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 1      UNITED STATES SECURITIES AND EXCHANGE COMMISSION 
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 4                               
 5                               
 6      SEC ADVISORY COMMITTEE ON SMALL AND EMERGING COMPANIES 
 7                 		OPEN MEETING 
 8   
 9   
10   
11                 Tuesday, September 17, 2013 
12                          9:30 a.m. 
13   
14   
15   
16   
17           U.S. Securities and Exchange Commission 
18            100 F Street, N.E., Washington, D.C. 
19              Station Place 1 Multipurpose Room 
20                               
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22                               
23                               
24            Diversified Reporting Services, Inc. 
25                       (202) 467-9200 
0002
 1   
 3    
 4   ADVISORY COMMITTEE MEMBERS PRESENT: 
 5        	Stephen M. Graham, Co-Chair 
 6        	M. Christine Jacobs, Co-Chair 
 7        	A. Heath Abshure 
 8        	John J. Borer III 
 9        	Dan Chace 
10        	Milton Chang  
11        	Leroy Dennis 
12        	Shannon L. Greene 
13        	Richard L. Leza 
14        	Kathleen A. McGowan 
15        	Catherine V. Mott 
16        	Pravina Raghavan
17        	Tim Walsh
18 		Gregory Yadley     
19	PANELISTS:
20		Alex F. Cohen  
21		Marianne Hudson
22	     	Jeffrey M. Solomon 
23		Joel H. Trotter
24		David Verrill
25
0003	SEC Staff: 
 1        	Mary Jo White, SEC Chair
 2	     	Luis Aguilar, SEC Commissioner
 3		Keith Higgins, Director of the SEC Division of Corporation Finance
 4		Jonathan A. Ingram, Acting Chief Counsel, SEC Division of Corporation Finance
 5		Johanna V. Losert, Special Counsel, SEC Office of Small Business Policy
 6		Mauri Osheroff, Associate Director, SEC Division of Corporation Finance
 7		Karen Wiedemann, Attorney Fellow, SEC Office of Small Business Policy 
 8		Ted Yu, Senior Counsel to the SEC Director of the Division of Corporation Finance    
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0004
 1                        C O N T E N T S 
 2                                                     PAGE 
 3   Call to Order and Opening Remarks                    4  
 4   General Solicitation                                23  
 5   Bad Actor Disqualification                          27 
 6   Regulation D and Form D Proposals                   34   
 7   Presentation by Angel Capital Association           53 
 8   Discussion of Amendments to Regulation D            76 
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0005
 1                     P R O C E E D I N G S 
 2                        OPENING REMARKS 
 3             MR. GRAHAM:  Okay.  Let's get started.  Ted, do 
 4   we have a quorum? 
 5             MR. YU:  Yes, we do. 
 6             MR. GRAHAM:  Okay.  One administrative note.  
 7   Could you make sure that you keep your cellphones away 
 8   from the mic because it does cause feedback.  Well, 
 9   welcome to all the committee members.  It's good to see 
10   you again.  Once again, thank you for your time and 
11   effort.  Thank you for your time and effort over the past 
12   two years.  It's been time I think well spent and time 
13   that has gone by quickly.  We also want to thank the SEC 
14   staff for all of their help. 
15             Before we get started, I'd like to introduce 
16   our newest committee member Pravina Raghavan.  Is Pravina 
17   here? Were you just waiting to be called? 
18             CHAIR WHITE:  It's called responding to a cue, 
19   right? 
20             MR. GRAHAM:  Yes. 
21             CHAIR WHITE:  Welcome also. 
22             MR. GRAHAM:  Yes.  Pravina has been appointed 
23   by Chair White to serve as the committee's SBA observer. 
24    And she is the Acting Associate Administrator in the 
25   SBA, with over 15 years of experience in providing 
0006
 1   advisory services to businesses in all phases of their 
 2   growth.  And before joining the SBA, Pravina was a vice 
 3   president with MTV and BET networks and was a small 
 4   business owner of a strategic advisory firm that assisted 
 5   companies with their growth plans.  Pravina, we're very 
 6   happy to have you with us.  Thank you. 
 7             As you know, this committee was created by the 
 8   SEC in 2011 for a two-year term which expires October 
 9   4. October 4 is just around the corner, and we understand 
10   that the Commission is considering the possibility of 
11   renewing the committee for another term.  But in this 
12   connection Chris and I took the opportunity to speak 
13   individually to nearly all of you to talk about the past 
14   and the future.  And we'd like to share two comments and 
15   observations that resulted from this conversation.  So at 
16   this time I'd like to turn it over to Chris. 
17             MS. JACOBS:  Thank you.  The purpose of these 
18   one-on-one calls was an end-of-term sort of report card, 
19   and to provide Stephen and I feedback about the process, 
20   about what we accomplished over the two years and to hear 
21   your thoughts and your experiences.  Our calls each 
22   lasted less than 15 minutes unless members needed more 
23   time.  Two members did, Catherine Mott and John Borer.  
24   We granted them the extra time.  They brought issues 
25   before the Committee, which we are going to hear about 
0007
 1   today. 
 2             The comments that we heard from these calls 
 3   with committee members fell into sort of four buckets of 
 4   comments.  The first bucket was sort of a self-report 
 5   card, more reflective comments, maybe personal comments 
 6   about the experience of being on the committee.  You felt 
 7   it was a privilege to serve, felt it was a great 
 8   experience, learned a lot.  A couple of quotes, "We did 
 9   things and we did a good job.”  “We did a lot with our 
10   seven recommendations that we put in over the two years." 
11   And lastly, that it was an honor to be asked to help.   
12             The second bucket was agency or SEC specific 
13   comments.  One member in particular found the agency to 
14   be sincere and had an admiration for their current 
15   challenges. Others felt that it was good to see that the 
16   SEC was genuinely interested in our issues.  There had 
17   been sort of an unfortunate turnover of talent top down, 
18   and there was worry that perhaps we would have lost 
19   momentum along the way. Some of you were a tad skeptical 
20   about the overall commitment to change and to address 
21   some of our issues.   
22             But generally, except for one of our members 
23   who said we should go slower and be more thoughtful, 100 
24   percent of the balance of our committee overall felt some 
25   frustration at seeing movement on our recommendations,   
0008
 1   saying things like, "We wish that the SEC could do 
 2   something with our suggestions.”  “We sure hope the SEC 
 3   moves on our issues, and this is all taking too long."  
 4             The third bucket was about Stephen's and my co-
 5   chair responsibilities.  It was noted that there was no 
 6   idle chatter, productive, that we kept the meetings going 
 7   and that we invited disparate views.  The last bucket of 
 8   comments from you at the committee was about the SEC 
 9   staff that we deal with day in and day out.  To a member, 
10   you said, "Thank you to the SEC staff for a job well 
11   done.  Felt that you all had done a great job on 
12   speakers."  One hundred percent of the committee was 
13   supportive of the staff that we have encountered over the 
14   past two years. And lastly the quote that we like the 
15   most was that “the staff had been impressive and 
16   dedicated.”  And with that I will end the comments from 
17   the one-on-one meetings.   
18             MR. GRAHAM:  Thank you, Chris.  Well, we 
19   certainly hope that the committee's term will be renewed, 
20   as we believe that it's important to have a meaningful 
21   way through which the needs of the smaller public 
22   companies and emerging private companies can be discussed 
23   and presented to the SEC for its consideration.  We have 
24   managed to accomplish a great deal over the past two years in 
25   terms of making recommendations and raising awareness.   
0009
 1             Seven of those recommendations -- we did make 
 2   seven recommendations.  And among them, of course, the 
 3   recommendation dealing with general solicitation, the 
 4   recommendation dealing with raising the Reg A+ limits and 
 5   also the recommendation dealing with raising the 
 6   thresholds that would trigger public reporting on the 
 7   part of private companies.   
 8             Now we know that these ideas found their way 
 9   into the JOBS Act, but that doesn't in any way lessen 
10   their importance or lessen the importance of your work in 
11   advancing these issues before something is actually done. 
12    In addition, we've made a recommendation regarding 
13   scaled disclosure, which we think is a fairly important 
14   one.  And we'd like to see some action on that.  Also 
15   conflict minerals, you know expressing at least the 
16   Committee's view of the need to focus on capital 
17   formation and investor protection and not politics. 
18             And lastly, tick size, which perhaps is a piece 
19   of the puzzle or a part of the answer to reinvigorating 
20   the markets for the smaller public companies.  But 
21   there's still much work to be done.  Perhaps there's no 
22   better example of that than the agenda that we have set 
23   for today which is quite full.  We will start the morning 
24   with a presentation by the SEC staff on three recent rule 
25   makings that will be very important for smaller 
0010
 1   businesses: the elimination of the general solicitation 
 2   ban; the Bad Actor disqualification provisions; and the 
 3   proposed new Regulation D and Form D requirements.   
 4             We'll then have a presentation by the Angel 
 5   Capital Association and its views on these rule makings. 
 6    And then in the afternoon we'll discuss the impact of 
 7   the JOBS Act, which was enacted, as you know, nearly a 
 8   year and a half ago and also new ideas for facilitating 
 9   capital formation.   We'll start with a presentation by 
10   Joel Trotter, now of Latham and Jeffrey Solomon of Cowen 
11   and Company.  And we'll also hear from John Borer who 
12   will present some ideas for easing the capital 
13   information process by expanding availability of Form S-3 
14   to smaller public companies.  Chris, I'll turn it over to 
15   you.   
16             MS. JACOBS:  Thank you.  We'd like to welcome 
17   Chair White this morning.  She was recently appointed in 
18   April of 2013 by President Obama to serve as the 31st 
19   chair of the SEC.  She arrived at the SEC with decades of 
20   experience as a federal prosecutor and securities lawyer. 
21    Prior to serving as the chair of the SEC, Chair White 
22   was the U.S. Attorney for the Southern District of New 
23   York, the only woman to hold that position in the 200-
24   year plus history of the office.   
25             And while her background in federal prosecution 
0011
 1   and securities fraud is deep and storied, she is now 
 2   facing challenges that broaden that range and expand her 
 3   reach and her legacy.  She understands capital formation. 
 4    And when Stephen and I had the good fortune of meeting 
 5   Chair White for the first time, she made it clear that 
 6   she understood our challenges, that she had followed our 
 7   work and wanted to make a difference in our world of 
 8   small and emerging companies.  So with that, I welcome 
 9   Chair White. 
10             CHAIR WHITE:  Thank you very much, Chris.  I 
11   appreciate it very much.  And I also was very interested 
12   in listening to your report.  I think there are some to-
13   dos in there for me that I heard as well from both you 
14   and Steve. It's good to be back with the Committee today. 
15    I think when I was here last time back in May, I hadn't 
16   been here all that long.  I feel like I'm fully settled 
17   in at this point.  I do continue, though, to really 
18   marvel at the scope and importance of the SEC's mission. 
19    And I was very glad to hear of your sort of hundred 
20   percent endorsement of the spectacular SEC staff which I 
21   -- you know, I completely share.    
22             I mean as you know, this agency shoulders 
23   significant responsibility on behalf of investors in our 
24   markets and we are really blessed with the staff that we 
25   have.  So I appreciate that endorsement from you folks as 
0012
 1   well.  I also want to reiterate just how important this 
 2   Committee is and how important your recommendations are. 
 3      They help us tremendously in our efforts.  I'm going 
 4   to talk a little more about that as I go through this.   
 5             So let me personally thank all of you for the 
 6   dedication you've shown to this Committee and the 
 7   contributions that you have made to helping us do our job 
 8   more effectively.  The Committee's co-chairs, Steve 
 9   Graham and Chris Jacobs, deserve a special thank you, 
10   which I extend for your leadership over the past two 
11   years.  I'd also like to single out but there are many 
12   more as well.   
13             But I thank SEC staff, Mauri Osheroff, and I 
14   think I pronounced that right. I can pronounce no names, 
15   as you know.  Ted Yu and Johanna Losert, in particular, 
16   for their work supporting the activities of this 
17   Committee.  And I'll thank Jonathan Ingram, who I know is 
18   going to lead the presentation today, too because he's 
19   right beside me.   
20             As members of the Advisory Committee on Small 
21   and Emerging Companies, you are in a unique position, 
22   truly unique position, to help us with insight into the 
23   challenges that these companies face in the capital 
24   markets.  And you've performed an absolutely invaluable 
25   role.  That is why -- and I guess I'm actually the 
0013
 1   deliverer of the news to the Committee.  I'm very pleased 
 2   to say that the Commission has renewed this Committee for 
 3   another two years.  No surprise at all, but I just want 
 4   to confirm that to the Committee.   
 5            And I look forward to continuing the dialogue 
 6   and receiving your insights and suggestions on how we can 
 7   continue to support, enhance our support of small and 
 8   emerging companies.  As I mentioned at the last meeting, 
 9   I really welcome policy and debates and am committed to a 
10   rulemaking process that insures, within the parameters 
11   obviously, our overall mission that the SEC makes a 
12   positive contribution to the success of small businesses. 
13             We have as an agency an extraordinary amount of 
14   work to do.  But one of my very top priorities, like I 
15   said this last time as well, is completing the 
16   congressionally mandated rulemakings that we have on our 
17   plate, including the JOBS Act mandates which are intended 
18   to help small businesses in raising capital.  And I think 
19   to reiterate what I think Steve said, you know, you also 
20   -- your contributions to that JOBS Act effort really 
21   can't be overstated as well, I think.  So just to pass 
22   that along. 
23             As you know, in July the Commission adopted 
24   rules as mandated by Title II of the JOBS Act to lift the 
25   ban on general solicitation in Rule 506 securities 
0014
 1   offerings.  And we, as Steve mentioned, adopted rules to 
 2   disqualify securities offerings involving certain felons 
 3   and other bad actors from relying on Rule 506.  These 
 4   adopted rules will be effective next week, and I'm very 
 5   interested to see how they will be used.   
 6             In connection with their effectiveness, the 
 7   staff will be closely monitoring and collecting data on 
 8   this new market to see how it in fact operates, observing 
 9   the practices issuers and market participants are using 
10   and assessing whether and to what extent the changes in 
11   the private offering market may lead to additional fraud 
12   or not.  And, as you know, at the same time these rules 
13   were adopted, the Commission also proposed rules intended 
14   to enhance its ability to evaluate the development of 
15   this new market and to address concerns that may arise 
16   once the ban is lifted.   
17             And I know your agenda as you've mentioned, 
18   obviously has a detail about a discussion and 
19   presentations on both the adopted rules as well as the 
20   rule proposal.  The comment period for the proposal ends 
21   next week, and I encourage you to comment on the 
22   proposal, obviously very interested in that.  I know you 
23   also have a keen interest in the remaining JOBS Act 
24   rulemakings.  So you should know we're continuing to work 
25   very diligently to get those rules done in a way that 
0015
 1   facilitates capital raising activities and addresses 
 2   investor protection concerns.   
 3             Again, I strongly encourage you to provide 
 4   feedback on all of our rule proposals, as the insights 
 5   and suggestions you provide really will help us to adopt 
 6   better rules.  So I couldn't be more encouraging of that 
 7   and that effort.  The JOBS Act, as you know, also 
 8   directed the Commission to conduct a study and to report 
 9   to Congress on decimalization, in particular the study 
10   which was sent to Congress last year.  It was to look at 
11   how decimalization affected the number of IPOs and the 
12   trading of small and mid-cap company securities.   
13             And following your last meeting in February 
14   where you approved recommendations regarding 
15   decimalization, the Commission held, I think it was four 
16   days later if I remember -- although I wasn't here yet 
17   but I did follow it -- held a roundtable to discuss this 
18   particular topic.  Across the panels I think it's fair to 
19   say that there was significant support for the Commission 
20   to implement a pilot that would widen ticks for small and 
21   medium capitalization companies, though some during the 
22   roundtable expressed concern about the potential costs of 
23   the wider ticks.   
24             The Commission is now considering whether to 
25   pursue such a pilot and its appropriate parameters as a 
0016
 1   means to gather data to help inform decisions in this 
 2   area. I realize that a pilot differs from the more- what I 
 3   would call- definitive approach advocated by the Committee 
 4   in its recommendations.  But I just wanted to have you 
 5   rest assured that this is something that continues to 
 6   have our very close attention -- this entire area 
 7   frankly, but including my personal attention and 
 8   interest. 
 9             Of course we also as an agency remain focused 
10   on a range of other important priorities from enforcing 
11   our laws and examining firms to reviewing filings and 
12   engaging in a lot of complex rulemaking.  In doing all of 
13   this we always keep in mind our tripartite mission, our 
14   overall mission to protect investors, to maintain fair, 
15   orderly and efficient markets and obviously to facilitate 
16   capital formation. 
17             And we're always open, indeed anxious, to 
18   receiving ideas for how we can better serve the needs of 
19   all investors and small and emerging companies in 
20   particular.  So I'll stop with that.  You have a very 
21   full agenda, but I want to just say thank you again for 
22   all that you do and for all of your assistance.  I look 
23   forward to receiving your report on your meeting today 
24   and to our continuing dialogues in the future.  Thank you 
25   for having me and thank you for being here. 
0017
 1             MR. GRAHAM:  Thank you, Mary Jo.  I would like 
 2   to introduce Keith Higgins.  Keith is the new director of 
 3   the Division of Corporation Finance.  Keith was appointed 
 4   by Chair White a couple of months ago.  He joins the SEC 
 5   after practicing for many years at Ropes & Gray.  Keith, 
 6   I'd like you to make a few remarks and then introduce 
 7   the staff at the table.  Keith. 
 8             MR HIGGINS:  Thank you, Steve, and thank you, 
 9   Chris.  Welcome, good morning.  And thank you, Chair 
10   White. We appreciate the support that you've shown for 
11   the Committee and its work.  I'd like to welcome 
12   everybody here and thank all of you for taking the time 
13   to be with us here today.  The very busy agenda that we 
14   have ahead of us -- gee everybody is leaving.  You sort 
15   of know what the pecking order is here at the Commission 
16   but that's all right.  I won't take it personally.   
17             We do have a busy agenda, so I want to be 
18   brief. As Stephen mentioned, I'm still a relative 
19   newcomer at the Commission, having been here for just a 
20   little over two months.  And this is the first time I've 
21   had the pleasure of joining the Committee in its work.  
22   However, both from my private practice experience as well 
23   as the short time that I have been here at the 
24   Commission, I've been able to observe the work of the 
25   Committee and the importance of the Commission and the 
0018
 1   staff to have a group of individuals broad ranging across 
 2   a lot of different disciplines, industries, types of 
 3   interest, to be able to provide thoughtful advice and 
 4   recommendations, to the Commission and to the staff, about 
 5   ways in which we can address the interests and priorities 
 6   of smaller companies and emerging companies. 
 7             When the Committee was created back in 2011, 
 8   then Chairman Schapiro charged it with providing the 
 9   Commission with ideas on how to facilitate capital 
10   formation in a way consistent with investor protection, 
11   as the Chair mentioned.  Stephen went over the 
12   recommendations and many recommendations.  It's amazing 
13   what the committee has done in its brief two-year tenure: 
14    The ban on general solicitation or eliminating it, the 
15   modification that triggers for reporting, the development 
16   of a new offering exemption modeled on Reg A, creation of 
17   a separate U.S equity market to facilitate trading by 
18   accredited investors.   
19             Ideas for revising small reporting company 
20   disclosures, scaling it back perhaps in ways that would 
21   make it more or less burdensome for smaller companies and 
22   allowing, as the Chair mentioned, smaller exchange listed 
23   companies to take advantage of an increased trading tick 
24   for their securities.   
25             Obviously, as Stephen mentioned, many of these 
0019
 1   have found their way into the law.  The JOBS Act picked 
 2   up quite a number of them, and I can tell you we've got 
 3   teams working right now on the JOBS Act rulemaking.  And 
 4   as the Chair had mentioned, the two -- the crowdfunding 
 5   and Reg A+ proposals are on the front burner.  So you 
 6   should expect to see something I think in the relatively 
 7   near future on those. 
 8             For me the real value of the Committee's work 
 9   is not, you know, the breadth of the recommendations but 
10   the thoughtfulness with which you bring your ideas to the 
11   Commission and to the staff to allow us to get a 
12   perspective of how you see things that we can be doing 
13   better to help small and emerging companies achieve the 
14   goals of facilitating capital formation.  So I'm 
15   delighted, as the Chair mentioned, the Commission has 
16   decided to approve the renewal of the Committee for 
17   another two years, and so I look forward during my tenure 
18   to working with you.           
19             With that and before we start out I'd like to 
20   introduce the other SEC staff members who are up here 
21   with me.  To my left are Johanna Losert, in the Office of 
22   Small Business Policy, and Ted Yu who is one of my Senior 
23   Special Counsels.  To my right are Jonathan Ingram, who is 
24   our Acting Chief Counsel, Karen Wiedemann, who is an 
25   Attorney-Fellow in the Office of Small Business Policy, 
0020
 1   and Mauri Osheroff, who is the Director who oversees the 
 2   office.   
 3             Since your last meeting Gerry Laporte, who I'm 
 4   sure all of you knew, who had for many years been the 
 5   Chief of the Office of Small Business Policy, retired.  
 6   And we are in the process of filling his position.  I 
 7   actually believe very strongly that the Office of Small 
 8   Business Policy is going to be a very interesting place 
 9   to be over the next several years.  There's a lot on the 
10   Commission's agenda between the Reg A+ the crowd-
11   funding, the general solicitation activities that are 
12   going to require implementation, thoughtful 
13   interpretations.  And really I think it will be a place 
14   where there'll be a lot of activity and it will be an 
15   opportunity for someone who's looking for an exciting 
16   challenge and has an interest in helping small and 
17   emerging companies to take on a responsibility. 
18             We are posting for the position.  It will be 
19   available on the website.  I would urge you if you know 
20   anybody who's looking for a gig in Washington -- I did it 
21   after 30 years of private practice.  I can tell you 
22   firsthand it's been amazing so far.  It's been a great 
23   opportunity to be involved in trying to shape policy.  I 
24   mean I've spent a lot of time advising companies how to 
25   comply with rules without thinking a lot about what those 
0021
 1   rules ought to be, although I obviously occasionally did. 
 2             This I think is an opportunity for someone who 
 3   really wants to do something and wants to have an impact 
 4   to come in.  So we'll be interested in getting 
 5   applications from folks who want to make a difference.  
 6   And so I urge you to if you have any recommendations, let 
 7   us know.  We'd be delighted to hear them.  So with that, 
 8   I'd like to turn it back to Chris and Steve to start 
 9   today's meeting.   
10             MR. GRAHAM:  We will just turn it right back to 
11   the table and let you guys proceed.   
12             MR. INGRAM:  Okay.  Thank you. 
13             MS. WIEDEMANN:  Good morning.   
14             MR. INGRAM:  And thank you, Keith.  Good 
15   morning members of the Committee.  This morning Karen and I are 
16   going to discuss the three rulemakings that Chair White 
17   mentioned just a bit ago, each of the rulemakings 
18   related to Rule 506, and Regulation D and Form D.  I want 
19   to start today by discussing the amendments to Rule 506 
20   that will permit issuers relying on the exemption to use 
21   general solicitation.  Karen is going to discuss amendments 
22   to Rule 506 that will prohibit certain bad actors from 
23   relying on the exemption. 
24             Finally, I'll conclude by discussing the 
25   proposed rules that the Commission issued that, if adopted, 
0022
 1   could enhance the Commission's ability to analyze the new 
 2   Rule 506 market that is expected to develop. 
 3             MS. WIEDEMANN:  And you know this but I'll say 
 4   it, we're here as a resource for you.  So while we've 
 5   planned a presentation with some time for Q&A, obviously 
 6   if you have questions as we go, please don't be shy.  You 
 7   know, this will work out better for everyone I think if 
 8   we can make it more interactive.  So if an issue comes up 
 9   as we're going, please just dive in and we'll try to 
10   address it. 
11             MR. INGRAM:  I was just going to -- the views 
12   that we express today are our own and don't necessarily 
13   reflect the views of other staff members or the 
14   Commission. I know that many of you -- 
15             MR. HIGGINS:  That's retroactive back to the 
16   Chair. 
17             MR. INGRAM:  Yes.  That is 
18   retroactive, yes.  I know that many of you are well 
19   versed in Regulation D and in Form D, but I thought it 
20   would be worthwhile to spend a couple of minutes 
21   describing the relevant rule and form at issue.  
22   Regulation D was adopted by the Commission in 1982 and 
23   consists of three exempted rules, Rule 504, Rule 505, and 
24   Rule 506.  Each of the exemptions have conditions that 
25   must be satisfied in order for the issuer to rely upon 
0023
 1   them, such as limitations on the amount of capital that 
 2   can be raised and the types of purchasers that can 
 3   participate in an offering.  
 4             Rule 506 is by far the most popular of the 
 5   exemptions under Regulation D, comprising 90 to 95 
 6   percent of all Regulation D offerings.  In 2012, almost 
 7   $900 billion was reported as being raised in Rule 506 
 8   offerings.  This compares to $1.2 trillion raised in 
 9   registered offerings.   I'm going to quickly run through 
10   the five conditions or elements of current Rule 506 which 
11   I will refer to as Rule 506(b).   
12             First, there is no dollar limit on an offering 
13   amount in a Rule 506(c) offering.  Second, purchasers in 
14   a Rule 506(b) offering must be limited to accredited 
15   investors, a concept that I'll discuss in just a bit and 
16   up to 35 non-accredited investors who are sophisticated 
17   persons.  Rule 506 defines sophisticated persons as those 
18   having such knowledge and experience in financial matters 
19   that they can evaluate the merits and risks of the 
20   transaction. 
21             Third, in a Rule 506 offering certain 
22   information must be delivered to non-accredited investors 
23   before any sales in the securities.  In contrast, there 
24   are no requirements to deliver information to accredited 
25   investors before a sale.  Fourth, the use of general 
0024
 1   solicitation in a Rule 506(b) offering is prohibited.  
 2   Finally, securities sold in a Rule 506(b) offering 
 3   are restricted securities for purposes of resale.   
 4             Generally speaking, this means that if 
 5   securities are sold by a non-reporting company, they do 
 6   not become freely transferable for a period of one year. 
 7    A key factor in the popularity in Rule 506 is that 
 8   securities required in a Rule 506 offering have “covered 
 9   security” status under Section 18 of the Securities Act.  
10   In a nutshell, states cannot require registration or 
11   qualification of a transaction in covered securities.  
12   This means that many issuers will choose to rely on Rule 
13   506 rather than other Regulation D exemptions in order to 
14   avoid state law registration issues.               
15             Now I'd like to go over two key concepts under 
16   Regulation D, the definitions of accredited investor and 
17   general solicitation.  The first key concept under 
18   Regulation D is accredited investor status.  In general, 
19   accredited investors are institutional investors and 
20   wealthy individuals that are presumed to be able to fend 
21   for themselves.  Natural persons can qualify as 
22   accredited investors on the basis of income or net worth. 
23     
24             For income, an accredited investor is a person 
25   who earned more than $200,000 or $300,000 together with a 
0025
 1   spouse in each of the prior two years and usually expects 
 2   the same for the current year.  For net worth, an 
 3   accredited investor is a person who has a net worth over 
 4   $1 million excluding the value of that person's primary 
 5   residence.  In addition, there's a long list of entities 
 6   that qualify as accredited investors under the 
 7   definition. 
 8             One thing to note about the definition of 
 9   accredited investor is the “reasonable belief” standard in 
10   the definition.  This means that a purchaser is deemed to 
11   be an accredited investor if the issuer has a reasonable 
12   belief that that is the case, even if it turns out that 
13   the purchaser does not in fact meet the thresholds in a 
14   definition.  The second key concept in Regulation D is 
15   general solicitation.  While the term general 
16   solicitation is not defined in Regulation D, Rule 502(c) of 
17   Regulation D provides examples of general solicitation, 
18   which include newspaper and magazine ads, communications 
19   over television and radio, and seminars where the 
20   attendees have been invited through general solicitation. 
21             In addition, the staff has issued interpretative 
22   letters in which we've indicated that there is deemed not 
23   to be a general solicitation in various circumstances 
24   where an issuer or a broker-dealer has a pre-existing 
25   substantive relationship with the offerees.  So that's a 
0026
 1   brief summary of Regulation D and Rule 506 as it exists 
 2   today, which takes us to the recent amendment to Rule 506 
 3   that was adopted by the Commission on July 10th and as 
 4   the chair indicated, will become effective on September 
 5   23rd. 
 6             Section 201(a) of the JOBS Act directs the 
 7   Commission to amend Rule 506 to permit general 
 8   solicitation in Rule 506 offerings provided that sales 
 9   are made only to accredited investors and issuers take 
10   reasonable steps to verify accredited investor status 
11   using such methods as determined by the Commission.  The 
12   Commission issued the proposing release to implement 
13   Section 201(a) in August of 2012 and voted to adopt the 
14   rule and amendments as proposed with one modification in 
15   July of 2013. 
16             There are at least four important things to 
17   note about Rule 506(c).  First, general solicitation is 
18   permitted under Rule 506(c) with no restrictions on the 
19   content or manner of the general solicitations.  This 
20   means that issuers may include general solicitation 
21   materials on their publicly-accessible websites.  
22   However, general solicitations under Rule 506(c) are 
23   still subject to the antifraud provisions of the federal 
24   securities laws.   
25             Second, purchasers in Rule 506(c) offerings 
0027
 1   must be limited to accredited investors, but there is no 
 2   limit on the number of purchasers who are accredited 
 3   investors.  Third, as I will discuss further, issuers 
 4   must take reasonable steps to verify the accredited 
 5   investor status of purchasers consistent with the 
 6   statutory directive in Section 201(a). 
 7             Finally, Rule 506(b), which I discussed earlier, 
 8   remains unchanged after adoption of the rule.  So for an 
 9   issuer that does not wish to engage in general 
10   solicitation, or does not wish to verify accredited 
11   investor status, or wants to sell to non-accredited 
12   investors who meet the sophistication requirements of 
13   506(b), those options are all still available.   
14             As in the case with Rule 506(b) offerings, 
15   under Rule 506(c) there is no limit on the dollar amount 
16   of the offering.  There are no specific information 
17   requirements because all purchasers must be accredited 
18   investors.  The securities are restricted securities for 
19   purposes of resale, and the securities have covered 
20   securities status under Securities Act Section 18.  As 
21   for verification, Rule 506(c) sets forth a principles- 
22   based method for verification, which is a flexible facts 
23   and circumstances test that requires an issuer to make an 
24   objective determination as to whether the steps taken to 
25   verify accredited investor status are reasonable in the 
0028
 1   context of a particular offering.    
 2             In addition, the Commission added in the 
 3   adopting release a nonexclusive list of verification 
 4   methods that issuers may use but are not required to if 
 5   they want greater certainty that they have satisfied the 
 6   verification required.  For the principles-based method 
 7   the Commission stated in the adopting release that the 
 8   factors to consider under this method include the nature 
 9   of the purchaser and the type of accredited investor that 
10   the purchaser claims to be, the amount and type of 
11   information that the issuer has about the purchaser, and 
12   the nature and the terms of the offering.   
13             In addition to the principles-based method, in 
14   response to a wide range of commenters, the Commission in 
15   the adopting lease also provided a nonexclusive list of 
16   methods that issuers may use to satisfy the verification 
17   requirement.  This nonexclusive list is intended to 
18   supplement the principles-based framework, and issuers 
19   are not required to use any of these methods. 
20             The nonexclusive list only applies to 
21   verification of purchasers who are natural persons.  This 
22   nonexclusive list of verification methods consists of 
23   four methods.  First, verification based on income, which 
24   can be done by reviewing copies of any IRS form that 
25   reports income.  Second, verification based on net worth, 
0029
 1   which can be done by reviewing specific types of 
 2   documentation dated within the last three months, such as 
 3   bank statements, brokerage statements and credit reports.  
 4             Third, written confirmation from a registered 
 5   broker-dealer, a registered investment advisor, licensed 
 6   attorney, or certified public accountant as to a person's 
 7   accredited investor status and finally, certification by 
 8   persons who had invested in the issuer's 506(b) offering 
 9   as an accredited investor prior to the effectiveness of 
10   the new Rule 506(c) and continued to be investors in the 
11   issuer.  
12             And finally, a quick note on Form D.  Form D is 
13   a filing that must be made no later than 15 days after 
14   the first sale of securities in a Rule 506 offering, or 
15   for that matter, in any Regulation D offering.  Since 
16   2008, Form D has been required to be filed electronically 
17   on EDGAR, so Form Ds are readily accessible on the 
18   Commission's website.   
19             In connection with the amendments to Rule 506, 
20   Form D was amended to add a Rule 506(c) check box, so 
21   that issuers will indicate whether they are relying on 
22   the Rule 506(c) exemption.  In addition, the signature 
23   block of Form D was amended to include a certification 
24   that the offering is not disqualified from the reliance 
25   on Rule 506 pursuant to new Rule 506(d).  And speaking of 
0030
 1   disqualification, now would be a good time for me to turn 
 2   over to Karen to discuss the bad actors release.   
 3             MS. WIEDEMANN:  Okay.  The Bad Actor Rule is 
 4   something that we've talked to you about before, but I'll 
 5   rewind the tape a little bit and give a little bit of 
 6   background.  As John mentioned, there were three 
 7   rulemakings that came out of the July 10th Commission 
 8   meeting, the 506(c) rules, bad actor, and a proposal for 
 9   Reg D and Form D amendments.  And for the Chair they were 
10   an important package that responded to some of the 
11   statutory mandates that the Commission has been given and 
12   also attempted to address some of the investor protection 
13   concerns and information gathering concerns that we have.  
14             Bad actor was part of that package, but it 
15   actually has a longer history.  It goes back to the Dodd-
16   Frank Act and was a mandate from July 2010 to add bad 
17   actor disqualification rules to Rule 506.  With the 
18   adoption of Rule 506(c), we think that bad actor has 
19   probably become even more significant than it was 
20   originally envisioned to be.  So the rule that was 
21   adopted as I said, you've been briefed on it before.   
22             The basic idea is that an offering will be 
23   disqualified from reliance on Rule 506 if the issuer or 
24   any other person that's sort of covered in a covered 
25   relationship with the issuer, has some sort of 
0031
 1   disqualifying event in its past.  And we can talk quickly 
 2   about what the list of covered people are and what the 
 3   triggering or disqualifying events consist of.  
 4             There is also a difference in treatment that we 
 5   can talk about between a preexisting disqualifying event, 
 6   so everything that's happened up until September 23rd 
 7   which is the effective date of the new rule, compared to 
 8   events that happened afterward.  So as I mentioned, 
 9   offerings will be disqualified if the issuer or any 
10   covered person has a disqualifying event.   
11             The list of covered persons that issuers will 
12   have to think about besides the issuer itself, its 
13   predecessor if there are any, any affiliated issuers -- 
14   there's a group of sort of control persons of the 
15   issuer that are in the frame, so directors, executive 
16   officers, general partners, managing members.  The rule 
17   also covers officers of the issuer who are actually 
18   participating in the offering.  That's a change from the 
19   original proposal which would have covered all officers 
20   of the issuer.  
21             There was a concern that that might reach too 
22   broadly with large and complex organizations that may 
23   have quite a lot of officers who don’t have much to do 
24   with the activities under Rule 506.  And so the focus for 
25   officers is only on those who were actually participating 
0032
 1   in the offering.  The rule covers 20 percent beneficial 
 2   owners of the equity securities of the issuer measured on 
 3   the basis of total voting power.  That's also a change 
 4   from the proposal which would have covered any holder of 
 5   at least 10 percent of any class of the issuer's equity.  
 6             Again, the concern was an attempt to avoid 
 7   possible over-breadth and focus really on the equity 
 8   holders who were in a meaningful position to influence 
 9   the policy and direction of the issuer.  The rule covers 
10   promoters as proposed.  There was a new addition for 
11   pooled investment fund issuers which constitute about a 
12   third of the 506 offerings reported on Form D.  For 
13   pooled investment funds the rules cover the investment 
14   manager, that is the investment advisor of the fund or 
15   other investment manager of the fund and the principals 
16   of that investment manager, so general partners, 
17   directors, managing members and so on.     
18             And finally, the rule also covers as proposed 
19   anyone who solicited or who is compensated for soliciting 
20   investors in the offerings in place of an agent, broker-
21   dealer, that sort of thing, as well as directors, 
22   executive officers, general partners and officers who 
23   participate in the offering of those compensated 
24   solicitors.  The triggering events were substantially as 
25   proposed with one addition, one fairly significant 
0033
 1   addition.   
 2             So what will trigger disqualification: certain 
 3   kinds of criminal convictions, basically convictions in 
 4   connection with the purchase or sale of security, making 
 5   a false filing with the SEC or arising out of the conduct 
 6   of certain types of regulated financial intermediaries?  
 7   And for that rule we'll look back five years in the case 
 8   of the issuer and its predecessors and affiliated 
 9   issuers, 10 years in the case of every other covered 
10   person.   
11             Similarly, you'll be disqualified for any court 
12   injunction or restraining order in connection with the 
13   same events, that is purchase or sale of security, making 
14   a false filing with the SEC arising out of the conduct of 
15   certain financial intermediaries.  The look back there is 
16   five years, so the injunction or restraining order must 
17   have been issued within the last five years and must 
18   still be in effect at the time of the proposed offering 
19   in order to trigger a disqualification. 
20             The new provision that was mandated by the 
21   Dodd-Frank Act is a set of disqualifying events for 
22   orders of state and other federal regulators.  So that 
23   includes things like state securities regulators, state 
24   insurance and banking regulators, as well as federal 
25   banking regulators and the National Credit Union 
0034
 1   Administration.  The Commission also added the CFTC, the 
 2   Commodity Futures Trading Commission to this list of 
 3   regulators, you know, taking the view generally that 
 4   their actions should be considered on par with these 
 5   other regulators in the financial sector. 
 6             So disqualification will be triggered if any 
 7   one of the regulators on that list bars someone from 
 8   associating with the regulated entity from engaging in 
 9   the business of securities, insurance or banking or 
10   similar businesses.  Disqualification will also be 
11   triggered for any final order based on fraudulent, 
12   manipulative or deceptive conduct.  And again, for those 
13   we’re looking back 10 years, so any such order entered within 
14   10 years of the proposed offering would trigger 
15   disqualification.   
16             There are a couple of different categories of 
17   SEC actions that will trigger disqualification.  First, 
18   disciplinary orders relating to brokers, dealers, 
19   municipal securities dealers, investment advisors, 
20   investment companies will generally trigger 
21   disqualification.  In addition, and this was a change 
22   from the proposal, a Commission cease and desist order or 
23   a subset of them will also trigger disqualification.   
24             When our baseline rules, the Regulation A bad 
25   actors qualification rules were originally adopted, the 
0035
 1   SEC didn't have cease and desist authority.  And so those 
 2   rules never covered C and Ds.  Now to take account of the 
 3   power that the SEC has in this area, certain cease and 
 4   desist orders will trigger disqualification, namely those 
 5   that are based on violations of scienter-based antifraud 
 6   provisions of the federal securities laws, so for 
 7   example, 10(b) and Rule 10b-5 or violations of Section 5 of 
 8   the Securities Act which is the basic registration 
 9   requirement that applies for most offerings.  
10             And then to round it out, the last group 
11   unchanged from the proposal, any issuer that's had a stop 
12   order issued with respect to their registration statement 
13   or an order which are in the Reg A exception or any 
14   underwriter that's participated in such an offering.  
15   Suspension or expulsion from an SRO such as FINRA will -- 
16   or a ban from association with an SRO will also trigger 
17   disqualification and lastly, U.S. Postal Service false 
18   representation orders.  
19             There is as proposed a reasonable care 
20   exception provided in the rules so that if an issuer can 
21   show that it didn't know and in the exercise of 
22   reasonable care couldn't have known of the existence of 
23   the disqualification, that it will not lose the 
24   exemption.  So that was proposed and broadly supported by 
25   the commenters and was included in the Final Rule.  And a 
0036
 1   key difference from the proposal is the distinction 
 2   between the treatment of disqualifying events that 
 3   happened before September 23rd, the effective date, and 
 4   qualifying events that happened afterward. 
 5             And remember we're focusing on the actual -- 
 6   not the underlying conduct but rather, you know, the 
 7   criminal conviction and the court order, the regulatory 
 8   order.  That's the triggering event.  So for any of those 
 9   that occurred before September 23, the consequence for 
10   the issuer will be a disclosure requirement.  They'll be 
11   required to provide purchasers a reasonable time before 
12   they purchase a description of the events, so that they 
13   have that in hand before they make their investment 
14   decision. 
15             For events that occur after September 23 -- on 
16   or after September 23rd I guess technically, 
17   disqualification will arise.  And then lastly as in the 
18   proposal, there is a provision for waiver included in the 
19   rule.  And so for good cause shown, the Commission would 
20   have the ability to waive disqualification if it should 
21   arise.  And with that I turn it over to John to talk a 
22   little bit about their Reg D, Form D proposal. 
23             MR. INGRAM:  Thanks, Karen.  Well, July 10th 
24   was a pretty busy day around here because the Commission 
25   wasn't done yet.  The final action that they took that 
0037
 1   day was to approve the issuance of a proposing release on 
 2   Regulation D, Form D and Securities Act Rule 156.  The 
 3   proposal is intended to enhance the Commission's ability 
 4   to assess developments in the private placement market in 
 5   light of the fact that the prohibition on general 
 6   solicitation will be lifted.   
 7             In particular, the proposal would improve the 
 8   Commission's ability to evaluate the development of 
 9   market practices in Rule 506 offerings and would address 
10   certain concerns raised by investors related to issuers 
11   engaging in general solicitation.  As the Chair 
12   mentioned, there is a 60-day comment period on the 
13   proposals and the 60th day is this Friday.  So I 
14   encourage you if you haven't already to read the 
15   proposing release and let us know what you think. I know 
16   that we're probably bordering on information overload 
17   here as far as our descriptions of the different adopting 
18   releases and now the proposing release.   
19             So on the proposing release what I'm going to 
20   do is -- there were seven main components too.  There 
21   were some proposals that were set forth in the release 
22   and I'm just going to tick through them one by one.  
23   First, issuers that intend to engage in general 
24   solicitation as part of the Rule 506(c) offering in 
25   addition to the current requirements would be required to 
0038
 1   file Form D at least 15 calendar days before engaging 
 2   in general solicitation for the offering.  The Commission 
 3   referred to this as the advance Form D filing 
 4   requirement.  
 5             Second, within 30 days of completing any Rule 
 6   506 offering -- so that would be with or without general 
 7   solicitation, issuers would be required to update the 
 8   information contained in Form D and indicate that the 
 9   offering had ended.  This was referred to as the closing 
10   Form D amendments.   
11             Third, issuers would be required to provide 
12   additional information in Form D to enable the Commission 
13   to gather information on changes in the Rule 506 market 
14   that could occur after the prohibition on general 
15   solicitation is lifted.  The additional information would 
16   include things such as expanded information on the 
17   issuer, the types of securities offered, the types of 
18   general solicitation used, if any, and the methods used 
19   to verify accredited investor status of investors.   
20             Fourth, an issuer would be disqualified from  
21   using the Rule 506(c) exemption in any new offering if 
22   the issuer or its predecessor or affiliates did not 
23   comply with the Form D filing requirements in a Rule 506 
24   offering within the past five years.  As proposed, the 
25   disqualification would continue for one year beginning 
0039
 1   after all the required Form D filings are made.  Issuers 
 2   would be able to rely on a cure period for a late Form D 
 3   filing and in certain circumstances could request a 
 4   waiver from the staff.  
 5             Fifth, issuers will be required to include 
 6   certain legends or cautionary statements in any written 
 7   general solicitation materials used in a Rule 506(c) 
 8   offering.  The legends would be intended to inform 
 9   potential investors that the offering is limited to 
10   accredited investors and that certain potential risks may 
11   be associated with these offerings.  In addition, if the 
12   issuer is a private fund and includes information about 
13   past performance in its written general solicitation 
14   materials, it would be required to provide additional 
15   information and materials to highlight the limitations on 
16   the usefulness of this type of information.  The issuer 
17   would need to highlight the difficulty in comparing this 
18   information with past information of other funds.   
19             Sixth, issuers will be required to submit 
20   written general solicitation materials to the Commission 
21   through an intake page on the Commission's website.  
22   Materials submitted in this manner would remain 
23   confidential, would not be available to the general 
24   public.  As proposed, this requirement would be 
25   temporary, expiring after two years.          
0040
 1             Finally, currently a Securities Act rule 
 2   provides guidance on when information and sales 
 3   literature by an investment company registered with the 
 4   Commission could be fraudulent or misleading for purposes 
 5   of the federal securities laws.  Under the proposal, this 
 6   guidance would be extended to the sales literature of 
 7   private funds.  Finally, the Commission also requested 
 8   comments on the definition of the accredited investor and 
 9   manner and content restrictions on the general 
10   solicitation of private funds. 
11             So that's a rundown of the proposing release.  
12   If you liked or didn't like anything that you heard, I 
13   strongly encourage you to submit a comment letter to the 
14   Commission.  If you have already submitted one, you are 
15   not precluded from submitting an additional one.  If you 
16   liked things, we'd love to hear that you did.  If you 
17   don't like some of the things that I've mentioned, we'd 
18   like to hear that as well.  And it would be particularly 
19   useful in those circumstances if you could provide us 
20   with some alternatives that we could consider to those 
21   proposals.   
22             We're also very interested in gathering 
23   information on the costs and benefits that each of these 
24   proposals would involve.  So to the extent that any of 
25   you have information or can compile information with 
0041
 1   respect to that that would be very helpful as well.  So 
 2   that concludes our discussions of the three rulemakings 
 3   from July.  And we're happy to try to address any 
 4   questions that folks may have.   
 5             MR. GRAHAM:  Comments, Catherine? 
 6             MS. MOTT:  I'd like to start with a question.  
 7   For the -- under general solicitation you list seminars. 
 8    Are seminars defined as demo days and venture fairs? 
 9             MR. INGRAM:  Well, we don't have a definition 
10   of demo days in the rules.  And in fact as I mentioned, 
11   we don't have a definition of a general solicitation.  We 
12   do provide examples of what could constitute general 
13   solicitation.  And it's a difficult question to answer.  
14   It's a facts and circumstances determination.  I don't 
15   think that we could give a bright line answer with 
16   respect to that one. 
17             MS. MOTT:  If I may comment on that please?  
18   There are thousands of demo days and venture fairs.  And 
19   many people are in the audience that are accredited 
20   investors and unaccredited investors and media 
21   professionals and things like that.  This is something 
22   that has been happening in the capital formation markets 
23   for many, many years.  And we have concern that a 506(b) 
24   offering that is present at the demo day that it will 
25   default to 506(c) by virtue of being now considered 
0042
 1   general solicitation.  So maybe having some I guess 
 2   clarifications might be helpful for the entire 
 3   marketplace. 
 4             MR. HIGGINS:  I understand.  What's the 
 5   situation now? 
 6             MS. MOTT:  The situation now is that venture 
 7   fairs and demo days people come in and present their 
 8   companies for, you know, basically what the company does, 
 9   and what they intend to do, how they intend to grow, and 
10   that they're raising capital.  And as matter of fact 
11   here's how much they're raising. 
12             MR. HIGGINS:  But I guess my question is -- and 
13   I'm sorry.  Someone must have concluded it's not 
14   currently a general solicitation, right, because if it 
15   were that would violate the rule, right? 
16             MS. MOTT:  Say that again please. 
17             MR. HIGGINS:  Someone must have concluded that 
18   demo days are not general solicitations, right?  
19   Currently, because if they were, they wouldn't be 
20   permitted under current 506. 
21             MS. MOTT:  That's correct.  What we're 
22   concerned about is 506(c) says that it is.  
23             MR. ABSHURE:  Actually on your first question, 
24   no.  Every state out there has venture capital days 
25   promotions for equity investment.  And every one of them 
0043
 1   violates the prohibition on general solicitation 
 2   advertising.  But unfortunately because they are most 
 3   often sponsored by a state government agency or in effect 
 4   the governor's office, we just watch.  I had to be honest 
 5   with you but, yeah, every one of those technically -- 
 6   every one of those violates existing rules.   
 7             MR. HIGGINS:  Well, I guess only if it's an 
 8   offer of security.  Listen, I think it's a hard -- it is 
 9   a hard question, right?  And, you know, the joke would be 
10   we'll get to a definition of general solicitation right 
11   after we get -- after one on insider trading.  And of 
12   course there isn't one.  I think it will be hard.  And 
13   we're open to ideas but I think it will be hard to come 
14   up with a definition, a safe harbor for what's a general 
15   solicitation and what's not, because it's one of those 
16   very gray areas.          
17             But we recognize the -- now the rule of course 
18   allows -- I mean the good thing about the rule is that 
19   you can do it.  If it happens to be a general 
20   solicitation, that's okay.  That doesn't preclude a 
21   company from raising -- but of course you've then elected 
22   into the only accredited investor bucket as opposed to 
23   more flexibility for other types of investors. 
24             MS. MOTT:  Correct.  For the entrepreneur who 
25   is raising capital, you know, he or she may default to 
0044
 1   that and not know it.  And I know the legal community is 
 2   trying to figure this out, and I know the incubators are 
 3   trying to figure this out.  I mean I received a couple 
 4   calls from our local incubators, and I can't answer those 
 5   questions for them yet.  So I know that there's some 
 6   fuzziness around that issue right now.   
 7             MR. YADLEY:  One of the advantages of Rule 
 8   506(c) -- and I applaud the Commission for doing a great 
 9   job.  It took longer than people thought and but I think 
10   the results are pretty good.  The most important thing is 
11   it focuses on who's purchasing.  It doesn't mean this is 
12   not an incredibly important issue, and it makes it very 
13   difficult for practitioners when the client comes in and 
14   says I met all these people at this fair and I didn't 
15   know them but boy, they really want to invest.  And you 
16   get into all this, so that's an advantage. 
17             Having gone slowly to adopt 506(c), I also urge 
18   the Commission and the staff to go equally deliberately 
19   with respect to the rule proposals which are very broad 
20   reaching.  And I think everyone understands the need for 
21   the Commission to have good information to be able to 
22   study what's happening.  I mean how can you improve 
23   capital formation unless you understand what people are 
24   doing and why they're doing it?  So the goals are 
25   laudable but the amount of information that would be 
0045
 1   required under the new Form D goes pretty far and 
 2   probably farther than is needed for the stated purposes.  
 3             And just to pick up another area from Catherine 
 4   of uncertainty: an advance filing is more difficult than 
 5   it sounds because often a company however it's met 
 6   investors, whatever it's trying to do, 15 days in advance 
 7   is a long time to make a commitment.  And particularly if 
 8   it turns out that you have defaulted into 506(c) land or 
 9   made an inadvertent general solicitation, by that point 
10   15 days is 15 days in the past and you've now blown the 
11   election.   
12             And because you've used general solicitation, 
13   you can't fall back on Section 482.  And I don't think 
14   that the Commission intends to inhibit people like that. 
15    But it really does decrease your flexibility.  So that's 
16   something that's important.  At the tail end of that the 
17   closing filing, it's really not so easy to know when an 
18   offering has concluded in many cases.  It's also as much 
19   as I love, as you did Keith, being a lawyer and being 
20   able to advise clients, in a lot of these private deals 
21   lawyers are not around to be consulting all the time.   
22             So a small company, even a good sized company 
23   that's well run, they're not focused on the SEC rules.  
24   So they think they're doing everything right but it's too 
25   late to make an advance filing.  And once the offering 
0046
 1   is done, they're back to business.  And, you know, they're 
 2   not necessarily consulting their lawyer.   
 3             And then just a comment on the content.  There 
 4   are lots of things that, again, I don't think this is the 
 5   Commission's intent but requests for information just 
 6   about the fact that somebody is raising money, that's 
 7   often considered confidential, particularly if it turns 
 8   out that the offering is not successful and you've now 
 9   sort of told the world hey, we tried to raise money and 
10   we couldn't.  
11             I think people that I've spoken with and 
12   certainly the American Bar Association Federal 
13   Regulations Securities Committee, to name one, is working 
14   very diligently to provide comments, including 
15   suggestions for how to do it better -- probably will not 
16   be there by next week although everybody is trying.  So 
17   please don't rush into adopting some of these proposals 
18   out of pressure from third parties.  Thanks. 
19             MR. ABSHURE:  If I could respond to a couple of 
20   Greg's comments there, we'll start with the advance 
21   filing. Part of the reason the states supported the 
22   advance filing is just so we can answer the questions 
23   that are asked of us by investors.  We go out and we 
24   encourage investors to do their research prior to making 
25   an investment, plus we're going to as part of our 
0047
 1   investment charge, be scouring the internet looking at 
 2   offerings and things of that nature. Well, if the Form D 
 3   doesn't have to be filed until 15 days after the first 
 4   sale, one, we're not going to be able to answer any of 
 5   those questions asked by the investors because we're not 
 6   going to have any information on file.            Two, 
 7   we're not going to be able to tell by looking at an 
 8   internet advertisement or going to a seminar, or seeing a 
 9   billboard, whether this is an entity that is actually 
10   trying to comply with Form D requirements under 506(c) or 
11   is skirting those.  Now in terms of confidentiality -- 
12             MR. YADLEY:  If I can just comment on that -- and 
13   I'm sure you're not expressing the view that your state 
14   or any other state advises investors about what offerings 
15   to invest in unless it’s a registered offering and your 
16   state has a fair, just and equitable standard.  Also, as 
17   much as I believe in enforcement, with all those the 
18   offerings that are made under Rule 506, $900 billion, 
19   there's not enough enforcement people to be doing that.  
20   I understand that it's a bad answer to say, you know, do 
21   your own due diligence investor, but to get the 
22   information 30 days earlier than you would, I'm just not 
23   sure how much you're going to get. 
24             MR. ABSHURE:  Well, I wouldn't disagree with 
25   the date, but at the same time if the investor calls me 
0048
 1   and says tell me about the officers and directors of this 
 2   corporation, tell me about the beneficial owners of this 
 3   corporation, tell me who the placement agents are that 
 4   are selling this offering, have you had any problems with 
 5   them, have there been any disciplinary actions, have 
 6   there been any complaints, what do you know, that's the 
 7   type of information we give them every day.  Now that's 
 8   not the type of information that I'm going to be able to 
 9   give them if I don't have that Form D.   
10             MR. HIGGINS:  I guess I -- it sounds like we 
11   have maybe a bit of a three bears' problem you know.  The 
12   papa bear says the form is too late and mama bear says 
13   the form is too early, right?  So maybe there's somewhere 
14   between 15 days before and 15 days after first sale. 
15             MR. ABSHURE:  I think it's -- you know in terms 
16   of 15 days before I don't need it.  We're not going to 
17   review it, it's not a qualification filing.  We're 
18   prohibited from making a qualification filing.  It's just 
19   that I think the filing date ought to be tied to the date 
20   that first time you use public solicitation of general 
21   advertisement.  As an issuer, you can't go that far until 
22   you've made that filing.           So you're going to 
23   know if you're engaged in general solicitation.  You're 
24   going to know if you put it on your lips.  You're going 
25   to know if you're going to a seminar.  Well, in that case 
0049
 1   I want to make sure that the Form D is on file prior to 
 2   that time, or at least simultaneously so when I get a 
 3   call from an investor who's been to that and wants to 
 4   know who are these people, have you had any problems with 
 5   them, I at least can answer those questions.   
 6             If the Form D is one of the documents that 
 7   investors use to make an informed decision on whether or 
 8   not to invest, if we tell investors to do their due 
 9   diligence before they invest, well let's give them the 
10   document before they invest.  If the Form D is part of 
11   that, then it needs to be part of the entire package of 
12   information that is out there before they would make a 
13   decision to purchase.   
14             MR. YADLEY:  I can't answer all the questions 
15   you've raised, but one thing that I think is key to the 
16   discussion is the Form D.  Should it be part of the 
17   offering materials on which an investor is relying?  And 
18   historically this was not why Regulation D had the Form 
19   D. It was there for information gathering and statistical 
20   purposes so it's -- 
21             MR. ABSHURE:  I mine every one that comes in.  
22   I pull the beneficial owners, I pull the officers and 
23   directors.  I pull the broker-dealers, I pull the 
24   consultants that are getting compensation.  And I put 
25   that in our database and I look to see who's selling what 
0050
 1   and who are associated with the bad guys, and I think 
 2   it's at the same time.   
 3             I mean consider a 506(b) offering where they 
 4   don't have to give you anything.  So if I have an 
 5   investor call me at that time and he says hey, I've got 
 6   an offer here to buy X, Y, Z corporation, and what have 
 7   they given you?  Nothing.  Well, at least I'm going to be 
 8   able to go back to the Form D and say here's the officers 
 9   and directors, here's the beneficiary, here's the guys 
10   that are calling the shots, here are the broker-dealers, 
11   and here are the issues that I've had with them in the 
12   past.  
13             The other thing in considering the permit on 
14   general solicitation without guidance, gives us a little 
15   concern.  And I understand that ship has sailed.  And 
16   part of that is because I don't think that the zealous 
17   entrepreneurs understand that once you start general 
18   solicitation in advertising, both in the 506 offering and 
19   perhaps a crowdfunding offering, you're no longer an 
20   entrepreneur that's calling your own shots.  You are now 
21   arguably the management of a corporation.   
22             And I don't think they understand the 
23   difference in the various state corporate laws that are 
24   going to be applicable to them.  And also I don't think 
25   they understand the difference between advertising their 
0051
 1   product, or say advertising their securities sales and 
 2   that the securities fraud liability is going to attach to 
 3   that.  With regard to the reasonable steps to verify, I 
 4   think all of us will agree that that problem is much more 
 5   acute with dealing in it with an individual than it is 
 6   with an entity. 
 7             The states support verification by a third 
 8   party. To be honest with you, the last thing in the world 
 9   that states want to see is a third party error, an 
10   investor sending their tax returns to the issuer that's 
11   trying to sell them an investment.  We don't want to see 
12   that happen. We would much rather see that verification 
13   take place specifically by a broker-dealer, because with 
14   the removal of that prohibition on general solicitation 
15   advertising that means you can have direct sales from the 
16   issuer to the investor.   
17             That gets the broker-dealer back into the 
18   equation, and then maybe we have a back door suitability 
19   analysis.  Maybe a little bit of due diligence or at 
20   least a broker-dealer looking at that investment and 
21   advising their client as far as whether or not it should 
22   be appropriate for purchase.  And then we're not -- we 
23   support the disqualification provisions, but in our 
24   experience if somebody is disqualified, they're going to 
25   stay in the offering, they're just not going to sign 
0052
 1   their name on the Form D.  But we still think it ought to 
 2   be there, because it gives us a little more of a hammer.  
 3             And the last thing I'll say is we're not 
 4   extremely happy with the lack of retroactive application. 
 5    While we agree that if a party has settled a late filing 
 6   violation, that that probably shouldn't kick them out in 
 7   terms of a retroactive application but if in January or 
 8   in July he was convicted of securities fraud, we think 
 9   that should.  That's all.  
10             MR. GRAHAM:  Thank you, Heath. 
11             MS. MOTT:  I'm going to speak practically, and 
12   I'm going to talk about what happens in the real world.  
13   First of all, my angel group has been around for 10 
14   years. We've invested in over 40 companies roughly 
15   $23 million  We have never used a broker-dealer.  We 
16   won't use a broker-dealer for deals, because they're 
17   coming to sell us a deal. We're out proactively looking 
18   for a good opportunity to invest in.  So this idea of a 
19   broker-dealer just how it plays in the marketplace, that 
20   doesn't bode well for the marketplace.   
21             By the way, I've never contacted my state 
22   securities association.  This is no offense intended, but 
23   this is, we do our due diligence.  We use the best 
24   practices of the National Venture Capital Association, so 
25   we behave a lot like venture capitalist.  And we do our 
0053
 1   due diligence, and not only do we know where the people -
 2   - we know the people on the board.  We know the people's 
 3   neighbors that are on the board.  I mean these are local 
 4   deals.  We drive by, we look and see that their car is in 
 5   the parking lot, lights on.         
 6             I mean we actively coach and mentor.  You know 
 7   these people because they're your neighbors.  They are 
 8   part of your community.  So I'm just speaking to what I'm 
 9   hearing here, and I'm thinking this is not how the 
10   marketplace behaves. 
11             MR. ABSHURE:  Well, I think that what you're 
12   speaking of is indicative of what the old private 
13   placement marketplace used to be, where you had 
14   investors, institutional investors, the 
15   organizational investors that had the experience, the 
16   expertise to look at a startup entity and realize okay, 
17   I'm taking a look at their board of directors.  I'm 
18   taking a look at their business plan, I'm considering 
19   their capital needs, I'm looking at their IT, I'm looking 
20   at the competitive -- you know, the competition and 
21   everything else.   
22             That was historically the private placement 
23   market, and things were wonderful.  That's changed, 
24   that's no longer the private -- with this, that is no 
25   longer the private placement market.  I'll be honest with 
0054
 1   you, you're not the investor I'm concerned about.  The 
 2   investor I'm concerned about is the one that flicks on 
 3   his computer, and whoever has the slickest website can 
 4   sell directly to that person.  I'm talking mom and pop, 
 5   grandma and grandpa retail investors.   
 6             And I think that was always our biggest issue 
 7   with changing and removing that general solicitation 
 8   prohibition, was because it moved the historical private 
 9   placement investor, you guys, which had the experience 
10   and the expertise and the ability to absorb a loss.  And 
11   it moved that speculative illiquid investment over to 
12   someone who doesn't have the expertise and who doesn't 
13   have the ability to absorb loss.   
14             MR. YADLEY:  Both of you have touched on 
15   something that is -- it's sort of a side issue but it's 
16   one that's been fighting for air; that is not everybody 
17   has access to the angel group and there are 
18   nontraditional broker-dealers who are available for some 
19   of these smaller offerings.  One of the key 
20   recommendations of the last 20 small business forums 
21   sponsored by the SEC, as well as a recommendation of the 
22   prior advisory committee on small business, was to have a 
23   sort of limited type of broker-dealer, someone who would 
24   be regulated but who would be able to assist companies 
25   raising capital, not necessarily do all the suitability 
0055
 1   and have all the bells and whistles attached to 
 2   regulation of a traditional broker.   
 3             But particularly now because issuers are not 
 4   going to necessarily be selling only to their neighbors. 
 5    Frankly, I think there are lots of dangers with general 
 6   solicitation.  Even though I have supported it for years, 
 7   it's a good thing.  The focus ought to be on the 
 8   purchaser and it is, but having lots of investors in 
 9   your offering if you're an issuer and having people that 
10   you don't know, are both bad things.  A smaller number of 
11   investors who you get to know you, who can be 
12   counted on for your next offering is very important. 
13             There are lots of mostly individuals out there 
14   who have some knowledge about the company who are not 
15   necessarily angels themselves, or if they are, they have 
16   limited funds but know people who have funds who can 
17   perform a great service for issuers.  And I think that 
18   this is something the staff has lots of information about 
19   this. And I hope you will reconsider a focus on a private 
20   placement broker.   
21             MR. GRAHAM:  Okay.  Greg, well you have the 
22   last comment for this session.  We're going to take a 
23   break now. I thank everyone for their thoughts.  We are 
24   going to break and reconvene at 11:00.  And we will be 
25   continuing this conversation. 
0056
 1             (A brief recess was taken.) 
 2             MR. GRAHAM:  We're going to be continuing with 
 3   the discussion of the amendments to Regulation D.  And we 
 4   once again thank the staff for giving us more context.  
 5   And thanks everyone for the discussion that we had in the 
 6   last session.  I'd like to introduce David Verrill and 
 7   Marianne Hudson of the Angel Capital Association.  They 
 8   will be speaking to us now about some of their views in 
 9   the amendments to Regulation D and perhaps some of their 
10   views of the unintended consequences of the new rules. 
11             Marianne is the Executive Director of ACA.  And 
12   for those of you who don't know, ACA is the professional 
13   Alliance of Angel Investors and angel groups in North 
14   America with 200 plus member groups representing 10,000 
15   accredited investors.  And I'm sure you can vouch for each 
16   one of those 10,000 accredited investors.  Marianne has 
17   been involved with entrepreneurial education and 
18   mentoring programs designed to insure that all 
19   entrepreneurs develop sustainable innovative businesses. 
20             David is the Chairman of the ACA.  He has spent 
21   a decade at MIT raising capital from industry and 
22   facilitating technology transfer.  And David is also the 
23   founder and managing director of Hub Angel Investment 
24   Group, an earlier stage investment group in Boston.  
25   Marianne and David, thank you for joining us and you have 
0057
 1   the floor. 
 2             MR. VERRILL:  Thank you very much.  It's a 
 3   pleasure to be here.  We've got a PowerPoint presentation 
 4   going on behind us.  We view so many PowerPoint 
 5   presentations we thought we'd inflict a little bit of 
 6   pain on you to see what our world is like.  I'm going to 
 7   run through a number of slides just to set the scene of 
 8   what the Angel Capital Association is and does, what our 
 9   member groups and members do as well, really how the 
10   process works.  So it really gets down into the weeds a 
11   little bit about the practicality of angel investing and 
12   as well as to let you know the scale and the scope of those 
13   investments.         
14             So the ACA's mission is to fuel the success of 
15   angel groups and private investors who actively invest in 
16   early stage companies.   We very recently expanded our 
17   mandate from angel groups to accredited investors, 
18   accredited portals and accredited family offices.  We are 
19   the largest trade group for angels.  We have members in 
20   every single state in the United States and five 
21   provinces that represent approximately 10,000 accredited 
22   investors, and, yes, we've certified them several ways 
23   which I'll talk about a little bit later.  Thank you.  
24             We do have a charitable partner in the Angel 
25   Resource Institute.  Their real focus is on educating 
0058
 1   angels and providing research about our $23 billion 
 2   industry.  And Marianne will go through one of the sets 
 3   of data that they have put forward.  Just to kind of take 
 4   a step back and give everybody a graphic on what the 
 5   fundraising life cycle is really like, and if you look at 
 6   this graphic here, you can see the line represents where 
 7   a company is with respect to its stage 
 8             On the far left is just the idea stage, a woman 
 9   in a garage, an idea and progressing through proof of 
10   concept, product design, product development, 
11   manufacturing and delivery.  Those are roughly the stages 
12   of a company's development.  And just underneath the line 
13   you can see the types of funding, and in the rectangles 
14   are descriptions of the likely funding sources for that 
15   stage of company.   
16             So the founder typically will use credit cards 
17   and other savings and methods of getting companies 
18   started. He or she then might solicit friends and family 
19   who may or may not be accredited investors to pitch in a 
20   small amount of money.  Usually the securities that are 
21   provided at that stage are loosely defined.  There's no 
22   lawyer typically that's involved in that level of 
23   activity.  But as individual angels and angel groups 
24   start to look at companies in the seed and startup stage, 
25   which is really the critical point of getting a company 
0059
 1   out of the garage and into the marketplace, that's really 
 2   the role that we play and our members play within the 
 3   Angel Capital Association. 
 4             And then outside of that oval you can see seed 
 5   funds, venture funds and then institutional equity.  And 
 6   loans and bonds are put there to make a point.  The banks 
 7   don't participate in the funding life cycle of early 
 8   stage companies.  There's no collateral for them to take 
 9   as bond. And so really the banks don't play much of a 
10   role until the end of a company's life.  Now having said 
11   that, there are banks like Silicon Valley Bank, which is a 
12   partner of ours, that do provide debt financing as a 
13   company is growing, but certainly they need to have 
14   revenue in the form of their collateral. 
15             Now just to talk about the level of investment, 
16   last year angel invested about $23 billion in about 
17   66,000 companies.  The VCs invested about $27 billion in 
18   a far less number of companies.  But just to give you the 
19   relative scale of angel investing, we really just don't 
20   get the notice or credit I don't think in the marketplace 
21   for (a), the amount of capital that we're putting to work 
22   and (b), the stage at which we're doing it.  And in 
23   comparison to private equity you can see the size of 
24   private equity funds is nearly $350 billion.  And for 
25   those of you who are interested in the hedge fund world, 
0060
 1   that's approaching $2 trillion.   
 2             So we're small in terms of the amount of 
 3   capital, but there are two really strong benefits to what 
 4   we do.  The first is the stage at which we invest.  And 
 5   if you look at the first two columns, the left hand 
 6   columns on this graphic, those are the seed and early 
 7   stages of a life's company.  And you can see that angels 
 8   really provide on the order of 90 percent of that 
 9   financing.  And again, these are companies taking in 
10   their first real capital from so- called sophisticated 
11   investors.  And just in those two categories, angels 
12   funded nearly 47,000 companies in 2012, and VCs funded 
13   less than 2,000. 
14             So almost 25 times the number of companies are 
15   being funded at their earliest stages by angels versus 
16   our colleagues the VCs.  And the real output of that can 
17   be seen in the creation of jobs.  Startups create a 
18   tremendous number of jobs.  Certainly when you're 
19   starting a company you don't have 482 employees, you have 
20   2, 3, 4, 5 or 6.  But there are many of them and they're 
21   a really important contributor to job creation.   
22             This graphic is a little bit of an eye chart, 
23   but it basically is U.S. Census Bureau data from 1977 to 
24   2005, nearly a 30-year period of time.  And it tracks the 
25   number of small companies and the number of jobs that 
0061
 1   they create in that year.  And there are two points to 
 2   note.  One, certainly without these jobs there would be 
 3   unemployment a lot higher than it is today and over this 
 4   period of time.  But secondly, the consistency of the 
 5   number of jobs created by startups is pretty amazing. 
 6             And it's even more interesting to note this 
 7   ends in 2005.  Since 2005, the number of angel groups in 
 8   the United States has nearly doubled.  So my suspicion is 
 9   that the blue lines on this chart continue to increase 
10   with regularity.  Now we're here today to talk about the 
11   JOBS Act and how the SEC has provided some rulemaking to 
12   it.  We want to make sure that everybody in this room and 
13   our friends in the SEC and the audience beyond knows 
14   about the landscape that angels work within, the 
15   statistics, the trends, how sophisticated we are, the 
16   impact on startups and how we help the health of our 
17   economy.   
18             We're going to talk about the final Rule 
19   506(c), reasonable steps to verify accredited investor 
20   status, what that means for startups and angels, the rule 
21   on Reg D Form D, Rule 156 and the accredited investor 
22   definition.  And Marianne and I are going to ham and egg 
23   it a little bit here.  I'm the ham, she's the eggs, so 
24   we'll let her take this from here. 
25             MS. HUDSON:  I have to think about what that 
0062
 1   means.  Thank you so much for including us on this agenda 
 2   today.  We really appreciate it.  And I personally want 
 3   to thank the staff of the SEC which has been really open 
 4   and accommodating to hearing us.  And I think they really 
 5   have -- are really trying to do the right things, protect 
 6   the investors, help capital formation.  And I really 
 7   appreciate what they do.  As David said, I think we want 
 8   to just spend a little bit of time talking about the 
 9   angel investing area before we talk about the rules.  So 
10   I'll be going through that in just a little bit. 
11             So this might be another way of, you know, 
12   talking about the overall financial landscape from one of 
13   the slides that David showed.  But we've kind of looked 
14   at five levels of equity capital right now.  And 
15   entrepreneurs don't necessarily follow all of these 
16   steps, but what we often see is first the entrepreneur is 
17   funding themselves with their credit cards, their 
18   mortgages, “First National Bank of You.”   
19             And then they might work with their friends and 
20   family to support what they're doing.  And as angels, we 
21   want to see that the people who know and care about them 
22   are going to support them as well, but that might be 
23   equity, it might be something else.  And then angel 
24   investors will follow up that kind of investment.  And 
25   then sometimes the kinds of things that we're funding 
0063
 1   need venture capital for expansion.  Sometimes we 
 2   continue that financing, and the company has the 
 3   financing that they need.  But between those kinds of 
 4   investment, between the angels who might stay in multiple 
 5   rounds and/or venture capital, we can then get those 
 6   companies ready so that they can go become part of the 
 7   public market, usually through merger and acquisition.  
 8             This will show you some kind of continuing 
 9   statistics about angels and again, making the point that 
10   in terms of startups and early stage companies, we're 
11   funding the majority of those kinds of companies.  So in 
12   2012, not quite $23 billion is estimated to have come 
13   from angel investors compared to not quite $27 billion from 
14   the important expansion of venture capital with 67,000 
15   deals during that time from angel investors and 3700 from 
16   venture capital.    And it looks like there's something 
17   like 268,000 accredited angel investors across the 
18   country.  
19             Just to give you a sense, you know, a piece of 
20   some really successful branding companies.  So what you 
21   have here is a set of companies that started off with 
22   angel investing.  A lot of them then were venture backed, 
23   but these became kind of the companies that have created 
24   the jobs and the innovations that have changed the 
25   quality of people's lives across the country.  Let me talk a 
0064
 1   little bit about who angel investors are.  Obviously, they 
 2   fit the accredited investor definition.  And for me they 
 3   also are the kind who invest in companies that are not 
 4   their family, kind of hard to separate from their friends 
 5   because we get to know those people. 
 6             But what we do see is that a lot of investors, 
 7   particularly the ones who belong to our angel groups, are 
 8   former entrepreneurs or who have exited their company and 
 9   then they're making angel investments -- might be becoming 
10   entrepreneurs again.  But a lot of them are also 
11   corporate leaders and professionals.  And again, we see 
12   about almost 270,000 of them.   
13             From a motivation standpoint, you know, a lot 
14   of them are doing it of course to make a return, and they 
15   understand the risks that are involved.  But this is 
16   their chance really to invest part of their investment 
17   portfolio in stuff that really matters to them from a 
18   non-financial standpoint.  So this is a way for them to 
19   help entrepreneurs to stay engaged to really help create 
20   what I'm going to call cool companies in their 
21   communities.  It's sort of that's their way of giving 
22   back.   
23             And they really care about that, whether that's 
24   in their community, maybe it's, you know, parts of 
25   alumnae of their university or some other sector that 
0065
 1   they really care about.  So you know, they're doing that 
 2   to network and learn, they do want to make a return, 
 3   they'd like to see that they're giving something back to 
 4   the economy.  But of course in the end, they are looking 
 5   for a return. 
 6             As David said earlier, we have seen a growth in 
 7   angel groups, almost a four-fold increase over the last 
 8   14 years.  It started off with less than a hundred angel 
 9   groups just as the century started, and we now have 
10   almost about 400 angel groups across the country.  And 
11   that's the majority of who we represent.  It's the 
12   easiest set of folks to be able to describe.  But I 
13   should note that the vast majority of angel investment 
14   doesn’t happen from angel groups, it happens from 
15   individuals doing their own work in formal sets of 
16   organizations who may or may not be sophisticated, and of 
17   course those who are now working through some of the 
18   accredited web platforms that David spoke about.   
19             I'm going to be spending most of my time on 
20   statistics, talking about angel groups, because they are 
21   the ones that we know the best and have the most data 
22   about, but I do want to make that important point about 
23   how angel investors work.  So if we do look at angel 
24   groups, you know, we see that there is something like a 
25   potential of 8.7 million accredited investors that have shown 
0066
 1   up in multiple reports, including the proposed SEC rules. 
 2    It looks like there's approaching 270,000 active angels, 
 3	and about 15,000 of those belong to the angel 
 4   groups that I'm going to be talking about.   
 5             They are the experienced kind of groups I think 
 6   Catherine Mott mentioned before, you know.  They have a 
 7   lot of experience.  A lot of them have been making 
 8   investments or are former entrepreneurs themselves.  They 
 9   like to invest in what they know about and have 
10   experience about, so that they can add value to the 
11   entrepreneurs, help them grow, connect them to potential 
12   funders, potential customers and those kinds of things.   
13             And we really spend a lot of time on best 
14   practices, so we actually do a lot education through the 
15   Angel Capital Association, the Angel Resource Institute, 
16   really one of the best practices in being an angel 
17   investor.  And learn how to find the right deals, how to 
18   do due diligence -- I'm going to spend a lot of time on 
19   that. What are the right kinds of terms for the deals and 
20   really best valuation?   
21             And one thing that's really fun about being an 
22   angel investor is, since a lot of us are former 
23   entrepreneurs, we really understand that for us to do well the 
24   entrepreneur needs to do well.  So we become kind of an 
25   extra advocate and mentor for them.  And then, you know, 
0067
 1   once we make the investment in the company, we spend a 
 2   lot of time.  We're on the boards of those companies, or 
 3   we are observers for that.  A lot of us then kind of 
 4   serve as seed level people for some time on the company 
 5   to help them move forward if they're missing a particular 
 6   capability. 
 7             And we also look at developing the kind of 
 8   relationships that they need for follow-on funding, be 
 9   that from other angels later on or from venture 
10   capital and other types of private equity.  And really 
11   kind of the biggest movement for us is developing 
12   relationships with corporations who might acquire some of 
13   our companies and help kind of an early exit.   
14             This is kind of a graphic of the overall 
15   evaluation process that angel groups use.  So what we're 
16   seeing is, you know, an angel group is getting somewhere 
17   between five and a hundred investment opportunities per 
18   month.  They are coming to them individually or through 
19   their own website that they have to work from.  They've 
20   set up often a team of members of the group to do an 
21   initial screening of the investment to make sure it kind 
22   of fits with what that group is good at.   
23             Is that what they know about, is it in the 
24   community that they want to work in?  Does the team have 
25   kind of a beginning understanding of really their company 
0068
 1   and their background and how they can really grow value?
 2         And if it passes that kind of screening, then they 
 3   will get in front of typically either a monthly or a 
 4   quarterly investment meeting where that entrepreneur will 
 5   have a chance in that room of just accredited investors 
 6   and the staff of that group to put out their presentation 
 7   and answer a lot of questions from the group.   
 8             Let the group kind of visit about what they 
 9   think are the merits or concerns they have about that and 
10   then might come back for an additional meeting for those 
11   who might be interested in learning a lot more about that 
12   company, spending a couple of hours with them to ask 
13   questions before they move through a formal due diligence 
14   process.  And then finally, some small set of those 
15   organizations receive an investment with professional 
16   terms, working with really some strong legal counsel to 
17   make sure we've got those processes together.  And then 
18   it's really our job to support those companies.  
19             It looks like based on the statistics that 
20   we've seen that somewhere on the order of about 5 to 10 
21   percent of the companies that come to an angel group end 
22   up getting financing from the organizations.  The others 
23   might kind of stay with us for additional mentoring and 
24   maybe connection to other angels and investors in a 
25   community to work with those companies and perhaps 
0069
 1   support them later. 
 2             And I guess from an angel group standpoint, it 
 3   looks like the average size investment for the group 
 4   itself is about a quarter of a million dollars.  That 
 5   might involve somewhere between 10 and 20 individual 
 6   investors who are supporting that particular company, 
 7   sometimes investing individually, sometimes forming a 
 8   single purpose LLC to invest in that company and often 
 9   then syndicating with others, 
10             Then, you know, what's really important for us 
11   is to make sure we're supporting the entrepreneur after 
12   we make the investment.  So I think I've mentioned a few 
13   of these things before, but certainly as part of the 
14   investment we want the information rights.  We want to 
15   know, you know, what's going on with the company.  And we 
16   actually have learned through research that when we 
17   really monitor the company and we mentor them, they do 
18   better.  There's a lot more potential success for their 
19   growth. 
20   So we have really spent a lot of time, you know, focused 
21   on working with them.   
22             And there has even been a study by Harvard and 
23   MIT that's really underscored the importance of having 
24   angels involved in selecting and supporting the 
25   entrepreneurs to help them grow that really increases the 
0070
 1   chance of success.   
 2             Finally, what I want to do is show you a couple 
 3   statistics about what we know about angel group 
 4   investment. This is through the HALO Report, which is 
 5   really designed to talk about the trends and what angel 
 6   group deals look like. It's not meant to describe the 
 7   size of the market, but just what the deals look like and 
 8   comparisons between regions and type of sectors.  And 
 9   this is a report done by the Angel Resource Institute, 
10   Silicon Valley Bank, and CB Insights which handles deals 
11   that were involved.   
12             So first, what we know over the last three years 
13   is that the median size deal of an angel group round is 
14   between half a million and $625,000 when just the angel 
15   groups are involved.  So that means typically you have 
16   two or three or four angel groups involved within that 
17   deal.  So this is the amount that the issuer, the 
18   entrepreneur has received.  Sometimes we do co-invest 
19   with venture capitals, so the green line along the top 
20   shows what the median sizes are when angels co-invest 
21   with venture capital. 
22             From a pre-money valuation standpoint for 2012, 
23   actually 2011 and what we know for the first half of 
24   2013, the pre-money valuation on a median range is two 
25   and a half million dollars.  But we give you a range 
0071
 1   there from really very small and startup to as much as 
 2   over $6 million.  But we do -- we are seeing that we are 
 3   seeing quite a range of differentiation between regions 
 4   and certainly sectors.  So certainly a lot of the IT type 
 5   investments would be smaller. 
 6             We know that the majority of our investments 
 7   are really in the Internet, what I call IT and software 
 8   and healthcare.  And when we say healthcare, we mostly 
 9   mean medical devices.  And so, you know, more than two-
10   thirds of our investments are in Internet IT, healthcare 
11   and mobile and telecom with a lot more growth coming in 
12   clean tech.  But then you'll see really quite a variety 
13   of investments. And by dollars of investments, you can 
14   see a similar distribution there, except you can see that 
15   healthcare takes a bigger percentage of our investments, 
16   showing that the investment size for the life science 
17   investments that we're making are actually considerably 
18   larger because that's what those companies need.   
19             Finally, the thing I really like about angel 
20   investing is that angels are everywhere across the 
21   country.  This gives you a distribution by number of 
22   deals in 2012 in the data set that's in the HALO Report, 
23   and it really shows that the investments were really 
24   truly across the country and not necessarily just in the 
25   traditional venture capital areas that you might see in 
0072
 1   say California and Boston, really everywhere. 
 2             And then the final point is this is showing the 
 3   returns of angels and angel groups conducted by academics 
 4   Robert Wiltbank at Willamette University and the Kauffman 
 5   Foundation.  And this shows I believe more than 3200 
 6   investments by angel group investors mostly between 1995 
 7   and 2007.  And what it really shows is the median size of 
 8   returns for these deals was 2.6 times the investment in  
 9   3 1/2 years, which roughly works out to an average IRR of 
10   27 percent.   
11             But the real point here is that median doesn't 
12   mean much, and so we've gotten to learn that, you know, 
13   there's a lot of risks involved in angel investment.  We 
14   knew that already, it was just good to have the 
15   statistics behind it.  And so we see that more than half 
16   of the deals or 32 percent lose some or all of our money 
17   and not quite 8 percent have a 10 times or more return on 
18   investment.  And that's where the majority of the return 
19   in that 27 percent IRR comes from.   
20             And so we've learned from this kind of work 
21   that, angel investors need to make multiple 
22   investments to protect their ability to have a return and 
23   not have a loss. Through some of this we are not showing 
24   the slides.  We've also learned things about if we invest 
25   in what we know, we increase our potential or chances of 
0073
 1   success often for the entrepreneur.  And also if we 
 2   support them with mentoring and monitoring, that also 
 3   helps them.  So with that, I'm going to turn things over 
 4   to David with that background to talk a little bit about 
 5   the rules. 
 6             MR. VERRILL:  Thank you.  So Jonathan and Karen 
 7   and colleagues did a great job of describing in detail 
 8   the different rules.  But just to repeat them very 
 9   briefly, the so-called 506(b) quiet deals, these are the 
10   deals that we've been doing all along.  And we have been 
11   self-certifying by questionnaire whether or not an angel 
12   investor is indeed accredited.  We do that in order for 
13   them to become a member of our group.  And then when we 
14   make an investment, we yet again confirm accreditation to 
15   the issuer that we are indeed accredited.   
16             And there have been no other additional 
17   verification requirements to date, and the issuer must 
18   have reasonable belief that the investor is indeed 
19   accredited and otherwise unaccredited.  We're going to 
20   get into a little bit of the detail here, but I wanted to 
21   just sort of put forward where the friction is, where the 
22   rub is in process.  And, you know, angels like everybody 
23   else are creatures of habit.  They've been doing 
24   something one way for a very long time.  They've been 
25   relatively successful at it.  They don't use 
0074
 1   intermediaries.  All of the work is done on their own.   
 2             They are mentors, they are board members.  And 
 3   so they sort of feel as if it's their ecosystem.  And 
 4   they participate in a number of activities in order to 
 5   contribute to that ecosystem, but also to generate deal 
 6   flow and understand which of the companies that are 
 7   presenting in business plan contests.  And demo days are 
 8   the best, because that's part of the screening process.  
 9   You want to find the best companies, and you want to help 
10   those companies be successful both with your time, your 
11   energy, your expertise, your connections, and your money.  
12             We had our annual conference in San Francisco 
13   last year, and the SBIR brought I think it was 10 
14   companies that they had funded through one of their 
15   programs.  It was amazing to see some of those companies, 
16   they were some really interesting companies.  That event 
17   was 99.9 percent accredited investors.  There were some 
18   vendors there and some sponsors of the ACA who had 
19   personnel who were not accredited investors.  And it 
20   would be a darned shame for that to be so strict of a 
21   regulation that we would consider that a public forum and 
22   subject to a 506(c) filing. 
23             These events are critical sources of deal flow 
24   for us.  And we want to continue to do that.  We don't 
25   want to retire our members from participating in these 
0075
 1   activities, and I fear that some of them will have that 
 2   type of a response.  The generally solicited offerings 
 3   state that all purchasers must be accredited investors.  
 4   The old Rule B allowed up to 35 non-accredited investors, 
 5   really does not apply to C.   
 6             And there are a number of questions, for 
 7   example, if a company had a previous round of financing 
 8   where it was a B filing and did have non-accredited 
 9   investors in that particular series of financing, what 
10   happens if the next series of financing is generally 
11   solicited?  And what about friends and family?  It could 
12   effectively make it difficult for friends and family to 
13   participate in these types of rounds. 
14             The other point I'd like to make is that the 
15   issuers must take additional reasonable steps to verify 
16   that all purchasers are accredited.  As I mentioned 
17   earlier, thus far we've been using a check-the-box self-
18   certification questionnaire.  I certainly would like to 
19   see that continue.   If there are additional questions 
20   that we all think could be added to that to add to the 
21   veracity of that questionnaire that would be a 
22   preference.  The suggestions that have been listed and as 
23   noted, it's a non-exhaustive list of methods that could 
24   be used to take reasonable steps to verify.   
25             But, you know, anecdotally I talked with a 
0076
 1   dozen or so angels when the initial rulings came out.  
 2   And, you know, the responses range from, "I'll never be 
 3   an angel investor again if I have to give my accountants 
 4   documentation such that he or she will have to prove 
 5   verification" to "It's no big deal."  But I think the 
 6   preponderance of people just didn't like the additional 
 7   friction in the marketplace.  And I think that adds just 
 8   another potential of risks of losing very important 
 9   investors in the angel ecosystem.   
10             And I think the issuers are going to need a 
11   tremendous amount of education.  Entrepreneurs are 
12   focused on starting their company, raising money to get 
13   that company's products into the market and being 
14   successful.  What they really can't be asked to do is be 
15   held down by regulation and additional activities that 
16   take away from really the primary importance.  Now I 
17   understand that with the advent of crowdfunding a whole 
18   new kettle of -- can of worms is being opened up.  And we 
19   do need regulation to govern that.  But I think the 
20   business as usual activities that we've been doing really 
21   need to be preserved as much as possible.   
22             The next slide is again, a little bit of an eye 
23   chart, but this points to the safe harbors that the SEC 
24   has commented on.  And I won't go through each one of 
25   them, but I think our initial response and that of the 
0077
 1   marketplace was okay, well let's find a safe harbor that 
 2   will cover us. And I think that approach has waned in 
 3   terms of how the marketplace ought to respond.  I really 
 4   think that the principles-based approach that's been put 
 5   forward needs to be the primary method that we hitch our 
 6   wagons to.  But I think we obviously need to define that 
 7   with far greater detail.   
 8             And to that point just a couple of bullets, and 
 9   Jonathan made note of these earlier as well.  Whether the 
10   steps taken as reasonable is an objective determination 
11   in the context of the particular facts and circumstances 
12   of each transaction, including the nature of the 
13   purchaser, the type of accredited investor the purchaser 
14   claims to be, amount and type of information the issuer 
15   has about the purchaser, the nature of the offering, the 
16   manner in which the purchaser was solicited, terms such 
17   as minimum investment amount.  The verification standard 
18   requires the issuer to establish reasonable belief that the 
19   purchaser is accredited.  
20             And in some instances when a third party is 
21   being asked to provide that additional reasonable belief 
22   and verification, there's sort of a 30-day trigger on 
23   that and also whether or not that needs to be done or a 
24   three month -- was it a three month, three months.  And 
25   whether or not that would thereafter have to be three 
0078
 1   months every single time you make a new investment seems 
 2   a little bit much. 
 3             So the ACA has put forward guidance on the 
 4   principles-based method to our membership.  We've shared 
 5   that letter of guidance with the SEC, and we have some 
 6   additional materials that we'll be putting forward to them 
 7   that show in far greater detail,I think, the positioning 
 8   that we think our membership will and should take.   
 9             The principles-based methodology certainly is 
10   robust.  We don't feel that people ought to be stuck in 
11   the safe harbor treatment.  But there are areas of shaded 
12   gray I think that really need to be clarified.  For us, 
13   we believe that membership in an established angel group 
14   called EAG here is a powerful mechanism of meeting the 
15   principles-based methodology.  We are all accredited 
16   investors, we have certified that in order to become a 
17   member of our angel group.   
18             Almost all of the members of my group are 
19   referred by another member.  Word of mouth is a really 
20   important method for us to sustain our angel groups.  
21   Many of the members of my group have made investments 
22   before joining an angel group, and the structure of the 
23   group offers them a different mechanism of investing that 
24   is appealing to them rather than doing it on their own.  
25   They can share the expertise and the process that we 
0079
 1   bring to the way that our group works.   
 2             By the way, we are structured as a fund.  Most 
 3   of the angel groups in the U.S. are networks where each 
 4   individual ultimately makes his or her own investment 
 5   decision and writes their own check.  In my group, all of 
 6   the members of my group have committed to our fund, and 
 7   that capital has been committed.  And then we will go 
 8   through the same process that Catherine's group or 
 9   Marianne's group goes through in order to find, screen, 
10   present, perform due diligence, negotiate terms and 
11   invest. We simply use a democratic approach for that.   
12             But because we're structured as a fund, I think 
13   there's a lot more rigor to the process.  We're able to 
14   preserve some capital from that fund to aggressively 
15   follow our capital.  Many of these companies need more 
16   money than they even think, and multiple rounds of 
17   financing are sort of the order of the day.  So there are 
18   different types of models amongst the angel groups that 
19   shouldn't go unsaid.  Almost all angel groups have a set 
20   of conflict of interest guidelines.   
21             Some of them even require their members to sign 
22   a document on how they will conduct their business, how 
23   they will report conflicts of interest.  Ours does and we 
24   take that very seriously.  And if we have a person in our 
25   group who does not behave accordingly to those rules, 
0080
 1   they're simply not invited into the next fund.  In all 
 2   cases we're recommending that a deal that our members are 
 3   involved in 
 4   -- make sure that the issuer checks with their legal 
 5   counsel that they believe that membership in an 
 6   established angel group does indeed meet the principles- 
 7   based method. 
 8             We also think that the principles-based method 
 9   may be appropriate for other active angels and those that 
10   might have invested previously, sat on public or private 
11   boards.  So these are other sort of litmus tests that 
12   prove further their accreditation.  So we'd like the SEC 
13   for clarification, and we hope that they will consider 
14   the discussion that we have here.   
15             We would like to affirm that the ACA's guidance 
16   on an established angel group as a reasonable principles- 
17   based method, so that the market can develop practices 
18   further and help capital formation more along the lines 
19   with which we've been doing it.  We don't want to upset 
20   that applecart.   
21             There are very common questions coming from the 
22   entire ecosystem, not just angels and angel groups, about 
23   general solicitation.  And I think the word that's been 
24   put into the rulings was seminars.  And obviously we'd 
25   like to know if demo days and other types of events are 
0081
 1   indeed considered public advertising, or if they're 
 2   really more an artifact of the process of a company 
 3   finding mentors, finding opportunities, to network with 
 4   people and ultimately finding funding.   
 5             And how do 506 investments work if previous 
 6   rounds had been filed as Bs, or had unaccredited friends 
 7   and family type of investors?  So I think there's some 
 8   room for clarification in those guidelines and those 
 9   rules.  And hopefully we'll get there at some point in 
10   the near future.          
11             MS. HUDSON:  Thanks and I think a discussion 
12   among this group about those kinds of issues would be 
13   particularly helpful.  What I'd like to talk about a 
14   little bit is -- are the proposed rules on Reg D, Form D 
15   and Rule 156.  And I completely understand the thought 
16   behind this rule to really get data and understand what's 
17   going on there.  It just may be that startups have some 
18   different issues when they're raising capital than other 
19   parts of the capital formation chain. 
20             So I think many startups and early stage 
21   investors do think that a lot of the pieces of that 
22   proposed rule could put a lot of startups out of 
23   business, because they missed some of the filing 
24   requirements and don't have the capital behind it to 
25   continue if they trigger a penalty.  And to talk about 
0082
 1   this a little bit, I guess what I'd really like to do is 
 2   talk a little bit about who these companies are and how 
 3   they raise capital and then I'll bring up a couple of 
 4   ideas.  
 5             So, you know, a lot of the startups that we're 
 6   investing in have no revenues at all or really low 
 7   revenues.  They're certainly not profitable at that time. 
 8    They have very few employees.  We're often seeing at the 
 9   angel group level even, you know, companies that really 
10   are just kind of two people and they're looking for 
11   capital to grow to five or six initially.  They don't 
12   have the kinds of resources of some other larger 
13   companies that also fit within the 506 space.   
14             Many of these entrepreneurs, you know, know a 
15   lot about their industry, they've worked in businesses, 
16   but this is the first time that they’re CEOS -- this is the 
17   first time that they're raising capital.  And in the 
18   past, you know, they've been funded through themselves, 
19   their family and friends, bootstrapping and other things 
20   like that.  So they're less familiar with these rules, 
21   and they often really don’t have attorneys or, you know, 
22   the kinds of attorneys that can really, I think, well, 
23   advise them in this process.  So in other words, they may 
24   not have heard about this process.   
25             And how they raise capital right now I think is 
0083
 1   also really relevant.  So most of them are submitting to 
 2   us an executive summary and then later a business plan 
 3   with an ability for us to ask a lot of questions that 
 4   then moves into much deeper information.  If we want to 
 5   go in to do due diligence with them, we'll get kind of 
 6   full binders for that.  But starting off, it's executive 
 7   summaries and business plans.  It's rarely a PPM and 
 8   almost never are we having involved a broker-dealer, any 
 9   other intermediary. It's really based directly on our own 
10   relationships. 
11             And frankly as an angel investor when I make an 
12   investment, I want to make sure that all of my capital 
13   goes to the entrepreneur so that they can grow.  That's 
14   kind of where I'm coming from.  So having an intermediary 
15   gets in the way of that.  It's hard for them, you know, 
16   to put some of the advanced information about them in an 
17   advance Form D because they may not know the 
18   investment terms upfront.  A lot of times what happens is 
19   that it gets negotiated with a lead investor, in an angel 
20   group or a platform or otherwise. 
21             So, and then, the lead investor will lead a team 
22   to do extensive due diligence which can still change the 
23   terms of the deal based on what we learned.  They're 
24   identifying their potential investors from who they 
25   already know, from the angel group, a lot of referrals.  
0084
 1   But yes, they are doing a lot of these events and demo 
 2   days.  It's a very important part of how they meet us and 
 3   we meet them.   
 4             Another key thing to know is as these startups 
 5   are getting started, they have one idea of what they want 
 6   the business model to be or what the product is or how 
 7   the product is going to be used.  And in discussions with 
 8   sophisticated investors and just kind of thinking 
 9   themselves, they may change their business model and 
10   their idea multiple times.  And there's so many great 
11   examples of, you know, big companies now that started off 
12   with one idea and it turned into something else.   
13             So it's going to be difficult for them up front 
14   to really talk about their business model.  They may 
15   really have to, in this proposed setup, file multiple Form 
16   Ds to be accurate about what the company is going to be 
17   about.  And they're going to, you know, currently answer 
18   a lot of questions and inquiries in person, by email, be 
19   it secure or not, to go through the due diligence 
20   process.  And right now a lot of them are not wanting to 
21   publicly reveal how much they're raising for 
22   competitive purposes, competitive protection reasons.   
23             So with that background, I think our key 
24   concerns right now is that at least for startups and very 
25   small businesses, it really is a significant burden to 
0085
 1   look at the requirements that are in the proposed rules. 
 2    As we've mentioned a few times, the pitch events are a 
 3   long-standing practice for how they're doing deals.  So 
 4   it sounds to us like they will be fitting into the 506(c) 
 5   general solicitation category.   
 6             And from our conversations so far, it sounds 
 7   like a lot of startups don't know about that.  And a lot 
 8   of the people who hold these pitch events also don't 
 9   start that and may or may not advise the issuers 
10   correctly if they're participating in these events again, 
11   triggering an unintended consequence.  If they do miss 
12   their filings and the cure of the 30 days, you know, they 
13   do lose the ability to raise cash for a year.   
14             And with some of them having very little cash, 
15   very little sales, they really don't have a way of 
16   continuing.  So they would go out of business or many of 
17   them would.  Many of them might have to file multiple 
18   Form Ds because they keep changing their models.  
19   The idea of the disclosures in the legends sound like a 
20   great idea, but it might take away some of the 
21   advertising opportunities -- the new ones that they could 
22   take advantage of.  For instance if they want to do a 
23   tweet or something like that, the legends are actually 
24   longer than an actual tweet.  So you want to kind of 
25   figure that out.  
0086
 1             And then I think, you know, providing all the 
 2   materials that they might want to do which some of them 
 3   might not understand all of the things that they need to 
 4   provide, but that's videos, it's PowerPoint, it's all 
 5   kinds of materials that will be difficult for the issuers 
 6   to provide.  And I guess we also kind of wonder what the 
 7   technology is to be able to accept all of these materials 
 8   kind of in one place because it's a lot of stuff and in a 
 9   lot of different formats. 
10             And the other piece for us is, you know, while 
11   this is really about the issuer, this does add additional 
12   risks for us as investors.  It's already a very risky 
13   type of investment for us.  And if we're increasing the 
14   risk that the entrepreneur might accidently break these 
15   rules, or perhaps not take care of the verification 
16   correctly, then they need to unwind from the investment 
17   and that's additional risks for us.  So it's some of our 
18   members are actually already intending to not invest just 
19   based on that increased risk, some but certainly not all.  
20             So our recommendations for discussion among 
21   this group really is we'd like to see the rules withdrawn 
22   as they're proposed.  But as I said when I started this, 
23   you know, certainly we do understand the need for data in 
24   understanding what's going on with this huge change to 
25   capital raising.   
0087
 1             So if you're working on a redeveloped proposal, 
 2   the couple things we think are important is to remove the 
 3   harsh penalties for noncompliance when it's accidental, 
 4   you know, not requiring an advance Form D, requiring the 
 5   legends and disclosures only when the terms of the 
 6   investment are communicated and also thinking about other 
 7   ways you might collect some of that data.  There's groups 
 8   like this and other advisory groups that I think the 
 9   Commission could work with to get some of that data and 
10   reports in monitoring to get that information without the 
11   additional burdens and penalties on the issuers.  Turn to 
12   the accredited investor definition. 
13             MR. VERRILL:  Thank you.  Just very briefly, I 
14   think the definition of accreditation has been noted a 
15   couple of times today.  But I just want to reiterate it 
16   within the context that the SEC has been asked to revisit 
17   this on a regular basis.  And I want to make sure that we 
18   all understand what the implications might be of changing 
19   this in any dramatic way.  So again, accreditation is an 
20   individual whose net worth is above a million dollars, 
21   not including that person's house, or through income of 
22   $200,000 in each of the last two most recent years, with 
23   a spouse $300,000.  And that must be anticipated as being the 
24   case in the current year as well.   
25             The recommendation that the ACA has is to make 
0088
 1   no change in income or wealth thresholds for 
 2   accreditation.  If there is the need for additional 
 3   questions added to the questionnaire to prove 
 4   sophistication, we think they're relatively -- there are 
 5   three really simple approaches to doing that.  One, the 
 6   individual is a member in an angel group, which again, 
 7   provides another layer of proof of accreditation or some 
 8   other professional organization or angel platform. 
 9             Secondly, work experience if somebody has been 
10   a director of a private or a public board, then certainly 
11   they are a sophisticated business person and/or those 
12   that have already made an investment under the existing 
13   Rule 506.  These are three very easy, reasonable 
14   approaches to providing additional sophistication to the 
15   questionnaire.  
16             And I wanted to also indicate what the effect 
17   of increasing the wealth threshold might have on the 
18   existing group of accredited investors.  This is a 
19   graphic done by Wiltbank & Boeker based upon AIPP data, I 
20   think it was commissioned by the Kauffman Foundation, 
21   which essentially says that if you used inflation over 
22   the past decade, what would that impact be if you 
23   increased the accreditation threshold according to the 
24   increase in inflation.  Essentially it would double it to 
25   $2 million as the net worth requirement.   
0089
 1             And the graphic shows that nearly 60 percent of 
 2   angel investors would not be accredited at that point, 
 3   so I think that's a scary number, and it points to the 
 4   fact that we're not all members of the Shark Tank show.  
 5   I know if any of you have seen that show, but they have 
 6   the misnomer of calling it a reality show.  It does not 
 7   reflect an ounce of reality on how the angel world works, 
 8   and I do not have Warren Buffett in my angel group. 
 9             We're not the 1 percent.  We are low-high net 
10   worth individuals who have become very effective and 
11   efficient at being angel investors.  And indeed, the SEC 
12   had put together some data reflected in the GAO report of 
13   July of this year that showed a similar potential loss of 
14   accredited investors should the threshold move from $1 
15   million to $2.3 mil1ion.   
16             So I think this is real.  I think that this is 
17   something we need to be careful of not pushing out a very 
18   experienced set of savvy investors.  I think it would be 
19   catastrophic for the angel community.  It would be 
20   catastrophic for startups.  There would be certainly half 
21   as many startups created and certainly half as many jobs 
22   and half as many chances for the next Starbucks.   
23             And just to make a couple of observations about 
24   the Dodd-Frank Act on these standards, there was a change 
25   with Dodd-Frank.  There was the removal of the investor's 
0090
 1   primary residence.  And I think that was a relatively 
 2   significant change.  And I think, to reiterate, that this 
 3   should be revisited under three circumstances to protect 
 4   investors, to be in the public interest and third, and 
 5   perhaps more importantly, in light of the economy.  And I 
 6   think if we dramatically change the rules of 
 7   accreditation, we would harm our economy.    
 8             MS. HUDSON:  Great.  So just to, you know, wrap 
 9   things up, I think it is important to have that balance 
10   of protecting investors but thinking about the economy.  
11   And as David showed before, companies that are five years 
12   or less create the net new jobs across this country.  
13   These are the kinds of companies that angels and others 
14   invest in, so we just want to remind you of that.   
15             And what angels are really trying to do is help 
16   those companies get the base, so that they get to their 
17   next five years and these become the companies that 
18   really explosively grow our economy and jobs, the Yahoos 
19   and the Facebooks of the world are successful examples.  
20   So we're really here to do that and to work with you to 
21   figure how we meet all of the goals of these kinds of 
22   regulations because they are important to us.  And really 
23   appreciate the time and we're here to answer questions or 
24   be part of the dialogue.       
25              MR. GRAHAM:  Well, thank you, David.  Thank 
0091
 1   you, Marianne.  I think that was very helpful and it 
 2   certainly kind of gave me and probably most in the room a 
 3   greater appreciation for the role that the angel 
 4   community plays within the smaller company ecosystem.  
 5   Questions, comments?   
 6             MS. JACOBS:  I have one. 
 7             MR. GRAHAM:  Okay. 
 8             MS. JACOBS:  Without speaking to the specifics 
 9   of your recommendations today, I think those of us in the 
10   room that have maybe been through all those phases which 
11   I have the good fortune of having been through that, not 
12   the angel phase but the growth, one of the things we did 
13   as our company -- it was a public company -- grew, was we 
14   went on an M&A.   
15             We went on an M&A streak and over on my watch 
16   alone looked at 2100 medical device companies, okay.  We 
17   ended up buying four but over the course of those years -
18   - and when you talk about the lack of sophistication, I'd 
19   like to echo that and say as we deliberate putting rules 
20   into effect for a particular sector being an emerging 
21   company, we really need to be careful.  They are not 
22   sophisticated.  Just take the investing aside, you have 
23   no clue what you will find when you go looking in their 
24   books.  And it's not intent to defraud.  It's just lack 
25   of sophistication.   
0092
 1             And I think this is the one area as we begin to 
 2   make rules -- throughout our two years, one thing we 
 3   noted from the folks at this table is that we have asked 
 4   for our regulators to recognize that one size does not 
 5   fit all.  And I think this is one particular area, you 
 6   know, just “sans your specific recommendations."  But 
 7   when you go looking at these 2100 companies and, you 
 8   know, their accounting is as creative as how they've 
 9   gotten to that point.  But man, these are the job 
10   creators.   
11             And, you know, I can't tell you how many of 
12   them we would sit there and as part of the M&A process -- 
13   and these people have double digit growth in medical 
14   devices.  Well, the big companies are never going to get 
15   it.  And so this is tangential to what your issues are, 
16   but it is the one size fits all issue for small and 
17   emerging companies that we really need to step up and say 
18   please be careful.  We have enough challenges and hurdles 
19   in front of us with these small companies.   
20             So I'm not commenting on your specifics, I'm 
21   just saying let's just take this whole scheme and say, 
22   you know, please can we be careful that we don't strangle 
23   this industry.   
24             MR. GRAHAM:  Well, I'd like to echo that a 
25   little bit, Chris.  I mean I don't -- I'm not speaking 
0093
 1   directly to your recommendations or maybe to the issues 
 2   specifically.  But it seems to me that, you know, it's 
 3   clear when you look at the numbers, that the angel 
 4   community is very, very important to emerging companies. 
 5    I mean without the angel community there's $23 billion 
 6   at least that would not have been put into the system.  
 7   And so my sense is that the issues that have been raised 
 8   are real.  I'm not sure what the answers are, but it does 
 9   seem to me that we need to be careful that whatever we do 
10   does avoid harm, that whatever is done does avoid harm.   
11             It seems to me that, you know, again this part 
12   of the -- we're talking about the way -- we've spent a 
13   lot of time talking about the way the markets are broken 
14   and it's all for this reason, that reason, it's difficult 
15   for smaller companies to raise capital and preserve 
16   capital.   This seems to be -- you know, one part of the 
17   systems that's working.  And nothing is perfect, but it 
18   seems like this is one part of the system that is 
19   working.   
20             And so it seems to me that in that regard we 
21   should kind of look for ways to kind of enhance the way 
22   it functions and not to insert additional friction into 
23   the way it functions.  Again, don't know what the answers 
24   are, but I think those are the kinds of things that we 
25   need to think about.   
0094
 1             I mean I know all about these demo days and 
 2   fairs and all the rest.  We have done similar things in 
 3   my own firm.  And, you know, just that alone raises some 
 4   significant questions.  And it could have a chilling 
 5   effect which could result in certain investments not 
 6   being made, and these things add up in terms of 
 7   investments not made, costs incurred, one job lost here, 
 8   one job lost there.  Pretty soon you're talking about 
 9   real numbers.  But in just that one situation for 
10   example, that one scenario, you know the reason why we 
11   started down this path to begin with in terms of 
12   modifying 506 to permit general solicitation was the view 
13   that the important thing was not how you got the 
14   investor, but the important thing was the nature of the 
15   investor.   
16             And it seems to me that at least when we were 
17   talking about certain demo days and fairs and that sort 
18   of thing, maybe we shouldn't decide whether or not that 
19   is or is not general solicitation.  But maybe we can do 
20   something which says that, you know, for purposes of 
21   determining whether or not someone who gets accredited 
22   investors by attending such an event, that they will not 
23   be deemed to have violated the rule because they are 
24   there and, you know, there a bunch of non-accredited 
25   investors in the audience.  
0095
 1             So again, don't know what the answers are but I 
 2   do think that my sense is that the issues are real and 
 3   that we should find ways to enhance as opposed to ways 
 4   that cause friction.  I mean obviously, investor 
 5   protection is something we never lose sight of.  Yes, 
 6   Pravina please. 
 7             MS. RAGHAVAN:  So I just actually wanted to -- 
 8   on the point of demo day I guess because you mentioned 
 9   SBIR.  People in the SBA actually helped monitor and run 
10   the SBIR program.  And part of our mission and priorities 
11   in the next -- actually even in the next coming months is 
12   to have several demo days across the country for both 
13   SBIR, as well as high growth entrepreneurs.   
14             We just finished one right here at the White 
15   House a month ago, so I would really take under 
16   consideration that you will have quite a few of our 
17   federal agencies participating in these demo days, 
18   because it is a way of highlighting the high growth 
19   entrepreneurship.  And it's part of all of our 
20   priorities, including I know my folks at the Department 
21   of Commerce that are looking at the similar thing, to 
22   actually highlight these high growth entrepreneurs across 
23   the country and support them trying to find different 
24   mechanisms.   
25             So if we consider that general solicitation, I 
0096
 1   don't think any of us are in the -- we don't move them 
 2   into a category that they weren't considering being in, 
 3   especially for some unaccredited investors in there.  And 
 4   the other thing I would say is we should really look at 
 5   the cost of verification.  Having been with the high 
 6   growth firms for the past year and a half, the costs of 
 7   verification might actually just put them out of trying 
 8   to even raise capital in this market with the general 
 9   solicitation.   
10             I understand their reason for looking for 
11   accredited investors but having them bear the burden, I 
12   think we need to look at the costs.  These guys don't 
13   have a lot of money as people have been -- well, as you 
14   artfully said.  It's a lot of credit cards, a lot of 
15   friends and family, and it's something we should really 
16   take into consideration not to increase the burden for 
17   them to go ahead and get that capital.  And we know that 
18   they are the net job creators.  We've seen a tremendous 
19   amount of growth in them for the past year. 
20             In fact one of our very big success stories is 
21   Chobani Yogurt started off as a small little company in 
22   upstate New York, and all of sudden now they are the 
23   number one leading yogurt producer across the country.  
24   So it would be terrible to see someone like that not be 
25   able to get jobs into the market.   
0097
 1             MR. GRAHAM:  Thank you. 
 2             MS. MOTT:  I was just going to maybe piggyback 
 3   on what Christine was talking about, the fear of one size 
 4   fits all on two fronts.  One is this could impact, you 
 5   know, the earliest -- let me say this first.  Areas where 
 6   there is a very healthy ecosystem, San Francisco and 
 7   Boston, you'll find a lot of sophisticated attorneys and 
 8   accountants that can help these companies get off the 
 9   ground.  And some of them do pro bono work because they 
10   know they can’t afford it, or defer charges, things like 
11   that.   
12             But in other parts of the country where job 
13   creation is more important than, you know, some of the 
14   larger cities, you don't have that sophisticated law 
15   firm. And you don't have that sophisticated accounting 
16   beast.  We experienced it ourselves when we put a smaller 
17   chapter in a city north of Pittsburgh in Erie, 
18   Pennsylvania.  When we started talking with 
19   entrepreneurs, they were -- the advice they were getting 
20   from their attorneys and from their accountants actually 
21   scared us, so you know, again for that one size fits all.  
22             The other if I can speak to the accredited 
23   investor status for one size fits all, I think the 
24   previous recommendations according to the Dodd-Frank Act 
25   was to raise the income from $200,000 a year to $450,000 
0098
 1   a year and from $1 million to $2.5 million.  I will tell 
 2   you that in Pittsburgh, Pennsylvania, where I live, 
 3   making $200,000 a year is comparable to making $450,000 in New 
 4   York City.  And if it was raised to $450,000, I will tell 
 5   you that the doctors that are in my group and the 
 6   attorneys in my group will be ruled out.  They will not 
 7   be able to invest anymore.   
 8             And, you know, here in Washington, D.C., a home 
 9   that sells for $1 million probably sells for $250,000 to 
10   $300,000 in Pittsburgh.  So net worth is very different in 
11   Pittsburgh as it is in so many other areas.  So when we 
12   think about this one size fits all, let's think about the 
13   middle of the country, other parts of the country beyond 
14   the big metropolitan areas and how those rules impact 
15   those regions and particularly job creation for them.   
16             Oh, and one other thing -- M&A.  You couldn't 
17   have said it better, Christine.   Large companies do not 
18   put the money into R&D that they used to, they don't get 
19   the credits.  There are other things that are happening 
20   that they just don't do.  They're not going to take the 
21   risk and quite honestly they have become a culture that wants 
22   to avoid risk.  And so as a consequence, those cultures 
23   don't cultivate new products, new drugs, new anything.  
24   So what large companies find, it's better to let the 
25   ecosystem create these small companies, take the risks.   
0099
 1             And the angel investors and the venture 
 2   community -- and that's how we get our exits and of 
 3   course that's how new products get delivered into the 
 4   marketplace.  So a pretty critical component as we think 
 5   about one size fits all.   
 6             MR. GRAHAM:  Thank you.  Milton? 
 7             MR. CHANG:   I have a slightly contrary view to 
 8   all of this.  I think when it's not broken, don't fix it. 
 9    And I don't think over-regulated is better than under-regulated 
10   to avoid problems and build a bad name for investing in 
11   that kind of a deal.  You now already have 35 exemptions, 
12   35 unsophisticated investors on the rules. 
13    So I think it's trying to make it easy up front, but make 
14   it a lot more difficult back end, because dealing with 
15   unsophisticated investor isn't funny either.   
16             MR. GRAHAM:  Please. 
17             MR. ABSHURE:  Skunk at the party, here I come. 
18    And I realize everyone here is talking about concerns 
19   over having an unsophisticated issuer and them getting 
20   caught by the rules.  But you've also got to remember 
21   what we're talking about doing here is opening up the 
22   doors of advertising and general solicitation to, as Mr. 
23   Chang said, unsophisticated investors.  And they're going 
24   to be even less sophisticated than the unsophisticated 
25   issuers that you're talking about.  And I think that when 
0100
 1   you talk about allowing them to advertise and sell to the 
 2   public, that has to be reasonable. 
 3             And when you consider the speculative nature of 
 4   startup investments, the illiquid nature of startup 
 5   investments and the death rate of small companies, you've 
 6   got to figure out a way to balance the burden on that 
 7   issuer with the burden on educating and informing a small 
 8   investor.  Now I understand concerns about the rules and 
 9   the proposed rules are problematic for, you know, 
10   startups and they might get caught.  If you are going to 
11   take advantage of an exemption that allows you to 
12   publicly sell and advertise your securities without 
13   registration, learn the rules.   
14             I mean to me we're talking about such a drastic 
15   sea change in how we regulate securities that if a small 
16   company wants to take advantage of that, learn what the 
17   rules are.  Now as I've said before, I think the SEC 
18   should provide guidance.  Startups don't have the 
19   resources. They can't afford experienced lawyers, many 
20   are raising capital for the first time, all of the 
21   reasons that you need to give more information to an 
22   unsophisticated investor, but those are also all the 
23   reasons that the SEC needs to take a more active role in 
24   reaching out to these entities and explaining what the 
25   legal playing field is. 
0101
 1             And many startups will not be aware of rules 
 2   and accidentally break them.  I don't know if there are 
 3   any enforcement people here, but I can tell you at the 
 4   Arkansas Securities Department that is an extremely 
 5   common defense. I get a whole lot of that one, "I didn't 
 6   know fraud was illegal."  Now I'm not saying that that's 
 7   what we're talking about here, but that's what you're 
 8   going to get, a whole lot of I didn't understand the 
 9   rules and it wasn't there. 
10             Now with concern to filing multiple Form Ds as 
11   business models change, if I understand it correctly, 
12   you're going to file a Form D if you have a material 
13   change in the structure of your offering.  I don't even 
14   think filing additional Form Ds are going to be your 
15   biggest issue.  I think your biggest issue is going to be 
16   determining whether you have just made a material change 
17   in an ongoing offering of such a size it's going to 
18   require you to go back and get confirmation from all your 
19   previous investors that they want to stay in, or if 
20   you've triggered rescission rights.  And I think the 
21   skunk shall be quiet at this point.   
22             MR. GRAHAM:  Okay, Heath.  Thank you for that. 
23    One thing is that you talked about unsophisticated 
24   investors but it's -- we're talking about 506 and then 
25   we're talking about often they're limited to accredited 
0102
 1   investors.   
 2             MR. ABSHURE:  And my answer to that is if 
 3   anyone in this room thinks accreditation equals investor 
 4   sophistication, you're crazier than I am.   
 5             MR. GRAHAM:  But that's the best system that we 
 6   currently have. 
 7             MR. ABSHURE:  It's the best the system 
 8   currently has, and it's what we would have to work with.  
 9   I've given you an example that's very common.   
10             MR. GRAHAM:  You're going to have to give me 
11   time, don't you understand that?    
12             MR. ABSHURE:  I understand that.  I accept 
13   that, I stipulate to that.   
14             MR. GRAHAM:  So you stipulate to the fact that 
15   the accredited -- does not -- investor standard in no ways 
16   measures sophistication or the ability of an investor to 
17   do anything other than to absorb loss after a couple 
18   hundred thousand dollars, and now we're going to 
19   publicly advertise to that person. 
20             MR. ABSHURE:  I'm saying -- and I think we're 
21   both -- so we’re both agreeing that that standard also 
22   should be changed. 
23             MR. YADLEY:  Isn't the standard -- no, just to 
24   break this up.  By the way, he's right, sorry.  We're 
25   talking about disclosure and that's what the system is 
0103
 1   built on.  And I'm -- my first job at the SEC was 
 2   enforcement.  I believe in it, but you can't create a 
 3   system that assumes that people are going to be bad guys 
 4   and that everybody is out to defraud people.  That 
 5   happens and that's unfortunate, and people lose money and 
 6   we need to do what we can to fix it.  But you can't tilt 
 7   the playing field so far in that direction.   
 8             I'm from Florida.  Florida has a private 
 9   placement exemption and it mirrors 506(b), okay.  You can 
10   have up to 35 unaccredited investors.  And it has an 
11   information requirement, and it says that you must do a 
12   private placement memorandum or provide 31 specific items 
13   of information.  Florida does not have a Form D or any 
14   other filing that talks about the offering.   
15             I stipulate that Florida has had lots of fraud, 
16   but not because there's not a Form D filing because 
17   people don't make the information that they're supposed 
18   to to investors.  And it's in the law and the rules and 
19   they're available.  They're available on the state's 
20   website which is easy, you just type what you want.  So I 
21   think that the focus is -- and you were talking about it 
22   earlier and I'm not saying that Form D -- that we 
23   shouldn't have a Form D.            
24             But all the information that an investor needs 
25   doesn't have to be in a Form D.  I think rules that are 
0104
 1   clear about what needs to be provided -- and that's clear 
 2   in Regulation D now.  No specific information 
 3   requirements except you look to what the appropriate 
 4   registration statement requirements would be if that 
 5   applies.   
 6             MR. ABSHURE:  But if you're selling to 
 7   accredited investors, there's nothing.  The Form D would 
 8   be it.   
 9             MR. YADLEY:  And the theory is they can ask for 
10   what they need.  And I think the presentation today was 
11   very instructive, and thank you both for doing that and 
12   it was very lucid.  Unfortunately, as your slides point 
13   out, there are 265,000 angels and only 15,000 in groups. 
14    So Heath isn't worried about you and your members and 
15   your investors.  And it's the other people out there, and 
16   I get it.  And so I think that's where a lot of our 
17   discussion has to be and it's not one size fits all.  
18             MR. ABSHURE:  That's the one thing I would say 
19   that I would agree that the one size doesn't fit all, 
20   both with regard to the issuer and the investor and it's 
21   the problem we're struggling with.  
22             MR. GRAHAM:  I want to make sure that everybody 
23   has a chance, so Leroy.  
24             MR. DENNIS:  Oh.  There we go.  I have a 
25   question along the same lines for Marianne and David and 
0105
 1   then I'll ramble a little bit to give you a chance to 
 2   think about it.  And so the question is the $1 million 
 3   threshold, and $200,000 has been around for a while. 
 4    Do you think the sophistication of that investor has 
 5   increased over the years?  And the reason I ask it, as I 
 6   listen to this I could see a train wreck coming.   
 7             If the sophistication is not improved so you 
 8   would say well, geez, you should index that for some kind 
 9   of inflation -- maybe it's not CPI but maybe it's growth 
10   and income or something like that, so that you've got the 
11   same investor investing that did 10 years ago that does 
12   today, especially when I'm faced with a situation where 
13   I've got a set of companies that now are less 
14   sophisticated or less able to provide accurate 
15   information.   
16             So it becomes very important for that investor 
17   to be able to sit across the table and ask critical 
18   questions of that investee as to whether or not they can 
19   -- so that make an informed investment.  So absent 
20   everything being the same you would say well, you should 
21   index for inflation those accreditations.  But, you know, 
22   Internet, new world, new information, so I would think my 
23   perception is that the sophistication of a person owning 
24   a million dollars of investments 10 years ago -- let me 
25   rephrase that. 
0106
 1             A person who owns a million dollars of 
 2   investments today is much more sophisticated than a 
 3   person that owns a million dollars in investments 10 
 4   years ago.  And to me that's the reason why you wouldn't 
 5   change the accreditation rules along those lines.  But 
 6   I'm curious what you guys see with your investor 
 7   community that you guys deal with.   
 8             MS. HUDSON:  I think there are a lot more 
 9   people that hit those thresholds that are sophisticated 
10   now than there were.  So the proportion of people has 
11   definitely increased, and that's come through the 
12   Internet.  It's come through a lot more information about 
13   what angel investing is, a lot more dissemination of best 
14   practices.  Even, you know, 20 years ago I think the term 
15   angel even wasn't that common.           
16             And so people are starting to hear about that 
17   and share that and do that through angel groups, through 
18   certainly these investment platforms, the accredited 
19   platforms.  We're seeing a lot of dissemination of 
20   information to the investors and to the issuers.  So I 
21   agree that a lot more of them are sophisticated.  I guess 
22   if I also build on that a little bit though, I also think 
23   that perhaps originally when those thresholds were set, 
24   they might have been set too high.  And we might just be 
25   getting to the level where they're correct as far as 
0107
 1   financials go.  
 2             MR. GRAHAM:  David. 
 3             MR. VERRILL:  Yeah.  I don't really have 
 4   anything incremental to add.  I think that's right on, 
 5   it's just the size of the angel ecosystem and the 
 6   mechanisms that accredited investors have to learn about 
 7   being an angel are just more prevalent.  Our sister 
 8   organization ARI educates tens of thousands of people, 
 9   not just the members of our groups every year.  And they 
10   do that not just in this country but in others.  I agree.  
11             MR. BORER:  Stephen, I don't think I've gotten 
12   through a morning session in the last two years without 
13   opening my mouth.  First of all, I've been in the 
14   investment banking and the private investment business 
15   for a long time.  And I must say that I've become far 
16   more sophisticated through the money I've lost than from 
17   the money I've gained.  So for this to be something to 
18   keep anybody from losing money and where we're better 
19   off, obviously sophistication comes with age and some 
20   amount of wisdom through learning. 
21             When we had the discussion and made the 
22   recommendation here at this committee, I think if I 
23   recall correctly most of the discussion was around what 
24   is the harm we're creating by advertising or soliciting a 
25   broader audience if we maintain the level of investor 
0108
 1   qualification that we had previously.  I don't recall 
 2   more than two or three minutes in that discussion 
 3   involving let's change the whole definition of who we can 
 4   go to if we're soliciting generally, and even come up 
 5   with a C instead of an A and a B.             
 6             What happened is through the JOBS Act, through 
 7   the implementation we've changed that pretty 
 8   dramatically. And I think a lot of this discussion is 
 9   around those particulars, either creating footfalls that 
10   can take place, the landmines, various things that will 
11   take place.  And I must admit I'm not versed at all in 
12   the angel investment communities.  I probably qualify as 
13   an angel, but I've lost more money than I've made.  In 
14   individual investments I've still got more than I started 
15   with though.   
16             One thing I'd like to make though -- because a 
17   point I'd like to make is there were a couple of comments 
18   here today that early stage companies, they don't need 
19   broker-dealers and agents.  And I absolutely agree.  
20   Agents and broker-dealers do not want to in many cases 
21   take those on.       
22             But in the cases where the companies are far 
23   enough along the development chain where agents and 
24   broker-dealers may be helpful in the due diligence, in 
25   the qualification, in putting a brand on a transaction 
0109
 1   that's getting done where it's not early stage, there are 
 2   certain requirements that are enhanced here under -- 
 3   where general solicitation is used with respect to 
 4   filings and those types of things. 
 5             FINRA put in place last year a series of 
 6   private placement filing requirements on the broker-
 7   dealer community which I think intersect with some of 
 8   what's taking place here.  And from my thought and some 
 9   of the discussion I've had with some of my peers, is 
10   there may be a discouraging element of having a greater 
11   level of disclosure if general solicitation is required, 
12   because all those same things will have to be provided to 
13   FINRA.   
14             And to the point of is there even the 
15   sophistication within FINRA of being able to accommodate 
16   the intake of all of that, everything from links to 
17   websites, all the content that may be on that website 
18   that's hyperlinked, even if it's just in a tweet that 
19   isn't big enough to contain all that information, et 
20   cetera, I just wonder if there had been thought given to 
21   that in the imposition of these requirements, the form 
22   requirements and the filing requirements, and the content 
23   with the FINRA requirements on the broker-dealer 
24   community.  
25             MR. GRAHAM:  Thank you, John.  We haven't heard 
0110
 1   from Richard.   
 2             MR. LEZA:  On the part of increasing the levels 
 3   for sophisticated investors, let me give you an example 
 4   of what a difference eight years have made.  I lived and 
 5   invested in the venture capital business in the Bay Area 
 6   for about 27 years.  About eight years ago I retired, I 
 7   moved to Palm Springs.  And in the Bay Area when you're 
 8   taking about sophisticated investors, you got a ton of 
 9   them.  In Palm Springs when you're talking about 
10   sophisticated investors, eight years ago you really 
11   didn't have it.   
12             But in eight years the kind of learning curve 
13   that has increased in the number of people, that I think 
14   it would be a mistake to increase the $1 million and 
15   $200,000 up because you don't need to.  You could really 
16   go down, because people have become much more 
17   sophisticated than before.  So it seems to me that you 
18   should leave the $1 million or the $200,000 where it 
19   is.  I think that's very significant.   
20             MR. GRAHAM:  Thank you, Richard.  Kathleen. 
21             MS. MCGOWAN:  I agree with Richard on keeping 
22   the threshold to where it is because of the 
23   sophistication.  But my one concern is something that 
24   Christine brought up about going and looking at 2600 
25   companies and the accounting.  What are some of the 
0111
 1   accounting requirements that you have for some of your 
 2   investments that you make?  Are they audited financials, 
 3   are there some sophistication in what they're reporting 
 4   and what they're saying is what their needs are and their 
 5   ability to project forward? 
 6             MR. VERRILL:  Sure.  Most of the documents that 
 7   we have in at closing are Series C financing or Series A 
 8   financing, have requirements of information rights that 
 9   often include financial information, particularly audit 
10   on a regular basis.  So yeah, they typically are. 
11             MS. MCGOWAN:  Mm-hmm.  So I guess I think 
12   what you were saying about some of the financials behind 
13   some of the companies you were looking at. 
14             MS. JACOBS:  But I'm going to go back to 
15   something that Catherine said.  Audited financials out of 
16   Philadelphia may not be the same as what we're going to 
17   see out of Tucson, Arizona.   
18             MS. MCGOWAN:  Okay. 
19             MS. JACOBS:  And I'm from Atlanta.  A lot of 
20   these companies stated they had audited, but when you are 
21   a public company buying a private company and the way 
22   things have been accounted for and assets have been 
23   identified, it's not always the same.   
24             MS. MCGOWAN:  It's not the same rigor that you 
25   would have. 
0112
 1             MS. JACOBS:  Yeah, exactly. 
 2             MS. MCGOWAN:  Okay.   
 3             MS. JACOBS:  And there's not fraud, it's not 
 4   bad intent.  These guys have done their best given what 
 5   they could afford in their local markets.   
 6             MS. MCGOWAN:  Right.  Okay.  Okay, thank you. 
 7             MR. GRAHAM:  Tim. 
 8             MR. WALSH:  Good morning.  I'm going to ask a 
 9   non-accredited investor question or comments.  It might 
10   have been easier to ask these when the presentation was 
11   going on, but the ying and the yang and the ham and the 
12   eggs presentation was so smooth I didn't want to 
13   interrupt. So just a couple of rapid fire questions.   
14             The 15,000 investors in angel groups, so what is 
15   that?  And then a couple of times you mentioned angel 
16   sites which sort of my ears went up when I heard that 
17   too.  What exactly -- these are Internets.  You have to 
18   have passwords I assume to be accredited investors.   
19             And then the one thing that sort of jumped out 
20   and there wasn't a page number on the presentation, we 
21   talked about the returns from the angel sites.  It seemed 
22   very sort of data mining, 2700 data points over 12 to 13 
23   years.  Could you give a little more clarification on who 
24   did this, why the 2700, how various investments are 
25   thrown out or put in.   
0113
 1             And then lastly, I thought it was interesting 
 2   you mentioned the Kauffman Foundation was in some of the 
 3   charts in here.  And I'm wondering if this was the same 
 4   article I read in the Kauffman Foundation maybe two years 
 5   ago when they were highly critical of the venture capital 
 6   industry.  And maybe they were positive on the angel 
 7   industry, which I hope they were.  
 8             MR. VERRILL:  I'll take the first two and give 
 9   you the last two.  So the first question was the angels 
10   within the groups that are members of the ACA.  So my 
11   group has -- we're structured as a fund.  There are 40 
12   people in that fund.  Catherine, how many people are in 
13   your group -- 65?  Marianne, how many people are in your 
14   two groups? 
15             MS. HUDSON:  One has 40 and one has 85. 
16             MR. VERRILL:  So rough order of magnitude there 
17   are 50 to 100 people in every angel group, and 200 angel 
18   groups are members of the ACA.  That's where the number 
19   of angels within our membership ecosystem comes from.   
20             MS. HUDSON:  And actually beyond.  So we 
21   collect data on any angel group that we know about.    
22             MR. VERRILL:  The second question was about 
23   accredited portals and an example may be Angel List.  
24   Angel List is a platform where you must (a), be referred 
25   into and (b), show proof of accreditation.  It's again, 
0114
 1   check a box. And then you can be on their platform where 
 2   they present deals that Catherine might have invested in 
 3   and because of her reputation, Marianne and I might look 
 4   at it even though we're not in that geography.  We may 
 5   not ever have that company present to us.  But based upon 
 6   the fact that Catherine and her reputation -- she's 
 7   invested in that company, we may choose to do it as well.  
 8             Angel List did submit a no-action letter to the 
 9   SEC which has made it into the safe harbor treatments 
10   under the recent ruling.  So they are I think the biggest 
11   on the block but there are many, many, many other 
12   accredited platforms lying in wait.  
13             Some of them are sector focused and others of 
14   them have different types of areas of focus.  Some of 
15   them offer different bells and whistles, but at the 
16   end of the day, they are an effective mechanism for 
17   anybody anywhere in the country to look at deals that 
18   somebody else that has a reputation might suggest that 
19   you want to invest as well.     
20             MS. HUDSON:  And maybe to follow up on that, 
21   most of them have a process to accept them where not only 
22   do they self-certify that they are accredited, but they 
23   also have a process where they check with one or possibly 
24   two members to confirm that they're accredited investors. 
25   And most of them do require a password 
0115
 1   or something to look at the deals behind the scenes.   
 2             On your other questions, I'm hoping I'm getting 
 3   them right and for full disclosure, I am a former Kauffman 
 4   Foundation employee myself.  And a lot of the work that 
 5   the Angel Capital Association does, and particularly the 
 6   Angel Resource Institute, is actually a spin out of the 
 7   Kauffman Foundation.  So I think they did have a belief 
 8   in angel investing as a good way to support startups, 
 9   particularly geographically across the country.  And the 
10   focus was really on how do we make sure that more 
11   investors are sophisticated and supporting those 
12   investors. 
13             As far as the study on the returns of angels 
14   and groups, it was done in 2007.  It was done by two 
15   academics from Willamette University and the University 
16   of Washington.  They had a process where they wanted to 
17   best collect these deals.  I think it was closer to 3200 
18   investments -- actually at exits with again, the majority 
19   of the exits not being so good.   
20             They wanted to be able to put in a process 
21   where they would be able to generalize as much as they 
22   could.  So for I think it was six groups they will 
23   collect all of the investments and exits it ever had.  So 
24   they made sure they got the good and bad and they 
25   compared that then with other groups they may not have 
0116
 1   gotten full information on. But they wanted to make sure 
 2   there wasn't too much of a selection bias, in other words 
 3   there were not too many of the deals that were put in 
 4   that had a good result as opposed to a negative result.   
 5             And it was sent out to -- I'm going to get the 
 6   numbers wrong -- but more than 80 angel groups 
 7   participated in it.  And more than -- I think it was 550 
 8   individual investors were part of that investment.  And 
 9   then finally on other question, I think yes, the Kauffman 
10   Foundation has put out a report on its own investments 
11   and what that's meant for their returns with venture 
12   capitalists.   
13             I don't know much more about that study now, 
14   but certainly they have been behind making sure that more 
15   angels are sophisticated and they have the education 
16   information that they need.  Hopefully that answers your 
17   question.   
18             MR. GRAHAM:  And Dan, I don't think we've heard 
19   from you.  Have you got something?  Want to tell us about 
20   your hike through Europe? 
21             MR. CHACE:  That would be interesting.  I don't 
22   have a lot to add.  I mean this isn't necessarily where I 
23   have any value to add, but it just strikes me that the 
24   ongoing balance of investor protections versus capital 
25   formation and which side do you come down on that.  I 
0117
 1   think to me the most interesting question is the $1 million 
 2   threshold and the income are reasonable proxy for 
 3   sophistication.  And I don't believe that it is, but I 
 4   also can't think of any other, you know, reasonable way 
 5   to define that.  And maybe the ability to absorb a loss 
 6   is what's really relevant here versus your acumen as an 
 7   investor in startup companies.   
 8             So I don't feel that I have a lot to add, but 
 9   my bias would be to come down on the side of letting 
10   people take risks within a regulatory structure that 
11   provides information that's relevant.  But you can't 
12   protect everybody from everything. 
13             MR. GRAHAM:  Thank you, Dan.  David and 
14   Marianne, thank you very much.  I think this has been 
15   very interesting and useful.  We're actually finishing a 
16   minute early, so that qualifies as being on time.  So 
17   we're going to take a lunch break.  The ideas for places 
18   to have lunch, they're kind of listed in your folder.  
19   And we'll reconvene promptly at 2:00.  Thank you. 
20             (A brief recess was taken.)  
21               A F T E R N O O N  S E S S I O N 
22             MR. GRAHAM:  Okay.  Let's go ahead and get 
23   started.  It's -- we want to try to stay on schedule, and 
24   this afternoon's schedule was to begin at 2:00, and it's 
25   a little bit after 2:00.   
0118
 1             As you know, we're going to be spending this 
 2   afternoon talking about the JOBS Act, the impact the Act 
 3   has had on companies and markets after a year or so and 
 4   new ideas for capital formation.   
 5             We've got three speakers this afternoon.  Two 
 6   have appeared.  We're hopeful that the third will appear. 
 7    But we have with us right now Joel Trotter and Alex 
 8   Cohen, both of Latham & Watkins.   
 9             Joel is global Co-Chair of Latham's Public 
10   Company Representation Practice, and he is the Deputy 
11   Chair of the Corporate Department in D.C.  As one of two 
12   lawyers on the IPO Task Force, Joel played a leading role 
13   in preparing a report to the Department of Treasury 
14   addressing job creation by improving access to the 
15   capital markets for emerging growth companies.  Joel also 
16   served as a principal author of the IPO-related 
17   provisions of the JOBS Act.   
18             Alex is Co-Chair of Latham's national office, 
19   and his practice covers capital markets, registration and 
20   reporting with the SEC and corporate governance.  Alex 
21   also served at the SEC, first as Deputy General Counsel 
22   for Legal Policy and Administrative Practice, and later as 
23   Deputy Chief of Staff of the SEC.  
24             We also expect Jeffrey Solomon, who is the CEO 
25   of Cowen and Company.  I will go ahead and introduce him 
0119
 1   in his absence.  Jeff is a director of the Cowen Group, 
 2   and he oversees all of Cowen and Company's business, 
 3   including investment banking and capital markets, sales 
 4   and trading and research.  Now previously Jeff served as 
 5   Cowen's chief operating officer and head of investment 
 6   banking.  He was with Republic, the New York securities 
 7   corporation, now part of the HSBC Group, and the Mergers 
 8   and Acquisitions Group at Shearson Lehman Brothers.   
 9             Jeff is also a member of the Committee on 
10   Capital Markets Regulation, a research organization 
11   dedicated to enhancing the competitiveness of the U.S. 
12   capital markets, ensuring the stability of the U.S. 
13   financial system. 
14             So with that, I will turn it over to Alex and 
15   Joel. 
16             MR. COHEN:  Well, Steve, thank you very much.  
17   And I wanted to thank the entire Committee and the Chairs 
18   and also the staff of the Division of Corporation Finance 
19   for having us today.  I think within Latham sometimes 
20   people are a little tired about hearing us talk about 
21   Title I because it's a topic that we really enjoy and 
22   gets us excited.  So we're awfully -- especially grateful 
23   for the chance to talk about Title I to an audience of 
24   people who are going to be -- I think share our passion 
25   for it.  
0120
 1             As Steve already mentioned, Joel did play an 
 2   important role in drafting Title I, and I like to think 
 3   of him as James Madison whenever I have questions or 
 4   issues that come up about Title I.  But what we thought 
 5   we would do today, if it would be useful for the 
 6   Committee, would be to go through an updated version of a 
 7   report that we put out in April which surveyed Title I 
 8   and looked into some data on what was happening and what 
 9   kind of accommodations, particularly, people were using.  
10   And some of the data was, you know, to us kind of 
11   surprising, and we'll talk about why that should be so. 
12             MR. TROTTER:  And just a note on how we -- the 
13   methodology for the survey data. 
14             MR. COHEN:  Yeah, that's important.  
15             MR. TROTTER:  What we did was we started with 
16   the universe of issuers that called themselves -- that 
17   identified as emerging growth companies, and we excluded 
18   from that universe the ones that were not listing or 
19   expected to list on a national securities exchange.  So 
20   we basically looked at offerings by emerging growth 
21   companies where they were either listing or reasonably 
22   expected to list on a national securities exchange.  So 
23   that brought the universe of 500 emerging growth issuers 
24   over the first year of the JOBS Act down to about 180, 
25   184 issuers that were doing an IPO in that first year 
0121
 1   after April 5, 2012. 
 2             MR. COHEN:  Yeah.  We've included a copy of the 
 3   report in your materials, and it's online.  But what was 
 4   -- one of the things that was interesting to us when we 
 5   started to bring down the data in order to prepare for 
 6   this meeting was that the trends that we had identified 
 7   in April were continuing.  That was one of the first 
 8   takeaways, not because we had such a great crystal ball, 
 9   but I think more because a year's worth of time was 
10   enough time to get a sense of how Title I was working in 
11   practice and how people were using it. 
12             So what did we find in the data?  I mean one of 
13   them was that -- you know, who are the EGCs?  There have 
14   been a lot of them actually.  I mean it was really 
15   striking to us, the take-up of Title I in IPOs.  In fact, 
16   I think we counted that about 85 percent of IPOs -- as we 
17   put up in the slide -- since April have been by ECGs, the 
18   companies that, as Joel said, self-identified as ECGs.   
19             So it's certainly the case that Title I has -- 
20   the people have been interested in following Title I or 
21   at least call themselves EGCs, and it -- get some sense 
22   for whether or not Title I scoped the world of EGCs 
23   correctly, but it did pick up, you know, as we say, about 
24   85 percent of IPOs.  That's a high percentage. 
25             MR. TROTTER:  Well, a couple of things you can 
0122
 1   draw from this.  One, it certainly changed the playbook 
 2   for the IPO process for all but the largest IPOs.  And in 
 3   terms of opt-in by the emerging growth company 
 4   population, nearly all of them are using at least one of 
 5   the accommodations provided under Title I of the JOBS 
 6   Act.  
 7             MR. COHEN:  And one piece of data which -- sort 
 8   of near and dear to my heart -- was that there were more 
 9   than 10 percent of EGCs who were foreign private issues. 
10    It's near and dear to my heart because I spent a long 
11   time in my career doing cross-border capital markets and 
12   was, in fact, practicing in London for Latham when 
13   Sarbanes-Oxley came out.  And there was a period where it 
14   was very difficult to persuade -- to make the argument 
15   for non-U.S. companies to come to the U.S. capital 
16   markets because they had, you know, various concerns, and 
17   regulatory burden was one of them. 
18             But to some degree Title I has been -- there 
19   has been quite a deal of -- a good deal of interest in 
20   Title I.  We've made presentations to a number of 
21   different securities regulators all over the world who 
22   really wanted to know what Title I did and how the 
23   decisions were made.  So it's really kind of path-
24   breaking in that way.   
25             Chart by industry.  You know, Joel, we were 
0123
 1   talking about this earlier.  I don't know -- I guess I 
 2   would have --before we had seen the data, I would have 
 3   thought that the technology line would be bigger.  I was 
 4   struck that it was more broad-based than we would have 
 5   thought, you know. 
 6             MR. TROTTER:  It's a good point.  And if you -- 
 7   this chart has been updated since the one that's 
 8   reflected in our report, but the trend lines are the 
 9   same.  So basically what you see is, on a percentage 
10   basis, these are very much similarly proportioned from a 
11   few months ago in April of this year when we did the 
12   initial breakdown. 
13             And one other thing about this, Alex, in 
14   addition to what you just pointed out is I think there 
15   was recent news coverage about the fact that -- or in -- 
16   according to this story, technology offerings were 
17   under-represented in the emerging growth company 
18   population.  And to me that was just -- it was yet 
19   another instance of where you read something in a news 
20   report, but when you look at the actual data after you 
21   crunch the numbers, they tell a completely different 
22   story, which is the preponderance of -- or certainly the 
23   plurality of emerging growth company offerings.   
24             If you're looking again at the sub-population 
25   of offerings that are on a national securities exchange, 
0124
 1   they're mostly technology offerings.  But then you have 
 2   it across all industries.  It's not -- to Alex's point, 
 3   it's not that they're all technology offerings.  It's 
 4   just that the greatest single slice is technology 
 5   companies.  
 6             MR. COHEN:  You know, and I -- we didn't run 
 7   the data.  I suspect there's something that -- you know, 
 8   Jeff, that your firm might know.  But to me, just on a 
 9   kind of qualitative level, this looks like it maps 
10   reasonably well to what you'd expect in an industry 
11   breakdown for IPOs.  It's a lot of technology companies, 
12   which you'd expect, but also the other company mix -- 
13   nothing really jumped out at me.  Maybe there's more 
14   financial services than I would have expected, but I 
15   don't know if there's anything in this bar chart that 
16   strikes you as out of proportion to the -- what you would 
17   normally expect in the run of IPOs. 
18             MR. SOLOMON:  I actually think -- you know, I'm 
19   not surprised about anything on here.  I think the good 
20   news is it's taking a while for people to get the word on 
21   what it means to be classified as an EGC.  So I think, 
22   you know, in the days just following the JOBS Act, there 
23   was a lot of debate and discussion about whether or not -
24   - if you were going to be an issuer that was labeled as 
25   an EGC, you know, was that going to be a stigma.   
0125
 1             And I think -- so there was a lot of discussion 
 2   in and around some of these areas about whether or not 
 3   that was a negative thing.  I don't hear that at all 
 4   anymore, so I actually think -- and I would say, once 
 5   companies go public, publicly traded investors, 
 6   institutional investors that we cover are not drawing 
 7   distinctions between EGCs and non-EGCs.  So that to me is 
 8   more -- this kind of represents what I would think is a 
 9   good smattering, and it just happens to be the industries 
10   that have embraced it most quickly. 
11             MR. TROTTER:  Jeff, you just mentioned the 
12   stigma issue.  I'll just throw out that was something 
13   that when the task force was making its recommendations 
14   prior to any of this becoming law, that was an issue that 
15   was an area of focus for us, was how do we do this in a 
16   way that creates meaningful change and doesn't just 
17   create a small co. system.  So we wanted changes that 
18   would avoid that kind of stigma.  
19             You see the 85 percent statistic that Alex 
20   cited earlier.  I think that's an important thing to bear 
21   in mind, is from my personal standpoint it's a -- it's 
22   right at the -- that's exactly what we would have liked 
23   to see, basically changing the landscape broadly for all 
24   but the very largest IPOs that don't need the assistance. 
25             MR. COHEN:  Yeah. 
0126
 1             MR. TROTTER:  So if you're a large -- a very 
 2   large old industrial line company that's emerging from 
 3   bankruptcy, you can -- you don't need these 
 4   accommodations.  Similarly, if you're a household name 
 5   major technology company, you don't necessarily need 
 6   these accommodations if you're over a certain revenue 
 7   threshold.  You can debate what that was.  And Congress, 
 8   at least last year, settled that debate for the moment.   
 9             But the billion dollar threshold for the 
10   definition gives you a very broad meaningful category 
11   that has a significant impact.  At a billion dollars of 
12   revenue, you're talking about a category of companies 
13   that's roughly three percent of total market cap.  So 
14   it's not taking over -- relative to the size of the total 
15   market, it's a small number.   
16             Relative to the IPO market, it's a big number, 
17   and that's where we were trying to -- that is the balance 
18   that the IPO Task Force was trying to achieve in defining 
19   the category the way that it was defined, but all of 
20   which is -- you know, and Jeff mentioned the stigma 
21   point.  It was a significant policy issue.  How do you do 
22   this in a way that's tailored, that doesn't -- that isn't 
23   over-broad but also avoids this issue of creating a 
24   shadow system, a small co. system, a junior varsity 
25   system that people are not going to want to use because 
0127
 1   of the stigma associated with them. 
 2             MR. COHEN:  Well, you know, Joel, really to 
 3   that point, if you go ahead two slides to the breakdown 
 4   of revenue, it's really quite interesting, I think, that 
 5   nearly two-thirds of EGCs, as we put up there, have less 
 6   than $100 million in revenue.  And then if you map to 
 7   less than $250, you pick up 80 percent of EGCs.   
 8             And so, you know, I -- there was a lot of 
 9   discussion when Title I came out, precisely on the point 
10   about whether a billion dollars was an appropriate level, 
11   was it too high, would it pick up too much.  But it's 
12   interesting that the EGCs have been, to such a large 
13   extent, smaller cap companies.  And it's -- really has 
14   covered the lower end of the market in terms of cap -- in 
15   terms of overall capitalization without, as I think 
16   you've said, segregating in some kind of box really small 
17   companies. 
18             So it did achieve the trick of getting what 
19   you'd think of conceptually as smaller companies without 
20   confining you to a -- you know a small group of micro 
21   caps.  Put it that way. 
22             MR. TROTTER:  So I'll just address what I'm 
23   imagining as a counterpoint to what Alex just said, which 
24   is, "Okay, well, then why didn't you just set the bar at 
25   $250 million in revenue."  And there's – here is the point -
0128
 1   - or the policy we're driving at is scaled regulation.  
 2   So it's not a one-size fits all transition period, right? 
 3    It's a period of up to five years depending on the size 
 4   of the company.  And so you can go public as a $250 
 5   million revenue company and still have plenty of 
 6   additional time where you're going to enjoy the benefits 
 7   of these additional accommodations until you phase out.   
 8             So if you quickly become a really large 
 9   company, you're no longer -- you will no longer have 
10   these benefits, or at the outer limit, even if you stay 
11   at $250 million of revenue sort of indefinitely, the 
12   phase-in ends after the year-end following the five-year 
13   anniversary of your IPO.  So you're really -- you're 
14   limited to a five-year phase-in, but the extent of that 
15   phase-in varies according to the size of the issuer.  
16             And that's in contrast to some of the older 
17   technology, right, under the securities laws where 
18   everybody, regardless of their size had the same period. 
19    You have until you're -- take, for example, SOX 404(b), 
20   the internal controls audit.  You have until the second 
21   annual report that you file as a public company, at which 
22   point it doesn't matter if you're a $10 billion revenue 
23   company.  It doesn't matter if you're $250 million.  You 
24   have to do SOX 404(b) compliance at that time under a 
25   prior rule.   
0129
 1             So this, again, was something that we were 
 2   driving at in terms of a meaningful period of relief that 
 3   would scale according to the size of the issuer in a 
 4   meaningful way, not just at a transition period, which, 
 5   although definitely meaningful in the past, was really 
 6   kind of one-size-fits-all and pretty unforgiving for 
 7   smaller companies. 
 8             MR. COHEN:  Well, one of the pieces of data we 
 9   looked at was which exchange just to see if there was any 
10   you could map to listing on NASDAQ rather than the New 
11   York Stock Exchange, which might have been one's initial 
12   instinct.  But it turns out that, in fact, it was quite 
13   evenly distributed, slight edge to NASDAQ.  But on the 
14   two national securities exchanges, they were just about 
15   50/50.  And, again, I -- without having run the numbers, 
16   I would imagine this is -- roughly correlates to overall 
17   number of IPOs, non-EGCs and EGCs although not, of 
18   course, by market cap where there -- you might see a 
19   distinction.   
20             So Title I accommodations, we thought -- we 
21   assumed that people on the Committee are quite familiar 
22   with what these accommodations are, so we won't summarize 
23   them -- but obviously happy to do that if anyone were 
24   interested. 
25             But one of the things we -- questions we said 
0130
 1   for ourselves was, "Well, what's popular?  You know, what 
 2   in Title I is popular?  What have people used?  What do 
 3   they use more of?  What do they use less of," because we 
 4   all had ideas, I think when JOBS was passed, what might 
 5   prove to be popular or less popular.  And to some degree 
 6   the results were kind of surprising.   
 7             And one that was, again, interesting to me 
 8   because of my experience over the years in the foreign 
 9   private issuer world was that the confidential submission 
10   process was extremely popular.  In fact, we counted that 
11   almost 85 percent of EGCs used it.  That number -- of 
12   course, you can't tell the number of people who put it in 
13   confidentially and never went through, so it may actually 
14   undercount a little bit. 
15             But it's a very simple idea, had always been 
16   very popular for the foreign private issuer world because 
17   it allowed people to get some degree of comment back and 
18   forth without exposing their entire business plan to the 
19   world.  And it's -- you know, it's been one that people 
20   really -- when you talk to issuers, our experience has 
21   been that really -- potentially IPO candidates -- that 
22   really speaks to them.  It's also just interesting to see 
23   how many rounds people go confidentially.  It turns out 
24   we count about two.   
25             So they just submit a document, get comments 
0131
 1   back from Corp Fin, do another document and then go 
 2   public, which, Joel, I don't know when -- from the 
 3   Committee's perspective whether there was a concern about 
 4   people doing kind of the entire process sort of in secret 
 5   and then suddenly popping up with a fully baked document. 
 6    But it hasn't quite worked out that way it looks like. 
 7             MR. TROTTER:  No, that's true.  I mean on 
 8   average it's about 49 days from the first public filing 
 9   until the launch of the road show.  And then the typical 
10   timing is about 10 days after that to price the deal.  So 
11   people are not running right up to the line on the 21-day 
12   requirement, but you know, even -- and with some of the 
13   recent coverage about this procedure, even among some of 
14   the critics, I've seen some commentary to the effect of, 
15   you know, it is a meaningful benefit to these companies 
16   to be able to do this without -- to initiate the process 
17   without exposing their most competitively sensitive 
18   information on the very front end of this process.   
19             And the JOBS Act requirement of three weeks 
20   prior to the road show, unveiling everything, including 
21   the initial submissions in each amendment so everybody 
22   can trace through the whole progression of the amendments 
23   that resulted from the review process -- three weeks is -
24   - there was a pretty vocal critic in this area who was 
25   recently writing about how three weeks is ample time to 
0132
 1   look over these filings if you're interested in figuring 
 2   out the back and forth and really studying the documents. 
 3    You've got a minimum of three weeks and, in practice, 
 4   over a month to do that.   
 5             And so, you know, this person was raising the -
 6   - you could, I guess criticize this as too short, but 
 7   what meaningful benefit would you -- I mean at a certain 
 8   point you would need to -- if you believe in this 
 9   accommodation, you would need to cut it off somewhere 
10   anyway. 
11             The point was minimum 21 days on the theory 
12   that that gives, in the information age with the 24-hour 
13   news cycle and instant availability of all of this 
14   information to anyone with a browser there is -- there is 
15   plenty of time to look at everything that you want to 
16   look at in three weeks. 
17             MR. COHEN:  Well, we also put up there 404(b), 
18   the phase-in on 404(b) as well as the scaled CD&A have 
19   achieved very, very broad acceptance.  It's -- I'd say, 
20   probably almost every EGC IPO has taken advantage of these 
21   two.  And to me what's interesting about the data is that 
22   it does help inform the question about -- I mean I know 
23   the committee has been considering scaling various kinds 
24   of public company regulatory aspects.  And this is at 
25   least, I think, sort of market feedback as to what 
0133
 1   issuers find, you know, helpful and what they're less -- 
 2   you know, what they need less in terms of accommodations. 
 3    So 404(b) -- probably not surprising given the -- all of 
 4   the conversations about the internal control audit over 
 5   the years.  But 404(b) is one of them. 
 6             But the CD&A is another.  And I think if -- to 
 7   the extent that you're thinking about exec comp 
 8   disclosure, at least in the initial years as initial 
 9   filing as a public company extents of CD&A, people didn't 
10   think that, I think, it was ultimately so critical for 
11   the investment decision.  There were other aspects that 
12   investors were more focused on. 
13             MR. TROTTER:  Another continuing theme is just 
14   that all of these accommodations are based on some 
15   precedent in SEC policy or regulation.  And here with the 
16   streamlined executive compensation disclosure as an 
17   example or the financial statement requirements -- those 
18   are directly borrowed, of course, from the smaller 
19   reporting company system where a similar policy judgment 
20   has been made in a similar context; how do we offer 
21   relief.  How do we provide a tradeoff? 
22             And so we were borrowing from a similar 
23   tradeoff that had been made in a different context and -- 
24   with the result that, you know, CD&A is not required for 
25   emerging growth companies, and some of the additional 
0134
 1   financial statement disclosure is not required. 
 2             MR. COHEN:  On this slide we talk about the 
 3   take-up of accommodations with respect to financial 
 4   statements.  I have to say I actually found this 
 5   surprising because maybe it's just that three years of 
 6   financials is so deeply ingrained in my psyche it's hard 
 7   for me to imagine people going public on two.  And I 
 8   think before --  
 9             MR. TROTTER:  But you don't represent a lot of 
10   smaller --  
11             MR. COHEN:  Well, that's true too.  That does -
12   - it reflects my practice actually.  But here -- and I 
13   think in advance people would have predicted though that 
14   three years -- investors are used to three years.  They 
15   would expect it.  But there's been a fairly significant 
16   take-up of it, not -- and I think not just in situations 
17   -- there are obviously specific situations like in the 
18   third year, a company's done a material acquisition and it 
19   might be hard to find the financials, or the company's on 
20   such an accelerated trajectory that, you know, in year 
21   one they were just a couple of people in a garage and 
22   then by year three, they are really a huge company. 
23             But, you know, it was -- I think it's a trend 
24   that not only we've observed but to some degree has sort 
25   of increased.  Initially it was relatively little take-
0135
 1   up, but now it's stabilized at a certain relatively 
 2   healthy percentage, I'd say. 
 3             MR. TROTTER:  One thing also that's noteworthy 
 4   is, even though most companies present the full three 
 5   years of audited financials, about one third of the 
 6   companies that do present the three years are taking a 
 7   pass on the selected financial data.  So the additional -
 8   - you know, years four and five they're not presenting.   
 9             So there is -- if you look at it very broadly, 
10   there is wide scale acceptance of the financial statement 
11   accommodation if you include selected financial data in 
12   the presentation. 
13             MR. COHEN:  You know, that's, of course, not to 
14   say that people are not diligent, say, in the out years. 
15    I mean you wouldn't be surprised to know that that's an 
16   important focus of activity.  And, you know, it would be 
17   -- you can imagine that, if there was an interesting 
18   story to be told about an out year, you'd have a 
19   different view about whether you'd include it or not in a 
20   registration statement.  But, you know, you're right that 
21   some of the earlier selecteds are not appearing as well. 
22             MR. TROTTER:  And both in -- so for both those 
23   and the material acquisitions above, say, 50 percent 
24   significance were previously a company would have to go 
25   to Corp Fin staff and get a waiver, part of doing their 
0136
 1   IPO, they no longer have to go through that kind of a 
 2   waiver process for these pretty far out years for 
 3   companies often that have limited operating history and 
 4   are growing at 30 percent. 
 5             MR. COHEN:  And that's been an area -- it was 
 6   one of the areas where there were helpful interpretations 
 7   from the Corp Fin staff about -- particularly in the 305 
 8   area but, you know, on a wide variety of other things.  
 9   And, Keith, one of the things we did want to say was how 
10   much we appreciated all the hard work of the Corp Fin 
11   staff from the practicing and in getting out a huge 
12   volume of interpretations in a short time.  It made a 
13   huge difference. 
14             The -- another Title I accommodation is one we 
15   -- the bullet point on the slide may be a little too 
16   actually narrow because we said “Testing the Waters” was 
17   deal-specific and industry-specific.  And that has been 
18   the case, but I think that's changing.  I think “Testing 
19   the Waters” is actually becoming a much more standard 
20   feature of the playbook almost across industries.   
21             It takes unlearning a lot of instincts to think 
22   it's okay.  I mean certainly I would -- all of my Section 
23   5 antennae are twitching when people were talking about 
24   it initially, and I think that's probably one of the 
25   reasons why it's taken some time to gain acceptance, but 
0137
 1   it's gaining acceptance.  I think that's pretty clear. 
 2             MR. CHACE:  Question. 
 3             MR. COHEN:  Yeah. 
 4             MR. CHACE:  Just which, you know, types of 
 5   deals and which types of industries did you see take that 
 6   up initially? 
 7             MR. COHEN:  Life Sciences was -- 
 8             MR. TROTTER:  Yeah, and biotech --  
 9             MR. COHEN:  Biotech and life sciences. 
10             MR. TROTTER:  In biotech -- was almost 
11   completely standard, those deals in particular. 
12             MR. COHEN:  Yeah. 
13             MR. TROTTER:  I think the buy side wants to 
14   meet the management team.  They want to understand the 
15   technology in a more intimate way than a 40-minute 
16   PowerPoint presentation on a road show can really permit. 
17    So -- Jeff, do you want to add to that? 
18             MR. SOLOMON:  No question about it.  And 
19   actually it's interesting.  You know, even as companies 
20   are considering making confidential filings, they're 
21   doing so so they can have a banter back and forth with 
22   Corporation Finance.  And actually all that's missing 
23   from the public domain is just that banter back and 
24   forth, right.  And so by the time these companies are 
25   getting out there, everything is already publicly 
0138
 1   disclosed that needs to be publicly disclosed, and 
 2   they've had substantive conversations in “Test the Waters” 
 3   that dovetails very nicely with "should we go or should 
 4   we not go".  
 5             And there are definitely times when we've been 
 6   through “Test the Waters,” especially in life sciences, 
 7   where we're saying, "You know what?  Our recommendation 
 8   is not to go.  And we got some feedback about this or 
 9   your strategy or this isn't resonating or that's going to 
10   be a problem."  And so not surprisingly, you're seeing 
11   fewer -- in particular in life sciences -- fewer 
12   companies actually priced below the range.   
13             That's not foolproof.  That still happens from 
14   time to time, but it gives you -- even though we're not 
15   discussing in that process valuation, we are gauging a 
16   level of interest from investors, and we can give advice 
17   to the company at that point very clearly about whether 
18   or not now is the right time before they start to get out 
19   on the road and end up in a situation where they spent a 
20   ton of money and there's a lot of -- and there's lot of 
21   deal expense and hung costs. 
22             And I think the -- a lot of frustrations I've 
23   heard from CEOs is, you know, "I'm in the middle of an 
24   offering process.  I didn't get a lot of transparency in 
25   how that was going to go.  It doesn't go well.  I've 
0139
 1   spent all this money.  I'm standing there with a -- an 
 2   only invested one-sided bet.”  All the investors are 
 3   saying, “We got you so back up the truck, and I want to 
 4   buy this cheaper".   
 5             And so, you know, that was a very unhealthy 
 6   dynamic, especially in life sciences where you saw that a 
 7   lot.  And now “Test the Waters” is actually -- you can 
 8   almost identify which of the investors are likely to be 
 9   anchors.  That gives the existing investors, the existing 
10   private companies and venture firms, a chance to think 
11   about whether or not they want to be partners with these 
12   people going forward.  Are they going to put up more 
13   capital at the -- at new issue?  Is that going to be a 
14   relevant investment decision?  For them they know that 
15   earlier so that they're not at the end scrambling around 
16   and say, "Okay.  We'll step out for a certain amount."   
17             And what it's just allowed for is a lot more 
18   balance and less stress in the offering process.  I would 
19   say, you know, the public offering process, especially in 
20   IPO -- you're fitting 10 pounds of stuff in a 5 pound 
21   bag.  You have all these investors you got to see.  You 
22   get 30- to 45-minute meetings.  Sometimes they're group 
23   meetings.  It's not a conducive environment for an 
24   institutional investor to make a rational, thoughtful 
25   investment decision.   
0140
 1             That's when the investment banks used to say to 
 2   me when I was in that seat -- they would say, "Okay.  
 3   We're pricing tomorrow.  Are you in, or are you out?"  
 4   And I would be like, "I have like three more questions." 
 5    "Yeah, yeah.  We hear you, but we need to know if you're 
 6   in or you're out."   And I'm like, "I didn't get my 
 7   questions answered," and then I'm making an investment 
 8   decision with partial information, or I'm not 
 9   comfortable.   
10             So if I'm in, I'm not really in.  I'm in only 
11   if it trades up, all right.  And so -- and if it doesn't 
12   trade up, I don't have enough information to know whether 
13   or not I should stay in, so I start selling.  It's a very 
14   -- was a very, very unhealthy dynamic for small 
15   companies.   
16             And what we're seeing now is there's a balanced 
17   thought.  So when you're taking companies, there's a 
18   higher probability around those offerings being 
19   successful because there's been a discussion and a 
20   discourse and setting expectations well in advance of an 
21   offering.  So a company can say, "Here are the benchmarks 
22   I think we're likely to reach over the next 12 months."  
23   And then when they come back for the offering, "We hit on 
24   these three, we missed on these two, and here's why," 
25   okay. 
0141
 1             It's just -- and so when it comes time for that 
 2   one week or two weeks to make an investment decision, 
 3   you're simply going out to a group of investors that's 
 4   well informed and you're not asking them at the end of 
 5   the day, "Are you in, or are you out?  And you have to 
 6   make your decision by tomorrow with less than perfect 
 7   information."   
 8             So I think it's -- these two areas of Title I 
 9   have been game changers, especially in life sciences 
10   where -- I mean let's face it -- even the best investors 
11   have difficulty pronouncing the names of the drugs when 
12   they're in clinic.  It's that -- it's complex.  And so I 
13   always like to say most of the work in those companies -- 
14   most of the fundamental investing work is done outside 
15   the room.   
16             There's the presentation, which is a half an 
17   hour, 45 minutes, maybe an hour, and then there's hours 
18   and hours spent fact-checking, talking to your scientific 
19   reference people, you know, getting into -- getting 
20   whatever information you can get to validate that and 
21   look at all the competitive -- and look at the 
22   competitive landscape.  It's a lot of work.  So it's 
23   really helped out tremendously. 
24             MR. COHEN:  I'm putting Jeff down as the -- in 
25   the fan column of “Testing the Waters.”  
0142
 1             MR. LEZA:  Question. 
 2             MR. TROTTER:  Yeah, please.  And keep them 
 3   coming.  We really -- you can tell I like this. 
 4             MR. LEZA:  Thank you.  As you keep going and 
 5   testing the waters, do you see the price range as more 
 6   and more companies will be able to hit in the price range 
 7   that they started off with? 
 8             MR. SOLOMON:  I think the stats have said 
 9   that's the case.  We were not allowed to talk about 
10   valuation, and that's a tricky thing, you know.  So -- 
11   there there's definitely still games that go on in terms 
12   of -- in investors' minds where they want to be included 
13   in an offering, so they're always more positively 
14   disposed to saying, "I want to see more," because as soon 
15   as you say, "I'm not interested," then you stop getting 
16   information.  So where we've been learning is how to 
17   gauge “Test the Waters.” 
18             MR. TROTTER:  And you can actually under the 
19   law talk about valuation.  But there are -- different 
20   banks have different procedures along a continuum of sort 
21   of prudential constraints, right?  So where you draw the 
22   line on what you discuss in your “Testing the Waters” 
23   conversations can vary.  And I think what you're saying, 
24   Jeff, is a fair number of banks have drawn the line at 
25   avoiding the valuation talk in the meetings. 
0143
 1             MR. SOLOMON:  So this is a point of 
 2   clarification that should be -- I mean if there's a point 
 3   of clarification, it would be great follow-on.  It would 
 4   be giving clear guidance on whether or not it's okay to 
 5   talk about pricing in “Test the Waters,” all right.  
 6   Because I'm not -- we've gotten guidance that, because we 
 7   don't have, that we just should not do it because then we 
 8   have Section 5 things we may be concerned about, so we 
 9   just don't talk about it.  We're just gauging your level 
10   of interest.  If this company were to come, you know, 
11   would you be interested?  Would you be a participant?  
12   How do you think about it?  Is this an area where you'd 
13   like to have some interest? 
14             And so it's -- we're just having these 
15   discussions now.  As the IPO calendar has heated up 
16   significantly, actually, there's just a contention on the 
17   amount of time.  And so we're seeing so many “Test the 
18   Waters” meetings and so many IPOs that I actually -- I'm 
19   wondering now, well, how much good information we're 
20   getting from “Test the Waters.”   
21             Interestingly, like early on when there wasn't 
22   a lot of IPOs, we got a lot of great information because 
23   a lot of people had a lot of time to spend and give you 
24   good feedback.  Now they're so busy looking at deals, 
25   they're sort of like, "Yeah, I'm sure I'm interested," 
0144
 1   and that's not helpful.  Like that's not a helpful thing. 
 2             So I think it's -- there will be an ebb and a 
 3   flow, but I would say we're definitely seeing, at least 
 4   to date, more companies coming in the range, and we're 
 5   able to really have substantive, sometimes difficult 
 6   conversations with issuers before pricing. 
 7             I had a conversation in the last week where it 
 8   was a tough conversation because the investors in the 
 9   company thought they were worth X, and the feedback we 
10   got suggested that, if we were to go in that range, in a 
11   range, that it was not going to be in that range. 
12             MR. LEZA:  It always starts there. 
13             MR. SOLOMON:  Yeah, it does.  But in this 
14   particular case it was pretty universal.  It was pretty 
15   universal.  And so I sat down -- when I sat down with the 
16   management, I'm like, "Look, here's the good news.  I can 
17   have a tough conversation with you now before you've rung 
18   up all the expenses."  And you're sitting there.  You're 
19   saying, "Oh my God.  I'm so pregnant with this; I got to 
20   go forward."  
21             So you need to decide if you're willing to go 
22   forward in this range.  If you're not, we could talk 
23   about alternative sources of financing and other 
24   milestones that we can come back at this later on.  But 
25   now it's -- you know, thankfully you're not already 
0145
 1   pregnant with it, and you go in with both eyes open.  So 
 2   --  
 3             MR. TROTTER:  And speaking of which, that goes 
 4   back to the confidential submission process --  
 5             MR. SOLOMON:  Yeah. 
 6             MR. TROTTER:  And the benefit that that allows 
 7   for pre-IPO companies to combine the two and start 
 8   talking on a substantive level with institutional 
 9   investors long before they have initially submitted a 
10   draft registration statement or even while their 
11   registration statement is under review with the SEC 
12   staff. 
13             MR. SOLOMON:  Right.  So this is a company 
14   that's -- you know, hasn't disclosed yet.  It's gone 
15   through the confidential filing.  It's pretty much at the 
16   end of that, and they're making sort of a go/no-go 
17   decision.  And when they decide not to go -- because our 
18   best advice is to -- that the range that they were 
19   thinking about isn't going to work, and so they may 
20   decide not to go, in which case they're not tainted the 
21   next time they decide to -- because they will come 
22   eventually.  I am a hundred percent convinced this 
23   company will be a public company.  It's just when --  
24             MR. GRAHAM:  This is a great conversation, but 
25   I want to make sure that Jeff has an opportunity to 
0146
 1   present his slides. 
 2             MR. COHEN:  We were just thinking that, yeah.  
 3   We'll stop. 
 4             MR. GRAHAM:  Okay.  So -- and then see how much 
 5   time we have left so we can continue. 
 6             MR. SOLOMON:  I don't want to cut you guys off.  
 7   So --  
 8             MR. COHEN:  No, that's quite all right.  We'll 
 9   --  
10             MR. SOLOMON:  Okay.  Are you guys at kind of a 
11   wrap-up point --  
12             MR. COHEN:  Yeah. 
13             MR. SOLOMON:  -- because I don't want to cut 
14   you off, either.  That's -- No, no, no.  That's quite all 
15   right.  You know the dangers of leaving us in front of an 
16   open microphone.  You can tell. 
17             MR. SOLOMON:  We all share that character 
18   quality. 
19             MR. COHEN:  Maybe we'll just -- we'll leave it 
20   on this slide and then turn it over to Jeff because we -- 
21   you know, really this is, I know, the focus of some of 
22   the things you want to talk about -- is what is to come. 
23    We already covered the first point.  We haven't talked 
24   at all about research, but -- which is a complex topic 
25   and would take up a whole hour.  Just suffice it to say 
0147
 1   that research is not yet -- pre-deal research, immediate 
 2   post-deal research hasn't yet developed for a whole 
 3   variety of reasons.  And, you know, we'll see what 
 4   happens in the future.   
 5             But Jeff, let's turn it over to you.  I'll turn 
 6   this off.  And you have a clicker. 
 7             MR. SOLOMON:  Yeah.  That would be great.  
 8   Thanks. 
 9             So real quick, I, first of all, what to say, 
10   thank you.  I mean I appreciate the opportunity to come 
11   and spend some time and give you some real-time feedback, 
12   as these guys have, on what's happening in the 
13   marketplace.  And I wanted to say to you I'm not -- I'm 
14   here today not just as a person whose primary 
15   responsibility is to run a firm that helps finance 
16   emerging growth companies and small companies, but I'm 
17   also a small capitalization company myself.  So I'm a 
18   named executive officer for a small cap company called 
19   Cowen Group. 
20             And so some of the things that we're going to 
21   talk about today -- or I'm going to talk about today -- 
22   are some of the challenges of being a public company that 
23   does not meet EGC standards.  And so we'll talk about the 
24   JOBS Act and where it's been helpful, and I'll also give 
25   you some insight as to some of the daily stresses that we 
0148
 1   deal with simply as a small cap stock.  And we'll talk a 
 2   little bit about some areas where perhaps we can have 
 3   some improvement as well. 
 4              When I'm asked to discuss this stuff, like I 
 5   always start with the following premise, which is that a 
 6   positive environment for equity capital formation for 
 7   small companies fosters economic growth and advancement 
 8   in a number of ways.  So jobs we talk a lot about but 
 9   also increased technology development and research 
10   funding.  And those are key tenets.  So the dollars are 
11   spent to get these companies public, and they're either 
12   spent, you know, in the process of getting public or 
13   spent in the process of developing the company.  And for 
14   a lot of these companies, that's a real decision; that's 
15   a real economic decision.   
16             I think that, if you look at the sum total of 
17   what's happened in our country, if you just look at the 
18   last century, you know, I think we did a really good job 
19   at balancing the needs of investor protection and 
20   creating a fair and balanced framework for regulation 
21   that made it safe for investors to invest and also had 
22   healthy capital formation.  And I want to be clear.  
23   People made money and lost money in the stock market.   
24             And yet if you look at the sum total of just -- 
25   if you invested in stocks post the '33 Act and '34 Act 
0149
 1   and you were a company that got formed in -- some of the 
 2   greatest companies the world has ever seen got actually 
 3   to where they were after the Securities and Exchange 
 4   Commission was created because there is this need to have 
 5   a balance between good regulation that protects investors 
 6   and regulation that fosters economic growth that doesn't 
 7   get in the way or impede it. 
 8             And so a little bit about what we're going to -
 9   - we'll talk about this good.  But if there is one 
10   thought I would like you to leave with today, it's that 
11   it's very possible to meet this dual mandate of 
12   maintaining effective investor protections and fostering 
13   economic activity. 
14             And let's recognize the fact that there are 
15   people and individuals and lobby groups on both sides 
16   that will always advocate for less regulation and always 
17   people that advocate for more regulation.  And our job -- 
18   I think the job of, you know, industry participants who 
19   are balanced and thoughtful and this group is to try and 
20   maintain that balance.  And so as we talk about these 
21   things today, there will always be points of view that we 
22   should be factoring in, but we should be thinking about 
23   the balance.  And that's where the JOBS Act fits in.    
24             So what's gone on with the JOBS Act is it 
25   demonstrates in a new regulatory environment, a difficult 
0150
 1   regulatory environment in which the bar is much higher 
 2   than it used to be, that we can put forth regulation as a 
 3   -- and legislation as a country that fosters economic 
 4   growth and does not get in the way of all the valuable 
 5   investor protections we've set forth. 
 6             So a lot of people were opposed to this because 
 7   they were worried about it.  I think there's probably 
 8   good reason why people were worried about it.  And yet 
 9   we're seeing that the market activity afterwards has 
10   actually been beneficial to individual investors and 
11   institutional investors alike.  And that's a really 
12   important thought process as we go through this because 
13   I'm going to spend a lot of my time on where we've been 
14   effective with the JOBS Act though I think you've heard a 
15   lot of this.  And then where can we go from here is 
16   really, I think, something I'm going to spend a little 
17   bit more time on.  
18             So I definitely think in general that, you 
19   know, we did a great job for small private companies in 
20   the JOBS Act, and that's been detailed.  One area that 
21   has not been addressed is existing public companies or 
22   companies that were public already that would have 
23   otherwise qualified or otherwise look and walk and talk 
24   like EGCs but aren't characterized and so don't get any 
25   benefits.  By the way, Cowen Group is one of those.   
0151
 1             Just for frame of reference -- I didn't even 
 2   think about it.  But one of the things I heard from a lot 
 3   of newly minted public companies that didn't meet the 
 4   deadline -- that kind of became public before the 
 5   deadline -- "if I had known this was going to happen, I 
 6   would have waited because now I have a structural 
 7   competitive disadvantage for all the people that do what 
 8   I do that came after that date" -- December 5th is the 
 9   date, right?  Is that the date? 
10             A PARTICIPANT:  December 8, 2011, yeah. 
11             MR. SOLOMON:  "They have a structural -- they 
12   have a cost advantage, and I don't."  So that's -- it's 
13   an interesting dynamic.  Not that there's that many of 
14   them, but there's enough of them that a lot of other 
15   companies are saying, "Wait a minute.  There's some 
16   benefits here to characterizing yourself as an EGC, and 
17   I'd like opt into that."  So we'll talk a little bit 
18   about that. 
19             But I do think, again, when we talk about where 
20   we go from here, there are a couple of key tenets I want 
21   you to think through.  One is how do we create and provide 
22   trading liquidity in the secondary market?  So if the 
23   JOBS Act effectively is -- the analog to the JOBS Act 
24   would be the '33 Act.  What should we be doing to think 
25   about things to make the existing public markets function 
0152
 1   more efficiently to induce capital formation?   
 2             One of them is trade and liquidity.  And it's 
 3   not just like more trading.  That's not the point here.  
 4   It's actually quality trading where -- can we provide an 
 5   environment in which fundamental buyers and sellers in 
 6   small companies -- I want to be really clear -- for small 
 7   companies -- can actually meet in a more rational, 
 8   simplistic market environment where real price discovery 
 9   works and where fundamental analysis matters more than 
10   the speed of execution.   
11             And I think we're talking about a very small 
12   percentage of the marketplace.  And we're -- on this 
13   theme of one size does not fit all, if we can sort of 
14   imagine small companies in and of themselves are really 
15   like a protected class, we should be doing things to 
16   foster maybe a different structure for them that promotes 
17   a more healthy environment for capital formation.  We can 
18   talk about that in a little bit. 
19             The second is, I think, you know, we have to do 
20   that within this dual mandate of making sure that 
21   investor protections are not squandered or we're not 
22   going back to the way it used to be.  And I think that's 
23   a favorite refrain I hear from a lot of people that are 
24   opposed to any change, you know, "We're not going back to 
25   the way it used to be like in the '90s when a lot of bad 
0153
 1   stuff happened."   
 2             And I will just say I was -- I spent most of my 
 3   career as an investor not as a CEO of an investment bank. 
 4    So most of my career was spent looking at companies and 
 5   investing in them and putting capital to work.  Like most 
 6   players in the marketplace, I did not have a good 
 7   experience at the end of the last century.  I didn't like 
 8   that way the world was going.  And so some of the changes 
 9   that have come into place -- I was a loud proponent for 
10   them. 
11             And so I feel like we made a lot of progress.  
12   And all the things we're going to talk about here today 
13   and maybe in the future are not about going back there 
14   because I don't think there's any market participant -- 
15   well, left -- who can with a straight face say that that 
16   was good and we should go back there.  The question is 
17   can we bring, again, a balance back because we can 
18   recognize the trend that I -- I wanted to show you, which 
19   is that we've had a dearth of capital formation.   
20             We've seen these slides before.  And so if you 
21   look at the slide carefully here, you can see not only 
22   how we had fewer IPOs but what -- the size of IPOs -- the 
23   number of small IPOs, which I'm defining as less than $60 
24   million has gone down significantly.  And that's really 
25   what we're trying to talk about here.  We're trying to 
0154
 1   talk about not just more IPOs.  But for growth companies 
 2   where -- you can clearly see, we've seen a clear drop 
 3   off.   
 4             And why are we doing that?  We're doing that 
 5   because at the end, if you look at the companies over 
 6   here, each one of these companies started as a small IPO. 
 7    Well, started before small IPO, but they came public as 
 8   small IPOs. 
 9             And I just had a conversation with the 
10   gentleman who was a founder at Home Depot.  And I hadn't 
11   focused on Home Depot because it's not a technology 
12   company; it's not a life science company.  But Home Depot 
13   -- $70 million public offering -- today Home Depot 
14   probably doesn't get funded, period.  If there's another 
15   Home Depot out there -- and it has nothing to do with 
16   technology or -- if there's another Home Depot out there 
17   or a company like that, it probably doesn't get the 
18   attention of investment banks or institutional investors.  
19             And it's a numbers game.  Let's think about 
20   this for a second.  In 1983 when Home Depot went public, 
21   there were not trillion-dollar investment management 
22   firms.  Some of the biggest investment firms today that 
23   we all have our money with, our 401(k)s with or wherever 
24   -- or you've invested in mutual funds -- they're huge.  
25   And so the dynamic is set up not to benefit the smaller 
0155
 1   companies.  And the reason why -- part of the reason why 
 2   a number of companies are waiting to go public is because 
 3   they feel like they need to offer enough stock to the 
 4   marketplace to actually get large firms interested. 
 5             So, again, I think if our job here is to create 
 6   that balance for smaller companies, let's acknowledge the 
 7   fact that there has to be a different regime to induce 
 8   those big firms to actually carve out and grow their 
 9   small company portfolios because they think they can 
10   provide positive returns for their investors. 
11             And that's where this balance thing really 
12   happens.  If we do this right and if we get regulation 
13   right and we can induce institutional investors who make 
14   up the preponderance of the way that the retail investor 
15   today enters the marketplace, if we can get them back, 
16   they are the primary providers of equity capital for 
17   America's growth. 
18             So I actually -- I acknowledge that there's 
19   room for conflict, and I acknowledge that there's always 
20   going to be room for bad actors to do things they 
21   shouldn't be doing.  But I would say to you that there is 
22   a far higher probability that market forces can conspire 
23   to create positive good that benefits both individual 
24   investors and institutional investors and companies.  And 
25   at the end of the day, that is the responsibility of all 
0156
 1   of us, regulators, market participants -- is to see if we 
 2   can find that center point and so that companies like 
 3   this can add to positive economic development. 
 4             So the three areas, I think, that are really 
 5   critical that we can talk about that have changed over 
 6   the last decade are just the change in market structure, 
 7   an increase in listing requirements, and changes in the 
 8   research ecosystem.  And I'm not here to prescribe 
 9   outcomes today; I'm here just to highlight some of the 
10   challenges.  And we can talk about  
11   -- if you want to talk about some of the potential 
12   solutions, we can talk about them.  But there are -- we 
13   can acknowledge objectively that almost all of the 
14   challenges that people agree that impacted capital 
15   formation fall into one of these three buckets. 
16             And so this is the problem as we've seen.  And 
17   I think we've all seen this statistic also, that IPOs -- 
18   that we've seen a slowdown in the unemployment rate.  And 
19   there's a lot of debate around causality here, so I don't 
20   want to spend a lot of time on this slide, but I think 
21   the next one sort of sums it up.   
22             The Kauffman Foundation talks about the fact 
23   that from 1996 to 2010 IPOs created 2.3 million jobs, 
24   which is a 45 percent increase in employment post-IPO.  
25   And so they estimate that small company IPOs -- which 
0157
 1   their small company definition doesn't exactly line up 
 2   with ECG, but it's close enough for statistics, so -- 
 3   created about a million jobs or 156 percent growth.  So 
 4   these firms have almost, you know, grown two and a half 
 5   times after they've gotten access to capital. 
 6             And so their estimate is -- which is, I think, 
 7   a lot more balanced than some of the other numbers we've 
 8   seen historically -- is between 1980 and 2000, had we 
 9   maintained that same growth trajectory as we had in the 
10   20 years before the turn of the century, we would have 
11   had another 1.9 million jobs from these companies.  Now 
12   that's just too much to ignore.  And, again, if our job 
13   is to help create economic -- a forum for capital 
14   formation that leads to economic growth, we have a 
15   responsibility to fix that. 
16             We've gone through some of these numbers, so I 
17   do think it's been -- you know, the JOBS Act was a great 
18   start.  And if I look at who’s benefitting -- total 
19   dollars raised for all EGCs, by the way, all sectors, is 
20   -- you know, let's talk about numbers -- $16.1 billion, so 
21   big enough to be meaningful.  But really at $16.1 billion 
22   -- we live in a world where the largest 20 institutional 
23   investors probably have close to a trillion dollars 
24   apiece.  Just --- it's not a lot. 
25             And that's a theme that you'll hear me talk 
0158
 1   about because the changes and the improvement's we're 
 2   making -- some people will say that it's going to be 
 3   changing the entire way the business works.  And the 
 4   reality is we're talking about just a small subsection 
 5   that we believe should be treated as a protected class.  
 6   And then we'll see how it goes.  So it's actually -- I 
 7   don't think -- I think there's actually very little risk 
 8   in doing some of these things in terms of major market 
 9   impact but very high reward if we get it right.   
10             And so I looked at the biotech industry.  
11   Again, it's just an area we do a lot of work in.  And I 
12   just -- I want to be really clear.  Everybody thinks 
13   we're in the middle of the greatest biotech IPO market in 
14   memory, and we are.  But I want to put it in clear 
15   numbers for you.  $2 1/2 billion has been raised in the 
16   biotech industry this year -- or actually since the JOBS 
17   Act.  That's 31 EGC companies.  Just to put it in 
18   perspective, I wanted you to know that the NIH budget for 
19   this year is $147 billion.  Again, I think we're doing 
20   great things, but there's so much more to be done if you 
21   really want to try to talk about making an impact. 
22             In particular, in this area in drug discovery, 
23   if I look at the drugs I know we funded that would not 
24   have gotten funded, I mean it's just -- there's a whole 
25   story line that goes to the good associated with getting 
0159
 1   orphan drugs funded that would never have seen the light 
 2   of day without access to public capital.   
 3             You know, one of the companies that we did 
 4   financing for is a company called Bluebird.  Bluebird Bio 
 5   is working on a -- their lead compound is genetic -- it's 
 6   a gene therapy.  And their lead compound is for 
 7   adrenoleukodystrophy, which is Lorenzo's Oil if you've 
 8   seen the movie, all right.  I encourage you to go to the 
 9   website and learn about Ethan and learn about how, when 
10   Ethan turned nine years old, he started seeing signs he 
11   was not developing.  And they misdiagnosed him with ADD. 
12    And by the time he was 10, his brain had swelled, and it 
13   was just a matter of time, all right. 
14             That company got financed this year in part 
15   because of Ethan's story but in part because we were 
16   actually able to raise them a significant amount of 
17   capital at a decent rate.  And that trial, whether it's 
18   successful or not -- we hope it will be -- is now funded. 
19    And we'll see if we can get to an end point there.  
20   These are very real stories, and I can tell you that 
21   trial would not have been completed if we hadn't been 
22   able to get the company public.   
23             So who else benefits -- because not every 
24   company out there is doing that kind of work -- you know, 
25   individual and institutional investors -- so after market 
0160
 1   performance -- you know, if you look at the 64.4 percent 
 2   average price appreciation for EGC IPOs versus 26.2 
 3   percent for non-EGC IPOs -- pensions, pension funds.  You 
 4   know, when you look at -- and they're clearly playing in 
 5   this space either through their institutional investment 
 6   arms or directly themselves.   
 7             And so I actually think in some respects we're 
 8   actually monetizing private portfolios that have been 
 9   private for a long time.  And that recycling of that 
10   capital for venture firms and for private equity firms 
11   really goes to being able to provide positive returns for 
12   investors more broadly, pensioners. 
13             And so there's a whole host of people that 
14   benefit.  And to date we haven't seen the abuses that 
15   people were concerned about.  I'm always looking out for 
16   them frankly, but we haven't seen them. 
17             So I put it in the slide package, which you can 
18   read at your leisure, the benefits.  And I thought it 
19   would be helpful to at least put some real stories in 
20   from some real people on job growth.  These are things 
21   that -- where we've gotten some really positive feedback. 
22    I went out to a few people when I knew I was going to do 
23   this, and I said, "Can you give me your thoughts on job 
24   growth or on the benefits of being a public company, on 
25   the challenges of being a public company?" 
0161
 1             And so I think, if we can focus on the 
 2   challenges for a second, you know, for a small cap public 
 3   company the largest concern is building an investor 
 4   interest and maintaining liquidity in my stock.  This is 
 5   a constant and continuous effort requiring significant 
 6   attention to the company's senior management team.  So 
 7   here he's saying, "I could either spend my time focusing 
 8   on execution or helping to get liquidity on the stock.  
 9   Boy, it would be great if the liquidity in the stock 
10   thing kind of took care of itself.  I could spend a lot 
11   more time executing." 
12             Now I can tell you I know that contention 
13   because I do have to get out on the road.  We have one 
14   research analyst that covers us.  I would like to take an 
15   insurance policy out on him because if he -- something 
16   happens to him, I don't know who I'm going to go to 
17   because I'm not sure there are other people that think 
18   it's worthwhile to cover Cowen Group as a public company 
19   because I just don't think we trade enough.  Maybe we do, 
20   but I'm not sure we do, and we're not likely to pay an 
21   investment banking fee to someone for a while or at least 
22   it's not obvious if we will. 
23             So the interest on the part of the sell side 
24   just to pick up Cowen group as a small company -- not 
25   high, you know.  And so I worry about it.  He does a 
0162
 1   great job, and I'm always happy when he puts me in front 
 2   of institutional investors, but I have to do a lot of 
 3   asking for that. 
 4             So we still have challenges raising capital.  I 
 5   think liquidity is one of them.  Lack of research 
 6   sponsorship is another one -- regulatory burdens.  You 
 7   know, there are certain aspects of the JOBS Act that have 
 8   not been implemented.  We can talk about those, but if 
 9   you -- I tried to put it in a little chart here that 
10   showed, you know, what are the challenges faced by a 
11   small company.  So each of these are addressed in some 
12   fashion by the JOBS Act. Some have worked and some have 
13   not. 
14             I think if you look at scaled regulatory 
15   requirements for small cap companies, it's something that 
16   -- it's very real.  We talk about it all the time.  It's 
17   certainly an inducement -- or it's certainly an 
18   impediment -- I would say -- to people thinking about 
19   becoming public.  They are always looking at what they 
20   have to do in terms of cost and expense and 
21   infrastructure. 
22             Reg A -- there's a wonderful section on Reg A 
23   in the JOBS Act that just hasn't gone anywhere yet 
24   because, again, as an issue -- as a capital raiser in the 
25   market, until we get some clarification around state 
0163
 1   securities rules, it's just going to be hard to utilize 
 2   that.  And I think that's a valuable path for a lot of 
 3   small companies to raise money. 
 4             In research we still haven't seen pre-IPO 
 5   research.  The blackout periods for IPO research -- I 
 6   mean we've talked about it.  There's just -- there are 
 7   some areas we can increase the opportunity for there to 
 8   be more research in the marketplace.  And I think this is 
 9   one we can talk about a little bit.  So I just -- if I 
10   have a few more seconds, I'll just go through these 
11   because I think it's really important to highlight them 
12   in some level of detail.  Then you can look at the 
13   packet, and I'm always happy to answer questions. 
14             This is interesting.  So "Trading Liquidity - 
15   Essential for Capital Formation" -- everyone thinks that 
16   this is a individual versus institutional battle that 
17   goes on here.  Actually it isn't.  You know, we've taken 
18   a look at the data.  The data suggests that, for 
19   companies that are under $250 million, you know, 68 
20   percent of those companies is owned by individuals.  
21   There's a lot of capital formation that goes -- that 
22   could go on there if we could induce the institutional 
23   market -- the institutional investors to come back to 
24   those markets. 
25             Even if you were to go up to $500 million in 
0164
 1   market cap, you're only -- half of those companies are 
 2   still owned by individuals versus at a billion and north 
 3   -- you know, 83 percent are owned by institutions.  And 
 4   this reflects our world and the post-Global Research Analyst 
 5   Settlement.  And more liquidity means more people are 
 6   just focusing on bigger fund companies, bigger cap 
 7   companies.  So I think there's a lot to be said for that. 
 8             And we talked about how, if we are going to 
 9   make changes to market structure to improve trading and 
10   liquidity or recommend those, we're really talking about 
11   a tiny subset, and that's the second chart here.  Look at 
12   it -- you know, you can see the chart -- the bars all the 
13   way to the right are -- that's billion and north.  So 
14   you're talking about a tiny percentage of trading that we 
15   think should be treated somewhat differently with a -- 
16   maybe a modified market structure.   
17             We talked about research and research 
18   sponsorship.  I gave you my own personal experience, but 
19   you can look here, and you can see all of these 
20   companies, 40 percent of the companies between $51 and $100 
21   million market cap -- I only have one analyst.  There's -
22   - if you're below $50 million, heaven help you trying to 
23   get a research analyst.  But even  
24   -- you know, even between $100 and $200 it's still a -- 
25   only a handful.   
0165
 1             When I talk to companies, they like to go -- if 
 2   they're going public, they want to have four to five.  
 3   It's really sort of -- everybody's trying to crowd four 
 4   or five research analysts onto the cover of an 
 5   underwriting.  So if you're already public, it's really 
 6   hard unless you're doing the financing to add research 
 7   coverage. 
 8             And so I think we should be -- we can be doing 
 9   things to try and create a better economic model that 
10   provides for maybe increased research in the marketplace. 
11    And here I just want to say -- this is a huge hot button 
12   issue that needs to be addressed and needs to be 
13   addressed in a very balanced way, so I go back to my 
14   theme of balance. 
15             Right now for these companies, the way the 
16   market is set up we're telling these companies it's 
17   better to have no information than potentially biased 
18   information about you.  So I want to be really clear 
19   about that.  If investors are making investment decisions 
20   based only on sell side research, that's a mistake.  
21   Institutional investors do not read a research report and 
22   buy stocks.  Individual investors should never do that, 
23   and that needs to be really clear.  
24             But more information in the marketplace about 
25   the prospects of a company is a good thing even if people 
0166
 1   read it and say, "I think this could be biased."  So -- 
 2   because what is happening in some instances -- in a 
 3   number of instances we have a number of venues now where 
 4   people can take opposing views and publish them.   You 
 5   know, we all see them.  Seeking Alpha is a wonderful 
 6   repository of great information.  Here's the difference 
 7   though.  In the absence of research, that becomes the 
 8   standard.  And there's no certification for those pieces. 
 9   So we have this great Reg AC (Regulation Analyst Certification) regime here and 
10   this great research independence mandate that should be 
11   upheld in every way possible, and we make it really hard 
12   for those analysts who write research for emerging growth 
13   companies because of the compliance requirements.  So 
14   we'd rather have -- the way it stands today we'd rather 
15   have non-certified people in open forums providing the 
16   only source of information for many of these micro cap 
17   companies.  
18             I would argue that we're better off being in an 
19   environment where we have more information even if that 
20   information is potentially biased and is labeled as such 
21   with conflicts -- which it already is -- than having no 
22   information.  And so we should be asking ourselves the 
23   questions, "What do we need to do in order to induce sell 
24   side firms to produce more research for debate and 
25   educating individual investors about the dangers of 
0167
 1   reading a research report and buying a stock," because 
 2   the real investors do not do that. 
 3             And so if we can create that kind of framework 
 4   where we could get more information labeled as such, we 
 5   will end up in a situation where more idea flow comes and 
 6   more institutional investors are likely to come back to 
 7   the market. 
 8             I'll give you an example in our own stock, all 
 9   right.  We had a decent second quarter for the first time 
10   in a while.  And our stock was trading around $3.30 a 
11   share when we announced.  We did our morning call.  There 
12   were a few crickets chirping on the other end of the 
13   phone.  Most of the people who dialed in were our 
14   employees.  A few of our biggest investors were there, 
15   but by and large nobody listened.  Maybe people read the 
16   transcript, but whatever.  There weren't a lot of people 
17   on the call, no different than any other quarter. 
18             We did this announcement.  We're feeling pretty 
19   good about it because we had a decent quarter.  Stock 
20   trades down 10 cents on like 250,000 shares.  We're like, 
21   "Wow.  Okay.  Let's go back to work," because we know if 
22   we keep doing it, eventually that's going to get 
23   rectified. 
24             Over the weekend the one research analyst we 
25   have writes a research report on us unbeknownst to us.  
0168
 1   He didn't call us to say, "I'm going to write a research 
 2   report."  He just -- he took what we said, he synthesized 
 3   it, he added to it, and he extended the investment theme 
 4   in ways we can't do because of Reg FD.  And he got most 
 5   of it right frankly.  It was a good piece. 
 6             We were up 40 cents.  Then we traded 2 1/2 
 7   million shares on Monday.  Now when I hear people tell me 
 8   that sell side research doesn't matter, I know first-hand 
 9   that it does.  Nothing changed between Friday's earnings 
10   call and Monday's research report other than an 
11   independent person took what we said and added and 
12   extended that thesis and called a few institutional 
13   accounts and said, "Hey, you should take a look at what's 
14   going on at Cowen Group.  Here's my research report."   
15             That's a big difference.  Now we still have to 
16   produce in order for that to be sustained.  I'm not 
17   resting on those laurels.  I feel like a lot of pressure. 
18     Now I've got to produce a lot to make sure we hit those 
19   numbers.  But the fact of the matter remains -- is we 
20   didn't do anything different on Monday than we did on 
21   Friday.  And so I can tell you first-hand that sell side 
22   research in this day and age, post-Global Research Analyst Settlement, 
23   with Reg AC and all the independent requirements is good, 
24   better than not having any. 
25             And if you're a bad analyst, I promise you, you 
0169
 1   get weeded out quickly.  So if you're an analyst who just 
 2   writes stuff that doesn't perform for people, people just 
 3   stop listening and -- as it should be by the way, as it 
 4   should be. 
 5             And so I feel like we had to clean up a lot of 
 6   the act, as I told you, at the end of the last century.  
 7   A lot of bad stuff was going on.  That needed to happen. 
 8    But we should probably take a fresh look at whether or 
 9   not some of those things can be scaled back moderately 
10   for a small subset of companies that could benefit from 
11   having more information in the marketplace rather than no 
12   information in the marketplace. 
13             And so with that I'll stop.  I think we've 
14   covered a number of grounds, but I just think now seems 
15   to be as good a time as any to have this discussion.  And 
16   I appreciate the fact that this group provides a forum 
17   where we can come in and have this kind of discussion and 
18   debate and hopefully have it be heard and resonate.  So 
19   thank you. 
20             MR. GRAHAM:  Well, thank you, Jeff, and thank 
21   you, Joel and Alex.   
22             We have a few more minutes, and I guess, you 
23   know, one thing that I just wanted to put to you three -- 
24   you know, clearly there have been a lot of benefits from 
25   the JOBS Act.  And clearly it's -- and the JOBS Act has 
0170
 1   changed the way IPOs are done.  And as you pointed out, a 
 2   lot of that is good.  What I'm a little bit afraid of is, 
 3   while it will change the way IPOs are done, we haven't 
 4   necessarily come up with a way to generate more IPOs.   
 5             If you -- and one of the things that we've been 
 6   focused on from the beginning is how do you bring back 
 7   the smaller IPO.  And if you look -- I think I've got 
 8   this right.  If you look at the stats, IPOs that raise 
 9   $100 million or less -- there are actually fewer of those 
10   done after the JOBS Act than before.  And so I see a gap 
11   there, and you know, clearly there are some needs.  And I 
12   think, Jeff, you were kind of alluding to this.  You 
13   know, there needs to be a way to address that market if 
14   you will. 
15             MR. SOLOMON:  Yeah. 
16             MR. GRAHAM:  And, you know, one of the things 
17   that we as a committee are searching for or -- you know, 
18   what can be done in terms of changing market structure, 
19   somehow generating research, you know, all the things 
20   that people have kind of talked about.  And maybe there 
21   is a JOBS Act II coming.  But any thoughts that you might 
22   have in that regard would be -- I'm sure you've thought 
23   about it. 
24             MR. SOLOMON:  Yeah.  I mean I -- you want to, 
25   guys? 
0171
 1             MR. TROTTER:  Go ahead. 
 2             MR. SOLOMON:  So I think in some respects, you 
 3   know, Rome wasn't built in a day, all right.  And so I 
 4   don't want to understate what the JOBS Act has done in 
 5   terms of providing a framework.  But like everything, you 
 6   know, we've got to get people to change their mindset and 
 7   their business models a little bit.  So we've had 10 or 
 8   15 years, almost 15 years in which going public wasn't at 
 9   the forefront of peoples' minds.  In fact, they were 
10   building businesses that didn't require a lot of capital 
11   because they were worried they wouldn't be able to fund 
12   them. 
13             So interestingly enough, like when you see 
14   social networking companies and software companies going 
15   public, those are not big capital users.  You know, we're 
16   in a market now that a data networking company -- it's 
17   the first data networking IPO in like five years.  Think 
18   about all the data networking companies that went public 
19   that are -- actually, you know, we could argue about 
20   whether they were right or wrong pricing-wise.  But 
21   Cisco?  I mean Juniper?  These are huge users and 
22   consumers of capital and creators of jobs. 
23             And the business model in the venture community 
24   over the last decade has not -- has been to focus on 
25   companies that do not require the public markets in order 
0172
 1   to create exits.  So that's going to take some time.  A 
 2   lot of them have been funded companies they think can be 
 3   sold to bigger companies because that's a better -- you 
 4   know, you got to have exits if you're going to be raising 
 5   more money.  Venture guys are capitalists.  They've got 
 6   to have -- they've got to see where the door is going to 
 7   be.   
 8             So better to fund a company -- med devices is a 
 9   great example.  If you're going to build a med device 
10   company, you better make sure it fits into Stryker's 
11   portfolio or J&J's portfolio.  There's like four or five 
12   consolidators. 
13             I would argue we got some great companies in 
14   the -- you know, 10 years ago that got funded that 
15   actually -- you know, Guidant was a great company for a 
16   long time until they had issues from a -- you know, they 
17   were an innovator that had great impact and great job 
18   creation.  You know, if Guidant had been a stent company 
19   that was geared to selling to J&J out of the gate, it 
20   never would have ever done what it did. 
21             And so it's going to take some time for people 
22   to get their heads around the fact that going public is 
23   actually -- funding companies that need to raise equity 
24   capital is an okay business strategy.  That's first. 
25             The second is we really do need to address 
0173
 1   market structure in a meaningful way.  And it -- you 
 2   know, there's been a lot of great changes that have 
 3   occurred to market structure that should not go -- that 
 4   we should not change back.  So -- and everyone talks 
 5   about tick increment and quote size.  For the vast 
 6   majority, as we've demonstrated, nothing should change.   
 7             But for this group we should be discussing 
 8   whether or not there needs to be a change that fosters 
 9   liquidity.  So not changing economics so much but can we 
10   put a simpler framework in place where institutional 
11   investors feel like they can actually engage in price 
12   discovery without getting front-run.  We don't have that 
13   today.  And so they're -- because they're big and because 
14   they need to move a lot of capital around, it's just 
15   easier for them to say, "I'm not going to focus on that."  
16             And so we've got to demonstrate it's okay to 
17   come back to the marketplace where we've -- and that's 
18   where, you know, I think sell side firms have been hugely 
19   beneficial as middlemen to create that liquidity that 
20   attracts fundamental buyers and sellers. 
21             And so there are some things we can do there.  
22   And I think if we're able to do those things, we'll look 
23   back in 10 years, which is kind of -- you've got to take 
24   a long-term view here.  And we'll say, "Wow.  Look at all 
25   the companies that became public."  But if we expect the 
0174
 1   giant -- the little acorns to be giant oaks in the first 
 2   year and that's going to be our judgment period, that 
 3   doesn't happen. 
 4             And so we can do a lot of things here and tell 
 5   -- and particularly the SEC can do a lot of things here 
 6   to seemingly help and have such a short judgment period 
 7   that we'll never get from here to there.  And so you've 
 8   got to give it some time and let's see if it regenerates. 
 9    And if it does, I think you're going to find that people 
10   are going to be a lot more productive. 
11             MR. TROTTER:  I would just add to that -- and 
12   Jeff, you put your finger on something really significant 
13   when you talk about basically how IPOs have to compete 
14   with the M&A company sale as a means of capital formation 
15   for companies providing an exit to their early stage 
16   investors.  And that was really at the heart of a lot of 
17   where we started on the IPO Task Force, which is you look 
18   at the last two decades of IPO activity, and you see the 
19   dramatic fall-off in the most recent decade.   
20             You also -- over the same period you see 
21   another trend, which is where two decades ago the trend 
22   was roughly 50/50 M&A versus IPO as the method of exiting 
23   and providing returns to the early stage investors.  Now 
24   it has been part of the JOBS Act.  It's been 90 percent 
25   private company sale as the exit and only 10 percent of 
0175
 1   these companies are getting out as public companies. 
 2             And first year of experience has not been bad. 
 3    It's been pretty darn good.  I think, Jeff, you're 
 4   right.  Over time what we would hope to see is, maybe 
 5   through some additional reforms but also just with 
 6   additional track record, as more small companies are 
 7   drawn to the process, as they're no longer deterred by 
 8   some of the -- you know, the confidential process, for 
 9   example, removes a significant deterrent for a lot of 
10   these companies weighing those two alternatives of 
11   selling the company privately versus going public. 
12             These, over the long term, could be really -- 
13   could have a significant impact, Steve, toward the point 
14   that you're making where are we really going to see the 
15   kind of bump that we want to see in the really smaller 
16   company IPOs not just more IPOs of really large 
17   companies. 
18             MR. GRAHAM:  Okay. Well, thank you for that, 
19   and thank you again to our panel.  We're going to take a 
20   short break and then reconvene at 3:30 sharp. 
21             (A brief recess was taken.) 
22             MR. GRAHAM:  Okay.  Well, I think we had a good 
23   meeting today.  Our speakers, I think, were well 
24   prepared, and I, for one, learned a fair amount.  One of 
25   the things that was really brought home to me -- and that 
0176
 1   is that we seem to have some real issues with the 
 2   proposed rule under Regulation D.  And as I said earlier 
 3   today, I'm not sure what the answers are.  I think it 
 4   does require more thought. 
 5             It's clear that the SEC has done a lot of work 
 6   on this, but I think it's equally clear that it might be 
 7   a good idea to think about these things a little bit more 
 8   before things are set.   
 9             My concern -- and I hope you share that -- is 
10   that of the -- the rules as drafted might have the 
11   opposite effect of what we're trying to do here, and that 
12   is to facilitate capital raising obviously and also work 
13   to protect investors.  But certainly we don't want to 
14   make capital raising more difficult, and if we're dealing 
15   with a system that needs to work, I think we need to find 
16   ways to make it work better as opposed to finding ways to 
17   create friction.  
18             And so I don't think we have enough time to 
19   think through many of the things that need to be thought 
20   through, but what I would like to put on the table is a 
21   recommendation that we ask the Commission to extend the 
22   comment period so that more of these thoughts can be 
23   articulated, more of these issues, and give ourselves a 
24   little bit more time to vet some of the issues.  So I'd 
25   like to hear from you. 
0177
 1             MR. YADLEY:  So moved. 
 2             A PARTICIPANT:  Second. 
 3             A PARTICIPANT:  Second. 
 4             MR. GRAHAM:  Okay, moved and seconded.  Let's -
 5   - have any other comments? 
 6             MR. YADLEY:  I think what you just said is 
 7   spot-on.  The -- our very first recommendation was to 
 8   focus on who bought securities privately, not how they 
 9   were found.  Fortunately that made its way in the JOBS 
10   Act.  But very specifically and in pretty much in that 
11   same vein it said -- well, we know what it said, that -- 
12   eliminate the prohibition on general solicitation for 506 
13   offerings made solely to accredited investors.  Congress 
14   added the verification but didn't say, "Change the rest 
15   of the rule."   
16             And so I think that we should be cautious in 
17   making changes, especially to a reporting forum, the 
18   initial purpose of which was to provide analytical and 
19   statistical data, that that doesn't swallow up the 
20   benefits of the expanded exemption that Congress and this 
21   committee endorsed. 
22             MR. GRAHAM:  Thank you, Greg.  
23             Any other comments? 
24             (No response.) 
25             MR. GRAHAM:  Okay.  All those in favor? 
0178
 1             (Chorus of ayes.) 
 2             MR. GRAHAM:  Okay.  All those opposed? 
 3             MR. BOCHNOWSKI:  Aye. 
 4             MR. GRAHAM:  Oh.  That was David.  Thank you, 
 5   David.  It sounded like an aye. 
 6             MR. BOCHNOWSKI:  I've been on the call since 
 7   earlier, but somehow I just got cleared to --  
 8             MR. GRAHAM:  Yeah.  We wanted to hear your aye. 
 9    Now -- okay.  Well, again, as Chris and I had an 
10   opportunity to speak with most of you over the last few 
11   months -- and at that time we didn't know whether or not 
12   this committee was going to be re-chartered.  As we heard 
13   this morning, it will be re-chartered, and so we have to 
14   take the next few days and weeks to figure out exactly 
15   what that means. 
16             But for the time being I would like to say that 
17   it's been a fast two years, and I've enjoyed working with 
18   all of you.  And once again, I'd like to thank each of 
19   you for your contributions and your efforts.  
20             Chris, do you have anything to add? 
21             MS. JACOBS:  Only that I totally concur with 
22   the thanks, the commitment, the attendance, and your 
23   candor.  What has really become clear, especially as we 
24   have made our recommendations over the past few years, is 
25   that they have been thoughtful on our part, brought to us 
0179
 1   by people who are out there doing it every day.  And for 
 2   that we thank you because it's very clear our work has 
 3   become important and that folks are paying attention to 
 4   what we see and experience every day.  Case in point was 
 5   Catherine's issue today.  So thank you all again for a 
 6   great two years. 
 7             MR. GRAHAM:  Okay.  Can I get a motion to --  
 8             MR. LEZA:  Thank you for your leadership. 
 9             MR. GRAHAM:  Thank you, Richard. 
10             Can I get a motion to adjourn? 
11             MR. CHACE:  So moved. 
12             A PARTICIPANT:  Second. 
13             MR. GRAHAM:  All right.  All those in favor? 
14             (Chorus of ayes.) 
15             MR. GRAHAM:  What about you, David? 
16             MR. BOCHNOWSKI:  I'm an aye. 
17             MR. GRAHAM:  Okay.  I guess we're done.  Thank 
18   you all. 
19             (Whereupon, at 3:19 p.m., the proceedings were 
20   concluded.) 
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 1                   PROOFREADER'S CERTIFICATE 
 2    
 3   In The Matter of:   SMALL AND EMERGING COMPANIES ADVISORY 
 4                       COMMITTEE MEETING 
 5   File Number:        OS-917 
 6   Date:               September 17, 2013 
 7   Location:           Washington, D.C. 
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 9             This is to certify that I, ______________, 
10   (the undersigned), do hereby swear and affirm that the 
11   attached proceedings before the U.S. Securities and 
12   Exchange Commission were held according to the record and 
13   that this is the original, complete, true and accurate 
14   transcript that has been compared to the reporting or 
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 1                    REPORTER'S CERTIFICATE 
 2    
 3   I, Beth Roots, reporter, hereby certify that the 
 4   foregoing transcript of 179 pages is a complete, true and 
 5   accurate transcript of the testimony indicated, held on 
 6   September 17, 2013 at Washington, D.C. in the matter of: 
 7   SMALL AND EMERGING COMPANIES ADVISORY COMMITTEE MEETING. 
 8    
 9   I further certify that this proceeding was recorded by 
10   me, and that the foregoing transcript has been prepared 
11   under my direction. 
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16          Diversified Reporting Services, Inc. 
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