bottom or whatever it is.  But for today, for
24   now, we've had multiple discussions about this and I think
25   we've all identified and come to the conclusion statistically
0181
 1   from studies, et cetera, that it is a business benefit to
 2   include diversity.  And which is why maybe investors would
 3   like to know, in regards to disclosure that Patrick is
 4   speaking about, this is just another piece of information to
 5   disclose.  
 6             Is it going to be perfect?  No, absolutely not. 
 7   But it's going to give an essence of perhaps a picture, other
 8   people do all their other due diligence.  And so it gives
 9   them a first place to start, you know, or end, as the case
10   may be, depending on where they're at.
11             So that's why I really think it's important that
12   we, instead of letting people, organizations, whatever,
13   maintain the status quo, because that's what we're talking
14   about, that we take out that -- that option.
15             MS. KASSAN:  I think it's also really useful for
16   fund managers and wealth advisers who are investing in public
17   equities, because their clients are asking for, you know, I
18   want to invest in companies that have diverse boards, I want
19   to invest in companies that have women in leadership, for
20   example.  So I just can't imagine any down side.
21             If a company really doesn't want to talk about race
22   and gender, they can say we have people from the following 10
23   states, or we have people from the following three age
24   groups.  You know, it's totally up to them to define
25   diversity.  I just don't see any problem with it.
0182
 1             MR. NELSON:  I'll say take it out.
 2             MS. HANKS:  Okay, so before we get to that bit,
 3   does anyone have any objections to any of the rest of the
 4   language?  Are we okay?
 5             MS. TIERNEY:  So I have the same concern that I had
 6   when we discussed this last time which is it says, you know,
 7   provide information regarding each member nominee as self-
 8   identified by the individual.  But what happens if an
 9   individual chooses not to self-identify?  Right?  So I don't
10   love the idea of opt out.  If we're going to think that this
11   is important, I think we should make it important.  Opt out
12   means they'll opt out and nobody will understand why some
13   companies have it and some companies don't have it.
14             But I do think we need to have some mechanism for a
15   company to, you know, acknowledge that some of their members
16   were not willing to self-identify.  Otherwise, you'll have 10
17   board members with information on five and no information on
18   the other five, because those people chose not to self-
19   identify.  But it's going to raise an SEC comment, I would
20   think.
21             MS. HANKS:  Presumably, the rule when written would
22   say, in the event the individual declines to provide that
23   information, put N/A in the box.
24             MS. TIERNEY:  Okay.  That's just my concern.
25             MS. HANKS:  I'm just going to punt that and say
0183
 1   I'll bet the guys at the SEC who are good at writing these
 2   rules will manage to work that one out.
 3             N/A.  Box one, box two, N/A, all good alternatives.
 4             So can we move to the -- the proposal is the
 5   language as drafted without the last sentence.  So again, you
 6   reproprose?
 7             MS. TIERNEY:  I repropose.
 8             MS. HANKS:  You re-second?  Okay.
 9             And then all in favor?
10             (A chorus of ayes.)
11             MS. HANKS:  Anyone against?  
12             We're good.  We have language.  Thank you.
13             MR. REARDON:  I gave out a comparison that we don't
14   need to talk about.  But if you have any comments -- I mean,
15   it's maybe not helpful after the discussion today.  But if
16   anybody wants to send me any comments to it, it's just
17   something I did.  In dealing with businesspeople, I found
18   that tabular presentations side by side are useful and help
19   people grasp the issues.  So I did that just because I felt
20   like it helped me, just drafting it helped me crystalize some
21   of the thoughts.
22             But anyway, we'll all see the typo on the first
23   page, and I'll correct that.  But Julie, if you're interested
24   in posting it on the website, I will get you the digital
25   file.
0184
 1             MS. HANKS:  And thanks for doing that.  It's a
 2   useful resource.
 3             Before we completely wind up, I will work with the
 4   Staff to put together the recommendations from the
 5   discussions this morning.  Interestingly, I thought the
 6   overall view was -- if I had had to predict anything, I would
 7   have said, preempt everything.  But there's a much more
 8   subtle and reasoned and nuanced opinion that wants to take
 9   the states' thoughts into account in both of the proposals
10   that we discussed, and we will be reflecting that and we will
11   be getting drafts out on those.  So thank you very much for
12   those discussions.
13             And just one thing before we leave.  Any thoughts
14   on what goes onto the agenda for next time?  I know Catherine
15   had -- 
16             MS. MOTT:  I'm very curious.  I know I brought this
17   up last time, too.  But whenever the tick pilot is completed,
18   really I'd like to see the data and hear the remarks from the
19   SEC on that.
20             MR. NELSON:  I would love to hear aggregate data
21   statistics on fraud.  Just because if we're protecting --
22   trying to protect unaccredited investors, it would actually
23   be helpful to say, okay, these are the instances when things
24   have gone south.
25             I would also love to talk about getting data -- I'm
0185
 1   a data nerd -- on how much capital small businesses think
 2   that they need, and what are ways that we could actually
 3   suggest to get that data.  Because all of our opinions are
 4   anecdotal; I don't think we actually have any hard data on
 5   this at all.  If it's possible.
 6             MS. YAMANAKA:  And to that point, elaborate on your
 7   point, Jonathan.  I think it was really interesting because
 8   clearly we have different communities, right.  The gushers or
 9   the gushers, that's great.  But I'd like to have a better
10   sense of, you know, is it 90 percent and how many "gabillion"
11   is that for 200 companies, versus the companies, I think
12   Patrick, you're talking about the ones that I see, that need
13   capitalization above leverage, okay, but below IPO or access
14   to that type of capital.  
15             So if there is any data out there, what is that? 
16   You know, what does it look like.
17             MS. KASSAN:  Yeah.  And, you know, there are so
18   many companies that completely count themselves out of even
19   thinking about being able to raise capital.  Because it's so
20   complicated, they hear about these laws and they hear, oh, I
21   can only talk to wealthy people and I don't know any wealthy
22   people.  So even if we were to get data on how many companies
23   are trying to raise capital unsuccessfully, that would leave
24   out a huge number that just don't even think that it's
25   possible for them.
0186
 1             MS. YAMANAKA:  If we could just get the tip of the
 2   iceberg.  But I don't know -- I know that's really hard.
 3             MS. HANKS:  I'm not sure where we would look for
 4   that iceberg.  Any thoughts on where the iceberg might be,
 5   gratefully received.
 6             MR. NELSON:  Quickbooks.  Intuit.
 7             MS. HANKS:  Interesting.
 8             MR. GOMEZ:  Also keep in mind that in some
 9   exemptions, you can't use general solicitation.  To the
10   extent that you have companies self-identifying themselves as
11   publicly looking to raise capital, query whether that puts
12   them already in a category of an exemption that would need to
13   permit general solicitation.  So I think part of the
14   challenge is how do you get data on the aggregate without
15   actually going to the particulars of a specific company such
16   that a particular company doesn't have to publicly indicate
17   to the world that they are looking for capital.
18             MS. HANKS:  That would be kind of ironic.  Hey,
19   companies, who would like to self-identify as violating
20   Section 5?
21             (Laughter.)
22             MS. HANKS:  We maybe shouldn't do that bit.
23             MR. NELSON:  I also think there is a census --
24   there is a census committee, they do like an annual census of
25   businesses, and this is where they get the jobs numbers from
0187
 1   and this is where they get that sort of stuff.  If we could,
 2   in that census, while the census is actually going out and
 3   getting them that data, just say, hey, zero to 10, how much
 4   would you like to have more money to grow your business, or
 5   something along those lines.
 6             MS. YAMANAKA:  I do know there are surveys that are
 7   out there, because I fill them out, because I get them all
 8   the time.  And I don't think we're going to get a precision
 9   in data.  It's not like we're going to get a census or
10   whatever.  But just something to -- so that when, you know,
11   people like Jonathan and Patrick, when they're throwing out
12   numbers, there's something that -- and I don't have to say
13   "gabillion," right?  We have more precision in the amount of
14   numbers.  Because again, intuitively, through anecdotal,
15   qualitative experience and people in my world, they fall into
16   more of the industries, the number of businesses that Patrick
17   is.  So if we could just get a -- or spoke about.
18             If we could just get kind of a data field, it would
19   be really great, just to put something on the ground.
20             MS. HANKS:  Continuing quest.
21             MS. SCHIMPP:  We use Pepperdine capital markets
22   survey, find it useful for at least the lower, middle market
23   comparisons.
24             MS. HANKS:  That would be good, if we could.
25             All right, anything else?  Am I missing anything
0188
 1   before we wind up?
 2             All right, thank you very much.  
 3             Thank you everybody in Internet Land.  Thanks.
 4             (Whereupon, at 3:44 p.m., the above-entitled matter
 5   was concluded.)
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0189
 1             PROOFREADER'S CERTIFICATE
 2   
 3   In the Matter of:  EQUITY MARKET STRUCTURE ADVISORY 
 4   COMMITTEE MEETING, SMALL AND EMERGING COMPANIES
 5   File Number:  OS-0215
 6   Date:  Wednesday, February 15, 2017
 7   Location:  Washington, D.C.
 8   
 9        This is to certify that I, Christine Boyce,
10   (the undersigned) do hereby swear and affirm that the
11   attached proceedings before the U.S. Securities and 
12   Exchange Commission were held according to the record,
13   and that this is the original, complete, true and 
14   accurate transcript, which has been compared with the
15   reporting or recording accomplished at the hearing.
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18   ___________________________  ______________________
19   (Proofreader's Name)           (Date)
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