0001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION 2 3 4 5 SEC ADVISORY COMMITTEE ON 6 SMALL AND EMERGING COMPANIES 7 8 9 10 11 WEDNESDAY, MAY 1, 2013 12 13 14 15 16 17 United States Securities and Exchange Commission 18 100 F Street, N.E. 19 Washington, D.C. 20 Station Place 1 Multipurpose Room 21 22 23 24 Diversified Reporting Services, Inc. 25 (202) 467-9200 0002 1 A P P E A R A N C E S 2 3 SEC COMMISSIONERS PRESENT: 4 MARY JO WHITE, Chair 5 LUIS AGUILAR, Commissioner 6 7 ADVISORY COMMITTEE MEMBERS PRESENT: 8 JACOBS, CHRISTINE (Co-Chair) 9 GRAHAM, STEPHEN (Co-Chair) 10 ABSHURE, HEATH 11 BORER, JOHN 12 CHANG, MILTON 13 DENNIS, LEROY 14 GREENE, SHANNON 15 JENNY, KARA 16 SUNDLING, CHARLIE 17 WALSH, TIM 18 YADLEY, GREG 19 SEC STAFF PRESENT: 20 BURNS, JIM 21 LAPORTE, GERALD 22 LOSERT, JOHANNA 23 NALLENGARA, LONA 24 YU, TED 25 0003 1 A G E N D A 2 PAGE 3 OPENING REMARKS 4 4 Stephen Graham and Christine Jacobs, 5 Co-Chairs, and Lona Nallengara, Acting 6 Director, Division of Corporation Finance 7 PRESENTATION AND DISCUSSION - 8 8 Duncan Niederauer, CEO, NYSE Euronext 9 PRESENTATION AND DISCUSSION - 65 10 William Hambrecht, Chairman/CEO, WR 11 Hambrecht + Co., accompanied by James 12 Tanenbaum, Esq., Morrison & Foerster 13 REMARKS BY CHAIR WHITE AND COMMISSIONER AGUILAR 109 14 PRESENTATION AND DISCUSSION - 117 15 Robert Greifeld, CEO, NASDAQ OMX Group 16 DISCUSSION OF NEXT STEPS AND CLOSING COMMENTS 152 17 18 19 20 21 22 23 24 25 0004 1 P R O C E E D I N G S 2 OPENING REMARKS 3 MR. GRAHAM: Let's see if we can get started. 4 Of course, we want to welcome all the Committee members. 5 Thank you again for coming. We also want to thank the 6 SEC staff for all of their help. We certainly couldn't 7 do all the things we do without their assistance. 8 As you know, we have made a number of 9 significant recommendations the last time we got 10 together. You might be wondering where we stand with 11 certain of those recommendations. That is something we 12 will turn to at the end of the day. For now, we have a 13 pretty full agenda. 14 We are very fortunate to have just a tremendous 15 group of folks to come and talk to us today about some of 16 the issues we're trying to address. 17 We will first hear from Duncan Niederauer, who 18 is as you know the CEO of NYSE Euronext. We will hear 19 some of his ideas about smaller companies and NYSE. 20 Then we will hear from Bill Hambrecht, who will discuss 21 issues relating to capital formation by smaller 22 companies. 23 That will take us through the morning. After 24 lunch, we should see some of the Commissioners. We 25 expect to see Chair White. Let me mention now we will 0005 1 break as usual until 2:00. Chair White will be down here 2 for a little meet and greet if you would like to get back 3 early. She should be here around 1:45. We should see a 4 few of the other Commissioners in the afternoon as well. 5 They are unable to join us this morning because there is 6 an open session of the SEC going on this morning. 7 After we hear from Chair White this afternoon, 8 we will hear from Bob Greifeld, who is the CEO of NASDAQ. 9 After Bob, we will talk about prior 10 recommendations, where we stand, where we stand with 11 certain rulemaking that is important to this Committee, 12 and talk about next steps. 13 Before I go any further, I would like to ask my 14 Co-Chair if she has any remarks she would like to make. 15 MS. JACOBS: I just want to reiterate my thanks 16 to the staff but maybe address the Committee and thank 17 you all. Whether we realize it or not, we're now into 18 our second year. Since the beginning, this Committee has 19 efficiently dispatched any and all directives that we 20 were given by then Chairman Schapiro. 21 Since inception, we have contributed to the 22 JOBS Act. We have provided context and suggestions for 23 capital formation while taking investor protection into 24 consideration. We have provided in-depth suggestions for 25 relief of small public companies, and to note, we have 0006 1 deliberated openly. We thoroughly discussed issues and 2 disagreed, as we should, on some of them. We put out an 3 impressive array of work product. 4 We have been near unanimous on most of our 5 recommendations, and we did so without divisive 6 commentary, special committees or dissent. 7 We wanted to take this moment to just step back 8 and say hey, do you all realize what we have accomplished 9 to date, and to thank you for your commitment, your 10 energy, and your time around these topics. Thanks. 11 MR. GRAHAM: Thank you, Chris. I guess I 12 should have asked this before, Gerry, do we have a 13 quorum? 14 MR. LAPORTE: According to my math, we do. Yes, we do, Mr. 15 Chairman. 16 MR. GRAHAM: We are officially convened. Next 17 we will hear from Lona Nallengara, who as you all know is 18 the Acting Director of the Division of Corporation 19 Finance. Lona will introduce the rest of the SEC staff 20 and say a few words. 21 MR. NALLENGARA: Thanks, Steve. I'll save our 22 broader discussion about the previous recommendations and 23 things we are doing here at the Commission related to 24 rulemaking and many of the topics we have talked about 25 for the afternoon so we can get into the program. 0007 1 Let me take a moment to introduce who we have 2 here. Most of the faces are familiar to you. Starting 3 at the end next to Chris is Gerry Laporte. Gerry is the 4 Chief of our Office of Small Business. Joining us today 5 is the Deputy Director in the Division of Trading and Markets, 6 Jim Burns. Beside me is Ted Yu, a senior 7 special counsel in the Division of Corporation Finance, 8 who I get to work with on a day to day basis, and Johanna 9 Losert, who works with Gerry. She's his special counsel 10 in the Office of Small Business Policy. 11 That is the team we have for the morning. 12 MR. GRAHAM: Okay. Thank you, Lona. Again, 13 thank you and the rest of the folks for all they do for 14 not only this Committee but quite frankly the country. 15 Thank you. 16 We are pleased to have Duncan with us today. 17 He is the Chief Executive Officer and a Director of NYSE 18 Euronext. 19 Prior to his current position, Duncan was 20 President and Co-Chief Operating Officer of NYSE Euronext 21 with responsibility for U.S. cash equities. Before 22 joining NYSE, Duncan had a 22 year career at Goldman 23 Sachs, where he was Managing Director and Co-Head of the 24 Equities Division, Executive Services. 25 We thank Duncan very much for taking time to be 0008 1 with us today. Duncan, the mike is yours, assuming it 2 works. 3 PRESENTATION AND DISCUSSION WITH DUNCAN NIEDERAUER, 4 CHIEF EXECUTIVE OFFICER AND A DIRECTOR, NYSE EURONEXT 5 MR. NIEDERAUER: It sounds pretty good. Thank 6 you, Steve, and thank you, Chris. Thanks to the 7 Committee for having us in. What I would like to do in 8 the time we have together is just go through a deck we 9 will have up on the screen that all of you should have 10 gotten in your packets this morning. 11 I want to start by reminding us how important 12 all the stuff we are talking about at this Committee is 13 because it's much bigger than just access to the capital 14 markets for companies who we think can get there. I 15 actually think it's also a lot about issues facing small 16 companies throughout the country. 17 The first few slides we have in the deck are 18 really going to just talk about why I think the work 19 you're doing is so critically important, and I want to 20 start a little bit on Main Street and then work our way 21 to the capital markets. 22 I realize the Committee might not think that 23 Main Street is necessarily within your purview, but as I 24 just said to Lona before we started, you are a group that 25 seems to be prepared to take action, not just hold 0009 1 meetings, and if you're prepared to take action, I think 2 there are other areas where you should at least be aware, 3 and I'm sure you share our view that as people who care 4 about public policy and care about the health of the 5 economy, there are actually some things I think we should 6 all be aware of about what Main Street is really 7 wrestling with today. 8 The first few slides are really talking about the 9 broader economy and Main Street. Just a few statistics 10 for you. If you think about all the registered and 11 incorporated businesses in the United States, what we 12 would call "small companies" are 99.7 percent of those 13 companies that actually employ people. Those small 14 businesses employ more than half of the country's 15 workforce in the private sector, and I think what is 16 particularly important to all of us is that's where a lot 17 of the innovation happens. 18 Small businesses create 13 times more patents 19 per employee than larger companies. 20 We read a lot about all the great work the big 21 companies are doing. They get a lot more publicity for 22 it. That's critically important as well, but let's not 23 lose sight of the fact of what we have across Main Street 24 and throughout the country. 25 What we have spent more time than you would 0010 1 probably expect focused on in our role at the NYSE is on 2 these Main Street businesses, the overwhelming majority 3 of which will never go public. Our work in this area is 4 not about nurturing them so they can find their way to 5 the NYSE some day, quite the contrary. 6 Nearly six million of these businesses have 7 less than 500 employees. I would venture to say almost 8 none of them will get to the capital markets. Their 9 issue is not access to the capital markets, it's access 10 to affordably priced capital. 11 You would think with the monetary policy that's 12 been in place the last few years in the country that 13 should have been readily available to them, given that 14 interest rates are at historic lows no matter how you 15 want to measure it. Yet in some surveys we've done 16 recently and that the National Small Business Association 17 did recently, you would find quite the contrary would be 18 the case. 19 Of those businesses I mentioned a minute ago 20 that have fewer than 500 employees, 43 percent of them 21 are unable to find sources of capital. Typically, they 22 would go to their local bank. They would get a loan or 23 line of credit from that bank. Really small mom and pop 24 businesses may try to get credit from their vendors or 25 suppliers. They may put it on their credit card. They 0011 1 may borrow money from friends and family. 2 The point is in the world we have been in in 3 the last two or three years, even the bank loans are 4 difficult to come by. I think if you look closely, it's 5 not hard to find examples where small businesses that 6 have had actually quite a good history are struggling to 7 find affordably priced capital in spite of the low 8 interest rate environment. 9 What's happening? The group that we count on 10 to actually be the consistent job creators in good times 11 and bad is actually in many cases reducing their number 12 of employees or finding ways to reduce benefits. We are 13 in exactly the opposite cycle that we would want to be in on 14 Main Street. 15 What we have tried to do, taking our job pretty 16 seriously, is not just the owner and manager and overseer 17 of a large public capital market, we also try to do 18 things under our corporate responsibility umbrella, like 19 the NYSE big start-up, that we think is trying to 20 pragmatically target some of the issues we find on Main 21 Street. 22 What we try to do is we think of it simply as a 23 matchmaking service. We call one of the things we do 24 "Corporate Connections." We reach out to some of our 25 already listed companies and have a discussion that 0012 1 ranges from everything to talking about their supplier 2 network, which is often stocked full of relatively small 3 companies, to gauging their willingness to go into the 4 communities in which they operate their businesses and 5 talk to small businesses, to teach them things about how 6 to scale their business. 7 A UPS or a FedEx can talk to a small company 8 about how easy it is in the 21st Century to have clients 9 really around the world if you are in a services business 10 or a product business. 11 We go on the road with Yelp, and Yelp will talk 12 to small businesses about what to do if there is a bad 13 review of your business in the social networking world, 14 in the blogosphere, how do you handle that, how do you 15 respond to that as a small business. 16 We will have legal and accounting companies 17 talk to companies about how to optimize themselves from a 18 corporate structure from a tax point of view. 19 What we try to do is connect big companies with 20 small innovative companies. Sometimes they can then 21 acquire products from the small innovative companies or 22 they can teach them the ways to scale. 23 We have also tried to put our money where our 24 mouth is. We have done a lot of work trying to evaluate 25 the various microfinance networks in the U.S. and around 0013 1 the world. We have provided some grants, and we are 2 actually thinking about going beyond just granting money, 3 but actually helping fund some of those microfinance 4 networks, not to get into the microfinance business 5 ourselves, but to kind of put our money where our mouth 6 is and say if these Main Street businesses are having 7 trouble finding affordably priced capital, let's be 8 willing to experiment with other alternatives. 9 My message on these first few slides was it may 10 not seem like the purview of the Committee, but if we're 11 a group of people who care about public policy and we 12 care about small businesses, let's not forget Main Street 13 when we're talking about small businesses. 14 I personally believe we should be spending a 15 lot of time trying to think about how to make micro 16 finance more transparent, how to help scale it, and I 17 also think there is room to re-think how we separate the 18 really large integrated global banks from the community 19 banks. If you think about the community banking business 20 model, how to regulate that, maybe how to calibrate the 21 regulation in the financial services sector, I think 22 there is a lot of opportunity for those banks to get back 23 in the business of providing affordably priced capital to 24 Main Street in a way that regrettably they are not able 25 to do today in the size we need them to. 0014 1 As I alluded to a minute ago, our fear is if we 2 do neither -- one of the byproducts we are hoping to get 3 from the monetary policy that's been in place and appears 4 to continue to be in place for the next year and a half 5 or so at least, the impact you would have hoped it would 6 have had on Main Street in a positive way, the impact 7 that would have had secondarily on job growth, it's not 8 going to materialize if we don't think about some of 9 these things. 10 Now let's shift gears a little bit to the 11 capital markets work of the Committee. For the rest of 12 the universe of small companies, which is actually a 13 relatively small fraction of that 99.7 percent that I 14 talked about a few minutes ago, I think the public 15 markets are where we should be trying to get these small 16 companies to because I do think they get benefits getting 17 to the public market, whatever public market it might be. 18 They get permanent access to capital so they 19 can more readily manage their finances. It's growth 20 capital that has a more permanent flavor to it. They get 21 visibility. These small companies can gain recognition, 22 build their brand, get more credibility. They can 23 attract higher quality talent because they can offer 24 equity as part of the compensation package. 25 It allows the broader public to basically 0015 1 participate in owning small companies that are the job 2 creation engine, that are the innovation engine, and this 3 is an opportunity that if we think about it, is not going 4 to really be afforded to a lot of the mom and pop 5 businesses that we spent the first few slides talking 6 about. 7 Why do we think it's important? We get accused 8 all the time of simply having self-interest because if we 9 can help 50 or 100 more companies get to the public 10 capital markets every year, that's obviously more 11 companies listed on the NYSE or NASDAQ, that's good for 12 our businesses. 13 I don't think that's what it is about. We are 14 set up to be the capital formation place. We are set up 15 to be the place where small businesses are supposed to 16 find their way to the public markets so they can get all 17 these benefits we talked about. 18 Why should we all care about it? Because the 19 statistics are pretty clear, that 92 percent of job 20 creation and job growth comes after the company goes 21 public. What happens? A company finds their way to the 22 public markets, they do an IPO, they take that growth 23 capital and they invest that in growing their business, 24 scaling their business, and obviously more often than 25 not, if not every time, they do that by creating jobs. 0016 1 Our statistics tell us that happens in good 2 times and bad times. You would sit here and say well, 3 I'll bet that didn't happen in 2008 and 2009. What we 4 will see in the next two slides is IPO issuance certainly 5 contracted in the financial crisis, but companies like 6 Rackspace that went public in 2008, a year later, they had 7 twice the number of employees they had when they went 8 public. 9 Companies like Rosetta Stone, that many of you 10 have probably heard of, they went public in 2009, 11 literally at the bottom of the market. A year later, 12 they had 50 percent more employees than they had when 13 they went public. LinkedIn, which I'm sure many of you 14 are on or familiar with, went public in 2011. Less than 15 a year later, they had twice the number of employees they 16 had before they went public. 17 It works. It is a job creation engine because 18 they get the growth capital. They put the growth capital 19 to work. They go into new markets. They build new 20 products. They scale their business. To do that, they 21 hire people. 22 I think that's why what we are doing here today 23 among other things is really important. A lot of you 24 would probably also say well, you know, the IPO market 25 doesn't work. The IPO market hasn't worked, it hasn't 0017 1 worked since 1999 and 2000. I'm not sure we want it to 2 work the way it was working in 1999. A lot of companies 3 that probably never should have seen the light of day. 4 The engine was working almost too well then, right? 5 We have to be circumspect about that. We have 6 to take a step back and say you know, what's the right 7 answer, we don't want the markets to be too feverish, we 8 don't want to create bubbles. 9 If you look on this chart, 2004 to 2007, we 10 were having roughly 300 IPOs a year. As you would 11 expect, in 2008 and 2009, that kind of dropped off a 12 cliff. It sort of found its way back to not quite 200 a 13 year in 2010, 2011 and 2012. If the early returns in 14 2013 are any indication, we have had about 50 IPOs in the 15 United States in the first quarter of 2013. The calendar 16 looks pretty good. 17 Obviously, it depends on a lot of things. Does 18 the economy hang in there, does the market hang in there, 19 et cetera. We would be on pace right now to have 2013 20 look a lot like 2011 and 2012. So far, so good. 21 If we want to put our nationalist hat on or 22 American hat on for a minute, I thought this was a really 23 interesting chart. You go back about ten years ago. The 24 U.S. was responsible for not quite half the global 25 issuance in the world. You can see how much that 0018 1 contracted in 2008, 2009 and 2010. You could argue 2 pretty successfully, I think, without a lot of 3 difficulty, that the demographics in the world right now 4 are sort of working against us. I don't want to put too 5 much stock in this chart. 6 If you think of the challenges that the 7 emerging part of the world has, particularly China, and 8 you think about the jobs China has to create just to 9 maintain the economic growth at the level it's at, they 10 have to create jobs that are of a number that the 11 people around this table, we probably can't even imagine. 12 They understand the connection between getting 13 private companies to the public market, what that does 14 for the job creation engine. They understand small 15 companies are the job creation engines. They understand 16 it's not going to be the SOEs. They understand it's not 17 going to be the kind of government overseeing companies, 18 it's going to be entrepreneurial companies. 19 It didn't surprise me in 2009 and 2010 when you 20 saw a ton of issuance coming out of places like Hong 21 Kong, like China, like the emerging markets in South 22 America, places like that. 23 That shouldn't surprise us. However, look at 24 what's happened in 2012 and 2013. As our markets here 25 have stabilized, the U.S. is back to where it is almost 0019 1 half the global issuance. A lot of the companies that 2 IPO in the U.S. are actually non-U.S. companies. They 3 find the U.S. capital markets to be by far the best, the 4 deepest, and certainly the most institutional. A lot of 5 the emerging growth markets are getting there, but even 6 including big markets like China, are still predominately 7 retail dominated. 8 I just thought that was an interesting chart to 9 show kind of how things are going. 10 This is a chart that shows -- if you go back 11 two slides ago, I talked about all the IPOs in the U.S., 12 how many of them were for companies when they went public 13 had a market cap of under $250 million. You can see 14 again if you go back about ten years, that number was 15 more like 40 percent. It dipped all the way down to 16 about 25 percent. We are now hovering at around 30 17 percent. 18 If I put this slide up through Q-1-13, which 19 I'm not saying is indicative, 2013 so far seems to be the 20 year of the private equity backed IPO, and 2011 and 2012 21 were a little more about venture capital backed IPOs. If 22 I had this year to date in 2013, in my head, I would say 23 the number is slightly lower because there have been 24 bigger companies that have gone public, an IntelSat, a 25 Sea World, companies like that. These have market caps 0020 1 considerably higher than $250 million. 2 I think that is a bit of a disturbing trend and 3 the point is there should be a lot more small companies 4 that are finding their way to the public markets if we 5 were all doing our jobs properly. 6 You have probably had this debate at this 7 table. Some of you have very informed opinions on why 8 small companies would be struggling to find their way to 9 the public markets. We have talked, I think, ad nauseam, 10 about the impact of Sarbanes-Oxley and the cost and 11 regulatory burden that put on a company. 12 I must confess it's been hard for me to assess 13 in the time I've had this job how much of that is real 14 and how much of that is imagined. I don't mean to 15 suggest that people don't understand it. It got this 16 reputation. I heard a lot of people say to me oh, it's 17 impossible. It's really expensive. 18 When you dug a little deeper, they weren't 19 actually sure how much it cost, but they had heard horror 20 stories from companies already public or they had heard 21 war stories from bankers or venture capitalists who were 22 saying, you know, somewhat anecdotally in some cases, oh, 23 yeah, the cost of that kind of stuff, we're just going to 24 bury you if you try to go public. 25 I have a feeling reality is somewhere in the 0021 1 middle, but the point is it still needs to be addressed, 2 and we do know that we applied a one size fits all 3 approach as regulation often does in the wake of a 4 crisis. I'm not sure that was the most sensible 5 approach, but it was the approach that was taken at the 6 time. 7 We have taken efforts to see if there are ways 8 to re-calibrate that standard so that different companies 9 -- it's more modeled to the complexity of the company, 10 the size of the company, the maturity of the company. 11 To be very clear, we have had no success doing 12 that to date. None. That doesn't mean we haven't tried. 13 We have talked about it a lot. We have had zero success 14 doing that, until we got to the JOBS Act. The JOBS Act 15 doesn't re-calibrate Sarbanes-Oxley. It just tries to 16 come at the solution in what I thought was a pretty 17 pragmatic but different way. 18 What's also happened in the last ten years is 19 the ecosystem around supporting these small companies after they 20 go public has changed dramatically. I'm sure you have 21 talked about that at the Committee. 22 You will hear that from Bill Hambrecht for 23 sure. Bill is a world class expert on this stuff. He's 24 watched how it has evolved out on the West Coast in 25 particular, where a lot of the banks that were taking 0022 1 these companies public, that were willing to provide 2 research afterwards, that were willing to be the market 3 makers afterwards, that has gone away with consolidation 4 in the industry. 5 I think decimalization had a lot to do with 6 that because it dramatically changed the economics, and 7 the economics at the end of the day are what the banks 8 are basing a decision on as to what stocks to cover, what 9 stocks to trade, et cetera. 10 Unfortunately, that's put us in a challenging 11 downward spin where the ecosystem gets the companies out 12 but then the ecosystem on T+1 isn't quite as viable as it 13 was for these companies, so if you have heard the term 14 that a lot of these companies feel "orphaned" after they 15 get to the marketplace, I think that's a legitimate 16 sentiment on their part because the ecosystem isn't 17 there. 18 That has led to a lack of market making, has 19 led to a lack of liquidity. You could argue that's led 20 to a lack of analyst coverage. I have a view that you 21 have to solve the liquidity problem and then you will get 22 more coverage in the sector. I'm sure other people would 23 just as convincingly say you have to incent people to 24 cover the stocks and that will bring liquidity. 25 I don't know which is which. As someone who 0023 1 grew up in the capital markets, I actually think it's 2 easier to solve the liquidity problem, and if you solve 3 the liquidity problem, I do believe more people will 4 cover the stock because it will be more interesting. 5 Without getting on my market structure horse 6 too much, what has also happened in the last five or ten 7 years is the markets have gotten considerably darker. If 8 you contrast what we spent the last four years talking 9 about with Dodd-Frank, about taking all these products 10 where we learned opacity was dangerous and we are now 11 trying to bring them into the light, I'm sad to report 12 that while we have been doing that, the U.S. equity 13 market has gotten darker and darker and darker with each 14 passing year. 15 Fifteen percent of the business was done away 16 from the Exchange three or four years ago. It is now 36 17 percent. 18 There are big loop holes that the banks are 19 exploiting. We have talked to Jim and his staff about 20 some of that and we have talked to some of the 21 Commissioners about it. 22 We think a review is warranted, but I think 23 that is also part of the problem, particularly for some 24 of these small stocks, more than half of the volume never 25 makes it to the Exchange, so there isn't real price 0024 1 discovery the way we think about it going on, and most of 2 the price discovery is happening in the dark. We think 3 that's dangerous. The back drop is we have obviously had 4 some macroeconomic concerns the last few years. 5 There are some bright spots. We were 6 instrumental, as you were, in getting the JOBS Act put 7 through. We spent a lot of time working on that. We are 8 very proud of our contribution to that. We are 9 particularly proud that it is one of those pieces of 10 legislation that seems to have had an impact. 11 You have had a lot of companies since the JOBS 12 Act was out there elect to file under the status of an 13 emerging growth company. The majority of those companies 14 are domiciled in the U.S. It is particularly rewarding 15 for us when a company comes to the NYSE and part of the 16 remarks as we are taking them to have their first day of 17 trading is they feel they were able to do this because of 18 the JOBS Act. 19 Many of them said I'm not sure I could have done 20 this if I didn't get the flexibility that the JOBS Act 21 affords me, and I think that gives us a window into how 22 we should be thinking about how to address companies that 23 are already listed in the public markets. It is time to 24 start thinking about a way to level that playing field, 25 too, if that's possible. 0025 1 What has probably been the most popular aspect 2 of the JOBS Act, and I was hopeful that it would be, and it 3 has been, is that nearly two-thirds of the companies are using 4 the confidential filing ability with the SEC as they go 5 through the drafting process with their registration 6 statements. 7 Why did we think that was important? We 8 weren't trying to play hide and seek with anybody. We 9 weren't trying to encourage companies to say hey, do as 10 much of this confidentially as you can. 11 If we're really thoughtful about it, what was 12 happening to a lot of these companies is they were small, 13 they are trying to go through what is a pretty cumbersome 14 registration process that in many instances was beyond 15 their level of sophistication. That didn't mean they 16 didn't have a good company, that didn't mean they didn't 17 have a good business model. It is a very complicated 18 process. 19 What would happen? These companies would file. 20 The comments back were in the public domain and it was 21 becoming a stigma for a lot of these companies. 22 Potential investors would look at all the comments these 23 guys are getting. Our view is it should be fully 24 disclosed when it's appropriate, a clean filing. 25 Investors have plenty of time to review it. Let's not 0026 1 get in the business where we are reviewing every filing 2 and the media is kind of poking fun at people who get a 3 lot of comments. That didn't strike us as terribly 4 sensible. 5 What we have been trying to do with the JOBS 6 Act, what you have been doing and what we have been 7 doing, is just simply a pragmatic approach to say build 8 an on-ramp where it's all very clear to the investor what 9 these companies comply with, what they don't comply with, 10 what they disclose relative to Sarbanes-Oxley, what they 11 don't, what's expected of them to scale into as they go 12 along the on-ramp and their business grows and gets more 13 complex, and let's not make it prohibitively expensive 14 for them to test the water to see if they can go public, 15 and then let's not complicate it further and make it more 16 expensive once they get there. 17 There are some market issues that I think we 18 should talk about, and then there's some issues about how 19 to re-calibrate what we can ask of companies that are 20 already out. 21 Like we try to do on a lot of things, we are 22 also trying to step up and put our money where our mouth 23 is here, too. We don't just come to meetings like this and 24 talk about it and then go home and say well, we don't 25 really care about this because most of the companies that 0027 1 are at the NYSE are all the big companies. In fact, 2 quite the contrary. 3 If you look at the pie chart on this slide, we 4 certainly have a lot of large cap companies. We have a 5 heck of a lot of microcap, smallcap and midcap 6 companies, too. 7 This notion that the NYSE is just home for 8 these multi hundred billion dollar companies is simply a 9 falsehood. In fact, we take companies as small as $40 10 million in market value, their public float, and on the 11 NYSE market model, which some of you may know is the old 12 American Stock Exchange, you can list with us with a much 13 smaller MVPF. 14 This notion that you have to be big and already 15 established to get out into the public markets is simply 16 nonsense. I think you will hear a lot from Mr. Greifeld, 17 because the majority of their companies are companies 18 with market caps below $250 million. 19 Both of us should care deeply about this 20 because it's an important constituency for us, and we 21 should care about it as people who care about public 22 policy and running the capital markets fluidly. 23 We also try to do things that I would say are 24 more policy driven or more awareness-raising driven. We 25 will host global entrepreneurship week. We have done a 0028 1 lot of work with the NVCA. We collaborated with NVCA and 2 Start Up America on the JOBS Act. We have tried to talk 3 about SOX reform. We have tried to talk about tax 4 policy. I'm not afraid to stand up and be heard from on 5 this topic. 6 I want to give you another fun fact that to me 7 drives the point home of why these small companies are 8 indeed the job creation engine. 9 We have 500 companies on the NYSE that I would 10 put in the small cap group that have an average market 11 cap of $250 million. If you think about that, that is 12 roughly $125 billion of total market cap. $125 billion 13 company listed on our Exchange, the average company of 14 that size would employ about 100,000 people. Those 500 15 companies collectively, with the same market cap total, 16 employ 500,000 people. 17 If we can get more of those companies out, 18 there is a force multiplier here, where it really is the 19 job creation engine. 20 We think there is a lot that could be done. We 21 are realistic, right? We're not a market maker. We can 22 create what we think is the best capital market in the 23 world. We can't make people come. We can work with Jim 24 and his staff and we can try to have the market structure 25 be the best it can be. That's not going to be enough. 0029 1 Other people in the ecosystem are going to have 2 to step up and I think we are going to have to be willing 3 to experiment as an industry, whether it's the Exchanges, 4 the banks, the brokers, the regulators, committees like 5 this, we are going to have to be willing to try some 6 things. There is no question if you look at the results 7 so far, there are things we can do to improve it. 8 Two thousand stocks have less than $1 million 9 in daily trading volume. That is really almost no 10 trading. Companies under $300 million in market cap now 11 have an average of less than 1.5 analysts covering them. 12 That means they have basically one or two. Years ago, 13 they had several. A few years ago, they at least had two 14 or three. Now a lot of them basically have zero, one or 15 two. 16 We talked about the off-Exchange trading 17 growth. I won't belabor that point. 18 There are things we can do. We could get the 19 rest of the JOBS Act that hasn't been implemented, 20 and what I will talk about in the next few 21 slides is what can we think about with regard to tick 22 size reform, what can we talk about with regard to market 23 maker incentives, and how do we think about market 24 quality and price discovery. Let's be willing to try 25 some new things. 0030 1 We are never going to be able to prove to 2 ourselves ahead of time that it's definitely better. 3 We're not going to know, guys. We're not going to know. 4 I think we are obliged to try if we know what's happening 5 now isn't good. It's hard for me to imagine that 6 collectively we wouldn't be willing to try to make it 7 better. 8 I know the Committee has talked about things 9 like tick size. I don't think tick size is the silver 10 bullet, but I think it's time to try a pilot that is a 11 meaningful pilot, not for 15 minutes, not for three to 12 six months, not for a handful of stocks. I think you 13 really have to try -- our view would be you take a few 14 hundred stocks, you re-think what the tick size should 15 be, you probably commit to doing it for a couple of 16 years. You need to gather data. 17 You need to ask people to commit to changing 18 their behavior in the ecosystem so that you really have a 19 chance to collect a meaningful amount of data. I do 20 think you have support for this, not only from the issuer 21 community, but from the trading and exchange community. 22 It's one of those issues where I think the 23 parties that the regulator would normally want to get 24 together to see if we all agree, I think you would find 25 most people would agree. You might sit there and say oh, 0031 1 investors aren't going to agree with this because they 2 like it when it's a penny. The investors I talked to 3 think it's more about liquidity and being able to 4 discover the price in these less liquid securities. The 5 spread being a penny is kind of artificial. It's never 6 for big sized and meaningful size anyway. 7 I think if we did it, it should change the 8 economics from the bank's point of view, and I would like 9 to think that would encourage them to quote more, display 10 more liquidity. 11 If you get more depth, you get more liquidity, 12 ideally that would move more of the business back to the 13 displayed market, which has always been the SEC's 14 objective, we want displayed liquidity, not hidden 15 liquidity. 16 It should reduce volatility. It should 17 increase interest from institutional investors. I hope 18 that the cart that comes behind the horse is you would 19 have a couple more analysts covering each of these 20 stocks. 21 I think hoping we are going to get back to our 22 eight or ten analysts covering all these stocks, that's 23 probably not realistic in the medium term, but having 24 zero, one or two, we should aspire to do a lot more. 25 If you get more analyst coverage, you get more 0032 1 following in the stocks, you get more buy-side 2 institutions willing to do their own research on these 3 stocks. I think that is a very positive outcome for the 4 market. 5 I would try to pick 300 to 500 stocks. I would 6 do a pilot for a couple of years, and to be very clear, I 7 wouldn't let the issuers pick any tick size they wanted. 8 I think we have to be reasonable. We can say it can be a 9 nickel, it can be a dime. I don't think we should have 10 75 different tick sizes. 11 I think we should say to the issuer would you 12 like to leave it at a penny or would you like to 13 participate in this pilot, and what would you like it to 14 be? Would you like three cents, five cents, ten cents? 15 We are very open minded to take advice from others on 16 what people think that should be. 17 We have also been working with the SEC, as have 18 the other Exchanges, very closely to try to develop a 19 pilot program for market making incentives in the ETF 20 arena, where this really came home to roost even before 21 we recognized what was going on with the small companies 22 here. 23 What has happened in the last five/six/seven 24 years? A proliferation of ETFs. Just to be very clear 25 so you don't view me as an expert on this topic, I have 0033 1 predicted exactly the opposite for five years in a row. 2 I've said we have way too many ETFs already. I'm wrong. 3 I've been consistently wrong, but at least I've been 4 consistent. 5 The ETFs continue to grow. There continues to 6 be a market for people who want to get exposure to 7 various sectors, various commodities. We even had some 8 fixed income ones come recently. Innovation continues. 9 If we are realistic, a lot of those ETFs really 10 never garner meaningful assets, but the sponsor is 11 reluctant to pull them off the board. We have a ton of 12 ETFs that are really, really illiquid that are out there, 13 so we have been working with the SEC staff here for a few 14 years now as has BATS and NASDAQ, and I think BATS and 15 NASDAQ both have had programs approved, and ours is close 16 to being approved. 17 That would basically allow us to give 18 incentives to market makers, those financial incentives - 19 - I want to be very clear. That may sound like a 20 conflict or it may sound inappropriate to some of you. 21 If you want someone to have an obligation that no one 22 else in the marketplace has, they are only going to 23 accept that obligation if you give them a financial 24 incentive to offset them having that obligation. 25 This has been a long debate we have had with 0034 1 the SEC. It's at the core of our model at the NYSE. We 2 are the only ones that have a market maker who is 3 responsible for making a quote in good times and bad. In 4 fact, we have seen recent quotes from the SEC staff that 5 encourage us that they would concur that we have seen 6 enough in the marketplace to say we need market makers 7 with obligations as part of market structure. You need 8 to give them financial incentives to have that 9 obligation. The question becomes who provides that 10 incentive to the market maker. 11 What we have talked about in the ETF space is 12 it is in the ETF sponsor's interest that these products 13 become more liquid, so we would pay the incentive 14 effectively to the market maker and then pass it through 15 to the ETF sponsor. 16 You could certainly adopt a similar mechanism, 17 and in fact, many small companies have approached us and 18 said look, we would be happy to pay an incentive to 19 market makers if it would make someone in addition to the 20 designated market maker on the NYSE step up. 21 This is particularly relevant in NASDAQ where 22 there is no designated market maker, and I'm sure we will 23 hear some ideas from Mr. Greifeld on that later. 24 Last but not least, before we throw it open to 25 questions, I do think we have to have a market quality 0035 1 discussion as well. We are in discussions with the SEC 2 and others now. We are doing this as an Exchange group, 3 so Mr. Greifeld, Mr. Adam and I are doing a lot of these 4 meetings together. 5 We believe we have presented data that would 6 suggest the more opaque the markets get, the wider the 7 spread gets. For very liquid stocks, that seems to be 8 more than just a correlation. 9 We think it's particularly an issue for these 10 more thinly-traded stocks. I'm even willing to put 11 things on the table that if you as a Committee said to us 12 why don't we completely re-think how small stocks are 13 traded, do they really need to trade continuously, as 14 someone who has been in the capital markets for 25 years, 15 I'm not sure they do. 16 I realize if I stood up and said let's go back 17 to three or four call auctions a day, like people would 18 bring out words like "prehistoric" again, it's about 19 getting to the right answer and being willing to try any 20 and all alternatives. 21 I could easily be convinced that what is better 22 for a lot of small companies is have a good solid 23 opening, have a cross in the middle of the day, and have 24 a good solid closing, and don't worry about it the rest 25 of the day. 0036 1 People may say sorry, that's not good, we're 2 all used to having continuous markets. I'm just telling 3 you that we are very open minded about this. We want to 4 do what we think works for the issuers. We want to hear 5 from issuers. We want to hear from investors. That is 6 who our constituents are. We are happy to listen. 7 Lastly, you are probably going to hear some 8 talk today about this continuum from when a company is 9 private to when it is a successful well-built company in 10 the public market. We are happy to listen to any and all 11 suggestions along that continuum, but I think you will 12 find us to be generally opposed to this idea of creating 13 private, pretty opaque markets where an insider trades 14 with an outsider, and it's only accredited investors -- I 15 don't think that's the right answer. 16 If people think we need to use the JOBS Act on- 17 ramp concept and think about starting that on-ramp 18 earlier or constructing a different kind of on-ramp, I 19 would say there is plenty of Exchange models already out 20 there that are probably much closer to that target than 21 you all would think. It's our job over time to explain 22 to you what those are, after we understand from you what 23 you really want. 24 Then I think we can work backwards to that 25 solution. If you think about it, that's kind of what we 0037 1 did with the JOBS Act. We said Sarbanes-Oxley reform 2 isn't going to work. Let's come at it from another 3 direction. Let's work with the accounting industry to 4 figure out what that on-ramp should look like. 5 If what your work has concluded is on-ramp 6 needs to start with smaller even less developed 7 companies, I think there are some things we could do to 8 make that whole process more transparent, where you could 9 do auctions for private companies, too, in a much more 10 transparent way than they are being done right now. 11 We would certainly volunteer to be a part of 12 that if people would like us to be, too. 13 Lona, and Stephen and Chris, I will stop there. 14 You guys can take the discussion anywhere you would like 15 to. Thanks for listening. 16 MR. GRAHAM: Thank you very much, Duncan. Your 17 comments were very insightful. I would like to think 18 this might be just the beginning of a dialogue. There 19 are certainly some things that I think we would like to 20 follow-up on. There probably is not enough time today 21 to follow-up on them in the depth necessary. 22 Certainly one of those for me is what you last 23 mentioned, and that is this whole notion of a continuum. 24 In our last set of recommendations as a Committee, we 25 talked about the idea of coming up with kind of a 0038 1 separate intra-market, if you will, trying to address the 2 fact that often times companies that might otherwise go 3 public are afraid to do so because of the costs involved, 4 the costs of going public initially. 5 You are not necessarily flushed with capital to 6 begin with, and just the whole process of getting ready 7 to go public is terribly expensive. Once you have spent 8 that, there is no guarantee that at the time when you are 9 finally ready, the window will still be there. 10 Obviously, once you go out there, the ongoing compliance 11 costs. 12 If there was a way where companies could go 13 public, lite, if you will, I guess it all kind of goes back to how you 14 define the on-ramp, because this really is just kind of a 15 variation of that theme, if there is kind of an interim 16 step as you were kind of moving up to what you described 17 as a fully built public company, that to us would be a 18 good thing. 19 The whole notion of coming up with an entirely 20 new market and an entirely new Exchange, you have 21 suggested the framework is already out there with 22 existing Exchanges, so I think the more ideas that you 23 have in that regard will be useful. 24 So much about the on-ramp, there are things 25 that need to be rationalized, if you will. Clearly, when 0039 1 you talk about adjusting the disclosure regime, for 2 example, why necessarily should that be time-based? You 3 look at the nature of the company and you make that 4 determination. 5 If you are dealing with a market where you are 6 just dealing with accredited investors, for example, if 7 that is where you ended up, then I think it will be 8 easier to come up with a rational way to cut back on the 9 disclosure framework. 10 I do not know if you have any response to that. 11 MR. NIEDERAUER: I think that's what we should 12 all be trying to talk about. If the broader ecosystem we 13 are talking about is the whole capital formation process, 14 many of us around the table have probably invested in 15 very small companies. Maybe you were an angel investor. 16 Maybe just friends and family of someone who started 17 their company. If you think about the life cycle, 18 somebody comes up with an idea. They go get that seed or 19 that angel money. Then if they succeed, they might get 20 some venture capital money. They are still very much a 21 private company and will be for a while. 22 They have given equity to a lot of their 23 employees. They have no intention of going public for a 24 while. Their employees are often pressuring the company 25 to say we have had some success, I need to monetize some 0040 1 of the paper you've given me, I know we're not going to 2 go public for a while, what's the mechanism for me to do 3 that. The CFO is concerned because they start to lose 4 control over who actually owns their stock. 5 I think there is a place. That company is 6 still very private. What are the mechanisms we can put 7 in place that would just more transparently achieve some 8 of the things you are talking about. 9 If someone came to us and said that's an 10 auction every two weeks in that stock, that's an auction 11 every month, where the company could go to their 12 employees. It's more fully vetted. I do have some 13 concerns there might not be enough information about 14 those companies out there, but I think that's addressable 15 over time. 16 The next stage is probably what Stephen was 17 really just talking about, which is kind of almost like 18 public-ite, semi-public, I don't know what euphemism you 19 want to use, where they are now ready to go but it's 20 really expensive to test the market, is there a JOBS Act- 21 lite or a version of the JOBS Act where you sort of work 22 your way backwards, and now you are filling in that hole 23 in the continuum. 24 I'm kind of with you. Whenever we come up with 25 legislation or regulation in this country, time is just 0041 1 an easier metric. It may be a harder metric but I think 2 your point is it should be tied to complexity not time. 3 Time doesn't mean anything other than time has passed. 4 In theory, we are more mature as the company gets older 5 and more established. It doesn't necessarily mean it is 6 more complex and requires any more disclosure than they 7 had before. 8 That's a harder thing to measure. Time becomes 9 the easier metric, but I think that bears some revisiting 10 as well. I'm with you. 11 The point you really make is there are lots of 12 stops along the way, how do we help these companies from 13 Main Street all the way to when they are a living, 14 breathing organism in the public market. 15 Open to suggestions on all that, and happy to 16 be a partner in any of that. 17 MR. GRAHAM: Great; thanks. Greg? 18 MR. YADLEY: Just had a question. Thank you 19 very much for the presentation. It was very informative. 20 With a lot of smaller companies who don't have a product 21 that ramps up quickly and provides a reason why investors 22 would be interested in a stock, thereby getting more 23 volume and liquidity for investors, but a company would 24 have a slower growth cycle, what are some of the 25 incentives you all have talked about for the market 0042 1 professionals beyond tick sizes that would get them to 2 take more of a position? 3 MR. NIEDERAUER: Unfortunately, not very many. 4 I think we are thinking tick size changes the economic 5 calculus so that people would be a little more interested 6 in making markets, but the only other thing we have 7 really come up with so far -- I'll go back to what I 8 said, if you want people to have these obligations to 9 encourage them to transact more, certainly you can get 10 their attention with some kind of financial incentives. 11 To be clear, again, I know these kind of have a 12 bad reputation, I'll give you an example with what we do 13 with the designated market maker at our Exchange. We 14 expect them to have a set of obligations, and the 15 compensation they get is directly tied to their 16 performance, which is very, very measurable, just to be 17 clear. 18 It's not like you and I sit around at the end 19 of the month and say so, Greg, how did you think you did 20 this month. You say I think I had a great month, you 21 know, providing liquidity in that stock. I say well, I'm 22 not so sure, so let's split the difference. 23 We look at a report together that says here's 24 when you provided liquidity, here's when you stabilized, 25 here's when the market was volatile, here's how you 0043 1 performed during that time, and it's very black and white 2 that I can tell how you fulfilled your obligations. 3 Your incentive is directly correlated and tied 4 to a formula, right. We have said to the market making 5 community, what else would it take besides tick size, and 6 we assume it's financial incentives, but I want to be 7 very clear, it just can't be here's $50,000 a year, go 8 out and do a great job. It could be $100,000 a year, if 9 you do a really great job, but it's going to be zero if 10 you don't. 11 I think that's what we have talked about. We 12 are happy to take any advice and guidance on other things 13 that you all think we should be talking about with these 14 market participants. I think it's easier to give them an 15 incentive to create that liquidity than to go to someone 16 and say hey, if you pick up the stock, we will give you 17 an annual stipend for doing that. 18 We don't know if that person is going to do a 19 high quality job of research or a low quality job. It's 20 a little harder for the two of us to measure and 21 evaluate. Whereas, liquidity, the way the markets work, 22 I can know did they take liquidity, did they provide 23 liquidity, how often were they making a market, was that 24 market the NBBO, what percentage of the time was it the 25 NBBO. 0044 1 You see my point? It's a lot easier to measure 2 someone for that, and I do believe that's the horse, and 3 then the cart of other people covering the stock will 4 come later. 5 MR. GRAHAM: Leroy? 6 MR. DENNIS: Duncan, thank you. I want to go 7 back to your slide when you first started. You said 43 8 percent of businesses in the U.S. have trouble finding 9 capital and that was traditionally served by banks. Real 10 quick calculations on my part, that is over two million 11 businesses that can't find capital. Assuming ten percent 12 of those are viable, some ridiculously low number, it's 13 still 200,000 companies out there. 14 Why hasn't there been a market to spring up to 15 serve those kinds of companies? Is there anything we can 16 do, whether it's incentivizing companies from a debt 17 standpoint or an equity standpoint that would help make 18 that market spring up? 19 MR. NIEDERAUER: Well, it's a great point and 20 it is one we talk about actually more than you would 21 think, because most of those two million companies that 22 are in the survey here, that are the 43 percent, they are 23 Main Street businesses that aren't accessing the debt 24 markets or the equity markets. 25 They have historically gone to their community 0045 1 bank and said Leroy, I'm trying to grow my business, I'm 2 trying to finance my business, can you extend my line of 3 credit, can you give me terms on a new loan so I can 4 maybe expand to another store or open another business or 5 grow my business, et cetera. 6 What we hear pretty consistently is that the 7 regulation of banks post the crisis sort of swept up all 8 the banks, right? If you and I were running a small 9 community bank and we are now saddled with much more 10 regulation to make $100,000 loan than we were before, 11 anecdotally, the evidence would suggest and the survey 12 would suggest that a lot of those visits to the bank by 13 that small business owner aren't going that well. 14 It may just be as simple as I'm not going to go 15 through all this paperwork to make a $100,000 loan 16 because there is not much money in it for me, and I have 17 the regulator looking over my shoulder, and I can't make 18 any more mistakes. To me, that's the wrong outcome for a 19 whole host of reasons, right? 20 We should be smart enough to calibrate and say 21 to a community bank these are the things you are allowed 22 to do. You're not allowed to do any of the other stuff 23 that the big banks get to do. This is your business 24 model. Go outside of that business model, we will take 25 you down. Stay within that business model and get back 0046 1 to the basics of what you were supposed to do, which is 2 lending in your communities, to that small business 3 owner. 4 We think what has sprung up, quite frankly, is 5 that is where a lot of these microfinance networks have 6 come from. We all know people who run businesses in our 7 respective towns. If they are looking to grow their 8 business, they are more likely to get loans from people 9 like us or loans in the microfinance network. They 10 don't have a lot of other places to go, to be perfectly 11 honest. 12 The Government put out $30 billion for small 13 business through the SBA a few years ago. I may have the 14 number wrong. Almost none of that money ever got in the 15 hands of Main Street businesses. 16 We keep waiting for there to be innovative 17 alternatives. I think that is why you are seeing a big 18 growth in microfinance and crowdfunding, whatever we 19 want to call it. That is where a lot of those small 20 business owners are going because the banks are saying 21 I'm not really going to do this for you any more. 22 We are happy to get involved in that 23 discussion, too, but I think it's actually a re- 24 calibration of the regulation, redefining what a "small 25 bank" really is and what it should be doing and what it 0047 1 shouldn't be doing, and getting them back in that 2 business. 3 In the meantime, being willing to be a lot more 4 open minded about microfinance then many of us to date 5 have been prepared to be. 6 MR. GRAHAM: On that point, just a comment and 7 then a question. In terms of capital formation and Main 8 Street, that is something this Committee is deeply 9 concerned about as well. We spent a lot of time 10 talking about the on-ramp companies that will go public. 11 I would like to think that most of us appreciate the 12 plight that Main Street finds itself in when you have 13 these small companies. 14 As you point out, there are tremendous drivers 15 in terms of job growth in this country, they just simply 16 cannot get financing. 17 Again, following up on some of the comments you 18 just made, do you have any views on crowdfunding? We as 19 a Committee, as you might know, we sympathize again about 20 the issue of capital formation among those who are not 21 going to be attracting venture capital, don't have rich 22 friends and family, but we kind of wrestled with the 23 whole notion of how do you structure basically crowd- 24 funding for non-accredited investors, so that you can 25 address some of those concerns. 0048 1 Any thoughts? 2 MR. NIEDERAUER: That sounds like a bit of a 3 loaded question. I'll take it on anyway. Let's start with 4 where you started, Leroy, which is let's say in our dream 5 scenario, we solve the publicly traded SME continuum and 6 100 more companies go public if we hit a grand slam home 7 run every year. Two million companies can't finance 8 their restaurant, their bagel shop, their gift shop, 9 their local family-owned business. 10 I think that is really important, so I'm glad 11 to hear all of you are focused on that, too, because that 12 is why I put these slides in. I think it's an issue that 13 we all have to be cognizant of. 14 Before we say what we are in favor of, what I 15 am in favor of is vetting any and all solutions to the 16 problem, and not writing something off because the easy 17 answer is microfinancing and crowdfunding don't work 18 because we have to protect people from themselves and 19 they won't know any better and they will put $25,000 in, 20 they will lose their money, that won't be a viable 21 business. If that business can't attract venture 22 capital, they are not worth surviving. 23 I don't know about the towns you guys live in, 24 none of the businesses in our little town are going to 25 ever get venture capital funding. Venture capitalists 0049 1 aren't excited about going to the mom and pop bagel shop 2 other than to get a bagel. They are not going to finance 3 them. Most of those businesses don't want to scale to be 4 national franchises, it's their family business, they are 5 simply trying to make a living. 6 My objective is if that ten person bagel shop 7 feels better about life and can grow their business and 8 can employ 15 people instead of 10, I declare victory and 9 move down to the next business on Main Street. 10 There are a few solutions out there. I think 11 on microfinancing and crowdfunding, there are ways to 12 do it where you could do it almost like the mutual fund 13 concept where it is more pooled. The money we give is to 14 networks where you are really investing in exposure to 15 their network of loans, you didn't invest in an 16 individual business. 17 One of the other things we have talked a lot 18 about through the big start up campaign, we have gotten 19 involved in something called the "Receivables Exchange." 20 We could say that factoring is as old as the hills, a third of 21 small businesses, of these 5.7 million businesses, don't 22 have a website, and a much smaller percentage of them 23 have any idea how to manage their receivables. 24 We don't sit around this table and go oh, 25 factoring is as old as the hills, just manage your day 0050 1 sales outstanding, that's how you do that, that's how you 2 manage your capital. A small business owner has no idea 3 what we are talking about in many cases. Going to them 4 and saying look, capital is actually your problem. 5 To go back to Greg's point, they may have a 6 product where it's chunky, right? They are going to make 7 some big sales but the companies they make the sale to, 8 they are going to pay them in 100 days. The next guy 9 comes in and says hey, Greg, I have another big order for 10 you, and the guy says I can't go get the financing to 11 deliver that order because I'm waiting 100 days, so give 12 them 99 cents on the dollar tomorrow. Give them their 13 working capital. 14 All I am saying is I don't know if any of these 15 things are the answer, whether it's re-calibrating what a 16 big bank versus a community bank is, or thinking about 17 crowdfunding and microfinance, or thinking about 18 teaching them about receivables, but let's at least have 19 a dialogue and say it's a problem, it needs to be 20 addressed, how can we collectively work to address it in 21 pragmatic ways. 22 I am in favor of talking about solutions, and I 23 do think there is an opportunity in the whole microfinance 24 structure for it to be a part of the solution to 25 the problem, but not the solution. 0051 1 MR. GRAHAM: Thanks. John? 2 MR. BORER: Thank you. Thanks for the 3 presentation. We discussed in this Committee the tick 4 size reform. I think for myself and probably for a bunch 5 here, had no idea what it was when I got started, but we 6 have had some very high level presentations. Some of it 7 is theory, going back and showing correlation of 8 different things when there were changes in market 9 structure and the way the pricing worked in trading. 10 The last discussion we had here, we were 11 discussing the problems inherent in establishing 12 something that was a pilot. You referred to this, with 13 respect to market participants actually investing in the 14 capital, new start-ups developing, as things did in the 15 past with the ECMs, et cetera, to provide more efficiency 16 in trading, good or bad, opaque or not. 17 One of the things I think we have discussed is 18 if you make it of a limited period of time, with a 19 limited number of stocks, those investments will not be 20 made, the market dynamics will not change, and new 21 participants may not come if it's okay, it's sunset after 22 two years. 23 Some specific questions because you made some 24 specific recommendations. One, why do a pilot? If it 25 is, why limit it to a number of stocks? Third, if you do 0052 1 limit it to a number of stocks, do you limit it to the 2 ones that are most inefficiently priced or do you have a 3 spread from the most inefficient, less liquid, all the 4 way up through the highest priced and most liquid daily 5 trading volumes? 6 MR. NIEDERAUER: How much time do you have? 7 MR. BORER: I do have a question after that. 8 MR. NIEDERAUER: I'll take that into account 9 with my answer. 10 MS. JACOBS: I'm going to jump in one second to 11 support John because this was a very big deal. Those of 12 us that are public are suffering with our illiquid 13 stocks. You have a couple say for God's sakes, just do 14 something, even if it's wrong, we can back away from it, 15 but one of the points that was made, and I want to back 16 John up on this, do you know those market cap companies 17 of $250 million, market cap and below, according to 18 Reuters, only make up five percent of the average daily 19 trading volume of NYSE and NASDAQ. 20 Who is really getting hurt here? Do you know 21 what we're saying? 22 MR. NIEDERAUER: Yes, I'm with you. Let me try 23 to respond. I want to do a brief history lesson just to 24 give us perspective. We can anticipate the reaction. A 25 lot of issuers feel like Chris does. 0053 1 Let's go back to the financial crisis and it's 2 late 2008. The SEC decides, I think correctly at the 3 time, we are going to ban short selling in financial 4 services companies. We all have that in our head. Now 5 let me just describe the next 48 hours that I had in the 6 wake of that announcement, a few conversations with Chris 7 Cox, that was the easy part of it, that was okay. 8 We spent the next 48 hours largely on the 9 telephone with companies in all different industries 10 trying to convince us they were really a financial 11 services company. 12 13 MR. NIEDERAUER: If they had any kind of 14 lending business, even if it was just vendor financing in 15 their supply chain, their hand was up saying count me, 16 too. Don't just do this for the banks. Please call us a 17 financial institution for the next -- I would say to some 18 of them be careful what you wish for -- my guess is the 19 regulation that is going to come out of this, you're not 20 going to be that excited to be a financial institution a 21 year or two from now, but I understand why you want to be 22 today. 23 Why do I tell you that? Not to be funny or 24 impolite. It gets right at the root of John's question. 25 History here tells us -- Jim, I don't want to speak for 0054 1 you guys -- the SEC tends to be more comfortable on a 2 change like this with piloting it. It seems less 3 permanent. It seems like if it's wrong, it's easier to 4 pull it back. You can fix it if it doesn't have the 5 intended outcome that we want. 6 I would encourage the Committee to talk to the 7 staff about that because we will implement whatever you 8 want. If you were asking us and it was our unilateral 9 decision, we would come up with a set of ground rules and 10 do it for everybody and convey to the market that as far 11 as we are concerned, it's in, it's changing, don't expect 12 it to change back. Otherwise, people aren't going to 13 come. That's your point. 14 It better be a pretty long time. Our body 15 language all better be to the ecosystem if we want them 16 to change their behavior, that we plan on keeping this 17 in. We are just being a little cautious just in case we 18 get something wrong. It's in and it's here to stay. 19 We put down 300 to 500 because we're just 20 trying to be pragmatic and get the ball rolling down the 21 hill. Why did I tell you this story about 2008? Because 22 I got 2,000 companies that want to be part of that 500. 23 If I sit there and say well, we are going to 24 pick 500 and 200 are going to be on the NYSE and 300 are 25 going to be on NASDAQ, we're going to be on the phone a 0055 1 lot because everyone is going to be convincing us why 2 they should be -- I think most issuers would want to be 3 part of this, not part of it, if you follow me. 4 We may have to be in this scenario. We may 5 have to throw caution to the wind a little bit. I'm not 6 trying to kill this in Committee, but I do think it's 7 going to be hard to just pick some stocks because it gets 8 a little random, right, and then a lot of issuers are going to 9 say what about us, right? 10 I think we should be prepared for that if we go 11 down this road, but I think the most important thing we 12 have to do is convey with our behavior that we intend 13 this to be as permanent a change as permanent gets, or 14 you're not going to get any change in behavior. I think 15 that's your point, John. Very valid. 16 MR. BORER: Thank you. I think that is 17 consistent with what we said. If I heard you correctly, 18 you went with the more limited approach because it's 19 easier to get the 20 SEC -- 21 MR. NIEDERAUER: History tells us that's what 22 works down here. 23 MR. BORER: Okay. My other point, and this is 24 harder to answer but I wanted to bring it up since you 25 touched it on it with respect to some of the provisions 0056 1 of the JOBS Act. Before the JOBS Act, after the JOBS 2 Act, we have talked about a number of these things, and 3 the staff has been very helpful in explaining how the 4 process all works. 5 We spent time talking about things, I'll use 6 general solicitation as an example, that if it can be 7 loosened up to allow greater outreach to a broader base 8 of eligible investors, why limit it. If it's not going 9 to do any harm, why not allow it, as opposed to well, why 10 change it just because we want to change it. 11 The question is -- I don't know if there are 12 statistics available from Corp Fin down here, because I 13 have never seen them -- the confidential filing for the 14 emerging growth companies. Do you have a view in talking 15 to companies -- some of this is going to be anecdotal -- 16 that more people are actually starting down the path of 17 taking that first step? 18 I haven't seen yet any increase in the number 19 or flow of IPOs that have come yet from any of the 20 provisions of the JOBS Act. It's like if you have two 21 universes of investors and one is going to make the 22 investment in the new plant because it's good economic 23 policy, return on investment, et cetera, and the other 24 one will, if you provide them a tax credit. If you make 25 that tax credit available, this half is going to take it 0057 1 as well. 2 If you make it so you can file confidentially, 3 from what I've seen from issuers, almost everybody is 4 doing it. To say people are taking advantage of that 5 provision and that's a good thing, I don't know if it's 6 changed anything with respect to the market. 7 Have you got any signs or sense? You're 8 talking to companies every day that are exploring these 9 opportunities. 10 MR. NIEDERAUER: I'll answer the second part of 11 the question, and I think Lona is probably better 12 positioned to answer the first part. I don't have any of 13 the data that Corp Fin might have on how do you change 14 the solicitation rules, how do you define an "accredited 15 investor," what is really a private placement, what isn't 16 a private placement. When do you cross that bridge. 17 That is probably subject to a different debate. 18 The second part of it, it's anecdotal by 19 definition, because we don't have enough data to call it 20 anything else, it's only been in place for a few months. 21 I think you are correct but for a reason that you might 22 not know you are correct for, the one thing that I didn't 23 think should have been part of the ultimate Act that you 24 all know better than I is how things work in this town, the 25 billion dollar number was kind of a crazy number, so I 0058 1 think it's way too high. 2 As a result, you are having more people use 3 that because everyone is an emerging growth company, 4 right? Every company that is going to go through the 5 process practically is going to qualify under that 6 standard because that number is so high. 7 That's why your analogy to the factory with or 8 without a tax credit is a very good one. If that number 9 had landed where it should have landed, I think we would 10 have better data. 11 I do think what's happening, John, to the front 12 part of the second half of your question, is I do believe 13 based on the companies we are talking to, more companies 14 are willing to try to get the process started because 15 they think the option is less expensive, not in the way 16 you and I would necessarily think about it, the money 17 that Stephen alluded to earlier, the option is less 18 expensive because I'm not going to be stigmatized if the 19 first filing I put in, you know, the comments we get back 20 from the SEC suggest we are way off base. 21 There is no cost of trying now to get started. 22 I think they feel like they can get out there, they can 23 get started, they can learn how that process works, and 24 it's not the damage that they would have been afraid to 25 do before when it wasn't confidential they are less 0059 1 concerned about, so I do think I'm getting clear evidence 2 that is one of the reasons they are using that, and I do 3 think more people are at least starting to go down the 4 road than otherwise would have been if we hadn't done 5 that. Hopefully, that gets to that part of it. 6 MR. NALLENGARA: The IPO Task Force, the folks 7 who did that, and then how that turned into the JOBS Act, 8 I don't think anyone thought confidential filings on its 9 own was going to change the IPO market. 10 I think there are a number of reasons why 11 people have identified why the IPO market is down. 12 Confidential filings is probably not in the top ten of 13 the list of things Duncan talked about in terms of tick 14 size, giving market incentives, where the ecosystem has 15 gone. 16 I think many more commentators in this area 17 would put those at the top of the list. Someone referred 18 to it as straws on a camel's back. Confidential filings is 19 one thing, scaled disclosure 404(b), those are all things 20 that add to what smaller companies may consider a burden 21 of getting to be a public company. 22 When you look at each one of those things and 23 say can we accomplish a confidential filing where a 24 company can talk to the SEC about their filing without 25 everyone watching, without someone at the Journal writing 0060 1 an article about how their draft one changed 2 significantly from draft two, maybe that will encourage 3 someone, along with some other things, to consider an IPO 4 sooner or at all. 5 I think in terms of confidential filings, we 6 are not going to be able to correlate confidential 7 filings to an increase in IPOs. I think what we will be 8 able to do is at some point, and I think it's too early 9 to tell, as Duncan said, tell whether the JOBS Act, Title 10 I, the IPO on-ramp, has had an impact. I think we will 11 have to wait. 12 There are a lot of other pieces of that Title I 13 of the JOBS Act relating to research and testing the 14 waters materials. I don't think people have really -- 15 market participants have really thought about and started 16 to implement in the way the drafters of the legislation 17 had thought they would, but that will take time. I think 18 it is really too early to put the score card together 19 on Title I. 20 MR. GRAHAM: Greg? 21 MR. YADLEY: I think some of your earlier 22 comments about reasons why small companies haven't gone 23 public and your comment about the costs and burdens may 24 be being exaggerated. 25 I happen to agree with you, I think this 0061 1 Committee has looked at one aspect of why it's true, and 2 that is there are so many regulations, and there are 3 regulations that really, because of the one size fits 4 all, ends up being put in place not necessarily by the 5 SEC but by conservative lawyers and accountants, for 6 example, who look at the models of big companies. 7 Another point you made is an advantage of going 8 public is permanent access to capital. I think it's 9 probably too early for you to have statistics on this but 10 I'm interested just in talking with your newly listed 11 companies, which sound like in the last three years is 12 about a little more than 500, a third of them are smaller 13 companies, are they talking about secondary offerings, 14 follow on offerings? 15 To me, that has always been either an advantage 16 if a newly public company can take advantage of it, or if 17 they don't, that is one of the ways they get orphaned. 18 They have done an IPO. They are now continuously 19 reporting. They are not really accessing the markets for 20 capital. 21 MR. NIEDERAUER: I will try to get some better 22 stats, but the follow-on market is alive and well. A 23 number of those companies have already come back to the 24 market with a secondary offering, particularly when we 25 have that wave of venture-capital-backed IPOs the last 0062 1 couple of years, a lot of those folks have already found 2 their way back to the market. The markets have hung in 3 there. 4 Many of those businesses are doing quite well. 5 I think you will see more of that trend. If you look at 6 the companies that came out the first quarter of this 7 year that were more private equity backed. Those tend to 8 be a little bit larger. They will certainly go to the 9 secondary market. 10 Q-1 this year, just to put it in context, $12 11 billion of IPO issuance on our Exchanges under the NYSE 12 umbrella, almost $50 billion of follow-on's, just in the 13 first quarter alone. 14 What I don't have for you, Greg, is the 15 demographics of who did that, but we can try to get you 16 those stats and I'll send them to Stephen and Chris. 17 MR. GRAHAM: Heath? 18 MR. ABSHURE: In looking at some of your 19 earlier slides, particularly slide three, where you talk 20 about 5.7 million businesses have less than 500 21 employees, many of these are mom and pop businesses that 22 will never go public. They need access to capital but 23 not necessarily the capital markets. 24 When you turn over to five, and we mention for 25 other small companies, access to capital markets can be 0063 1 powerful, the job growth occurs after the company goes 2 public. I think that is not something we necessarily 3 struggled with but I have noticed in our meetings that 4 when we talk about small companies, we're talking about a 5 whole lot of different sizes of companies. 6 I'm assuming the companies you mentioned in 7 slide five are those that are perhaps pre-IPO, post-IPO, 8 struggling with Sarbanes-Oxley costs and things of that 9 nature. 10 I think to facilitate liquidity and the 11 securities of either type of entity, we are going to have 12 to have timely material information regarding both types. 13 How do you think we facilitate that type of 14 disclosure and facilitate some sort of liquidity 15 mechanism for the companies in the first instance, the 16 ones with less than 500 employees, the Mom and Pops that 17 need capital but not access not to the capital markets? 18 MR. NIEDERAUER: I'm not sure I understand the 19 question, but I'll try my best. You're right. What we 20 are trying to convey here is they are two very different 21 groups. I think my impression from a distance was when 22 you talk about the recommendations that the Committee put 23 forth, that is really addressing the companies we are 24 talking about on slide five. 25 Those are the companies that are actually going 0064 1 to try to get there. They are going to get venture 2 capital money. They are going to make it along that 3 continuum where they will have a chance to consider 4 accessing the capital markets at some point in their life 5 cycle. 6 What we were trying to convey on slide three is 7 the overwhelming majority of what we might all define as 8 "small businesses" in the country, that's not even in 9 their range of thinking. They spend no time thinking 10 about accessing the global capital markets for capital. 11 They are simply trying to think I own one business, 12 should I also open up a similar business in the town next 13 to me. 14 I think what we are trying to figure out there 15 that I was answering Stephen's question earlier, I 16 don't have the answer on that one. We just had some 17 suggestions. 18 It doesn't lend itself to necessarily a capital 19 market, but I think we should be thinking about things 20 like microfinance, how to re-calibrate the rules and 21 regs for community banks, how to think about helping them 22 manage their working capital better, how to get them 23 introduced to bigger companies who might be able to give 24 them, I would call, like intellectual property, not in the sense we 25 think about it with technology, but just sharing some 0065 1 wisdom of hey, it is easier to scale your business than 2 you probably think. 3 My favorite example is go to a farmer in 4 Vermont who thinks his only market for his maple syrup is 5 locally, and it's pretty easy to show that individual he 6 can have customers all over the world now for that 7 product and scale his business without a huge investment. 8 Most of those folks don't know how to do that 9 because they don't have a website, they don't know how to 10 do logistics. They don't know how to export, et cetera. 11 I think all we were trying to say there is 12 that's a big issue that folks like us who seem to be 13 interested in these topics, maybe we can do some good 14 there as well. 15 MR. ABSHURE: I think later on you mentioned 16 that crowdfunding from the great experiment that it is, 17 it's clearly directed at entities in slide three, more so 18 than anything else. 19 I guess my concern is given that crowdfunding 20 makes those securities non-restricted securities, and I 21 think it does certain things to facilitate subsequent 22 resales in those securities and the facilitation of the 23 market, I think state securities regulators are just 24 worried about transparency and information for markets in 25 the companies on slide five is going to be there because 0066 1 price discovery is coming, but we have no idea what the 2 market for the companies on slide three is going to look 3 like, and it gives us much concern. 4 MR. NIEDERAUER: There may never be a market 5 the way you and I think about markets. It should give us 6 all concern. In fact, what we have been trying to talk 7 about is to say if that's a potential solution, let's 8 just put it on the table and say what would make us feel 9 better about it being a more viable solution. 10 I'm with you. The way it's grown up, I think 11 it's a great innovation. I think we need to shine a 12 spotlight on it and if anything, we were trying to bring 13 it more into the light. We share some of your concerns 14 on that. 15 I just don't want to dispense with it. What I 16 was trying to convey earlier is I don't want to dispense 17 with it because it's hard. I think Main Street is really 18 struggling and there are ways -- a lot of these potential 19 solutions we talked about, they are really challenging. 20 They are not trivial solutions. 21 Let's not give up. I feel like the group here 22 has clearly spent time thinking about small businesses. 23 I thought you were a perfect audience to have the kind of 24 discussion you and I just had. 25 The innovative ideas are cropping up, solutions 0067 1 for how to address those innovative ideas are likely to 2 come from groups like the people at this table. Let's be 3 proactive instead of just watching it. That was really 4 my message there. 5 Thank you, Stephen. 6 MR. GRAHAM: With that, I will thank you, 7 Duncan. Your remarks were informative and insightful, 8 and once again we appreciate you taking the time to speak 9 with us. 10 MS. JACOBS: I'm going to add a thank you to 11 the small business folks that are at this table, 12 especially the public ones that may be in the audience, 13 to have an opportunity to hear how much the Exchanges 14 care. 15 It is a very expensive and labor intensive 16 process to go public. As we have often said at this 17 Committee, then you have a day two to worry about, and 18 that is your ongoing support from Exchanges, and then the 19 burden of the regulations. 20 Thank you for definitively telling us what you 21 all are working on. It wasn't all evident until today. 22 MR. GRAHAM: Okay. With that, we will take a 23 14 minute break. 24 [Brief recess.] 25 MR. GRAHAM: We are pleased to have with us 0068 1 today Bill Hambrecht, who is Chairman and Chief Executive 2 Officer of WR Hambrecht + Co. As most of you know, Bill 3 founded WR Hambrecht in 1998. Before that, co-founded 4 Hambrecht & Quist. As many of us know, an investment 5 banking firm specializing in emerging growth technology 6 companies. 7 I did a lot of deals with your bank way back 8 when, and I miss not having you around. 9 Joining Bill is one of his lawyers, Jim 10 Tanenbaum. Jim is a partner with Morrison & Foerster. 11 Jim, you head up Global Markets? 12 MR. TANENBAUM: Global Capital Markets. 13 MR. GRAHAM: Global Capital Markets. With 14 that, I think I will just turn it over to Bill. 15 PRESENTATION BY AND DISCUSSION WITH WILLIAM R. HAMBRECHT, 16 CHAIRMAN AND CHIEF EXECUTIVE OFFICER, WR HAMBRECHT + CO., 17 ACCOMPANIED BY JAMES TANENBAUM, ESQ., MORRISON & FOERSTER 18 MR. HAMBRECHT: Thank you very much. Thank you 19 for inviting us here. We think the IPO process has 20 broken down and has not responded the way people had 21 hoped. We think the JOBS Act has done some very positive 22 things and has helped us along, but as you can tell from 23 the numbers, there has been very little quantitative 24 proof that the IPO market, particularly for small 25 companies, has recovered. 0069 1 If we could go to the first slide. What I 2 would like, if possible, we have prepared a written 3 statement that everyone has, I believe, and if I may, 4 rather than read it into the record, I would like to 5 highlight it this way, and encourage questions as we go 6 along, if that is okay with you. 7 MR. GRAHAM: Yes. 8 MR. HAMBRECHT: Great. As you can see, when 9 you look at the last 11 years of the IPO process, there 10 has been, of course, a dramatic fall off after the 11 bubble, the Internet bubble of the late 1990s was broken, 12 and the IPOs have stayed with a little bit of recovery in 13 the mid-2000s, and then of course, as we got into the 14 financial crisis, dropped off sharply again. 15 I would draw your attention if I may to the 16 size category. As you can see, there has been virtually 17 almost no IPO activity in companies raising zero to $25 18 million. Very, very little up to $50 million. This was 19 the area we were trying to address when we proposed an 20 expansion of the Regulation A exemption. We feel this 21 market is the market that has been most hurt by the 22 structural changes and market changes, and has the least 23 opportunity to access the public market. 24 This, of course, ended up in a dramatic decline 25 in publicly reporting companies in the United States 0070 1 today. As you can see, it has dropped by really over 2 half. I thought it was interesting that even in the last 3 two years, it has continued to drop. 4 We have in effect almost eliminated the microcap 5 and smallcap market that used to be so vibrant and 6 was a place for smaller companies to initiate a public 7 offering. 8 The reason, of course, for the JOBS Act was to 9 somehow or other open this market to these small emerging 10 growth companies. The Venture Capital Association has 11 shown a lot of data about the impact of venture capital 12 on job formation. There are a lot of different ways of 13 parsing the data. One of the things they like to point 14 to, of course, is that the venture capital-backed 15 companies did go through the financial crisis in perhaps 16 better shape than the economy as a whole, and that they 17 continue, particularly in the last ten years, to have 18 provided significant job growth. 19 There are a lot of ways of parsing this data, 20 by state, by growth rate. I think the interesting thing 21 to me is that the job growth basically takes place after a 22 company goes public. Until a company gets public, it has 23 limited capital, it is typically being funded to develop 24 its product line, and particularly in technology-based 25 companies. 0071 1 Once their product is accepted in the 2 marketplace and they have a business opportunity to grow, 3 they don't go out and buy fixed assets and they don't go 4 out and buy plant machinery or anything like that. They 5 basically go out and hire more engineers and more 6 marketing people. They basically go out and sell the 7 product. 8 You can look at almost any of the major 9 successes in Silicon Valley or elsewhere, and you will 10 find that the significant job growth comes after they 11 have gone public and have stayed independent. I think 12 that is a distinction that should be kept in mind 13 throughout this whole presentation. 14 Ninety percent of the venture capital companies 15 that have a liquidity event over the past really five 16 years, and it goes back almost ten years, 90 percent of 17 them have exited via trade sale or an M&A transaction. 18 Less than ten percent have actually had a liquidity event 19 that carries some public. 20 I would argue that a trade sale or merger 21 almost always results in job consolidation, not job 22 growth. Basically, someone is buying them to get the 23 product. There is duplication of marketing, duplication 24 of engineering. Almost in every case that I've ever 25 seen, employment drops off dramatically when a company is 0072 1 acquired. 2 This brings us to the JOBS Act. I think the 3 JOBS Act recognized this effect on job creation. I again 4 want to stress that its principal objective was promoting 5 access to capital formation so innovative emerging 6 companies would have an opportunity to grow, and I would 7 add as independent companies. I think this is the key to 8 jobs growth. 9 Title I, we think it has been successful, 10 although I will admit there has been very little 11 application of it in the marketplace so far. I think 12 first of all in going out and talking to companies who 13 were thinking about going public, Sarbanes-Oxley was a 14 major psychological barrier. 15 We did everything we could to argue around it 16 because we had some pretty good examples of companies 17 that had complied with Sarbanes and on a fairly 18 reasonable basis. For example, NetSuite, a company we 19 did bring public through the auction, actually made a 20 decision to comply with Sarbanes even though they didn't 21 have to, and actually wrote a software program to do the 22 documentation and offered to give it to anybody who 23 wanted to use it, because it really did not take that 24 much effort. 25 There was such a psychological barrier, no one 0073 1 would believe us. We just could not get people over that 2 particular barrier for the most part. 3 I think the phasing in of Sarbanes and in 4 particular allowing relief on the internal audit process, 5 which is really very difficult and expensive to put in, 6 and not really applicable to so many of these smaller 7 companies, I think that was a great step forward. 8 Secondly, the confidential submissions, I would 9 add to what Duncan said, it helps because people would 10 like to have an opportunity to really test the waters and 11 find out whether you have a shot. I will say this, when 12 you file confidentially, you have turned the switch of 13 expenses. I don't think it really changes that. 14 I think Jim this morning at breakfast pointed 15 out to me that 75 percent of the first three years of 16 public ownership expense is incurred in the first couple 17 of months preparing to go public. 18 A company, even if it files confidentially, is 19 committing to a process that is going to be very costly. 20 We can argue the costs. I can show you models where I 21 can tell you that for a small company, it shouldn't cost 22 more than half a million. I will be the first to admit 23 there has been only one of our 23 auctions that has cost 24 less than half a million. 25 It's a process that does cost money because 0074 1 number one, accountants are looking at it as a liability 2 issue, not just time, but liability, and of course, the 3 legal process requires considerable time and attention to 4 detail. 5 I think confidential submission is helpful but 6 on its own, it is not going to be the reason someone will 7 go ahead. They will have to be very confident of success 8 because they will be turning on the expense switch. 9 I think the pre-market testing will be most 10 effective before any kind of confidential filing. That 11 way, you can go out and you can talk to investors and you 12 can get an idea of how they are going to respond before 13 you commit to the expense. 14 I think the most important part of Title I is 15 the allowance for pre-IPO research. I think that is a 16 major step forward in providing investors with relevant 17 information in a format that they are used to seeing to 18 make an investment decision on an underwriting. 19 I think so far from what I understand, we are 20 the only firm that has used it. I think there is 21 considerable debate as to whether firms who were part of 22 the Spitzer agreement can use it, and I think there will 23 always be legal advice that says if you don't have to, 24 don't. 25 Probably 25 years ago, Jim's partner, Bruce 0075 1 Mann and I, led an effort to get a safe harbor put in for 2 estimates in the prospectus. It was done with the SEC, I 3 believe, about 25 years ago. I got one company over a 25 4 year period that would ever use it because when you 5 really got in there, the lawyer would finally say to the 6 company, look, you don't have to, and this is the 7 liability issue you are going to have to run with. 8 This was dramatically brought forward in the 9 Facebook offering, because it was clear that there was an 10 estimate out there, it was changed, it was conveyed to 11 the marketplace through the bookrunner's sales force, and 12 only to a certain select number of companies -- 13 institutions. 14 MR. TANENBAUM: There are notable examples of 15 when the staff has been ahead of the Street. One thinks 16 about free writings and how permissive they might be and 17 how restrained the Street has been in using them 18 historically, and it took a while. 19 This is probably going to take a while, too, 20 but that's because of the overarching concerns about 21 litigation risk in this country. You are going to 22 comment on that later, I assume, but there is not much we 23 think is addressable on that subject for this group 24 today. 25 MR. HAMBRECHT: Before the on-ramp provisions 0076 1 were contemplated and in fact it happened several years 2 back, our firm recommended to a congressional hearing 3 that we consider amending existing Regulation A by 4 raising the dollar threshold and modernizing the 5 provisions of the exemption as a means of addressing the 6 drop in small company IPOs. 7 We chose this because first of all, it was part 8 of the 1934 Securities Act. It was the small company 9 exemption built into the original Act, and we felt if it 10 was in the original Act and had been there, what could we 11 do to make it useful. 12 What we found, of course, is it hadn't been 13 used in quite a number of years because it had a limit of 14 $5 million, and that was not a high enough offering to 15 get you listed on any of the Exchanges, and once NASDAQ 16 became an Exchange, that meant you had to go back without 17 a Blue Sky exemption, you had to go back and in effect 18 file in all the states where you wanted to sell the 19 security. That was very costly and very burdensome, and 20 just didn't fit in the economics of a $5 million deal. 21 Regulation A fell into disuse. We focused on 22 it because number one, it is an exemption. When you look 23 at Regulation A, historically Regulation A offerings, 24 the Regulation A offering circular looks a lot like a 25 prospectus, and to a great degree follows the S-1 0077 1 process but it was simplified. 2 I do think the key to small company IPOs is 3 simplifying the process, not lessening the regulatory 4 requirements, but simplifying the process so that these 5 companies don't have to take as much time risk while they 6 are in a registration process, because we live in very 7 volatile markets. When you commit today to go public, if 8 you do everything right, you will probably get it done in 9 six months. 10 What you have to do is you have to look out six 11 months and say is the market still going to be receptive 12 for my kind of offering. 13 I think the more you can condense that time and 14 condense that market risk through the preparation 15 process, the more likely it is people will use this 16 option. 17 I do think the IPO ramp did address some of the 18 other advantages of Reg A. Reg A did always allow pre- 19 marketing. It did allow them to go out and talk to 20 people before they actually filed. 21 I think the JOBS Act did cure a lot of it, but 22 I do think the process which hopefully could be different 23 for Reg A, different than an S-1, could be done in a way 24 that will simplify and shorten the time span. If it goes 25 through the same process as an S-1, I don't believe it 0078 1 will be at all effective because you are just going to be 2 another S-1. 3 I may be kidding myself, but I honestly do 4 think that there is a large backlog of companies that 5 would take advantage of this, and you will have a 6 processing problem almost under any set of circumstances. 7 We go into some numbers later, but for example, 8 Silicon Valley Bank, who has been very active in lending 9 to these companies, has 7,000 privately-held companies 10 that they actually are bankers to, 1,000 of them, they 11 actually lent money to. 12 I've tried to come up with some number out of 13 their database as to who I think would be eligible for an 14 offering, who could basically justify a market 15 capitalization of $50 to $100 million. I think the number 16 is like 2,000 companies. 17 I do think if the market opens up for small 18 companies, you will have a tremendous burden on your 19 staff if it's basically processed like an S-1. 20 I guess the last time I was here I used Intel 21 as the example of a small company going public, and it 22 was an $8 million company. This time, I thought the 23 better example would be Adobe. Adobe was a company that 24 was started by two scientists out of Xerox Research Park. 25 It developed some graphics software and basically moved 0079 1 into electronic printing. 2 It was a company that was thought of as a niche 3 company. I remember we invested in it for all the wrong 4 reasons. We thought it would be a niche company. Steve 5 Jobs came along, saw it and said gee, you ought to put 6 this on the Mac, and everybody laughed, he said I'll give 7 you $2 million to do it, so fine. They did put it on the 8 Mac, and it became basically the driving graphics engine 9 for Apple and then became a great company. 10 My point is I guess we had just started 11 shipping the product and Steve came in and said okay, I 12 want to buy it. I remember him saying I'll give you $40 13 million for it, and to the investor group, boy, we had 14 started the thing with $1.5 million. We said no, but I 15 knew we wouldn't be able to say no again, and I knew he'd 16 keep coming back. 17 We went back to the investor group and said we 18 want to say no, we want to stay independent, but we will 19 take you public so you have some marketability to your 20 shares, so we don't have to sell out. 21 This is a clear example of a company that went 22 public, $5 million public offering. It is now probably a 23 $20 billion-odd market capitalization company, 10,000 24 employees. 25 That would not have happened if it had been 0080 1 part of Apple. The technology would have been fine but 2 it would have been owned by the Apple operating system. 3 To me, that is the kind of company we are 4 trying to find. I think another reason they did it is 5 because it's hard to identify the great companies early. 6 They all have a great story. Some will work and some 7 won't. I do think giving these companies the ability to 8 create marketability for their investors is the key item. 9 That takes the pressure off selling out. 10 Some of the others, Steve Case, who was so 11 active in the JOBS bill, AOL, he likes to point out AOL 12 was an $8 million IPO. Starbucks, Peet's Coffee, Whole 13 Foods, Panera Bread, Odwalla, Intel, Amazon, Oracle, 14 Cisco, all raised less than $50 million in their 15 offerings. 16 The pattern that was there through the 1970s, 17 1980s and into the mid-1990s was most of the companies 18 did come out early when they had a proven product but 19 before they had a big financial record. They came out in 20 modest size. Almost all of these companies didn't need 21 working capital. What they needed was marketability for 22 their investors. 23 I think the Internet bubble changed all that 24 because what it did was create huge market values for a 25 lot of younger, smaller companies, which attracted the 0081 1 major investment banks because suddenly what used to be 2 $10, $15, $20, $25 million deals became $50, $75, $100 million 3 deals, and suddenly, those were attractive to the major 4 investment banks. 5 The pattern changed, and as you can see from 6 the numbers, it really hasn't changed back. The business 7 is still dominated by deals of over $50 million done 8 primarily by the major banks. 9 What are the other alternatives? There are 10 reverse mergers, some of these second market prices that 11 are doing things, you can do successive Regulation Ds, 12 maybe even crowdfunding, but none of them get you the 13 secondary market that you need to satisfy the liquidity 14 requirements of your venture investors or your angel 15 investors or your employees or whoever put up the money 16 to get you started. 17 We think having what we would call hopefully a 18 Reg A+ would provide a process to allow them to get 19 this kind of public market. From an information 20 disclosure requirements' point of view, I think current 21 Regulation A does not require audited statements. 22 We have recommended it should require an audit. 23 I would argue having the last 12 months audited and 24 certified should be enough. Most of these companies 25 don't have a long history and the history really doesn't 0082 1 matter too much in terms of being precise on accounting. 2 Most of it is pretty simple. 3 If you could have one year of certification, I 4 think you would probably find 99 percent of the companies 5 who would use this would already have that. Two years, 6 probably. When you do have to go back and get 7 certification for two years back, it becomes costly and 8 difficult. 9 The SEC review, as I said, if there is some way 10 of keeping it as an exemption, which requires the 11 inclusion of certain documents and certain information 12 that the investors should have, I think that would be a 13 great move forward. I do think that the information 14 required for smaller companies is not nearly as complex 15 as the larger multi-division kind of companies that need 16 all the special accounting. 17 I do think the research, the pre-IPO research 18 allowed now under the JOBS Act should be applicable to a 19 Reg A+, because I think that would be the key to 20 giving the information that an investor needs. 21 Smaller emerging growth companies are basically 22 judged on their ability to grow, and people want a 23 picture of what the next 12 months' financial picture 24 will look like. There is a need for an estimate, a need 25 for goals. I think the way to discipline them is make 0083 1 them transparent and make them available to everybody. 2 If you don't allow them to put it out, there is 3 a whispered estimate. Then there is no discipline on it. 4 Once you print it and you put it out into the public, the 5 blogs, everybody can pick it up, people can comment on 6 it. I think the market is quite smart and sophisticated 7 at looking at these things now. 8 I do think the pre-IPO research combined with a 9 required list of documents that must be out there would 10 be more than adequate disclosure to future investors in 11 smaller companies. 12 MR. TANENBAUM: Bill, of course, maybe it goes 13 without saying, for those companies seeking to go public 14 this way, they will comply immediately with the 1934 Act 15 obligations and our view of what the world might look 16 like. 17 MR. HAMBRECHT: Yes. I do think the fact that 18 the Reg A+ requirement does not have a deadline on it, and 19 we didn't think it needed it, I guess, because it was 20 already existing statutory, already built in, but I would 21 recommend that it be at least thoroughly aired and out as 22 soon as possible. I do think there is a need for it now, 23 and I think the market would respond to it. 24 As Jim just said, on the recommendations, there 25 has been a lot of comment about the idea that Regulation 0084 1 A might be some kind of vehicle that people would use to 2 in effect avoid some of the market reporting 3 requirements, and I do think if Regulation A+ were 4 available, there really wouldn't be an awful lot of point 5 in using it unless you wanted a public market. 6 Otherwise, you could use Reg D. You could do the regular 7 private placement. 8 If you went to the trouble of doing a Reg A, I 9 think you would end up as a 1934 Act reporting company. 10 Jim, do you want to talk about some of the 11 legal parts? 12 MR. TANENBAUM: I think we could probably take 13 those with Q&A. 14 MR. HAMBRECHT: Okay. The recommendations, 15 they are spelled out here. I guess the only thing I 16 would add is I think as you know there have been comments 17 from the state regulators, and I think for this to work, 18 for companies who have offerings of say under $15 19 million and there are a lot of them, 5 to $10 million 20 would be plenty, there ought to be some way of either 21 getting an Exchange listing that would give them the Blue 22 Sky exemption or some uniform way of registering it Blue 23 Sky. 24 There are some programs out there. There is 25 one that gets you automatically registered in 42 states, 0085 1 and it is pretty inexpensive. If you could do that for 2 all of them, that would work. 3 I do think the real answer is either having an 4 Exchange, either NASDAQ or the New York Stock Exchange, 5 American platform, be willing to go down to as low as a 6 $5 million offering, and I know it's not an easy thing to 7 get specialists to do the smaller less liquid kind of 8 securities, but to me, the best market would be an 9 Exchange based market with competitive electronic 10 trading, if it develops, but we hope we can get an 11 Exchange to be aggressive about allowing these companies 12 to move forward onto their Exchanges. 13 MR. TANENBAUM: Although it's not clear yet how 14 it will emerge, one thought that should flow from the 15 discussion up to now is that if a very comprehensive 16 approach to Reg A+ offerings would include the 17 ability to offer secondary shares, and Bill can comment 18 on that, but if one were to look at the portfolios of 19 many of the larger venture capital firms, there are any 20 number of companies that are of value but are not 21 necessarily of the size or don't necessarily have the 22 attributes to make them candidates for anything these 23 days other than acquisitions. 24 Reg A+ could be very helpful in creating an 25 alternative for such companies. 0086 1 MR. HAMBRECHT: I do think Jim is correct, 2 allowing selling shareholders, particularly in companies 3 that really don't need much working capital, as I say, 4 most of these companies, the objective will be to get 5 liquidity for their shareholders, and allowing them to 6 participate in the IPO makes it more attractive for them 7 and of course, increases the size of the offering so 8 there is a little more liquidity in the after market. 9 I'd like to leave Reg A now and just reiterate 10 that we think the reporting requirements as envisioned 11 here would protect the investors much more than they get 12 protected now in a Reg D, and I think it would be more 13 than adequate protection for both retail and 14 institutional investors. 15 I would like to move onto the IPO market. I 16 think Regulation A will be a big help with smaller 17 companies, but I do think we have to recognize that the 18 IPO market as it exists today has not been responsive to 19 the smaller companies and has only been available to a 20 very small group of specific type companies to really 21 have IPOs, unless you have a very major deal. 22 The bigger companies, $100, $200, $500 million 23 kind of offerings are getting done, and they are 24 companies that are well established, and the existing 25 structure of investment banks lends itself to that kind 0087 1 of an offering, and that is happening. 2 There is an awful lot of other companies that I 3 think have not had this offering, and I do think there 4 have been some very significant changes in the 5 marketplace over the past 15 years that should be 6 addressed to bring the IPO market back to real health. 7 I think first of all, the results of the 8 financial crisis has created a consolidation of the major 9 investment banks, where if you look at the assets, they 10 are probably twice what they were before the crisis, and 11 it has created a half a dozen or so, six or eight very 12 large banks that have large asset bases, have large 13 overheads, have large scale, that makes it very 14 difficult for them to approach anything but the largest 15 deals. 16 The independent firms that used to service this 17 market, the H&Q’s, Robertson, Underberg, those firms are 18 all a thing of the past for several reasons. First, when 19 the major firms decided to go into it, they bought 20 everybody, including us. Secondly, the institutional 21 brokerage business, which used to be the income stream 22 that supported these kinds of firms between 23 underwritings has largely disappeared. 24 Electronic trading has come in and now most of 25 the firms cannot afford the research effort with only 0088 1 commission flow. To me, so many of the good analysts now 2 have either moved to the buy-side or have gone into the 3 boutique firms that basically get paid directly by 4 checks. 5 I think the other changes that are perhaps even 6 more profound, the economics of the large investment 7 banks are largely determined now by the hedge funds, 8 hedge funds have achieved, I don't know, 50 percent of 9 the market. It's huge. Most of them don't report their 10 portfolio transactions. They are dependent on the major 11 banks for stock lending and for credit. They are very 12 important both ways, and it is a strong partnership. 13 I think whether we like to admit it or not, the 14 marketplace is dominated to a great degree by the 15 combination of the investment banks and the hedge funds. 16 I think what this means is that in the traditional sense, 17 the biggest beneficiaries of short term trading profit 18 would be the hedge funds. They are the major clients of 19 the investment banks who underwrite, therefore, there is 20 even a deeper, stronger incentive for the investment 21 banks to under-price the initial IPOs and to get a hot 22 new issue going and to get a pop. This creates short 23 term profit for their hedge fund clients. 24 I have always felt this is the problem, this is 25 the thing that basically is the weakness in our IPO 0089 1 system. Any time you can create free money, which is 2 what they are doing, creating free trading profit, it 3 will corrupt the system one way or the other. You will 4 get a flow back in some way. Maybe you won't realize it 5 if you are running the firm, but it happens. 6 I do think it has led to trading patterns in 7 the IPOs that because it has monetized this discount and 8 people expect the discount, it makes it very difficult to 9 understand what the real demand is. 10 I think the Facebook offering was the best 11 example of this. They claimed they had indications of 12 interest five/ten times the amount of shares they had, 13 and yet a great deal of that interest was there because 14 the buyers were buying it because they thought it would 15 trade up in the after market and that they would trade it out 16 right away. 17 You can go through the history of it. So many 18 of the mutual funds that used to be the beneficiaries of 19 these big allocations, since the bubble burst, since the 20 2003 IPO Committee, I think that has moved to the hedge 21 funds from the mutual funds. There is still a tremendous 22 demand that has built up on the basis of a one day 23 trade, and that makes the after market tremendously 24 vulnerable, if you have engaged right, who really wants 25 to own the stock and what stock level you will get real 0090 1 long term investor interest. 2 I think there should be alternatives to the 3 book building basis that the major banks now use. 4 We are, of course, an auction-based firm. We 5 have done 23 auctions. That works out to 1.2 percent 6 market share. People say, well, it's not a factor in the 7 market. It was interesting, when we took the top ten 8 percent of the offerings as measured by how well the 9 investors did, we have a six to seven percent market 10 share. 11 I have always thought that the way to determine 12 what is a good underwriting is does it work for the 13 buyer, does the investor come out, is it a good deal for 14 him. We think our process does work for the investor, 15 and it is an improvement. 16 I don't claim to be the only one. There are a 17 lot of different ways of doing it. If you look around 18 the world, you will find all kinds of different ways, 19 where there will be a subscription basis for retail 20 investors, there will be different ways of doing it. 21 I do think basically getting some discipline on 22 the pricing would help our own IPO process and 23 specifically what we would recommend is that since these 24 things are basically agency trades, in theory, you have a 25 fixed commitment underwriting, in reality, they commit to 0091 1 the underwriting immediately, get an all sold wire, and 2 it is immediately closed, but if they don't have an order 3 book, they don't bring the deal. It is really an agency 4 trade. To me, as an agency trade, it should be subject 5 to best execution rules. 6 Best execution allows discounts. Sometimes you 7 have to clear a trade. I think if there was some 8 discipline and some accountability on the pricing, along 9 the best execution rule, I think it would go a long way 10 in solving this deep discounting and the hot deal and the 11 aftermath that happens. 12 The other recommendation I think would help 13 greatly is again subject the IPO process to full 14 disclosure. For some reason, it was exempt from Regulation FD. 15 That is why again in the Facebook offering, when the 16 selective distribution of the estimate was made, the 17 underwriter's response was this is the way we always do 18 it, and that is true, it is the way it was always done, 19 because they are exempt from Regulation FD. 20 I think the JOBS Act allows pre-IPO research if 21 it is allowed, if it is distributed electronically to 22 everybody. That is Regulation FD. I would say a way to solve it is 23 to just make it subject to Regulation FD. 24 I could give you some more, but those are the 25 two major recommendations I would have to approach the 0092 1 current process, and would hope that we have a number of 2 other things that really revolve around those two things, 3 and of course, if there is some way of mitigating some of 4 the litigation risk, that would be helpful, too. 5 MR. TANENBAUM: That is probably not for today. 6 I think one thing would be useful, if we could maybe tie 7 it together, by commenting on all of the components and 8 the constituent elements that you view as necessary to 9 effect a smaller cap initial public offering these days. 10 Some of them kind of get lost in the shuffle. 11 MR. HAMBRECHT: Okay. First of all, I think 12 there have been steps already that have been very 13 helpful, the Sarbanes' phase-in has been very helpful, but 14 what we found in the last several things we have done, 15 the accountants are very, very liability conscious. I 16 don't know if there is anything that can be done about 17 that, but anything that could allow a small company to go 18 public with a normal certification, I think would be very 19 helpful. 20 I think they will always charge for what they 21 assume is added liability, but I think the accounting, 22 because of the Sarbanes' phase can be handled, but 23 anything you can do to help would be great in terms of 24 not requiring the additional schedules and everything 25 else that is part of a major S-1. 0093 1 Number two, I think some kind of process that 2 allows much more rapid turnaround from filing to 3 marketing would be greatly advantageous in terms of 4 reducing market risk while that happens. 5 Third, I think the pre-IPO research should be a 6 part of the process, and I do think anything to encourage 7 that dealing with the Spitzer settlement or whatever has 8 to be done, I think it should really become part of the 9 process. 10 We’ve embraced it. I think it works and I think there is plenty of 11 research out there that is high quality research that can 12 do it. 13 Fourth, I do believe to really make these IPOs 14 really public offerings, there should be some 15 requirement, as I said, to go to the best execution rule, 16 which says if there is a legitimate buyer out there, you 17 have to recognize it. You have to recognize it through a 18 selling group or some mechanism that allows the real 19 buyers to come into the system and purchase the stock. 20 Finally, I think there has to be a pathway, 21 immediate pathway to an Exchange listing that I think 22 would provide an after market that is crucial to the 23 success of an offering. 24 Thank you, happy to take any questions. 25 MR. GRAHAM: Okay. Thank you, Bill. That was 0094 1 helpful. Continuing on with your recommendations, if I 2 heard you correctly earlier in your remarks, you 3 indicated that in your view, I think you were pointing at 4 the number of companies that are backed by Silicon Valley 5 Bank, as I recall, and of that number, there was a 6 significant number that you viewed as potential public 7 companies that could easily go out with $50 million, $100 8 million market cap. 9 You indicated that Lona and his colleagues would be 10 significantly burdened if the market opens up for those 11 smaller companies. 12 You may have already answered this, but 13 focusing on the "how," as opposed to the "if," is there 14 anything you want to add to the recommendations you just 15 made in terms of what in fact is the "how," I think we 16 are all kind of wrestling with the so-called "IPO on- 17 ramp" and various definitions for that. 18 We have talked about maybe having a separate 19 market for smaller companies and ultimately they graduate 20 into the existing more mature markets. 21 Do you have anything further to add in that 22 regard? 23 MR. HAMBRECHT: I do think the best solution 24 would be the way Reg A is currently set up where you 25 basically address a number of documents that have to be 0095 1 included and information that has to be included, and I 2 would not envision it as a line by line, word by word 3 kind of review, but more a review that says okay, you 4 have included everything that you think is important to 5 the investor, in their words. 6 A lot of times with the S-1 the SEC is almost 7 put into the position of rewriting a legal document with 8 lawyers. If we could have it not go through the same 9 process as an S-1 but more from adhering to a schedule of 10 documents that have to be provided and information that 11 has to be provided, and certainly if you see something 12 you don't like, of course, but instead of really getting 13 into comment letters, the kind of process now, which I 14 would assume is very time intensive on the part of the 15 SEC, it's a tough process. 16 Other things that could help is standardization 17 of certain things, probably the item that takes the most 18 legal time and the most effort in an S-1 is cheap stock. 19 I have often said tell us how you want to do it and we 20 will do it. 21 If you could somehow standardize that because 22 it's a non-cash charge to the P&L. The investors 23 basically have started to look at GAAP and non-GAAP. I 24 really think the issuers are more than happy to comply 25 with whatever you want. 0096 1 MR. NALLENGARA: We have tried to give guidance 2 on that. I think it's a tendency for companies to look 3 at what other filers have done and if their IPO went 4 forward, then I should do the same thing, not recognizing 5 that it may have gone through quite a lot of comment and 6 review. 7 If there has been near term sales or issuances 8 of stocks before the IPO, and we have seen vast 9 differences in pricing just before the IPO as compared to 10 the IPO, we would like to understand where -- 11 MR. HAMBRECHT: Sure. Again, sometimes if you 12 say this is what is standard, if you want to go off 13 standard, come in and debate it. I think that would be 14 very helpful. 15 I do think the numbers may sound crazy, but 16 when you really think about it, the population out of the 17 small cap market has declined by 5,000 companies. 18 Secondly, Silicon Valley Bank is not the whole market. 19 When you add in all the angels and everything else that 20 is out there, what I did is I just multiplied their 21 number by two, and my guess is it's probably even bigger 22 than that. 23 We put a number in the document of 5,000 24 companies. I do think there will be 5,000 companies that 25 would go public over the next three to five years, but I 0097 1 do think there is this immediate backlog. 2 MR. GRAHAM: Okay. Greg? 3 MR. YADLEY: Thank you, Bill, for all of your 4 comments. I remember well the late 1990s and that kind 5 of IPO market and while we may not get back there, these 6 are all very good thoughts on how we might improve the 7 situation. 8 When you were talking about Reg A+, I think 9 we were all listening pretty carefully because that is a 10 topic that we have addressed. We made recommendations 11 before the passage of the JOBS Act. One of the problems, 12 of course, of Regulation A has been exactly what is it 13 and how is it used. 14 I think you acknowledged that in your view, 15 most companies that would take advantage of Reg A+ 16 would do so intending to be a publicly reporting company. 17 I guess I have two questions. I haven't had a chance to 18 read your presentation, so feel free to tell me you have 19 laid it out there. 20 It sounds as if for companies that wish to 21 pursue the public path following Reg A+, this would 22 simply be an alternative more user friendly and more 23 streamlined than the emerging growth company pathway as 24 currently set out. 25 I'm curious as to the other Reg A companies, 0098 1 those that wouldn't pursue a real public life. You have 2 indicated there should be an annual filing, some filings 3 afterwards. 4 What would cause you to recommend to one of 5 your clients that they take that less public path? Is it 6 because initially what you are trying to achieve is the 7 liquidity for the long time investors and then after 8 that, letting the company see without too much post-IPO 9 expense, or what kind of companies would be just this, we 10 have done our Reg A+, we have raised our money 11 publicly, and now we're not going to do 1934 Act 12 reporting but we will give an annual reporting. I think 13 you also suggested an 8-K for material events. 14 MR. HAMBRECHT: I never quite understood the 15 fear of companies using this and not becoming public 16 companies. To be honest, the companies that I've talked 17 to, the only reason they would use Reg A would be to 18 become a public company. Otherwise, I think Regulation D 19 would be a lot safer and a lot easier. I don't know what 20 advantage they would get out of using it. 21 MR. YADLEY: This is something that you 22 obliquely referenced, if that's the case, leaving aside 23 that maybe Heath and his colleagues would be happier to 24 have the public information from a Reg A+, why not 25 simply do a 506 offering, if you are really not intending 0099 1 to publicly report, why not just do a private placement? 2 MR. HAMBRECHT: That is exactly my point. I 3 would be surprised if companies used Reg A. It's a lot 4 of work and expense. 5 MR. ABSHURE: The difference is it will allow 6 you, and Lona, correct me if I'm wrong, it will allow you 7 to advertise to non-accredited investors. That is the 8 point I was going to make. I'm hearing from mainly small 9 bank holding companies that they are really looking 10 forward to using Reg A because they want the ability to 11 advertise shares in their bank holding company to members 12 of their community. However, they don't necessarily want 13 to become public. There is that aspect. 14 You mentioned something I wanted to ask you 15 about. As you know, the current Reg A+ also 16 authorizes the SEC in addition to the 1934 Act Lite 17 offering statement, which we are used to seeing, to draft 18 rules that will be a “1934 Act Lite” periodic reporting 19 scheme. 20 I think you basically mentioned what you would 21 like to see, some of your thoughts on what that would 22 look like, but you also mentioned full blown Exchange Act 23 reporting, full blown 1934 Act reporting, which I think 24 is probably going to be necessary to get the Blue Sky 25 covered treatment preemption, if you're going to rely on 0100 1 the Exchange listing. 2 For those companies that choose a lighter 3 touch, I just wanted to let you know that the state 4 securities regulators are working with the ABA right now 5 to develop a one-stop filing program that would also 6 have an uniform review process and probably a one-state 7 review to kind of streamline that, but also remember that 8 the states are only going to be looking at the offering 9 document. We are not going to be looking at the periodic 10 reports when they come out. 11 MR. HAMBRECHT: To me, our firm and my 12 predecessor firm was in both private placements and 13 public offerings for many, many years. I used to find 14 that the private guys required more reporting, not less. 15 To me, I would almost think a recommendation that says 16 hey, if you use Reg A+, you are a reporting public 17 company, and it would be a good thing. 18 A bank certainly has the numbers and they could 19 report quarterly and annually. I would think that would 20 be a precursor to getting good demand. I would bet most 21 of them do. 22 MR. GRAHAM: Another thing that we have 23 wrestled with as the Committee, I think everyone who is 24 concerned about small business capital formation has 25 thought about, and that is crowdfunding. Crowdfunding 0101 1 comes in a number of different shapes and sizes. I think 2 we are just kind of wrestling with, and apparently the SEC 3 is wrestling with the rulemaking process, in terms of 4 implementing the JOBS Act, but there are other ways of 5 kind of skinning that cat or at least partially. 6 I think we have seen no action letters, and of 7 course, I think you have more direct involvement. 8 I was just wondering what thoughts you might 9 have and to what extent this is kind of a viable answer 10 to the small business capital formation riddle. 11 MR. HAMBRECHT: I think the idea of crowdfunding 12 is conceptually a really good idea in some ways, 13 particularly out in Silicon Valley. An awful lot of the 14 good companies have started with engineers pooling their 15 money and putting things together. They are not 16 accredited investors, but they know a lot more than most 17 accredited investors do. 18 There is a natural constituency for a lot of 19 companies to get started, and that can be on a talent 20 level like engineers, it can be family, it can be a lot 21 of different ways to do it. I think it is a good thing. 22 We decided as a firm not to do it directly 23 because I felt that number one, any process that doesn't 24 require financial statements is going to lend itself to 25 fraud. I think there ought to be a requirement that says 0102 1 you have to have a statement, a balance sheet and profit 2 and loss statement, even if it is something that says I'm 3 not in business yet and it's zero. Investors should 4 know, should have a balance sheet in front of them. I 5 think that should be a requirement. 6 Secondly, what we found at Hambrecht & Quist 7 over the years on private placements, the appetite is 8 very conditioned by the market climate. Generally, the 9 real appetite for private placement's from outside 10 investors comes pretty much at the wrong time in the 11 market. It comes after some big successes and everybody 12 goes oh, boy, I want a piece of that. 13 What we found is they would typically come in 14 at the wrong time, buy one or two deals, and then pull 15 back and wait, wait and see. Unless there was some 16 liquidity event within a year or two, they became very 17 discouraged. 18 Our advice on crowdfunding was number one, 19 financial statements, and number two, some kind of 20 limited liquidity based on reporting. In other words, 21 maybe some kind of a call auction every quarter where you 22 would allow people if they were sellers or buyers, you 23 concentrate it all under a very narrow time frame, and do 24 it on the company reporting quarterly or six months, or 25 something, some degree of requirement that the company 0103 1 keep the investor informed and there be some measure of 2 liquidity out there, albeit in a very narrow range. I 3 think that would help. 4 MR. GRAHAM: John? 5 MR. BORER: Thank you very much for coming and 6 presenting. The Reg A points you made, I think, are 7 fantastic. I stated, I think, in the first meeting we 8 had at the end of 2011 here, Reg A was in the dust bin 9 and nobody was going to use it. There were 144 Reg Ss 10 and indirect registrations and swaps, the reverse mergers 11 that were taking place, the $5 million limitation was one 12 piece of it. 13 I don't know if this fits within the rulemaking 14 authority of the SEC, but if you can do away with the 15 review of the filings, which makes it very similar to an 16 S-1 process before you can actually go out and sell 17 securities, I think that would make it so that certain 18 participants may take that path as opposed to just going 19 the regular S-1 route. 20 I think until that takes place, it's going to 21 be obsolete. Maybe some banks will use it to stay 22 private. I think the market will drive almost every 23 company to do it if they raise more than $5 million to 24 become 1934 Act compliant, the market will require that. 25 I happen to agree with that. 0104 1 Two points that I think are more important. 2 You talked about infrastructure, and while you were 3 talking, I was going back through names like Morgan 4 Keegan and Sudrow Tucker, Anthony Rauscher, Bosworth, not 5 to mention Robbie Montgomery, Underberg, you mentioned, 6 H&Q and Alex Brown. 7 In my view, being a participant in this market 8 for all these years, until we get a vibrant 9 infrastructure and culture of these small firms, Goldman 10 Sachs, J.P. Morgan, Morgan Stanley, Credit Suisse, et 11 cetera, are not going to be doing $25 million and below 12 offerings. 13 If it is just you out there, like Lt. Dan in 14 the crow's nest, screaming at the hurricane, it's not 15 going to happen. 16 What in your mind would it take in order to 17 bring that vibrancy back? You have been a financial 18 entrepreneur for a long time and you've done it. Even 19 Thomas Weisel, 2.0, threw in the towel a couple of years 20 ago. He was a pretty bright guy. 21 MR. HAMBRECHT: First, I feel very lonely. You 22 are absolutely right, the big firms have absolutely no 23 interest in it. You are also right -- the other day 24 someone asked me, I took the Apple tombstone down, and 25 the Apple offering was in 1981, the IPO. There were 68 0105 1 firms in the syndicate, three are left in its original 2 form. 3 There has been a dramatic change. You can say 4 well, they merged or something. H&Q is no more. There 5 are a dozen people left at Chase Bank. There has been a 6 dramatic change. 7 By the same token, for example, in the Bay 8 area, there is at least four advisory firms that have 9 started, that I think have been started by high quality 10 people that are doing a professional job. They are 11 responding, of course, to the 90 percent of these 12 companies that are going M&A. 13 I think if the public market opens up, I would 14 guess -- we work with them now, but if we start doing 15 public offerings and small deals, they will want to do 16 them themselves. I think there is more than enough firms 17 out there that would respond but the deals have to get 18 done. I can't tell you how many people I have talked to 19 that have said okay, when you get this thing done, come 20 back and see me. 21 MR. BORER: With respect to that, I think it 22 connects, the last point on your last slide was a very 23 good one. I think this is one where market participants 24 are just sitting back and it has to do with the adoption 25 of certain of the things in Title I. I think as long as 0106 1 the large banks --FINRA, because of 2711, isn't going to 2 be encouraging of the banks going out and doing the early 3 research, allowing the involvement of the analysts in 4 transactions, truly changing the way analysts are 5 compensated. 6 I have mentioned this here before. Allowing 7 them to do more work towards helping deals get done but 8 prohibiting the fact they are taking on greater 9 professional and other responsibility, they can't make 10 any more money doing it, at least not in any direct way, 11 because that was prohibited. 12 When will it be that the -- I've talked to 13 people at Deutsche and J.P. Morgan, they are just we're 14 not going to go do it first, and we may never do it, 15 because we have a monopoly at this end of the market, and 16 there is nobody nipping at our heels from below, with the 17 exception perhaps of yourself, but it is going to take a 18 while to change that mindset. 19 FINRA, from what I have seen, and I have seen 20 several law firms who have said what you can do, but at 21 the same time when the FINRA people come in and say what 22 are you doing that for, and this is anecdotal, they can 23 put us out of business very easily if they like. 24 We can go complain to Congress all we want, but 25 that's not going to help. How does that change? 0107 1 MR. HAMBRECHT: First of all, when I said 68 2 firms to three, the three that survived are the three 3 firms that have had 85 percent of the IPO business for 4 the last 100 years, Morgan Stanley, J.P. Morgan, Goldman 5 Sachs, First Boston, they haven't changed. 6 MR. TANENBAUM: First Boston didn't survive. 7 MR. HAMBRECHT: You are right, they have 8 dominated the IPO business at the high end forever. They 9 have no incentive whatsoever to go small. To be honest, 10 I think structurally, it would be very difficult for 11 them. Their overheads are such that it's pretty hard in 12 a big firm to show a profit with all the work you have to 13 do, and in some ways, a small, hard to understand, company 14 is harder to do than General Motors. 15 General Motors - Morningstar and everybody else 16 is going to write research on it, but if you have a small 17 semiconductor company, you have to spend time and effort 18 and money understanding it. 19 I don't think they ever will. I do think the 20 answer for small to medium sized companies is the smaller 21 either boutique banking firms or boutique research firms 22 that have taken the place of the old traditional regional 23 firms and the H&Q type firms. I think they are the ones 24 that are going to have to fill the gap. I don' think it 25 will come from the top. 0108 1 MR. BORER: Thank you. 2 MR. GRAHAM: We are just about out of time. 3 Does anyone have any more questions? 4 MR. HAMBRECHT: I just thought, it was in this 5 morning's Journal, there was an interview with a man who 6 has an Internet-based real estate company, the question 7 was: "Do you plan to take late stage capital and delay an 8 IPO?" His answer was: "Right now, there are investors who 9 are willing to pay premiums to get exclusive access to a 10 deal before it gets public. More appreciation of company 11 valuations is now happening in private markets as opposed 12 to the public markets. I feel like it doesn't matter 13 what valuation you get, at one point or another." 14 He's one of maybe 50 companies out there that 15 are on everybody's wish list. This would be a $100 16 million deal. He's waiting until he gets a big enough 17 deal. 18 It's the other 950 I'm worried about. They are 19 the guys that don't have this option. They are the ones 20 I hope we can find a way to get some movement in this 21 smaller deal area. 22 MR. GRAHAM: Bill, once again, thank you very 23 much for spending time with us. Again, that was very 24 helpful. 25 We are going to break for lunch. As I 0109 1 indicated earlier, Chair White should be here in about an 2 hour and 15 minutes, if you want to get back by then and 3 take an opportunity to say hello before we reconvene at 4 2:00. That is the plan. Thank you. 5 [A luncheon recess was taken.] 6 A F T E R N O O N S E S S I O N [2:01 p.m.] 7 MR. GRAHAM: Thanks everyone for returning from 8 lunch. As you all have noticed, we have Chair White 9 joining us. As you also know, she was recently appointed 10 as Chair of the SEC by President Obama to serve as the 11 31st Chair. 12 She arrived at the SEC with decades of 13 experience as a Federal prosecutor and as a securities 14 lawyer, and prior to serving as Chair to the SEC, Chair 15 White was the U.S. Attorney for the Southern District of 16 New York and the only woman to hold that position in the 17 200 plus years of that office. She was also the Chair of 18 the Litigation Department at Debevoise & Plimpton in New 19 York. 20 She would like to give a few remarks, and so I will 21 turn the mike over to her. 22 REMARKS BY CHAIR WHITE AND COMMISSIONER AGUILAR 23 CHAIR WHITE: Thank you very much, Steve. 24 Appreciate it. Still the only woman in that District. 25 We have to work on that, I think. 0110 1 Good afternoon, everybody. I have met many of 2 you, and I know from your agenda and your presenters, 3 you have already had a great meeting and still more to 4 come, and I do not want to get in the way of that. 5 I would just like to take a couple of minutes 6 mainly to thank all the members of what really is an 7 extremely important committee for contributing your time 8 and your efforts to the Committee's work. It really is 9 important to the Commission, I just want you to know 10 that, and it is very much appreciated. 11 I would also especially like to thank Steve and 12 Chris for their leadership and hard work. They are fun 13 people also, I can add, from meeting them last night and 14 today. I would also like to thank -- now that I 15 recognize them -- SEC staff members, Gerry Laporte, Ted 16 Yu, and Johanna Losert, for their work in supporting the 17 Committee. 18 Is that about right, Lona? And Lona, of 19 course. 20 More importantly, I would like to thank the 21 staff that does assist this Committee for ensuring that 22 the needs and opinions of investors in small and emerging 23 companies and the entrepreneurs who drive those 24 companies get heard and considered at every level of the 25 SEC. 0111 1 Literally three weeks ago today, I was honored 2 to become the 31st Chair. I call myself "Chair" unless 3 it's awkward to write it, then it's "Chairman" of the 4 Securities and Exchange Commission. I must say I have 5 worked with men and women of the SEC since I was U.S. 6 Attorney in New York 7 in the 1990s and 2000s, and then I kind of worked on the 8 other side of the table a little bit when I was a 9 securities lawyer in the private sector, and just gained 10 tremendous respect for this agency and the staff. 11 I have to say having been here, it has soared. 12 They are just the greatest group to work for that I can 13 imagine. I have totally embraced the SEC's mission and 14 the staff. It is a lot of work but having the time of my 15 life basically. I'm just very fortunate to have been 16 able to not only return to the public sector but here in 17 the public sector. 18 I do believe very strongly that the best way to 19 fulfill the SEC's mission is to reach beyond the agency 20 walls, to listen closely to a variety of opinions on 21 important subjects, to work collegially within the agency 22 and with outside stakeholders. We may not agree on every 23 issue but we sure want to get that input and get it 24 fully. Respect the objectives and the ideas of all who 25 contribute to the discussions that we have and that we 0112 1 welcome committees like yours. 2 I can't say it enough, are not only very 3 welcome, but I think enormously helpful, and I look to 4 you for expertise and points of view all the time. Thank 5 you again. 6 This is a committee that really quite 7 forcefully and articulately advocates on behalf of a 8 critical and I fear at times an underrepresented segment 9 of the American economy sometimes, and in doing so, you 10 help make sure the SEC is very much focused on doing our 11 jobs more effectively, and you also make a real 12 contribution to the economy with the work you do. 13 It goes without saying I think that good policy 14 is never made in a vacuum, it never arises from a vacuum. 15 We need to hear ideas and criticisms and suggestions from 16 experts in the areas that we have a direct impact on at 17 the SEC. 18 Again, we appreciate the feedback, the insight, 19 even the criticisms, that you learn from, and the 20 suggestions that you deliver to us. 21 Again, something that probably goes without 22 saying is the SEC can have a dramatic role in the life of 23 a small and emerging business where that business seeks 24 to raise capital, when it goes public, when it 25 contemplates an expansion, or when it is involved 0113 1 obviously in a merger or acquisition. 2 I am committed to policy debates and a 3 rulemaking process that ensures within the parameters of 4 obviously our mission that the SEC makes a positive 5 contribution to the success of small businesses. I feel 6 very strongly about that. I think we can do that through 7 our support of efficient capital markets, investor 8 confidence and thoughtful regulation, as advised by you 9 folks and others. 10 As you know and I certainly know, the 11 Commission is in the process of a series of important 12 rulemakings, including JOBS Act mandates, that are 13 intended to aid small businesses in search for investors 14 who will help them grow, create jobs, and strengthen the 15 economy. In your analyses of these mandates, and I have 16 caught up on this, the voice you gave to small and 17 emerging businesses in the course of that debate is very 18 much appreciated. 19 I know those rulemakings have not proceeded as 20 quickly as at least some of you and many others would 21 have liked. They are among the mandates that are really 22 my most important priorities. I indicated that in my 23 confirmation hearing, plainly, I want to get the rules 24 done right, but I also want to get them done, but all the 25 while keeping a very close eye on investor protection 0114 1 concerns. 2 That is important to all of us. Among other 3 reasons, investor protection concerns, if you don't pay 4 sufficient attention to them, the investing public will 5 not have the confidence in an enterprise to invest in it 6 and provide capital, so you don't want these new ways of 7 raising capital to not be used or to be under used 8 because investors may not have the confidence to use 9 them. 10 Looking beyond the JOBS Act and other pending 11 rulemakings, I recognize there are many other issues of 12 concern to this Committee in particular, and those 13 include more streamlined and easier to understand 14 disclosure and a series of recommendations that you 15 issued on February 1, I think, designed to improve 16 capital access and secondary market liquidity for small 17 and emerging businesses. 18 These are under consideration by the Commission 19 and the staff, and I particularly appreciate your 20 insights, and thank you for helping us to better 21 understand those challenges for small businesses. 22 There are many opportunities that lie ahead for 23 all of us. We are going to be listening to you early and 24 often and continuously. Thank you very, very much for 25 your work. 0115 1 I don't want to take any more of Bob Greifeld's 2 time. I know he is next up on the agenda. Thank you. 3 MR. GRAHAM: Thank you, Mary Jo. Speaking on 4 behalf of all the Committee members, we are happy to 5 serve in this capacity. 6 Before we get to you, Bob, we have Commissioner 7 Aguilar in the house. Commissioner Aguilar has been a 8 Commissioner at the SEC since 2008. Prior to serving as 9 a Commissioner, he was in private practice, specializing 10 in securities and corporate law, international 11 transactions, investment companies and investment 12 advisors. 13 Commissioner, if there is anything you would 14 like to say? 15 COMMISSIONER AGUILAR: Just really to add my 16 voice to Chair White to thank you and every member of the 17 Committee as well as the staff for all the work you are 18 doing on this Committee. This is not my first meeting with the Committee. 19 I have had a chance to meet some of you before. I've had 20 a chance to see the work product that you have done and 21 grateful for the fact that we are getting that work 22 product. 23 As Stephen says, I've been a Commissioner since 24 2008, and given that the market crashed three weeks or 25 four weeks after I joined, I feel like in dog years, I 0116 1 may be the longest sitting Commissioner ever. I think 2 it's probably 35 years in dog years. 3 I'm delighted to be here. My own personal 4 career involved representing small to mid-sized 5 companies. I value the need to address their needs, to 6 make sure the capital formation process works for them. 7 There are different views sometimes on what that takes, 8 but I think we are all in agreement with what the end 9 result should be, which is to have capital formation work 10 for issuers and investors. 11 We had an open Commission meeting today to 12 discuss and vote on, unanimously, I might add, cross border 13 rules on derivatives. Before that meeting occurred, I 14 snuck in here to hear Duncan Niederauer's discussion. I 15 thought he had a lot of good things to say. I'm going to 16 try to hang in here as long as I can to hear what Bob has 17 to say before I have to go to another meeting scheduled. 18 The fact that you are getting Bob and Duncan in 19 one day, I'm not sure that is allowed legally, but you 20 certainly have managed quite a coup. I will give the 21 podium back to you so we can hear what Bob has to say. 22 Thank you for being with us today and thank you for all 23 the work you are doing. 24 MR. GRAHAM: Thank you. We are pleased to have 25 with us today Bob Greifeld, who is the Chief Executive 0117 1 Officer of NASDAQ OMX Group. 2 Bob has led NASDAQ since 2003, and through many 3 of the important events in NASDAQ's history, such as the 4 acquisition of the Philadelphia Stock Exchange and the 5 acquisition of the Boston Stock Exchange. Prior to 6 joining NASDAQ, Bob led the buy side business of Sunguard 7 Data Systems. 8 Again, Bob, thank you for joining us today. 9 PRESENTATION AND DISCUSSION WITH ROBERT GREIFELD, 10 CHIEF EXECUTIVE OFFICER, NASDAQ OMX GROUP 11 MR. GREIFELD: It's my great pleasure to be 12 here today. As I speak, don't hesitate to interrupt and 13 ask any questions you might want to. I understand you 14 are not shy about that. That's good. 15 Let me start with a matter of introduction in 16 terms of who NASDAQ OMX is. It may or may not be 17 necessary. It's good to take a couple of seconds on it. 18 We have global listings that total over $6 19 trillion in market capitalization. That is comprised of 20 3,400 companies, and certainly $6 trillion is a big 21 number. 22 Do I have a control for the projector? 23 MR. GRAHAM: Bob, as long as you have managed 24 to interrupt yourself, let me continue with the 25 interruption. I forgot that I was supposed to remind 0118 1 everyone to see if you can turn off your mics when you 2 are not talking and to keep your cells away from the 3 mics to prevent feedback. Thank you. 4 MR. GREIFELD: $6 trillion in market 5 capitalization, and that is spread across 23 markets 6 around the globe and three clearing houses. Probably 7 also very importantly is we provide the technology to 70 8 different Exchanges in 50 different countries, and we 9 have direct visibility in terms of how those markets 10 operate, what they do well, and what they do not so well. 11 With respect to what the Commission has done, I 12 do want to compliment and express NASDAQ OMX's broad 13 support for the findings regarding trading spreads. I 14 like to call them "intelligent spreads," for smaller 15 Exchange-listed companies, specialized disclosure 16 requirements, and certainly a concept of a separate 17 equity market structure for those of small and emerging 18 companies. 19 When we look at the JOBS Act, we certainly 20 applaud it as an overall piece of work, but it was 21 remarkably light with respect to the secondary trading of 22 these companies that come to market, and that has been a 23 real life concern for us for a long period of time, where 24 we have a lot of companies that come to market pre-JOBS 25 Act and obviously post-JOBS Act, where their experience 0119 1 once they come to market is not what it should be. 2 Certainly, there is a dramatic lack of liquidity in that 3 environment. 4 There is always the question of why that is 5 happening. We certainly think we live in an ecosystem 6 where the public markets have suffered through what I 7 will call "the thousand small cuts," you can't point to 8 any one thing that says this is wrong and this is the 9 cause of the issue, but certainly on a cumulative basis, 10 it has had a negative impact in terms of what has 11 happened in the public markets. 12 In terms of NASDAQ OMX, our DNA is geared 13 around these small companies that grow into larger 14 companies. When you hear $6 trillion of market 15 capitalization, well, that's a very large number, but 16 let's understand very clearly that we understand why 17 NASDAQ was formed and what it is has done more 18 successfully than any other Exchange on the planet. 19 This is certainly an interesting set of 20 circumstances where back in the day, I understand it was 21 a hostile, a somewhat neutral hostile environment to some 22 companies, where they were forbidding in Massachusetts, 23 Apple going public because it was too much of a risk for 24 investors. 25 The point here is obviously interesting and 0120 1 hopefully the people of Massachusetts did at some point 2 have the opportunity to buy shares in Apple, but beyond 3 Apple, Microsoft, Oracle, Google, Intel, you see they 4 originally listed on NASDAQ as small companies and grew 5 to be very large companies. We don't expect that to be 6 the norm, but it is our fundamental responsibility to 7 make sure that situation can recur in 2013 and beyond. 8 It is something we care about. 9 When you look at why we care, you see that 10 since 2010, we have had 177 IPOs under $100 million come 11 to our market. We have 1500 other companies under $500 12 million in market cap that spans all industries, and our 13 smallest market tier today collectively totals $52 14 billion. As a broad statement, the overall market cap on 15 NASDAQ averages around $5 billion. 16 It is something we spend a lot of time thinking 17 about what can we do better, what can we improve upon in 18 this marketplace. 19 One of the things we are doing as a result of 20 the JOBS Act, which we think will be particularly 21 important, is to focus on the private aspect rules on the 22 JOBS Act. The JOBS Act said you can basically stay 23 private up to 2,000 investors, and the employees didn't 24 count towards that 2,000 number. 25 As we look at companies today, a statement of 0121 1 fact is they stay private longer, and the question is 2 what kind of organizational capability can we bring to 3 the private market that doesn't exist today. 4 I would think of this on the continuum, not as 5 a reference point of a public market, but the reference 6 point of a private market that takes in angel investors, 7 venture A, B or C, so it would be seen as another round 8 of investing in these companies but able to do it with 9 the imprimatur of bringing solid listing standards to 10 this marketplace, bringing strict logistical capability 11 of managing the cap table, the shareholder registry, 12 knowing exactly who is buying and selling the stocks, and then 13 possibly running once a quarter or twice a year, once a month, a 14 call auction to provide those limited set of shareholders 15 with some ability to get liquidity above and beyond what 16 is available today. 17 We think this is an important aspect of the 18 world. We don't think it's the major part. We want to 19 focus on the public market. Clearly, the private market 20 will be there and we think under the JOBS Act, there are 21 ways for us to basically add some degree of organization 22 to it. 23 As we come to our positions, we obviously want 24 to gain insight from what we see around the world. We 25 first look to our Nordic markets, and this is before 0122 1 NASDAQ acquired OMX, a marketplace called First North, 2 and that was for emerging growth companies, and relative 3 to the Nordic marketplace, relative to the size of the 4 Nordic marketplace, it has been a success, I would say a 5 qualified success, not an overwhelming success, but it introduced a better state of 6 affairs than what existed before. 7 We have had 23 companies come to this market 8 since 2011. Most importantly, about five companies per 9 year graduate to the main market. I think that is the 10 ultimate sign of success for these kind of incubator 11 markets. Not every company should graduate, but the fact 12 is you want to be having some positive self selection 13 where a number of them can graduate. 14 One of the things that is very interesting when 15 you look at the next slide is that we have run a fairly 16 effective market for companies of this size. Before 17 First North came along, the default value would be for 18 these small companies to list on the London based AIM 19 market. 20 When you look at the world today, we have about 21 70 percent of our companies having an effective spread 22 below five percent. I think that is fairly remarkable 23 for companies this size, and you flip it around, 80 24 percent of the AIM companies have a spread over five 25 percent. We have been able to obviously solidify our 0123 1 presence in the Nordics and also attract additional 2 companies from outside the region. 3 One of the things we do in the Nordic, which I 4 think is fundamental to the success of First North, is we 5 have the ability to have what we call "liquidity provider 6 service," and in that liquidity provider service, the 7 listed company itself has the ability to pay a market 8 maker to maintain a spread in the marketplace. 9 To me, this is one of the most interesting 10 slides here, page 12. The typical scenario is liquidity 11 providers are good until you really need them, then they 12 disappear. How can you ask a liquidity provider to catch 13 the falling knife. The falling knife, I think, is a 14 valid point. 15 If you look at what transpired to the credit 16 crisis early, it was remarkable what the liquidity 17 provision did to the trading of these stocks, and that 18 represents a direct reduction in the costs to investors. 19 We certainly see this as a valuable lesson for us. 20 Learning from that and other markets we deal 21 with, we say okay, what is what we internally calls "JOBS 22 2.0," and 2.0 being focused on the secondary trading of 23 these stocks that make it through JOBS Act 1.0. 24 We would say first, very directly, there should 25 be a market maker support-pilot program, and this would 0124 1 be at the company's option, no company is forced to do 2 this. They can provide economic support for more 3 aggressive trading and quoting in their stocks. 4 These programs are not limited to First North 5 at this point. They are in fact very common around the 6 world. I think the U.S. stands out at this point in time 7 on not having them available. 8 The other option we would definitely put on the 9 table is the smaller companies also should opt into a 10 trading regime that is less fragmented than what exists 11 under Reg NMS for larger companies. 12 What we see with respect to the payment scheme 13 is we have the first example of approval of that in the 14 U.S. through our Market Quality Program, which is limited 15 to ETFs, not for stocks. We will have some great stats 16 on that in the U.S., but clearly we have stats for 17 outside the U.S. to do that. 18 In this market structure, the market makers 19 would receive a payment in compensation for commitment to 20 obviously enhance the quality of the market in the 21 registered securities and they can compete for a large 22 pool of dedicated funding. The intention here is 23 obviously a tightened spread, reducing execution costs 24 overall for the issuers. 25 In this program, these privileges obviously 0125 1 have to come with obligations and responsibilities. They 2 have to have a competitive price for the vast majority of 3 the trading day, and it can't just be for a 100 share 4 lot, it has to be for a significant number of shares 5 available to qualify. 6 If they meet these standards, then they should 7 be able to receive a proportion based upon some formula, 8 both in trade and quote payments, and we think the 9 payment from the listing company should be for both 10 trades and for quotes. We want to see tight spreads, and 11 beyond tight spreads, we obviously want to see trades 12 that happen. 13 As I said, this is new for the U.S., common in 14 other parts of the world. There is data that it does 15 work, and I think it ties in beautifully with the 16 intention of the JOBS Act. 17 With respect to the fragmentation question, in 18 our Reg NMS stocks, if Apple trades ten million shares a 19 day and it's fragmented, as you see in the pie up on the 20 chart here, that is enough to go around. Let's make it 21 clear, with these smaller stocks, if they trade 5,000 or 22 10,000 shares in a day, that would be accepted as the 23 norm. 24 I do remember when the Dodd-Frank legislation 25 was being considered. The concept was how can you move 0126 1 illiquid over-the-counter instruments to a screen. I had 2 Gary Ginser up in our office. I said Gary, we will look 3 at five or ten stocks and see how they trade. If you 4 pull up Microsoft or Apple, the screen is moving so fast, 5 you can't even see it at the opening. 6 Then if you pick up any of the 2,000 stocks 7 below that, it's not even like watching paint dry. There 8 is no activity at all. Then you see the volume for the 9 day is 500 shares or 1,000 shares or 1,500 shares. It is 10 unbelievably low. 11 For us to fragment that volume, I think, is 12 just making a difficult situation more difficult. 13 In terms of us talking our book on this, I just 14 want to make it clear that our transaction revenue per 15 day from our thousand lowest stocks is around $50. It 16 might go to $75. It's obviously the right thing to do. 17 We think liquidity, hopefully we will attract liquidity, 18 but just make it easier for investors to be involved with 19 the stock, and I think it goes hand in hand with you have 20 market makers being paid by the companies to provide that 21 tight spread and to trade in the stock. 22 It's good for that to be concentrated for a 23 period of time. Again, there is a point in time where 24 this doesn't make sense. At 5,000 shares a day, I think 25 it makes sense, 10,000, you get to 100,000, you can start 0127 1 arguing you have to change the set of rules. Certainly, 2 that would be our recommendation. 3 We certainly see that as a standard practice 4 when you go outside the U.S., in Sweden, the small caps, 5 the First North type stocks, you see 99 percent of it is 6 done in one place and it obviously makes it easy for 7 investors, and then for the intermediaries in the market 8 to deal in that environment. 9 Our recommendation is quite straightforward, 10 and it is company selected, so to the extent a company 11 was paying for a market maker, it would be their option. 12 If they wanted to stop doing it, they could do it. There would 13 not be any time commitment to it. To the extent the 14 company had a centralized liquidity pool, no, that is not 15 good, I want to change that, they get to do it. They can 16 decide what is the right structure. 17 I also want to make clear that none of these 18 things are a panacea, per se, but just as we have suffered 19 through a thousand cuts, making these two changes will 20 start reversing that and will help. We are not going to 21 instantaneously create a deep and liquid market, but it 22 will be an easier path to get there. 23 We obviously think the private markets will be 24 there for a longer period of time, and we recognize our 25 obligation to make sure we can bring some of the benefits 0128 1 of the public market in a low cost world to the private 2 markets. 3 Thank you. 4 MR. GRAHAM: Thank you, Bob. Any questions? 5 MS. JACOBS: I have one. Historically, as we 6 have spent time on this issue and had a lot of speakers, 7 this group came to the decision: why not? Those of us 8 associated with these illiquid micro cap companies, we 9 are not even advocating even for a pilot. We are just 10 saying for God's sake, just do it. It's only what, five 11 percent of the companies with $250 million in market cap, 12 only represent five percent of the average daily 13 trading volume across both Exchanges. So, why not? 14 However, we have seen in the press there are 15 folks that are opponents to this, and can you weigh in or 16 provide some color for the Committee? Those folks that 17 oppose this say these spreads -- when decimalization came 18 in, and I don't remember the date, but the purpose in the 19 press at the time was to take fraud out of the process or 20 reduce these spreads and protect the investors. 21 I don't understand all those arguments today. 22 Are you familiar with that? What I am trying to do is 23 link where we all are today because we are sitting here 24 associated with these markets, we are in them and we are 25 living through it, but there were opponents to what 0129 1 happened in the past. 2 Could you link that for us? 3 MR. GREIFELD: In terms of going back in time, 4 I think what you saw is you had both NASDAQ and NYSE with 5 market structures where intermediaries were able to 6 collect rent that they did not necessarily deserve. That 7 was seen as the "big evil." I think there was legitimacy 8 to that. 9 MS. JACOBS: You mean the market makers? 10 MR. GREIFELD: The market makers and the 11 specialists had issues and investigations, and the spreads were kept wider 12 than they should be. The answer that was delivered was 13 the proper answer for the vast, for the 95 percent of the volume that you 14 are talking about. 15 We came out -- we reacted properly but then 16 over reacted or reacted in kind of a monolithic way, and 17 didn't think through the smaller -- it was impossible 18 politically to talk about the good things that market 19 makers and specialists did in the supporting of the 20 trading of the stock in the wake of the specialist and 21 the market maker issues. 22 We came out with one size fits all solution to it. I 23 think enough time has gone by to reflect on what is 24 happening here. 25 I have been head of NASDAQ since 2003. I think 0130 1 the issues were back in 2001 and 1999, but it was still 2 fresh and raw, we had intermediaries making money where 3 they should not have. 4 The fact is in an actively traded stock where 5 the buyers and sellers are constantly there, the role of 6 an intermediary is quite limited, but as you go down the 7 market cap curve and the volume curve, that role becomes 8 more and more fundamental to the success of the 9 enterprise. 10 I would hope now enough years have passed where 11 we are looking at this thing academically and 12 intellectually and taking all the emotion out of it, and 13 by any data driven analysis, the five percent of those 14 small companies are not being well served by this market 15 structure, and it is time to do something for it. 16 MS. JACOBS: One of the other missions that we 17 are charged with is besides capital formation, protecting 18 the investors. The one argument I have never seen made 19 in and around the decimalization and the tick size is 20 what about our current investors who are in the stocks of 21 these small illiquid companies where we have events and 22 they are stuck, they can't get in, they can't get out. 23 It is almost like double trouble. Does that 24 make sense? 25 MR. Greifeld: Completely. 0131 1 MS. JACOBS: I understand now the picture and 2 the purpose where decimalization was concerned. We sit 3 here today, and I want to protect my investors. They 4 were there when we needed to raise money. Do you know 5 what I'm saying? They are stuck. 6 MR. GREIFELD: If you are a PM, you obviously 7 want to understand why you want to buy the stock, but a 8 fundamental consideration is can you get out. We are at 9 the bottom end of a negative reinforcement cycle. We 10 have low volume and because we have low volume, we can't 11 get higher volume because people who can bring volume to 12 the world don't want to do that. 13 The market maker, he warehouses the inventory 14 for a period of time and should collect a proper rent for 15 doing that, helping people to get in and out. 16 There is always a willing buyer and a willing 17 seller. If you go down the market cap curve, you are not 18 going to have a simultaneous buying and selling interest. 19 You need that person in the middle to grease the wheels. 20 It is a fundamental responsibility. 21 If you are an investor, if you can't get out, 22 even if you think it's a great investment, you don't want 23 to do it. There is no doubt about that. 24 MR. GRAHAM: I think you have already answered 25 this, but just to confirm, one of the things Chris was 0132 1 just touching on is the whole issue of decimalization, 2 and you indicated that you support the Committee's 3 recommendation in that regard? 4 MR. GREIFELD: Yes, I do. I would probably 5 broaden the topic to what we call "intelligent spreads," 6 a nickel or six cents or whatever is not always the right 7 answer, but there should be different dimensions to what 8 is the right spread for a stock at a given point in time. 9 Right now, we have fundamentally dumb spreads, 10 it doesn't make any sense. It makes sense for Apple. 11 That part of the market is well served. It does not make 12 sense for other parts of the market. 13 MR. GRAHAM: Another thing we have talked about 14 as far as that subject area is concerned is the need to 15 have some certainty if you are going to make that change. 16 In other words, the notion of a pilot program that is 17 here today could be gone tomorrow. It does not strike us 18 as the way to go. 19 Do you have any thoughts on that? 20 MR. GREIFELD: To me, it's an opportunity to 21 use the JOBS Act. It is to my definition a pilot 22 program. It goes for five years or $1 billion in market 23 cap, and then you move on. I would think JOBS Act 2.0 24 should fit within that construct. We are not calling it 25 a "pilot," per se, but there is a natural termination 0133 1 date. To me, that is the easiest path to get there. 2 That doesn't address a situation where a small 3 company that's been there for five years and still trades 4 3,000 shares a day, so it's a pragmatic answer, but I 5 would think we would have enough data, we would have five 6 years of data, and then see where it goes from there. 7 I don't know if you agree with that. I think 8 that is an easier path to go. 9 MR. GRAHAM: The devil is always in the 10 details. I think most of us would be of the view in a 11 situation like that, after five years, you take stock 12 where you are, with the eye of making adjustments, not 13 kind of eliminating things, going back to where we were. 14 MR. GREIFELD: Agree. You would have five 15 years worth of data to see if you made a difference and 16 made things better. 17 MR. GRAHAM: Another thing is just the whole 18 notion of a separate U.S. equity market for securities 19 from small and emerging companies. Do you think the 20 Nordic stepping stone model is something that might fit the 21 U.S. markets? 22 MR. GREIFELD: Definitely. It also has worked 23 very well in Canada with their venture market and their 24 way to graduation into the main market is quite strong. 25 Yes, we believe that. As you say, the devil is in the 0134 1 details. 2 We came to this meeting saying if you have the 3 JOBS Act construct and broad congressional support, and 4 SEC support, I'm not sure yet, you could use that. 5 Clearly, the right answer is let's look at the markets 6 and change them based upon the data we see for the 7 better, independent of the JOBS Act. I don't which one is 8 practically more doable. 9 MS. JACOBS: I have a quick question about 10 taking the JOBS Act and consolidating it for your 11 existing small micro cap companies because you have the 12 lion's share of them. 13 If there has been activity on your part -- the 14 Committee worked on a set of specific recommendations we 15 thought could materially assist an existing public 16 company, but where we were coming down on several of 17 these issues is that we have this whole plethora of 18 existing public companies that are already engines. They 19 already have gas. They are already moving. Yet, we 20 could provide them some relief. 21 MR. GREIFELD: Our recommendations here would 22 apply to all those companies, not to pre-negotiate, but 23 we are saying if that right answer is not doable and the 24 JOBS Act companies is the easier path, we would take that 25 as a very positive step, begging the question if it 0135 1 worked for JOBS Act companies, you can prove it's good 2 for the companies that have been listed for a longer 3 period of time. 4 We are pragmatic people. We can play it either 5 way. The better answer is to take care of the existing 6 companies. You can go to a screen today and watch paint 7 dry faster than you can see trading happening in a lot of 8 these companies. 9 To me, a guy who is a software entrepreneur who 10 ran a private company for a long period of time and as 11 the head of NASDAQ, why do these companies want to be 12 public. There will always be a friction cost associated 13 with the public, you have investors you have to respond 14 to and answer to, but the payoff should be that you have 15 liquidity and ability to raise capital quicker than you 16 would in a private company context. 17 If you are not getting that benefit, you see a 18 degrading of the value of being a public company. Some 19 companies are waiting longer or delaying it altogether or 20 doing a roll up from a larger company. It is just not as 21 appealing as it was not too long ago. 22 MR. GRAHAM: Leroy? 23 MR. DENNIS: I just want to follow up on the 24 comment you made, Stephen, about First North. Maybe 25 understand it a little bit better. Are there different 0136 1 disclosure requirements for companies on First North, are 2 they significantly different? Do you do an IPO in a ten 3 page document? 4 MR. GREIFELD: The whole process is easier, so 5 yes, the disclosure, the original documentation, the 6 disclosure regime is less onerous than it would be for a 7 main market listing. The trading is different and the 8 regulatory regime is different. 9 MR. DENNIS: We heard earlier that on a best 10 case scenario, it was half a million dollars to take a 11 small company into the public markets. Is that number 12 substantially different for a company coming into the 13 First North regime? 14 MR. GREIFELD: Let me start by saying if the 15 market delivered what it is supposed to deliver, the half 16 a million dollar number is not a big deal. I think the 17 half a million dollar number becomes a big deal when you 18 spend it and then you don't trade, and you have wide 19 spreads. If you spent the half a million dollars even a 20 small company in an active and liquid market where you 21 could raise new capital and investors get in and out, I 22 really think the complaints on that issue would go down 23 dramatically. 24 When I look at our situation, I think there are 25 a lot of good things we do here for investor protection, 0137 1 it has a cost to it. I have not been that philosophically 2 opposed to a large part of what Sarbanes-Oxley does. You 3 have to have the payoff on the other side. I think the 4 issue is you are spending the costs but not getting the 5 payoff. 6 That being said, the regulatory regime is a 7 lighter regulatory regime than you have for the main 8 market listing. I don't have command of what the dollar 9 difference was, but we can certainly get that to you. 10 MR. GRAHAM: Greg? 11 MR. YADLEY: Thanks very much for being here. 12 This is very instructive. I think just to sort of put a 13 tail on a couple of the last comments, and we may be 14 getting caught up in nomenclature. 15 I think our resistance to the use of the term 16 "pilot program" in the traditional sense is with 17 something that would represent a change now, especially 18 if we can do it now, we would hope that it would be permanent 19 enough that people would buy in as opposed to well, it's 20 just a pilot, we can wait them out. 21 Another fundamental thing, which I think is 22 what Chris was saying, is we are happy about the JOBS 23 Act, many of those recommendations were supported by our 24 Committee as the legislation was pending, but we do have 25 these public companies and we have representatives of 0138 1 several of them in the room who feel a little bit 2 orphaned, and they are not getting the payoff for being 3 public, and it's not really right that they should have 4 to sit there and continue to be ignored simply because we 5 have the JOBS Act. 6 I think with respect to decimalization 7 specifically, if there is a way to do both, acknowledging 8 that a pilot program with a pre-directed set of companies 9 may be easier, I think we would like to see as much 10 innovation as possible. 11 At our February 1 meeting, we talked about 12 recommendations for making regulation right-sized and the 13 idea of a continuum for companies growing through stages, 14 including in the public markets. 15 I was totally unfamiliar with this Nordic First 16 North market. Thanks for bringing that up. I have a 17 little more familiarity with what's happening in the 18 Toronto Stock Exchange. 19 Could you just describe a little more what 20 NASDAQ has been able to do to help the companies along, 21 other than simply providing them marketplace? In other 22 words, how did they get to the next phase and then 23 ultimately NASDAQ U.S.? Were the liquidity providers 24 instrumental in that or simply another feature? In other 25 words, how did it actually happen for these companies 0139 1 that have graduated? 2 MR. GREIFELD: That's a great question and a 3 multi-faceted answer. Clearly, here in the States, 4 before we get to the Nordic, we refer back to the days of 5 the Four Horsemen, and say what was right then and how is 6 it different now. These companies had a strong research 7 component behind them. You see a lack of that today, and 8 you live in a feast to famine world. 9 As not a large company, NASDAQ listed our own 10 market, a $5 billion market cap, we have 20 analysts 11 covering us. I don't really need 20. Probably four or 12 five would be more than enough. You go down the market 13 cap curve, and it drops off the cliff with coverage. 14 We are certainly of the opinion that to the 15 extent that there is economic value to the trading operation, 16 that will support increased research coverage. Back in 17 the days of the Four Horsemen, that was a fundamental 18 relationship between those enterprises. 19 What we have done in NASDAQ OMX to try to get 20 the pump primed a little bit is we set up a relationship 21 with Morningstar, where they do kind of tear-sheet research, just to 22 help a little bit. That is still a fundamental different 23 thing than detailed research analysis for that. 24 I think the research and liquidity, if you were 25 to highlight two things, are fundamentally important, and 0140 1 they are tied together in some way. The only way they 2 are not is again if the company wants to pay for research 3 itself but then that research tends to have a taint to it 4 because you are paying the person to -- you might as well hire your marketing department, some people might say, to write the research. So it doesn't work. You 5 have to have an ecosystem work for that. 6 That is what you struggle with, how do you do 7 that. We certainly didn't cover it here but we think if 8 you have a proper market maker support program, the 9 research will start being generated as a result of that. 10 That is what we desire to do in the Nordics. I 11 don't want to over sell how successful First North is. 12 It is a success on a relative basis, relative to AIM, 13 relative to what existed before. I don't think it has 14 reached its full potential. You do see better research 15 coverage, tighter spreads, and more volume for given 16 market cap levels as a result of that. 17 MR. GRAHAM: John? 18 MR. BORER: Thank you again for coming and 19 presenting. I know part of your business is providing 20 technology to other markets and Exchanges around the 21 world, aside from running markets yourself. 22 If you or your team were to walk into a place 23 and suggest a new market, where one didn't exist before, 24 given no regulatory oversight or burden, what would the 25 key elements be that exist here in the United States with 0141 1 respect to regulatory oversight or market structure that 2 if they didn't exist some place else would really be able 3 to allow a market to be more efficient up and down the 4 curve, transparent and liquid? 5 MR. GREIFELD: It is not "a market." One of 6 the things we have to think about is the continuous 7 market for thinly traded stocks might not be the right 8 model. You could have a once a week call, once a day 9 call, and how do you do that. 10 In a fragmented world, it's harder to 11 experiment with different structures because you would 12 wind up with no market share. I wish we had more data to 13 show. We don't. Frank is here and might correct me. 14 When does a call market -- when should a call 15 market step away and you go to a continuous market. We 16 don't see around the world enough discussion or debate 17 about that. 18 As I said, if we take somebody from 5,000 19 shares a day to 15,000, you have a 300 percent 20 improvement, but that still may not be the right way to 21 run it there. 22 If we were starting from a clean slate, I would 23 want to do further experiments or experimentation with 24 call markets for variously thinly traded stocks based 25 upon the nature of them being there. 0142 1 I also think the market on a continuum starts 2 from a buyer beware market, which we kind of have with 3 the QIBS and accredited investors here, and then goes to 4 the general public, mom and pop, and how do you manage 5 that transition in a proper way. 6 We are trying to do a little bit with the 7 private market because when you look at the world today, 8 it is jarring between being private and being public. 9 The twain really don't meet. I think companies have 10 difficulties with that transition. 11 A direct answer to your question, if we were to 12 design something from the ground up and we had the wisdom 13 of the gods, we would know when to do the call, when to 14 transition to a continuous market and how to do it, and 15 we would have a limited investor set to be a larger 16 investment set as the company itself was able to grow 17 into an increased regulatory disclosure without putting 18 any adverse impact on its business. 19 One of the things we learned from Sarbanes- 20 Oxley from the large companies, as a percent of revenue, 21 it was a tenth of what it was as a percent of the revenue 22 for the small companies. Companies as they grow have 23 more ability to meet increased disclosure requirements 24 and have more ability to address a wider investor set, 25 and have more ability to then trade in more of a 0143 1 continuous fashion. 2 MR. GRAHAM: Shannon? 3 MS. GREENE: In light of that, piggy backing on 4 that, can you provide a little bit of color on the timing 5 and the thought process behind the recent proposal on the 6 internal audit function for NASDAQ listed companies? 7 MR. GREIFELD: Yes, I would say this, we were 8 very surprised by the response from our listed companies, 9 in particular, in the biotech world. I think the most 10 poignant story I heard was a research based biotech 11 company that had a partner, but they basically were a 12 group of scientists, and they got the partner payment, 13 and that was their revenue. They didn't really have any 14 customers. 15 They said you are asking me to hire or pay for 16 internal audit functions instead of hiring when we are scientists, we are a 17 zero revenue type company. That one kind of hit home 18 that maybe that was not the right thing to do. 19 We are certainly talking to the Commission and 20 thinking about that and how it should apply. I would say 21 we were not careful enough in knowing exactly the state 22 of affairs from all our customers with respect to where 23 they were, and what it would mean, and we are revisiting 24 that right now. 25 MR. GRAHAM: Milton? 0144 1 MR. CHANG: I'm going to be simplistic for a 2 moment. In some sense, the Internet changed the way 3 people get exposure. Anybody really good can get instant 4 exposure. 5 One of the problems we keep addressing is small 6 companies don't get the excitement of the bankers and 7 analyst reports. Why couldn't there be as part of their 8 reporting answering ten standard questions? The analyst 9 report really contains very basic information that gets 10 people excited. Why couldn't that be presented in a very 11 simple way in a mass exposure sort of way? 12 MR. GREIFELD: By the company itself? 13 MR. CHANG: Yes. 14 MR. GREIFELD: I think it can. If you want to 15 be critical about what the analyst does, it takes the SEC 16 mandated information, maybe it has a meeting with 17 management, and then a lot of times reformats it, and 18 certainly that is a doable thing. 19 It kind of ignores the independence aspect of 20 the information. Yes, reading the company's SEC 21 information, learning about the company, is very helpful, 22 and to me, mandatory if you're going to make your own 23 investment decisions, but there is still something 24 serving a different function where a trained professional 25 is writing a report. 0145 1 MR. CHANG: Independence is really controlled 2 by the legality of what you present. There is very 3 little room for interpretation when it is all said and 4 done. 5 MR. GREIFELD: I'm not sure I follow you there. 6 What the analyst writes? 7 MR. CHANG: Yes. In a sense, the analyst's 8 interpretation can also be broken down into a series of 9 questions, so to speak. 10 MR. GREIFELD: I think you are getting more 11 towards a cash sheet analyst, something like a 12 Morningstar. You have certain analyst functions that 13 will be more of a plain recital of the facts and 14 repackaging of what's available in the public. The 15 higher order function would be somebody distilling that 16 down into what is ultimately a recommendation and a price 17 target and their logic for coming up with that. 18 That is something a company really can't do. 19 MR. CHANG: I will make my last comment in the 20 sense of once it is discovered, then there is a lot of 21 information you can dig down to sort it out, it is the 22 first step. It doesn't provide the rest of it. The rest 23 of it would be taken care of by itself. 24 MR. GREIFELD: I think what you are getting at 25 is can you do 80 percent of the work -- I think I 0146 1 understand -- a higher order analyst could lever their 2 time. That is a good thought. You see that in some of 3 the firms where they have some of the research done 4 offshore. But I don’t think you could make the division of the work that way. It is something to think about. 5 MR. GRAHAM: Charlie? 6 MR. SUNDLING: My question is if maybe you can 7 provide some insights on the feedback that you might be 8 getting from the category companies we have been talking 9 about this morning, which are the market cap of $250 10 million and less. We heard some really interesting 11 statements, for example, about Adobe. I believe the 12 number was they raised $8 million on their IPO, very 13 small. 14 It is critical that these companies were funded 15 and remained independent and were allowed to grow. Some 16 of the other statistics that were brought up were as a 17 company gets acquired and becomes part of a larger OEM, 18 generally the trend is for reverse job growth, where you 19 get consolidated out, all the duplicated jobs are 20 eliminated and so on. 21 Small company, software tech CEO, probably 30 22 or 40 folks that fraternize with who are in the same 23 boat, and we have been around doing this thing and looked 24 at the AIM and some of these other markets and so on, but 25 honestly, I would say nobody takes, this size of a 0147 1 company, takes public markets as a serious liquidity exit 2 strategy, there is so much private equity, there are so 3 many strategic buyers, as you go through all the 4 different regulatory requirements and everything else 5 going on, I don't know anybody that talks about IPOs any 6 more, at least not in the same way that we all did back 7 in the mid-1990s. 8 It is what every kind of CEO's dream was, and 9 what I say has changed is we have become much more 10 pragmatic, you are looking at an exit as a final event, 11 whereas an IPO to me has always been maybe a partial 12 exit, but what you are really betting on is what you can 13 do once you are public. 14 My question is around -- the statistics that we 15 saw, and I don't know if that was only limited to NYSE or 16 if it is just in general, showed there was an absolute 17 cliff for small company IPOs in 2001. There was a little 18 dead cap bounce and that was it. The number is 19 extremely small. 20 For all the objective evidence suggests what 21 Mr. Hambrecht's headline was on one of his slides, is the 22 IPO market for small companies dead, is it gone, is it 23 ever coming back, so as you talk to would-be listing 24 companies, and just from a philosophical standpoint, and 25 I would guess the ones you end up talking to have already 0148 1 philosophically shown an interest in being public, of 2 course, how many don't show up even to have that 3 conversation? 4 Do you have any statistics or insights or 5 anything else about just philosophically have small 6 companies decided to stay away from the public markets in 7 general? 8 MR. GREIFELD: I don't know if they have 9 decided to stay away, but they are staying away because 10 they are not hospitable to them at this point in time. 11 We certainly recognize that as the basic statement of the 12 problem. 13 I don't want to overstate the problem because 14 certainly back in 2001, there were probably companies 15 that came to market that should not have. The 16 denominator of the problem is smaller than you think, but 17 it is still there, and something that we thank this 18 Committee for their efforts on. 19 What can we do as NASDAQ to help with that. We 20 have covered a lot of different pieces today. Just to 21 cover them in a little different way, a large global bank 22 with their cost infrastructure cannot be involved with 23 these smaller companies and make a nickel. We call it at 24 NASDAQ OMX "the corporate kiss." The allocation from 25 corporate in J.P. Morgan as a well run bank is still 0149 1 monumental in terms of what they have to do without 2 getting less. 3 There clearly has to be entrepreneurial based 4 investment banks that have name brand and credibility to 5 make this market work. They will be interested in it if 6 it is on their low cost structure, still profitable for 7 them to be involved with it, and it would not just be the 8 IPO but obviously the after market support, and support 9 you as it grows. 10 What makes them interested? Clearly, if they 11 have a profitable market making operation, profitable 12 research associated with it, that would help. 13 Where are the investors? Investor funds have 14 restrictions on liquidity. They have to be able to buy 15 and sell to get out. There is less of them available, 16 and we certainly don’t have a period of time where you are 17 capturing the imagination of the retail investor with 18 some of these things, and that could be just the part of 19 the cycle we will be in, and we can be in there for a 20 period of time. 21 Our feeling is the barrier to be public today 22 will still be higher than we want it to be. The work of 23 this Committee and the Commission hopefully will lower 24 that. We clearly see with the private market there is 25 going to be that period of time where that would be a 0150 1 valuable service to them, and as a glide path into the 2 public market. 3 If you are saying the public market's position 4 of where it is today and then you have the venture market 5 where it is today, assuming those things are right, there 6 is a gap there, and it is our job to see if we can come 7 up with something that helps address that, where people 8 would have a weekly, monthly, once a year call market, 9 control the register to know who their shareholders are, 10 they still have the ability to pick shareholders, and 11 shareholders will then demand what they need with respect 12 to audited financials and have that kind of work in a 13 better fashion than it does today. 14 For the existing public companies, we need to 15 do what we said and that will improve their situation and 16 not to be negative, I don't think it is going to be 17 overly dramatic, but I think it will be helpful in terms 18 of what we are talking about here. 19 MR. GRAHAM: Any more questions for Bob? Tim? 20 MR. WALSH: If someone was opposed to your 21 liquidity concentration program, what argument would they 22 make? 23 MR. GREIFELD: It's an easy one to debate or 24 argue against. It is saying we want a monopoly in the 25 trading, the listing venue has a monopoly for a period of 0151 1 time. That can't hold. It's not the right thing. 2 It is a question of what is the proper 3 incubation period before you fragment the liquidity. To 4 me, the first job is to have a liquidity pool, build 5 that, and then try to fragment it by competition. First, 6 build it. How do you best build it? We have to get the 7 fire going first, and we are not doing that today. 8 Others will definitely differ on that. 9 Once you do the math in terms of what we are 10 talking about, I think the opposition will be a lot less. 11 You need incubation time. These small companies, it's 12 hard to survive and to grow. We need to do everything we 13 can to encourage that to all parts of the value chain. 14 MR. GRAHAM: Leroy? 15 MR. DENNIS: I just have one more small 16 question. On First North and other markets like it, has 17 there been enough data to suggest whether or not there is 18 an increase in investor fraud in those kinds of companies as opposed to where the 19 full protections are, institutions like the SEC have in 20 place? 21 MR. GREIFELD: That is a great question. I 22 don't have command of that data. I'm not sure I can get 23 back to you with the answer, but we will see if we can. [Inaudible.] 24 I will say a politically incorrect comment, 25 the risk of fraud, it is not as endemic in the system up 0152 1 there as it is here. 2 [Laughter.] 3 MR. GREIFELD: I didn't say that, I retract 4 that statement. We will see if we have the data but I'm 5 not sure. I think our set of challenges here in the U.S. 6 is actually more intense on the investment fraud base. 7 MR. GRAHAM: Bob, everything you have said is 8 now part of the webcast for all time. 9 [Laughter.] 10 MR. GREIFELD: Oh, boy. It's six hours ahead 11 in the Nordic, I might get through the night. 12 [Laughter.] 13 MR. GRAHAM: Thank you again, Bob. We very 14 much appreciate your contribution to the dialogue. 15 Thanks for taking the time. 16 MR. GREIFELD: I appreciate you folks 17 volunteering your time. It is obviously an important 18 topic. It is multi-dimensional. It's not easy, it's 19 hard. Appreciate what you are doing. 20 MR. GRAHAM: Thank you. We will give Bob and 21 Mary Jo and Jim an opportunity to excuse themselves. We 22 will do a quick wrap up. 23 DISCUSSION OF NEXT STEPS AND CLOSING COMMENTS 24 MR. GRAHAM: I think today has been a very 25 productive day. I think there is a lot we have to 0153 1 digest. I think the next thing we need to do is to think 2 about in a critical way some of the information we got 3 today, couple that with some of the issues we already 4 felt were kind of on the table and come up with a set of 5 recommendations to discuss at our next meeting. 6 What I would suggest is that we allow Chris and 7 I to get together and talk with Lona and Gerry, formulate 8 a set of recommendations that we can then get out to you, 9 and then see if we can come to some agreement on a set of 10 issues that we should focus on at our next meeting. 11 If the Committee feels that might be the 12 correct approach, that is what I suggest we do, as 13 opposed to taking time today and kind of going back and 14 distilling what Duncan had to say, what Bill had to say, 15 and what Bob had to say. 16 Does that make sense? 17 [Nodding of heads.] 18 MR. GRAHAM: Okay. I would like to wrap up by 19 asking Lona to give us a wrap up as to where we stand on 20 prior recommendations and then maybe if you are willing, 21 where we stand on the rulemaking that is of particular 22 interest to this Committee. 23 MR. NALLENGARA: Thanks, Steve. I think the 24 Chair sort of stole all of that in her remarks. We are 25 working on the rulemakings, so there are three primary 0154 1 rulemakings that all of you have been talking about and 2 we have been talking to you about in the JOBS Act: general solicitation, crowdfunding, and in 3 Reg A+, all of which we touched on, more so Reg A+ 4 , today. 5 We are working on those. Chair White indicated 6 today and she has indicated in other venues that those 7 are her priorities along with getting through other 8 congressionally mandated rulemakings. 9 Everyone asks what is the schedule, what is the 10 time table. I don't know other than we are working as 11 hard as we can. We have rulemaking teams on each one. 12 They can all work independently of each other. They are 13 staffed separately. They can all work as hard as they 14 can, which they are, and we are getting them done as 15 quickly as we can. 16 With respect to your four recommendations that 17 you made at the last meeting, those have been provided to 18 the Chair as well as to the other Commissioners, and they 19 are posted. 20 You hopefully saw some of the media coverage of 21 some of those recommendations. As you know, right after 22 your meeting, there was a Roundtable the Commission had 23 on decimalization. The Commissioners are considering 24 next steps from that Roundtable, some of the ideas 25 relating to tick size and decimalization we talked about 0155 1 today, regarding whether a pilot is something to proceed 2 with. 3 I know this Committee had questions about 4 whether a pilot is the right answer, and also whether it 5 should be some subset of all companies should be 6 eligible to use it. Part of the idea of a pilot -- I 7 know a pilot is a question for all of you to begin with - 8 - part of the idea of a pilot is to be able to have 9 something to assess on whether you need to modulate what 10 the pilot put in place to make sure you are getting the 11 result you want, and part of having a sample size is also 12 being able to compare the companies that were subject to 13 the pilot to companies that were not subject to the pilot 14 to understand what liquidity may have occurred or may not 15 have occurred. 16 There is consideration among the Commissioners 17 on next steps. That is something to come as well. 18 On the other recommendations, the Exchange as 19 well as the disclosure, the final recommendation related 20 to specialized disclosures, I think that was something 21 for the Commission to inform Congress. We will leave 22 that one aside for the moment. 23 On the other two, we have a study/report that 24 we are working on disclosure requirements in Regulation 25 S-K. That, we hope, will be a step towards broader 0156 1 disclosure review, looking at all our disclosure 2 requirements, looking at things like what we are asking 3 of companies, whether we are asking the right things of 4 the right companies, and where we are asking for that 5 information to be disclosed. That, I think, to the 6 extent you are interested, would be something this 7 Committee could help the Commission and the staff with as 8 we work through that. 9 Your recommendations will serve as a guide to 10 what this Committee thinks is a good first step. 11 I think that covers it. As always, I have no 12 answers, just more questions. Hopefully, one day I will 13 be able to answer the "when" question, but it will likely 14 be after it is done. 15 MS. JACOBS: Lona, is there any movement at 16 all? Not that all four suggestions have to be taken 17 collectively. To take the $75 million market cap 18 exemption and move it to $250 million, some of this is in 19 the purview of rules and regs and doesn't take an act of 20 Congress. It's not of the magnitude that decimalization 21 would be. 22 MR. NALLENGARA: You are right, Chris. Many of 23 the things that you have provided us a recommendation on 24 are things the Commission could do on its own. The 25 priorities, the rulemaking priorities now are getting 0157 1 through like what Congress told us to do, so that is 2 completing Dodd-Frank, getting through the JOBS Act 3 mandates. 4 The next step with respect to smaller companies 5 is to look at a number of the issues you have talked 6 about here, and one of those is disclosure reform, but 7 looking at disclosure reform is also looking at are we 8 asking for the right information from the right size of 9 companies. Is $75 million right, is $250 million the 10 right number. If we are cutting it that way, why are we 11 cutting it that way, what are the indicia of the 12 companies at each level that makes sense. 13 Duncan indicated the $1 billion number, he 14 didn't understand where that came from. He suggested it 15 was there wasn't a basis for it, he thought it was too 16 high. 17 If we were going to have rulemaking with 18 respect to changing $75 to $250 million, we would have to 19 have a basis to make that change. Our analysis would 20 have to show data to support a change from $75 to $250 21 million. That is work we have to do. That is work that 22 would be part of a broader project on disclosure reform. 23 MR. GRAHAM: Don't sell yourself short, Lona. 24 You have answered our question, the answer is 25 unsatisfactory. 0158 1 [Laughter.] 2 MR. SUNDLING: Steve, I have a question. It's 3 more of an observation. The topics that we have taken on 4 here from crowdsourcing to tweaks in Reg D to the public 5 markets, it is a lot of stuff. 6 One of the things in these Committee meetings 7 and the content coming out of here that I find falls into 8 the disturbing category is what's going on in the public 9 markets. I guess my question is does it warrant 10 separating that out into when we talk about the public 11 markets specifically as a separate topic, focus on a get 12 well plan just around getting public, staying public, and 13 all the things involved because that on its own is a 14 massively complex and broken part of this equation. 15 The part that is disturbing is given the amount 16 of importance that has to the economy in general, we hear from all this testimony 17 the jobs that get created post-IPO, all these jobs are 18 elements, and I guess my concern is when it gets bundled 19 in, all this stuff together and we look at it more 20 holistically, what you need to do, as it is kind of piled 21 in there, there is going to be smaller recommendations in 22 each one of these different categories, but that 23 certainly seems to be something that is good and broke 24 and needs to be looked at very closely, and I'm sure it is. 25 Even for this Committee, maybe that is a 0159 1 separate topic that we can focus on and just come up with 2 a ten point plan of some type to address it. 3 MR. GRAHAM: I think I understand your point. I think 4 addressing things like tick size and kind of the whole 5 disclosure framework, the IPO on-ramp, alternative 6 markets for new public companies and that sort of thing, 7 I think that addresses that broad issue. 8 Maybe there are other things we haven't thought 9 of that we should be focusing on as well. Please keep 10 those in mind. 11 The other side of that is while we understand 12 when companies become public, they become the big job 13 creators, as far as the life of that company is concerned, like 14 Duncan was saying this morning, most of the jobs in this 15 country are going to be generated by companies that have 16 no aspiration whatsoever to ever be a public company. 17 We can't forget that either. He described it 18 as capital formation for Main Street. I think that side 19 of the equation tends not to get the headlines, but I 20 think that is certainly of equal if not greater 21 importance in terms of the overall economy and job 22 creation. 23 That is just my take. 24 MR. DENNIS: Steve, I agree. The other thing I 25 would caution the Committee on is don't lose hope in what 0160 1 we are doing here. I sat on the previous Committee with 2 Gerry and some of our recommendations were -- I think 3 most of them eventually got adopted. It just takes a while. 4 I know we all want things to move tomorrow, but 5 the SEC does have to analyze it and make sure they are 6 going in the right direction. I know when we left that 7 original Committee, you kind of felt depressed that 8 nothing was going to get done, but then lo and behold, it 9 does happen. 10 I guess my advice is to keep charging and keep 11 coming up with good ideas because it just takes a while 12 to move the beast. 13 MR. GRAHAM: Thank you for that. Our next 14 meeting is scheduled for September 17, I think. D.C.? 15 MR. NALLENGARA: Yes. 16 MR. GRAHAM: Details to follow. Can I get a 17 motion to adjourn? 18 MR. CHANG: So move. 19 MR. GRAHAM: Second? 20 COMMITTEE MEMBER: Second. 21 MR. GRAHAM: Anybody opposed? 22 [No response.] 23 MR. GRAHAM: Thank you. 24 [Whereupon, at 3:20 p.m., the meeting was 25 adjourned.] 0161 1 PROOFREADER'S CERTIFICATE 2 3 In the Matter of: MEETING OF ADVISORY COMMITTEE 4 FOR SMALL AND EMERGING COMPANIES 5 File Number: OS-265-27 6 Date: Wednesday, May 1, 2013 7 Location: Washington, D.C. 8 9 10 This is to certify that I, Susan Watkins, 11 (the undersigned), do hereby swear and affirm 12 that the attached proceedings before the U.S. 13 Securities and Exchange Commission were held 14 according to the record and that this is the 15 original, complete, true and accurate transcript 16 that has been compared to the reporting or recording 17 accomplished at the hearing. 18 19 20 21 ____________________ ____________________ 22 (Proofreader's Name) (Date) 23 24 25 0162 1 REPORTER'S CERTIFICATE 2 3 4 I, Jon Hundley, reporter, hereby certify that the 5 foregoing transcript of 160 pages is a complete, true and 6 accurate transcript of the testimony indicated, held on 7 May 1, 2013, at Washington, D.C. in the matter of: 8 MEETING OF ADVISORY COMMITTEE FOR SMALL AND EMERGING 9 COMPANIES. 10 11 I further certify that this proceeding was recorded by me, 12 and that the foregoing transcript has been prepared under my 13 direction. 14 15 16 17 Date: __________________________ 18 Official Reporter: __________________________ 19 Diversified Reporting Services, Inc. 20 21 22 23 24 25