0001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION 2 3 4 5 6 7 8 9 MEETING OF THE 10 SMALL BUSINESS CAPITAL FORMATION 11 ADVISORY COMMITTEE 12 13 Monday, May 6, 2019 14 1:07 p.m. 15 16 17 18 19 20 21 22 23 Securities and Exchange Commission 24 100 F Street, N.E., Washington, D.C. 25 Multipurpose Room 0002 1 PARTICIPANTS: 2 Jay Clayton, Chairman 3 Hester Peirce, Commissioner 4 Elad Roisman, Commissioner 5 Martha Legg Miller, SEC's Advocate for Small Business 6 Capital Formation 7 Bill Hinman, Director, Division of Corporation 8 Finance 9 Jennifer Zepralka, Director, Office of Small Business 10 Policy 11 Joe Shepard, Associate Administrator for the Office of 12 Investment and Innovation, U.S. Small Business 13 Association 14 Greg Dean, Senior Vice President, FINRA 15 Robert Fox - National Managing Partner, Professional 16 Standards Group, Grant Thornton LLP; Chicago, IL 17 Carla Garrett - Corporate Partner, Potomac Law Group 18 PLLC; Washington, D.C. 19 Stephen Graham - Co-Chair, Fenwick & West LLP's Life 20 Sciences Practice; Seattle, WA 21 Sara Hanks - CEO and Co-Founder, CrowdCheck, Inc.; 22 Alexandria, VA 23 Youngro Lee - CEO and Co-Founder, NextSeed; Houston, TX 24 Brian Levey - Chief Business Affairs and Legal Officer, 25 Upwork Inc.; Mountain View, CA 0003 1 PARTICIPANTS(CONT.): 2 Terry McNew - President and CEO, MasterCraft Boat 3 Holdings; Vonore, TN 4 Sapna Mehta - General Counsel & Chief Compliance Officer, 5 Rise of the Rest Seed Fund; Associate General Counsel, 6 Revolution; Washington, D.C. 7 Karen Mills - President, MMP Group, Inc.; Boston, MA 8 Catherine Mott - Founder and CEO of BlueTree Capital 9 Group, BlueTree Allied Angels, and BlueTree Venture Fund; 10 Pittsburgh, PA 11 Poorvi Patodia - CEO and Founder, Biena Snacks; Allston, 12 MA 13 Jason Seats - Chief Investment Officer, Techstars; 14 Austin, TX 15 Jeffrey M. Solomon - Chief Executive Officer, Cowen, 16 Inc.; New York, NY 17 Hank Torbert - President, AltaMax, LLC; New Orleans, LA 18 Gregory Yadley - Partner, Shumaker, Loop & Kendrick, LLP; 19 Tampa, FL 20 Michael S. Pieciak - Commissioner, Vermont Department of 21 Financial Regulation, Montpelier, VT 22 23 24 25 0004 1 C O N T E N T S 2 PAGE 3 Introductory Remarks by Commissioners 4 4 5 Committee Member Introductions 7 6 7 Discussion of SEC Capital Formation Initiatives: 8 Overview of the Advocate's Office by 24 9 Martha Miller, Committee Member and SEC's Advocate 10 for Small Business Capital Formation 11 12 Overview of SEC Data on Public and Exempt Offerings 27 13 and the SEC's Capital Formation Initiatives by 14 Bill Hinman, Director, Division of Corporation 15 Finance 16 17 Discussion of the Committee's Future Steps and Areas 42 18 of Focus 19 20 Introductory Remarks by Chairman Clayton 56 21 22 Review and Consideration of Proposed Committee Bylaws 96 23 24 Adjournment 101 25 0005 1 P R O C E D I N G S 2 MS. MILLER: Thank you all for being here, and 3 welcome to the first meeting of the Small Business 4 Capital Formation Advisory Committee. We are thrilled to 5 have each of you here today, especially on the very quick 6 notice for time between being appointed for service on 7 this committee, as well as us convening this meeting. 8 For those who missed the memo, it is National 9 Small Business Week, and it is no coincidence that we 10 have this group here together to talk about capital 11 formation with smaller businesses. 12 I wanted to give a brief introduction of the 13 Office of the Advocate for Small Business Capital 14 Formation, which is the group that will be working the 15 most closely with this Advisory Committee. 16 We were born out of the same legislation that 17 created this Committee, and our office was established to 18 provide a dedicated office and resource network to serve 19 as an amplifier for advancing policy that can support 20 small business capital formation. 21 This same legislation is what dissolved the 22 predecessor Advisory Committee that focused on small and 23 emerging businesses and constituted a new Committee with 24 a revised scope of work. 25 Congress charged this Committee with providing 0006 1 the SEC with advice on SEC rules, regulations, and 2 policies relating to capital formation across the 3 spectrum of small businesses all the way, on the one 4 hand, from small, really emerging, privately held 5 businesses all the way up to smaller public companies 6 with less than $250 million in public market 7 capitalization, which is a really broad swath of 8 companies, which is why we have such a diverse group of 9 industry and professional experience here today to help 10 us deal with the myriad of issues that we see across that 11 landscape. 12 In addition to looking at, you know, what the 13 issues are with raising capital, this Committee was also 14 charged with looking at the trading in the securities of 15 the companies, as well as public reporting and corporate 16 governance requirements of these smaller businesses. 17 I want to confirm that we also have on the 18 phone in addition to those who are here present today 19 three members of our committee: Jason Seats, Mike 20 Pieciak and Poorvi Patodia. 21 Can you guys hear us? 22 MS. PATODIA: I can hear you. 23 VOICE: Yes, thank you. 24 VOICE: Yes, I can. 25 MS. MILLER: Wonderful. All right. We have 0007 1 just come from a closed administrative session where we 2 covered some lovely policies and procedures and things 3 that we did not go through in the public setting, but we 4 also appointed the inaugural officers of this Committee. 5 So we're thrilled to announce that the 6 Committee has appointed Carla Garrett as our Chair; Jeff 7 Solomon as a Vice Chair; Greg Yadley as our Secretary; 8 and Youngro Lee as our Assistant Secretary. 9 So congratulations to each of you, and thank 10 you for committing not only to the Committee, but to an 11 extra level of leadership and service. 12 So I will be taking a more active role today 13 facilitating this meeting since the new officers got 14 about 15 minutes' heads up that they are now in charge, 15 and they not have quite the opportunity to plan for 16 leading, but going forward, they will be the ones running 17 the show and I will take a seat alongside you just as 18 another member. 19 We're very appreciative though of each of you 20 stepping up into these roles. 21 And because this is the first meeting of this 22 Committee, we want to start with getting all of our 23 members really on the same level and up to speed on the 24 various capital formation initiatives that the Commission 25 is currently undertaking. 0008 1 And from there, we will start to discuss items 2 that we wish to take up in the coming months as a 3 Committee, but before we move into our agenda for the 4 day, we are very pleased to have Commissioner Peirce and 5 Commissioner Roisman with us. Chairman Clayton had a 6 meeting out of the building, and he will be joining us on 7 the back end of this Committee meeting, and Commissioner 8 Jackson regrets that he cannot attend today due to a 9 preexisting travel commitment. 10 So I will turn the microphone over to you, 11 Commissioner Peirce for opening remarks. 12 COMMISSIONER PEIRCE: Thanks, Martha. 13 And I have to start with just the disclaimer 14 that my views are my own and don't necessarily represent 15 those of the Commission or my fellow Commissioners. 16 But I think with the first part and saying that 17 it's my great pleasure to welcome you to the SEC this 18 afternoon, I'm sure I have unanimous agreement on that. 19 One of the difficulties of being a good 20 regulator is ensuring a thorough understanding of the 21 industries that we regulate. From Washington, New York 22 and its financial center is a quick train ride away, 23 especially when we at the SEC don't even have to leave 24 the building to get onto the train. 25 But it can be easy to think only of Wall Street 0009 1 and the companies whose trickers dominated its exchanges 2 when we think about regulating the capital markets. As 3 you well know, however, our influence and, therefore, our 4 duty extend across every part of the country and to 5 nearly every company that issues securities or dreams of 6 raising capital in our marketplace. 7 It's, therefore, essential that if we're to 8 fulfill our duty, we solicit feedback not only from our 9 biggest and most visible players, but from every type of 10 market participant. 11 We're delighted to have Martha Miller as our 12 first Advocate for Small Business Capital Formation. I 13 was impressed with her before she got here, but she has 14 already exceeded my expectations as she's jumped into 15 this role with a great work ethic and a great attitude, 16 and I know that all of you will enjoy working with her. 17 We're honored to have all of you and the 18 breadth of the experience that you bring to give us 19 counsel, insight, and feedback. I want to quote from the 20 statement that one of, Youngro Lee, submitted to explain 21 why he wanted to serve on the Committee. He said, quote, 22 "I believe that the capital markets, if properly 23 harnessed in this era of massive disruptions and 24 uncertainties, can become an incredible tool to level the 25 playing field for hardworking entrepreneurs everywhere, 0010 1 while also creating opportunities for all investors, not 2 just the super wealthy." 3 I share that vision for what our capital 4 markets can do, and I look forward to hearing from you 5 how we can make our capital markets a tool that will 6 improve the lives of people all across our country. 7 As a native Ohioan, I especially appreciate 8 Martha's efforts to assemble a geographically diverse 9 group. Great ideas and great businesses exist all across 10 the country, and this group clearly demonstrates that. 11 Welcome, and I look forward to having you 12 onboard. 13 MS. MILLER: Thank you, Commissioner Peirce. 14 COMMISSIONER ROISMAN: It is always a really 15 hard act to follow, and I will say the same disclaimer as 16 Commissioner Peirce. My views are my own. But good 17 afternoon, I think, is universal. 18 I'd like to welcome everyone here, but I'm 19 especially pleased to welcome the inaugural members of 20 the Small Business Capital Formation Advisory Committee. 21 Thank you for accepting this responsibility, and I 22 really mean that. 23 I realize that each of you is certainly busy 24 enough with your day job to feel justified in saying that 25 you simply do not have the time for this commitment. 0011 1 Each member of this Committee is devoted to 2 improving the current state of play for small and new 3 companies and businesses. You're driven, dedicated 4 practitioners who care deeply about the issues the 5 Committee will address and will strive to ensure that the 6 small business communities' ideas are communicated to us 7 here at the SEC. 8 I recently spoke on the importance of capital 9 formation. I'd like to take this opportunity to 10 reiterate that this is a priority for me. In particular, 11 I hope that this Committee will advise the Commission on 12 steps we can take to encourage the entrance of smaller 13 companies to our capital markets. 14 I'm also interested to hear the Committee's 15 thoughts on improving secondary market liquidity for 16 smaller companies and recommendations on guidance we can 17 issue with respect to finders so that we can provide 18 clarity to those market participants. 19 As we heard from Mr. Harold Hughes this 20 morning, I think more ideas about ways to improve capital 21 raising mechanisms, such as crowd funding and Reg. D 22 offerings, would be very helpful to new and small 23 companies looking for funding. 24 Before I conclude, I want to say 25 congratulations and thank you to Martha Legg Miller and 0012 1 her team, including Julie Davis. I've been so impressed 2 by both your passion for the agency's and your office's 3 mission and also your ability to get things done at such 4 a fast pace, especially here in government. 5 So enjoy all that you've accomplished today and 6 thank you, everyone. I look forward to today's 7 conversation and to supporting your mission going 8 forward. 9 MS. MILLER: All right. Thank you very much. 10 So as is very clear, we are thrilled. 11 "Pleased" doesn't really seem to cut it. We are thrilled 12 to have the wide variety of experience and perspective 13 represented today. Each of you bring very different 14 backgrounds and areas of expertise which we will allow 15 each of you to elaborate on in just a minute. 16 But one thing that is very clear in spite of 17 the very different approaches that you have and roles in 18 the marketplace that you all clearly share a common 19 passion for small business capital formation. 20 So I would love for everyone to go around the 21 table and for each of the Committee members to introduce 22 themselves, starting with Bert. I'd like for you to give 23 your name, professional affiliation, and the highlights 24 of any experience that is relevant to small business 25 capital formation. 0013 1 And while we could make an entire Committee 2 meeting out of learning about each other, I will ask that 3 each of you limit your bio to a very short one-minute 4 blurb so that we can move into substance thereafter. 5 Bert. 6 MR. FOX. All right. My name is Robert Fox. I 7 go by Bert. I am a partner at Grant Thornton LLP. 8 Currently I lead our national office in the audit 9 practice. So all of the technical accounting, SEC 10 regulatory matters, independence audit training, risk 11 management all report up to me. 12 But I've been in the audit profession for over 13 20 years. While I've worked with a variety of all sites, 14 types of companies, the majority of my career I've spent 15 with start-up and emerging companies. 16 I've done everything from helping companies 17 raise capital, even helping them write their business 18 plans and doing their initial projections, to taking 19 companies public, to advice on all sorts of different 20 issues. 21 So I really look forward to the work of this 22 Committee, and I'll turn it over to Carla. 23 MS. GARRETT: Good morning. My name is Carla 24 Garrett. I am a corporate securities partner at Potomac 25 Law Group based here in Washington, D.C. 0014 1 In my role as the partner, I routinely advise 2 small businesses on corporate issues and securities 3 issues, and I have been involved with small businesses 4 throughout my career. 5 I started my career in Silicon Valley at Wilson 6 Sonsini as a corporate securities attorney and continued 7 it in Washington, D.C., at Sullivan & Cromwell as a 8 corporate securities attorney, and I then went on to be 9 the first General Counsel of a then small public company 10 called CoStar Group, and that was a very interesting 11 experience, to be the first General Counsel of a public 12 company. 13 I am looking forward to working on this 14 Committee and serving as Chairman, and thank you very 15 much. 16 MR. GRAHAM: I'm Steve Graham. I am a partner 17 at the law firm of Fenwick & West. I've spent the last 18 three or four decades representing tech and life sciences 19 companies from emerging companies to smaller public 20 companies. So has been my life. 21 MS. HANKS: I am Sara Hanks. I'm CEO of 22 CrowdCheck and managing partner of CrowdCheck Law. 23 Between the two entities, we provide a wide range of 24 legal due diligence and compliance services for companies 25 raising funds online through the various exemptions and 0015 1 the intermediaries that assist them to do so. 2 MR. LEE: Hi. My name is Youngro Lee. I'm the 3 co-founder and CEO of NextSeed. We are an online 4 investment platform focusing really on local businesses 5 and utilizing regulation crowd funding specifically; also 6 with a broker-dealer practice, try to grow really the 7 power of alternative capital into private markets. 8 Prior to starting NextSeed, I was a corporate 9 lawyer really focused on private equity and private 10 equity formation. So my personal desire to start 11 NextSeed as well as to be on this Committee is to try to 12 bring the professionalism that we are used to at the high 13 levels and to be able to provide that service and access 14 to really the local medium and small investors as well. 15 MR. LEVEY: I'm Brian Levey, Chief Legal 16 Officer at a company called Upwork, which just recently 17 went public. It's a marketplace that connects 18 independent professionals with small businesses of all 19 types around the globe. 20 Prior to Upwork, I was at eBay for 13 years 21 sort of doing the same, helping small businesses create 22 their own businesses in a marketplace that had never 23 existed before. So I've had wonderful fun and experience 24 doing that. 25 And prior to that, I was in private practice as 0016 1 a corporate attorney. 2 So thrilled and honored to be invited to be 3 part of this and look forward to contributing my 4 perspective. 5 MR. McNEW: Like Brian, I'm thrilled to be here 6 as well. My name is Terry McNew. I'm the president and 7 CEO of MasterCraft Boat Holdings. We're comprised of 8 three companies and four brands in the recreational 9 fiberglass boating industry. 10 I've been in manufacturing for 31 years, 23 at 11 Brunswick, a former Executive Vice President there. 12 I've grown MasterCraft from essentially a 13 break-even company to today we're listed on the NASDAQ 14 Exchange, a public company with about half a million in 15 market cap. So like many of our team members, I have 16 worked with companies that are very small and had to 17 generate capital to grow and have some experience in 18 that. 19 Looking forward to working with my colleagues 20 on the team to help provide a voice for manufacturing on 21 this panel, as well as helping to spawn more 22 entrepreneurs. 23 MS. MEHTA: Hello, everyone. My name is Spana 24 Mehta, and I'm Assistant General Counsel at Revolution, 25 and General Counsel of the Rise of the Rest Seed Fund, 0017 1 led by Steve Case, trying to shine a spotlight on the 2 fact that 75 percent of venture capital money goes to 3 Silicon Valley, Boston, and New York. We're trying to 4 spread those opportunities and encourage venture capital 5 investments in the rest of the country. 6 Prior to that I was Deputy GC at Living Social, 7 where I handled M&A, and a very interesting perspective 8 being in a start-up, going through hyper growth stages. 9 And prior to that I was at Latham & Watkins for 10 five years. 11 So I'm very excited for this opportunity. 12 Thank you. 13 MS. MOTT: Good afternoon. I'm Catherine Mott 14 from Pittsburgh, Pennsylvania. I'm the founder of 15 BlueTree Allied Angels and the BlueTree Venture Fund in 16 Pittsburgh. 17 BlueTree Allied Angels is one of 600 18 professionally managed angel groups in the United States. 19 We were founded in 2003 when there were only about 100 20 angel groups. 21 I'm former chairman of the board of the Angel 22 Capital Association, our national trade support 23 organization, which is like the National Venture Capital 24 Association, and I'm also the former chairman of the 25 Angel Resource Institute and also happy to be here and be 0018 1 supportive of the efforts of the council. 2 Thank you. 3 MR. SOLOMON: Hi. I'm Jeff Solomon. I'm the 4 CEO of Cowen. Cowen is an emerging growth-focused 5 investment bank located in New York, just turned 100 6 years old, though I was not there at the founding just to 7 be clear. Some days it feels like I was. 8 But so I have spent the better part of the last 9 decade trying to figure out what we could do to help 10 small businesses figure out how to get access to capital, 11 debt capital and equity capital. It's a focus of ours at 12 Cowen. 13 I did co-chair the Equity Capital Formation 14 Task Force, which was sanctioned by the Treasury a few 15 years ago to try to figure out some solutions around 16 market structure that would create liquidity for small 17 cap companies, and I was involved in helping to advocate 18 for the Jobs Act, which I think really turned over a new 19 leaf and created a new day for a lot of small market 20 capitalization companies that were looking to get access 21 to public capital. 22 But I am myself the product of a small 23 business. My father still owns and runs a small 24 manufacturing business in Pittsburgh and where I was born 25 and raised, and I do remember that he and my mother both 0019 1 had to sign away just about everything we had when he 2 bought that business in 1978, and I like to remind 3 everybody that he's only ever one recession away from 4 trouble. 5 So if we can figure out ways to bolster our 6 economy through the growth of small business, it would be 7 a real benefit to a lot of folks, including the people 8 that really gave me my start. 9 So happy to be in a position to help. 10 MR. TORBERT: My name is Hank Torbert. I 11 serve as the president of AltaMax, which is a New 12 Orleans-based specialty manufacturing company focused on 13 packaging for the U.S. military as well as commercial 14 clients. 15 I have been in and around the sort of start-up 16 private equity community for most of my life. I'm also a 17 former investment banker with a special commitment to 18 providing capital and capital related solutions to 19 everyone along that value chain. 20 And also, similar to a lot of my colleagues 21 here, I am also the product of entrepreneurs from grocery 22 stores. My mother had an antique store. Everyone tried 23 to do something in my family. So any way that I can help 24 them and help all my friends and colleagues out there 25 seeking to raise capital, I'd like to do that. 0020 1 MR. YADLEY: I'm Greg Yadley. I'm a partner 2 with the law firm of Shumaker, Loop & Kendrick in Tampa, 3 Florida, and I've worked with small businesses my entire 4 career, everything from start-ups through IPOs and 5 successful sales and some not so successful sales. 6 One of the speakers at this morning's round 7 table that the SEC hosted for National Small Business 8 Week said that not all dollars are equal. So as part of 9 my practice I try and help companies raise money and use 10 it wisely, which requires discipline and an appreciation 11 for compliance. 12 And so I think this is a great effort that the 13 SEC is undertaking. I've been quite active in small 14 business. I'm on the Advisory Board of the 15 Entrepreneurship Institute at the University of South 16 Florida. I'm the past chair of the American Bar 17 Association's Middle Market and Small Business Committee 18 and past co-chair of the Private Placement Broker Task 19 Force. 20 And it's a thrill to be here, and I look 21 forward to working with all of my colleagues. 22 MR. SHEPARD: My name is Joe Shepard. I'm glad 23 to be here with everyone on the Committee and the 24 Commissioners, and, Martha, good to be joining you today. 25 I'm the Associate Administrator for the Office 0021 1 of Investment and Innovation. That office was created in 2 1958 by Congress with the Small Business Investment Act 3 of 1958, 61 years ago, trying to do something similar to 4 some of the things we're going to be talking about in the 5 weeks and months to come with the Small Business Advocacy 6 Act of 2016. 7 When you read the beginning of the Small 8 Business Investment Act, it talks about -- and, again, 9 this is in 1958 -- trying to figure out a way for the 10 U.S. economy to create a program in federal government 11 that would stimulate and supplement the flow of private 12 equity and long-term loan funds to small business 13 concerns because the supply is inadequate. 14 And so some of those truths are still facing us 15 and some of those challenges today, and so the program 16 that I manage does that within the Office of Investment, 17 seeks to do that through Small Business Investment 18 Company Program, which some of you may be familiar with. 19 One of the other entities within the Office of 20 Innovation is a 1982 and 1992 legislation with the Small 21 Business Innovation Research, the SBIR Program, which was 22 a grant program, and then the STTR Program as well, which 23 is more related to universities. 24 My background is primarily in private sector, 25 venture capital, private equity as a sub-debt lender with 0022 1 SBICs before I came into this public service position, 2 and also as an intermediary in terms of being in 3 corporate finance and being an investment banker as well. 4 So, again, I look forward to our discussions, 5 look forward to being able to contribute, and good to be 6 here. Thank you. 7 MR. DEAN: My name is Greg Dean. I'm a Senior 8 Vice President at FINRA. We're very thankful to Martha 9 and the Commission for inviting us to be part of this 10 Advisory Committee. We weren't doing part of the 11 statutory delegation, but we're very happy to be part of 12 this. 13 Recently FINRA has undergone a number of 14 changes with regard to capital formation. We put forth 15 our capital acquisition broker rule set. 16 In addition, we had our advisory committees 17 reformulated. So now we do have a capital acquisition 18 and private placement advisory committee specifically 19 focusing on these issues. 20 In addition, through our FINRA 360, we are open 21 to looking at our rule sets as well as making more 22 changes to help access to capital and small business 23 capital formation. 24 Personally, in the '90s, I spent a lot of time 25 with angel financing and small business capital 0023 1 formation. So this is such an important Advisory 2 Committee to get the views out and to make sure the 3 policy makers hear them. 4 Thank you for inviting us. 5 MS. MILLER: Wonderful, and Bill and Jennifer, 6 we'll introduce you in just a minute. 7 A little bit of background on me. I am here at 8 the SEC as the first Advocate for Small Business Capital 9 Formation, which is quite a long title and comes with a 10 lot of responsibility as well for creating this new 11 office, and I'm trying to really do more to raise the 12 profile of small business within the SEC, which has 13 always been a priority, but we are making it a priority 14 on a new level. 15 A little bit of background out me, I have come 16 directly from private practice at a law firm in 17 Birmingham, Alabama, in the Southeast where I worked on a 18 spectrum of transactions across the company life cycle, 19 from, you know, your very nascent companies, 20 entrepreneurs or repeat entrepreneurs that are looking 21 for their first bits of funding, to working with 22 companies on investments as they merge through the so- 23 called "Valley of Death" trying to come out on the other 24 side with more institutional capital, to sometimes a sale 25 or purchase to strategic buyers on the other end. 0024 1 And I used to joke that when you get involved 2 with a securities capital raise you get to hear about all 3 the other issues that are happening within the company, 4 and so my joking response used to be that I was a 5 business therapist because I took in all the issues. I 6 just couldn't advise you on all of them. 7 But it was a lot of fun and got to really see 8 how the entirety of the company life cycle and system 9 really impacted and came down to that crucible moment of 10 when and if you can bring in the right amount of capital 11 from the right people. 12 So I was appointed by the Commissioners to lead 13 this office in December and started in January, and our 14 office, I will point you to more information online for 15 those who are interested in it. We have plenty more 16 online, including our business plan, which lays out 17 exactly how we plan to approach this first year of 18 operations for our office, including through the 19 constitution of this Committee. 20 So one thing I'll note along those lines. 21 Noting my role as Advocate here, it means that not only 22 am I working in an externally facing role, but our office 23 is also heavily involved internally with rulemaking long 24 before they are public and are at the point of public 25 consumption. 0025 1 And so when we do take matters to a vote with 2 the Committee, because of that somewhat conflict of 3 interest there, I will not be taking votes on anything so 4 as not to give away whether or not something is or is not 5 under current rulemaking consideration and also not 6 before it has come before a vote of the Commissioners. 7 So that is just to go ahead and get that 8 procedural piece out there about my role. 9 I do also want to introduce two members of our 10 staff who are here today who are absolutely integral. We 11 have Julie Davis and Emerald Greywoode, Boston Mama, who 12 are both fantastic and none of this would be happening 13 today without them, and I look forward to each of our 14 Committee members getting to know both of them. 15 And we do also have members on the phone. 16 Thank you, Julie, who also makes sure that nothing goes 17 awry. 18 For those on the phone, perhaps, Jason, would 19 you like to start with an introduction of yourself? 20 MR. SEATS: Sure. I'm Jason Seats. Yep, I am 21 Chief Investment Officer at Techstars. Techstars is a 22 worldwide network that helps entrepreneurs to succeed. 23 We do really early stage investing in start-ups all over 24 the globe, but a significant amount of that in the U.S. 25 Eighteen hundred portfolio companies and lots 0026 1 and lots of need for capital formation of all types. So 2 on this topic, this Committee is near and dear to our 3 hearts. 4 MS. MILLER: Thank you, Jason. 5 Poorvi. 6 MS. PATODIA: Hello. My name is Poorvi 7 Patodia. I'm the founder and CEO of Biena Snacks. We 8 are one of the leading natural snack brands in the 9 country, and I'm thrilled to be here. 10 MS. MILLER: Mike, are you on the line as well? 11 MR. PIECIAK: Yes. Hey, Martha. How are you? 12 MS. MILLER: Doing well. Thank you. 13 MR. PIECIAK: My apologies for not being there 14 in person. I hear so many friends in the room. So I am 15 sorry I'm not there in person, but I'm Mike Pieciak, and 16 I represent the North American Securities Administrators 17 Association, or NASAA; currently the president of NASAA 18 and previously served as NASAA's representative under a 19 previous formation of a similar committee. 20 I'm the Commissioner at the Vermont Department 21 of Financial Regulation, where we regulate insurance 22 banking and security sectors in Vermont. 23 Small business certainly is important to our 24 state. I think it is like 95 percent of all Vermont 25 businesses have 50 or less employees, and in our state, 0027 1 as in many states, the small businesses are the entities 2 that drive our economy and drive job creation. 3 So capital formation for small businesses has 4 always been the focus for our department and a focus of 5 our work here in Vermont. So looking forward to working 6 together with the new iteration of the Committee, and 7 look forward to seeing everybody in person shortly. 8 MS. MILLER: Wonderful. Thank you. 9 I don't think we have anyone else on the line. 10 This is the point where I get to give the 11 lovely SEC disclaimer that any of the views that are 12 expressed here today, whether by staff or our 13 Commissioners, don't necessarily represent the view of 14 the Commission or the SEC taken as a whole. 15 And the flip is true that any views that are 16 expressed by our Committee members, whether here today or 17 out in public outside of this don't necessarily represent 18 the views of this Committee, but we certainly welcome you 19 to share your perspectives candidly so that we can engage 20 in a really fruitful discussion. 21 So we are pleased to have with us today 22 Director of the Division of Corporation Finance, Bill 23 Hinman, and Jennifer Zepralka, who is the Director of the 24 Office of Small Business Policy, which sits within Corp 25 Fin, as we love to give an abbreviation to everything 0028 1 here. I'm learning them all. 2 They are here today to talk to us a little bit 3 about what is on the regulatory agenda, specifically 4 around small business. 5 To give you a little bit of background on Bill, 6 he joined the Commission staff in 2017 after a long and 7 very productive career in private practice most recently 8 with the Silicon Valley office of the law firm Simpson 9 Thatcher & Bartlett. 10 And in private practice, he advised issuers and 11 underwriters in capital raising transactions and 12 corporate acquisitions in a wide range of industries, 13 notably including technology, e-commerce, and the life 14 sciences. 15 Jennifer Zepralka is back at the SEC for her 16 third go-around or second, not third, second. Thank you. 17 Second go-round coming from private practice, and we are 18 thrilled to have her here leading OSBP, which is the 19 group that is responsible for much of the rulemaking that 20 impacts small business capital formation, and she brings 21 a wealth of experience from the private practice, as well 22 as from her prior service here at the Commission. 23 So just to give a little bit more background on 24 Corp Fin to level set, there's a broad array of 25 responsibilities within the Division of Corporation 0029 1 Finance. It's the one that a lot of companies and 2 lawyers know very well for reviewing and commenting on 3 public company reports with initial public offerings. 4 But the Division is also responsible for making 5 recommendations to the Commission about rules that govern 6 public reporting company obligations and, importantly, as 7 all of you are aware, if a company wants to offer or sell 8 securities without doing a public offering, you have to 9 have an exemption. 10 And the regulation of those private exemptions 11 also falls within this group, including Regulation D, 12 which is the most commonly known exemption that most of 13 you are probably quite familiar with. 14 So this Committee will have many agenda items I 15 am sure over the coming months and years that will be 16 directly related to the work that Bill and Jennifer are 17 doing, and so we are thrilled to have them here today in 18 what is a very busy schedule that both of them have with 19 the rulemaking agendas that they'll be discussing to 20 share with us a little bit about what they're doing in 21 the capital formation space and what you can expect to be 22 coming out of the SEC very soon. 23 So I'll turn it over to you two. 24 MR. HINMAN: Thanks very much, Martha. 25 It's delightful to be here and to have Martha 0030 1 as our Advocate and have a Committee assembled again 2 after a couple of years of looking for the right team, 3 and we are all delighted that we have accomplished that. 4 Listening to all of the introductions and 5 hearing where folks are from and thinking about this 6 morning's theme, I think we're doing very well to have a 7 broad cross-section of the country represented here today 8 and sort of demonstrating that there's a lot of expertise 9 outside of the coasts and there's a lot of need for 10 capital formation in that area that is served well by a 11 number of the Committee members, and we hope to do our 12 part in Corp Fin. 13 As Martha has said, we look over the private 14 placement exemptions, which are very important for small 15 businesses. We don't have anything to do really with the 16 rules that govern finders, which I know would be a big 17 topic. So we'll get that off the table right now. 18 (Laughter.) 19 MR. HINMAN: That's another group you can lobby 20 on that one. 21 But anyway, we are delighted to have some 22 interaction with this Committee. 23 This Committee's input to our rulemakings is 24 very, very important, and I really encourage the members 25 to sort of follow what we're doing, and we will be 0031 1 reaching out for input on the various initiatives that we 2 have underway. 3 We will cover today a few of those, as well as 4 I'll give you a little bit of a report on where we stand 5 with Reg. A and regulation crowd funding. We're soon 6 going to be reporting on both of those rulemakings and 7 rules and how they have been used, and we'll give you a 8 little preview of some of the numbers and some sense of 9 how that's going. 10 And then we'll also talk about some proposed 11 rulemakings that we have and concept releases. I've 12 chosen to talk about the ones that I think this Committee 13 would be very valuable to provide us some input with 14 respect to. 15 The Chairman and I got here about two years 16 ago, and in that period of time, I think we have been 17 emphasizing the value of looking at funding outside the 18 coasts. The Office of Small Business Policy that 19 Jennifer heads had held a forum every couple of years. 20 It will now be the responsibility of this Committee, and 21 traditionally it has been held in New York or -- excuse 22 me -- in Washington. We did one in New York. 23 And since the Chairman arrived, we've been 24 holding those outside of D.C., and we have found that 25 very valuable. The first one we did was in Austin, 0032 1 Texas. We got to know Youngro there, showed us around a 2 little, and last year we did Columbus. And I think this 3 year it's going to be at Omaha. 4 We've also done some conferences in the middle 5 of the country. Chairman Clayton and I went out to 6 Montana to do an entrepreneurship conference. We did a 7 similar thing in Nashville. 8 And every time we leave D.C., we learn 9 something new and valuable. So we will continue that 10 practice. 11 So let me talk a little bit about the two 12 exemptions that were put in place or expanded through the 13 Jobs Act. First, crowd funding. 14 So, you know, it is still small relative to all 15 the various other exemptions that we oversee in terms of 16 the amounts raised, but we do think it's important, and 17 we want to make sure that we optimize Reg CF or crowd 18 funding. 19 As I think all of you know, just to level set a 20 little bit, an issuer can raise right now up to $1.07 21 million through a crowd funding in any given year. The 22 investors are limited also in the amounts that they can 23 put into a crowd funding raise, about 100,000 if you're 24 sort of at the top of the income standards there. 25 And then every crowd funding, as I think you 0033 1 know, is mediated by a portal, and Youngro and others 2 have been engaged in that kind of business. 3 We've been getting a lot of comments around 4 ways to improve crowd funding, and again, this is one 5 we'll look to you for more thoughts. Right now we count 6 about 1,300 offerings done under the crowd funding 7 regulation. 8 Out of that 1,300, a little less than half, I 9 guess about 520 or so have actually raised the targeted 10 amounts, and I think a total of about 110 million has 11 been raised. So relative to, say, Reg. D or even Reg. A, 12 the amounts are modest, but the numbers are increasing. 13 And we hear a lot of interest when we go out 14 and speak around the country. So this is something that 15 we'll be keeping an eye on and be looking for your 16 recommendations on things we might do there to improve, 17 whether we should be raising limits for the amounts that 18 can be raised or the amounts that investors can put in. 19 You know, we're interested in the Committee's thoughts on 20 crowd funding. 21 Regulation A, thanks to the Jobs Act, was 22 broken into a couple of pieces, Tier 1 and Tier 2. We're 23 due to report on that this year, and again, we're going 24 to be looking at the size of funds that can be raised 25 under Tier 2 of Regulation A. 0034 1 Right now that's limited to $50 million. We 2 are considering whether it's appropriate to raise that. 3 As you know, Reg. A is a lighter touch in terms of 4 regulatory compliance. Tier 2 of Reg. A requires audited 5 financials, but the reporting is somewhat simpler. 6 The staff reviews the Reg. A filing, gives 7 comments, qualifies them to go forward, and as I think 8 you know, they can be offered to the public generally. 9 They're not restricted securities. 10 The Tier 2 level has gotten a lot of activity, 11 in part, we think because of the ability to do a Tier 2 12 offering without compliance with the various state 13 securities rules. Those are preempted for Tier 2 14 offerings. 15 So we'll see a lot of folks doing Tier 2 16 offerings, but at amounts that could have been raised 17 under Tier 1. So they're willing to go a little bit 18 further in the disclosure and live with Tier 2 standards 19 to afford themselves the preemption protections. 20 Since the start, we have seen 360 offerings 21 done under Tier 2. About 277 of those have actually been 22 qualified by the staff. 23 We have 132 of that 277 reporting actually 24 raising proceeds. So there's a bit of a delay from the 25 time folks get qualified to the time they actually report 0035 1 a deal getting done. 2 Total amount of the Tier 2 raise has been 1.4 3 billion. That's an average for a deal of about 10.6 4 million, and again, we are looking at the size limits 5 there and other ways that that might be improved, and 6 again, the Committee's input will be very valuable. 7 One of the things that you may be wondering is 8 the Committee over the years, your predecessor Committees 9 and this Committee will be making recommendations with 10 respect to our various exemptions and what happens to 11 those. 12 Right now I can tell you that Jennifer and her 13 team are taking a look at a lot of the prior Committees' 14 recommendations, and we're looking for thoughts from this 15 Committee as well on how we can harmonize our private 16 placement exemptions. 17 The first proposed rulemaking I'll talk about 18 is we're thinking of doing a concept release on the 19 harmonization of our various private placement 20 exemptions. There's a whole network of exemptions. Some 21 would call it a patchwork that have grown up over time, 22 some by statute, some of the things we just discussed, 23 Reg. D being one of the larger and most often used 24 exemptions. 25 But in terms of how do they work together, you 0036 1 know, can we do things that would make them fit various 2 life cycles of a company more appropriately? 3 Are the accredited investor definitions that we 4 use in connection with many of those exemptions, are 5 those appropriate? 6 Right now we see a very binary system in terms 7 of accredited investors. Generally, if you're an 8 accredited investor, you can invest unlimited amounts, 9 and if you're not, you can't invest a penny. 10 We'd like to look at ways, you know, to examine 11 whether that's the right approach. Some of the 12 approaches in some of the other rulemaking like crowd 13 funding do kind of scale the amount of the investment 14 with the wealth of the individual, and are there scaling 15 opportunities more broadly across the private placement 16 exemption framework? 17 So we'll be looking to the Committee for that, 18 and that will be a significant release, and again, the 19 prior recommendations or prior Committees' and this 20 Committee's recommendations really do get folded into our 21 thinking there. When you read the concept release that 22 we'll put out on harmonization, you'll see a lot of the 23 thoughts that we've gathered from Committees such as this 24 reflected in the background that we're providing in that 25 release. 0037 1 So the work you give us is valuable and finds 2 its way into our rulemakings. 3 Another rulemaking that is in the shape of a 4 concept release that is still outstanding are the changes 5 to Rule 701. As many of you know, 701 is the rule that 6 allows private companies to offer equity to their 7 employees or consultants on an exempt basis. 8 We're looking at that to see whether the 9 eligibility for participation in those exemptions can be 10 broadened. Right now you need to have that either 11 employee or consultant kind of relationship with the 12 recipient of the award to use the exemption. 13 We're asking in light of the gig economy where 14 people don't always have employment relationships with 15 people that they want to incent, is there some value in 16 redefining the universe of folks who could take equity 17 from a company where they're involved and they have a 18 business relationship, but just not necessarily a 19 traditional employment relationship? 20 So we're looking for input on that, and that is 21 out right now for comment, and again, any thoughts from 22 the Committee or the Committee's members would be really 23 helpful. 24 Another sort of broad-based release that we 25 have out there is looking at quarterly reporting. We, 0038 1 you know, are examining whether quarterly reporting in 2 general creates a more short-term type view of the world 3 for companies and the people that invest in them. We are 4 looking at whether smaller companies might have a better 5 pace of reporting available. If they had more 6 flexibility, would that be useful? 7 We're looking at the relationship between 8 earnings guidance and short-termism. We're looking at 9 the connections between the earnings release and when 10 that goes out and the 10-Q that follows a week or so 11 later generally, and is there a way to put those rules or 12 to revise the 10-Q rules so that the earnings information 13 can be incorporated or you can streamline some of the 10- 14 Q reporting to make it easier to join the public 15 reporting sphere? 16 And, again, we're looking at the pace, and 17 again, the Committee's thoughts on, in particular, 18 whether smaller companies find quarterly reporting 19 burdensome or whether there's a better cadence for them. 20 That would be useful to look at. 21 We recently changed the level at which 22 companies can qualify for the smaller reporting company 23 scale disclosures. We've upped the size limits there to 24 250 of market cap or 700 of market cap in less than 100 25 million of revenue. 0039 1 As we did that, we did not change what we call 2 the 404(b) attestation requirements that companies face 3 at a certain size. It used to be if you were a smaller 4 reporting company, you did not have to do a 404(b), 5 outside auditor attestation of your controls over 6 financial reporting. 7 As we significantly increased the number of 8 companies qualifying for smaller reporting status, we 9 said let's take a harder look at whether companies that 10 qualify for smaller reporting status also should be given 11 relief on the attestation requirements because as we 12 moved the smaller reporting limits, we did not change 13 that exemption at the same time. 14 So now we are looking at that. In fact, we've 15 noticed for this Thursday's open meeting a proposal on 16 404(b) that would reexamine the limits and when do you 17 have to provide that outside attestation. 18 Right now the test depends on market cap at 75 19 million or more of market cap. We are thinking there may 20 be a more tailored way of looking at those limits and 21 whether you could also integrate the company's amount of 22 revenues or a different level of market cap and have 23 attestation only apply after a certain level of revenue 24 has been met. It might be a way to approach that rule. 25 So you'll see a proposal there and, again, this 0040 1 Committee's input, your predecessor Committee had a lot 2 of thoughts on the attestation requirements. This 3 Committee's input will be very valuable. 4 We just proposed, and again input from the 5 Committee on comments would be useful; just proposed 6 changes to Rule 305 of Regulation SX, and Rule 305 of 7 Reg. X has broad applicability to all public companies, 8 but as we started to look at it, I was surprised to see 9 that smaller companies, even companies that are not 10 reporting companies, were focused on 305. 11 Three, oh, five is the rule that says when a 12 company acquires you, they generally have to provide, 13 depending on how significant you are, provide historical 14 financials of the acquiree. Many times the acquiree is a 15 private company that hasn't been preparing financials in 16 accordance with the U.S. GAAP that are easily dropped 17 into public reporting documents. 18 So a lot of private companies we understand 19 have been preparing their financials with an eye towards 20 305, even though in their daily business they don't need 21 to provide 305 styled financials. They do that because 22 it makes them an easier financing target. 23 You know, if you're going to exit not through 24 an IPO but through an M&A transaction, having financials 25 that are easily dropped into the reporting system is 0041 1 valuable, and so people have been looking at 305 and 2 trying to sort of gauge their own reporting and their own 3 financial statement presentations based on 305. 4 Three, oh, five, we think, can be simplified, 5 has a number of technical issues with it in terms of how 6 you do measure significance under 305 and when historical 7 financials are required. So we're reexamining the 8 significance test and also the period of time that needs 9 to be covered with those financials. 10 It's expensive to go back and prepare 11 historical financials if you haven't just to get ready 12 for an M&A transaction, particularly for private 13 companies, and so we're asking for comment on whether the 14 periods could be shortened without really in any way 15 lessening investor protection. 16 We think some of the older years may be much 17 less relevant as investors look at an acquisition and try 18 to understand its impact. So we're looking at the number 19 of years that need to be covered. 20 We're also looking at some of the pro forma 21 requirements like come along with 305 requirements. So 22 when companies are combining the pro forma financial 23 statements that give effect to what they would have 24 looked like if they had combined earlier, have kind of 25 grown to be almost irrelevant to the users of pro formas 0042 1 in that they are sort of a hypothetical accounting test. 2 And we're looking at those pro forma 3 requirements and perhaps by entertaining the idea that 4 management's synergies could be worked into those pro 5 formas to show people what may happen as a result of the 6 acquisition, that that might be a useful thing. 7 So, again, take a look at 305. There are a lot 8 of things there that even though it's generally something 9 that large companies worry about, I think smaller 10 companies because of their target sometimes in these 11 acquisitions, it's a way people get liquidity, have a 12 real interest in 305 working well. 13 Longer term we are looking at Regulation SK 14 generally. As you know, Regulation SK is sort of the 15 repository for all the various disclosure requirements 16 that get incorporated by reference into your periodic 17 reporting. We've been looking at these in chunks. We've 18 been trying to modernize those as well. 19 Some of the SK rules have sort of bright line 20 dollar standards that may be a little out of date. We 21 want to sort of reinvigorate SK with a principles-based 22 approach that focuses on materiality. We do think that 23 will give us an ability to streamline some of the 24 requirements there. 25 Also, if you look at SK, it's quite evident 0043 1 that it was done at a time when property, plant and 2 equipment was usually the biggest set of assets that a 3 company had, and as we all know, about 85 percent of 4 companies' assets today are generally intangibles. 5 And so looking at things like intellectual 6 property through the lens of SK as well as human capital, 7 again, with a principle-based approach, will be, we 8 think, important, and we look forward for the Committee's 9 input on that. 10 Those are just some of the highlights. I, you 11 know, would welcome questions or thoughts on any of that 12 or other things that you'd like to raise. 13 MS. MILLER: Thank you, Bill. 14 MR. HINMAN: That was a lot in a little bit of 15 time. 16 MS. MILLER: Well, I think what's clear from 17 that overview is I think a lot of folks, and we've heard 18 this as we've gone out in meeting, have said, "Okay. 19 We've delivered some recommendations and we've told you 20 some things we want to hear you working on. Where is 21 it?" 22 Here it is, and it is underway, and the 23 Commission and Commission staff and particularly Bill and 24 team have really made it a priority to not just hear 25 recommendations, but to start acting on those. 0044 1 I will highlight a couple of other initiatives 2 that are going on within the building that are not within 3 his division, but that are also germane and which we hear 4 about often when we are out and about. 5 The first one is on BDCs, and business 6 development companies in March, the Commission proposed 7 offering reforms for BDCs, and from meetings we know that 8 there are a lot of issues and opportunities around how 9 BBCs can work within the small business ecosystem. 10 And so we are encouraging investors and 11 businesses to take a look at those, at that proposal and 12 provide comments on that that is already out. 13 Another one that we are keenly aware of because 14 we've heard about it quite a lot since we've gotten the 15 office started is the finder's issue and the lack of 16 clarity on the role of finders and in the context of 17 whether or not they need to be registered as a broker- 18 dealer when they are providing something less than the 19 full suite of services that you typically expect of a 20 broker-dealer. 21 And so I know that many around this table have 22 encouraged the Commission to take action there, and we 23 have been in discussions with staff about that as well, 24 and that topic has been added to the Commission's long- 25 term reg. flex agenda. So you will see that there. 0045 1 There's also a small fund outreach initiative 2 that is underway that was just launched by Dalia Blass 3 and Brent Fields in the Division of Investment 4 Management, and they are looking at small funds' specific 5 issues. 6 And we are thrilled to see them looking at that 7 because small funds tend to invest and take smaller 8 positions, and you guessed it, smaller companies, and so 9 there's a direct correlation with what's happening in the 10 funds space and what then trickles down over into the 11 investment dollars that are flowing into businesses. 12 And on the last set, which is not really 13 rulemaking or regulatory agenda, we are working as an 14 office with a statutory mandate and a personal passion 15 looking at how any sorts of regulatory issues and 16 requirements may create unique challenges or hurdles for 17 women-owned businesses and minority-owned businesses and 18 businesses in areas of natural disaster. 19 And we have been working closely with our 20 Office of Women and Minority Inclusion to identify groups 21 who can help weigh in on the issues they face and so that 22 we can layer in those unique perspectives into the 23 various rulemaking agendas that are underway across the 24 Commission. 25 So that's a lot of us telling you what's going 0046 1 on. I think from what Bill has shared and what I have 2 hopefully previewed, you can see that there is a lot 3 happening. While we have two experts sitting at the 4 table, we did want to make sure that we had an 5 opportunity for any Committee members to ask any 6 questions or seek any follow-up from them. 7 Yes, Catherine. 8 MS. MOTT: Thank you, Martha. 9 One of the things I think you heard earlier 10 from Kathy this morning is there's still market confusion 11 around general solicitation, around 506(b) and (c). So I 12 know that, you know, we get the Angel Capital 13 Association just testified to the Senate Finance 14 Committee on passing the HALOS Act, which we hoped this 15 would address it, but I don't know if there's anything we 16 can do here that could clarify. 17 Because what we're seeing sometimes is that 18 demo days and pitch competitions are confused about how 19 they can conduct themselves and not default to 506(c). 20 Still we see it across the country. 21 MS. MILLER: Yes, and just to provide further 22 clarity into the HALOS Act, that's looking at demo and 23 pitch events, which are common. They are mainstays in 24 the entrepreneurial community where a company gets up on 25 stage and they talk about what they are creating and what 0047 1 they're doing, but there's a fine line that they have to 2 walk between not then soliciting an offer for the sale of 3 securities. 4 And it's a fine line that is often a little bit 5 difficult for entrepreneurs to navigate and to understand 6 what do those look like within the securities framework. 7 And so the HALOS Act is proposing to draw a 8 bright line and make that clear. 9 MS. HANKS: If I could actually build on what 10 Catherine was saying, one of the things that I've noticed 11 with the whole regulation of offers is we keep having 12 this sort of incremental approach. 13 Okay. You can do testing the waters for Reg. 14 A, but here's your legend. You can't do testing the 15 waters for Regulation CF, and we heard this morning 16 that's an issue. 17 I think all of this boils into one thing. 18 We're regulating offer when we don't need to. Let's just 19 regulate the sales and not the offers. 20 And so is there any possibility on building on 21 -- I know there's a proposal open at the moment -- on 22 expanding testing the waters? Let's just expand it so we 23 say if it's an offering and you're not actually taking 24 money, not regulated yet. 25 MR. HINMAN: Right. 0048 1 MS. HANKS: Because then you have some kind of 2 legend. 3 MR. HINMAN: Right. So the proposal that's out 4 there on test the waters is basically just expanding it 5 to non-AGCs, which is somewhat increment, right, because 6 you can only go to QIBs, and it's just a group of people 7 that are pretty sizable anyway, generally not the focus 8 of this group. 9 But in the harmonization release that we are 10 working on, we are asking the questions around, you know, 11 is there a better approach if we regulate offers. We are 12 looking at the general solicitation question, and you 13 know, again, just sort of seeking input from the market 14 right now through that harmonization release so that when 15 we do do this, it is a little bit more comprehensive and 16 it isn't something here done one way and something on 17 another, exemption done another way. 18 When we say "harmonize," that's the kind of 19 thing we are thinking of doing. 20 MS. ZEPRALKA: Not really. I mean, I think 21 people have been following this space for a long time. 22 You know, Linda Quinn was talking about deregulating 23 offers back in the '90s or whenever that was. It's 24 something that we spend a lot of time thinking about, and 25 you need to find the balance with the investor 0049 1 protections. 2 You know, this was sort of the idea with 3 506(c), which I'm hoping this Committee will talk about, 4 you know, over time as well and why we're not seeing a 5 huge uptake in 506(c) offerings and whether that comes 6 down to, you know, the investor protection that's been 7 put on 506(c). 8 If you're going to deregulate offers, how do 9 you protect investors to keep them from, you know, being 10 defrauded? 11 So one way is to, you know, verify their status 12 as an accredited investor, but we've heard anecdotally, 13 you know, that that chills the market a bit, but people 14 don't really want to do verification. That may or may 15 not be true. I'd love to get this Committee to talk 16 about that. 17 But you know, whenever you think about 18 deregulating offers, the first question is: okay. Well, 19 how do we keep that from turning into advertisements on 20 TV where widows and orphans are now, you know, calling up 21 in the middle of the night and buying securities? 22 That's just a concern. 23 MR. LEE: Could I ask? 24 So, first of all, I really appreciate the SEC's 25 interest in this topic, and, Bill, like you said, when we 0050 1 talked about really the small businesses that you saw in 2 Austin, it's a very different reality, I think, than what 3 gets portrayed in the media. 4 So now that we're on this Committee, I'd love 5 to learn maybe is there any specific topics that you or 6 the SEC would rather appreciate sort of more technical or 7 just more specific information on? 8 Because, I mean, just kind of paraphrasing, I'm 9 speaking for other portals that are involved in 10 regulation crowd funding and Reg. A, let's say, as well 11 as major entrepreneurs that we deal with outside of the 12 coasts. 13 I'm based in Houston, Texas, and the common 14 feedback that I get and I felt myself is when we at SEC 15 or anybody in this kind of position talk regulation, we 16 assume that it's some sort of rule that everybody in the 17 world knows, and that's just not true, right? 18 Entrepreneurs don't think of it as, oh, I can 19 get money from this accredited investor or this private 20 equity shop or this, you know, Mom or whatever. Like 21 it's money. They need money. 22 From an investor's side, they don't look at it 23 like it's a Reg. D offer and this is a Reg. A offer and 24 this is a Reg. C offer or anything. This is a real 25 estate offer, and so I'm not sure of the rules. 0051 1 So the reality is that people who need money to 2 start businesses are looking for money wherever they can 3 get it. People who are looking to invest are looking for 4 investments wherever they can find it, and sometimes the 5 rulemakings are so specific to this almost academic 6 perspective of what is securities and what is not, it 7 really confuses everybody. 8 So at least my purpose and I think, again, 9 speaking for the entrepreneurs who don't have any access 10 to any of us at this table on a typical basis, if there's 11 some clarity on literally what is the role of capital 12 formation instead of trying to pinpoint the exact 13 specific scenario in which this works, maybe a guidance 14 of or spirit of this is the way the world is evolving and 15 this obviously you can help. 16 I think personally that would give a lot of 17 confidence to the Main Street entrepreneurs and 18 businesses on sort of SEC leadership on this topic. 19 MR. HINMAN: We hear you. That, again, is 20 really why the harmonization release is in the works, and 21 that would be one of the things that we'd be thinking 22 about there, is instead of having, again, this somewhat 23 of a patchwork approach, something that steps back and 24 says, okay, at different cycles of a company's existence, 25 what are the things they are doing in terms of trying to 0052 1 raise capital, and how can the private placement 2 exemptions fit well into that world? 3 And in looking at, again, the level of company, 4 the size of the company, and the kind of disclosure you 5 would expect it to provide will be one really important 6 piece of that in scaling that, as well as potentially 7 scaling the ability of folks who may not be classic 8 accredited investors, but want to invest a small amount 9 and diversify their portfolio, their ability to get 10 involved in that space, too. 11 So that's what we're looking at. We're going 12 to ask a lot of, you know, good questions, I think, in 13 that release, and again, this Committee's input will be 14 really useful. 15 But I think that's going to be our vehicle for 16 a while. 17 MS. MILLER: Jeff. 18 MR. SOLOMON: Yes, so two questions. You 19 mentioned small fund creation initiatives. I'd like to 20 understand a little bit more about what's going on there 21 because I think one of the things we've talked about is, 22 you know, the challenge for a lot of companies is being 23 able to access. 24 We heard this morning that three to $20 million 25 Series A, but even small public companies have a very 0053 1 difficult time accessing the right size funds. It was 2 just one of the reasons why I think we don't see small 3 IPOs anymore. 4 The funds that are buying public securities are 5 so big that, you know, taking a company public with a 75 6 or a $100 million in float doesn't move the needle for 7 most of those funds. 8 I'd like to hear that, and then second, I'm 9 just curious, and this is the upper edge of the range on 10 small companies, but certainly we're beginning to see 11 MiFID II impact. Small company research, we see it all 12 over the place, and I think that that's actually moving 13 in the opposite direction. 14 So to the extent that we're funding smaller 15 companies that may someday want to avail themselves of 16 the public markets, certainly MiFID II, which is sort of 17 creeping into the regulatory or sort of the compliance 18 framework of U.S. publicly managed funds is now beginning 19 to really put a crimp on small company research. 20 I'm curious to know if SEC is planning to give 21 any guidance around that or any guidance around 22 investment advisor status. 23 MS. MILLER: So that's a really fun one where I 24 have to punt because I can't speak for what I am doing. 25 I will give you more clarity on what they're doing with 0054 1 their small fund outreach initiative, which is very 2 nascent. 3 So it's just launched this year, and right now 4 my understanding is that they are very much so in the 5 active. Tell us what the issues are. Talk to us about 6 the specific pain points before we come out and own some 7 proposed solutions. 8 And so we are encouraging people to get 9 involved with that. I had an opportunity to jointly 10 attend an event with them last week and to try to start 11 getting feedback about what the issues are that are faced 12 by smaller funds. 13 I think if you look, this morning, I think, 14 everyone when you log into the computer in the morning, 15 you have 20, if not 50, different newsletters or updates 16 that you get, and I woke up extra early so that I could 17 read through those just in case there was anything 18 particularly applicable for today, and lo and behold, 19 PitchBook and the National Venture Capital Association 20 released their first quarter deal results. 21 And I mentioned this morning the statistic on 22 13 percent of capital by deal flow went into the middle 23 of the country if you were to carve out the West Coast 24 and the Northeast. 25 But beyond that, they also pointed out what's 0055 1 happening with venture capital deal flow and more 2 institutional investors pushing further into the maturity 3 cycle of companies. The data is showing that year over 4 year there's a larger gap in earlier stage financings 5 where your institutional capital is moving out of it. 6 And we're looking for angels and smaller funds 7 to step into that space, and they're just not there in 8 the numbers that are needed, and that's just reporting 9 the data as it's come out raw right now. 10 I think that one of the things that's really 11 interesting from the SEC perspective is where is that the 12 marketplace doing things independently of regulation and 13 where is that driven by regulation. 14 And that's something that I don't have the 15 answer to yet, but we are hearing a lot of anecdotal 16 evidence from folks, and we're very interested in 17 learning more on that from our office because we very 18 much so see small businesses and the small business 19 investors as intertwined. 20 And if one of them is moving in one direction, 21 it's going to have an impact on businesses and how they 22 access capital, especially if you create this void where 23 you can't move. If the "Valley of Death," so to speak, 24 if it becomes increasingly wide, fewer companies are 25 going to come out the other end. Fewer are going to IPO, 0056 1 and they're going to make it to full maturity. 2 And that's my thought on it. 3 CHAIRMAN CLAYTON: Actually maybe I can use 4 that to segue into a few general remarks, and then I'll 5 address your specific question, Jeff. 6 First, to all of the members of the Committee, 7 thank you very much for your willingness to do this. As 8 Martha said and I'm sure Commissioners Peirce and Roisman 9 said, it is extremely important. You have identified a 10 number of the issues today that I'll come back to. 11 I also want to say to Martha, Julie, Emerald, 12 Bill and Jennifer, thank you for getting this Committee 13 up and running so quickly and hitting the ground running. 14 Now, to the turn of the business of the 15 Committee, I think we all recognize that a $100,000 16 company is different from a million dollar company, is 17 different from a $10 million company, is different from a 18 $100 million company. 19 And then let's get into the public markets. A 20 $100 million company is different from a billion dollar 21 company, is different from some of the much larger caps 22 we see. 23 Our rules and the way we approach the 24 regulation of capital raising, they need to reflect that. 25 They also need to reflect that in a way that, to Mr. 0057 1 Lee's point, doesn't make it so complex that nobody can 2 access them. 3 We could write pages and pages of rules that 4 would be tiered along the way, but then you'd just employ 5 more and more lawyers and intermediaries, and as we heard 6 this morning from the panel, intermediaries are costly. 7 To the extent we can cut out intermediaries and 8 allow capital to flow where it needs to flow, 9 particularly in the early stages of companies, while 10 giving and maintaining appropriate investor protection, 11 those are the ideas we're looking for. 12 And your kind of boots on the ground feel for 13 where the real issues are, I think that's what we're 14 aiming to receive from this Committee and aiming to 15 respond to. 16 So I thank you for being willing to do this. I 17 really like the way the agenda for this Committee matches 18 up with the agenda that Director Hinman has set for our 19 Division of Corporation Finance, and I look forward to 20 actionable suggestions. 21 So thank you. 22 MS. MILLER: Wonderful. And I think, Chairman 23 Clayton, that's a good segue into talking about, you 24 know, each of you that are here today bring a wealth of 25 experience, and I do encourage our members of the public 0058 1 and everyone to really take a look, and we put the bios 2 on our Website, soon about just the breadth of experience 3 and knowledge that this Committee brings. 4 But based on that, each of you have come in and 5 you have seen the pain points. You know, it's funny. 6 When you've done enough outreach events, I've figured out 7 what question elicits the best feedback, and it's not 8 when you ask just more broad, what would you change 9 necessarily or, you know, what's your least favorite part 10 of the securities laws, because you don't know what 11 you're going to get on that one. 12 But when you ask the question of where's the 13 gray area, where is the gray area, whether you're talking 14 to a lawyer, where you don't know what to tell your 15 client is the way they should approach the rule? 16 Where's the gray area as the issuer where you 17 don't know if, you know, you hit this point where it's 18 clear you can do something over in one lane; it's clear 19 you can do something in another, but that innovative 20 opportunity lies in the gray area in between, whether 21 that is through, you know, creation of new vehicles or 22 offering, you know, development? 23 And so we'd be curious to hear from this group. 24 Where do you see gray areas? Where do you see areas 25 where we need further clarity in the securities framework 0059 1 that we as the Commission can take that feedback and try 2 to start acting on that? 3 So I'll turn that over, and I think this is 4 right time for discussion of the different types of 5 issues that you think that we could take on as a 6 Committee, that we can use to then set our agenda for 7 specific topics that we will dive into. 8 We won't each time have more of open discussion 9 with the Committee, but instead we will try to take on 10 different topics. We would love to know some specific 11 topics that you think would be really fruitful for us to 12 delve into. 13 MR. YADLEY: Tying together a number of points 14 that have already been made and responsive to the 15 Chairman's comment, companies are out there, 16 entrepreneurs who love what they do. That's what they 17 talk about. They live and breathe their idea, their 18 technology, their product, their service, and they talk 19 to everybody about it. 20 So as Youngro was saying, okay, that's general 21 solicitation. We know that. Don't care; they don't 22 know, first, and by the time they get a lawyer, it's too 23 late. 24 So this intersection of what's an offer and who 25 can they talk to. So finders, obviously something that I 0060 1 care a lot about, and mindful of the enforcement issues 2 involved, and happy to have FINRA here because that's 3 also an issue that affects them. 4 But really allowing entrepreneurs to be able to 5 tell their story without worrying about whether they've 6 already violated the law. 7 And I know it touches a lot of points, but I 8 think there's enough discussion that's been out there, 9 and at Small Business Forum and the prior Advisory 10 Committee, and actually the prior-prior Advisory 11 Committee back in '06, we've talked about these things. 12 So I think the composition of this Committee 13 reflects a lot of people who are out there dealing with 14 those problems, and several companies that have survived 15 that and gone public and maybe are happy they've grown 16 through that. 17 So we're happy that you're listening, and I 18 think we will be able to put together some good responses 19 to the concept release and be very constructive in 20 helping you do the right thing. 21 MR. McNEW: To further what Greg and Youngro 22 had said, you know, we heard this morning there's that 23 gap in funding for companies between three and 20 24 million, and I can tell you as a public company CEO, I 25 probably spend 20 to 30 percent of my time with 0061 1 investors, non-deal road shows, conferences, Qs, Ks. 2 It's very expensive. It's prohibitive, and I 3 think we're choking the pipeline of new companies, new 4 innovation. They can start, and honestly, I agree with 5 100 percent, Greg and Youngro and others that have said 6 it. It's expensive, but it's complicated. 7 Entrepreneurs generally have a great idea. 8 They're not, and none of us are in our businesses; we 9 hire a broad spectrum of subject matter experts to help 10 us, but it's very expensive. 11 So I think simplifying -- I think you hit it on 12 the head, Youngro -- is simplifying this. A $100,000 13 business, really it's nothing. I mean, when we became a 14 public company, we were probably 200 million in revenue. 15 Today we're closer to, you know -- well, I've got my 16 earnings release next week. So I'm in a quiet period. 17 (Laughter.) 18 MR. McNEW: But it's more than that. Okay? 19 So when we were a young public company, I 20 continuously heard from portfolio managers that we didn't 21 have enough float. What we're talking about here, you 22 know, anything under 20 million is not much. Don't over 23 complicated it. 24 The beauty of this country is simplification, 25 and it's speed, and speed's a function of trust, and 0062 1 that's how we can outflank and raise great ideas. 2 Investors in our business, and I think I speak 3 for every public CEO here today, a long investor is two 4 years. So we're always having to wrangle with ISS and 5 others, and again, these are my own comments, but it's 6 complicated, but when you think of somebody, long, two 7 years? I mean, that's not long, but it is in their 8 world. 9 So I think to help these younger companies, 10 newer companies, just really I think we ought to come up 11 with some real practical, simple ideas to root out 12 unnecessary regulation. 13 There's balance between investor risk, and 14 there's risk of these companies. They're taking their 15 time, but don't expect a young company, a CEO to be an 16 expert on all of these fields. 17 And I think it may have been you in our closed 18 session, Jeff, talking about just the cost increase from 19 being a private company to being a public company. It 20 goes from thousands of dollars to millions of dollars, 21 and then you've got, you know, audit committees and so 22 forth. 23 So, again, I'll just summarize it. I think 24 Youngro is right on and Jeff's alluding to it. Greg's 25 alluding to it. Simplify this. Nobody knows all these 0063 1 rules. It has taken many of us years to understand this, 2 with counsel, to be somewhat converse in this. 3 So that gap from three to 20 million will kill 4 a lot of great businesses if we don't simplify and allow 5 them to get through that pain, and you're still really 6 small, honestly, if you're under 100 million. 7 So anyway, that's my thought, Bill, and I don't 8 think we have to deliberate for, you know, years on this. 9 I think if we can approach it from that manner, we heard 10 a lot of great panelists this morning, which some are 11 here, to just make their lives a little simpler and 12 balance the risk with an investor. 13 An investor would like almost no risk and great 14 return. Well, so would I. So would any of us. There's 15 a balance in there, but we're not talking particularly 16 large dollars, not in the scheme of our $22 trillion 17 economy. 18 Anyway, thank you. 19 MR. FOX: I agree with everything that's been 20 said, but I think we can't lose sight of what Jennifer 21 said earlier, too. There's a big investor protection 22 piece of this, too. 23 I know I hear a lot of people say that, hey, 24 $20 million is small in our economy, but it can be very 25 big to the people actually investing in that deal, and 0064 1 you know, my guess is that a lot of the things that are 2 in the current regulations are there because something 3 happened in the past, right? 4 And so, you know, to me I do think we have to 5 be mature; we're balanced in the approach because I 6 totally agree with you. I hear all the things that Bill 7 laid out, and I can understand where that all is coming 8 from, but several of them will come with some sort of 9 cost, right? 10 You know, if we raise the limit for 404(b), 11 there is a cost in the accuracy of financial reporting. 12 You know, if we reduce the amount of information 13 investors get, there's a cost to that. 14 Now, I'm not saying that that means that you 15 can't do it, but I do think that as a Committee we need 16 to make sure we weigh both sides of the argument, and 17 that cost can be factored in through a return. 18 Investors say, "I'll take the risk if you'll 19 give me a higher return." Let the market fuel caveat 20 emptor. Let the market help balance this. 21 We're not saying -- I agree with you. We're 22 all investors. I'm the seventh largest shareholder of 23 our stock in the world, and so I share your concerns, but 24 I think there's some balance between three and 20. Maybe 25 it doesn't protect perfectly all the way to 20, but 0065 1 there's got to be something because otherwise I'm really 2 concerned we're going to choke off the new Commission. 3 CHAIRMAN CLAYTON: Yes, let me jump in there 4 with my own views on some of this. 5 Clearly, I hope there's nobody who disagrees 6 with this. The compliance structure the you would have 7 for a multinational one billion dollar company should be 8 substantially different from the compliance structure you 9 have for a one million dollar regional company that's in 10 a growth phase. 11 And we should be recognizing that, and that 12 compliance structure goes from financial reporting 13 throughout because you can't have that kind of barrier to 14 entry for being a compliant company. It's crazy. 15 I'll pause there. Does anybody disagree with 16 that? 17 On the investor side, we have a model now. 18 Look. Our model has worked incredibly well. I've had 19 the luxury of traveling the world to do deals and do 20 private deals and public deals. It's the best model in 21 the world by far. 22 But it's odd to have a qualification system 23 where unless you're an accredited investor, you 24 effectively can't invest. Okay? Maybe that's, you know, 25 your right level of paternalism. We can debate that, but 0066 1 once you're an accredited investor, you can lose 2 everything in one deal. That doesn't make sense to me. 3 Now, you know, that's a pretty bold statement, 4 but I think that's effectively where we are. If you're 5 not an accredited investor, there are ways to invest, but 6 it's so expensive that no one wants your money. 7 And then once you are an accredited investor if 8 you just qualify, you can invest to your heart's content 9 in one deal. I'm not sure that all makes a lot of sense. 10 So maybe we can do something about both of those things. 11 MR. SOLOMON: So on that front, just to extend 12 it a little bit because, you know, it's interesting to me 13 that crowd funding is something that I think we'd all 14 like to see more of because it democratizes. It gives 15 access to exciting companies to those who might not 16 otherwise have it. 17 But when you look at it, those people's 18 ability, the same people's ability to invest even in 19 public companies, you know, the deck is stacked against 20 the smaller retail investor in many ways. 21 And so one of the things we talk about is 22 what's missing for a lot of smaller public companies, 23 microcap companies, is that they used to be dominated by 24 individual investors, and a bunch of people had a really 25 bad experience in the late '90s, and everybody remembers 0067 1 that, and it was really bad for a lot of folks, but that 2 was like 20 years ago, and a lot has changed. 3 And what hasn't come back is the individual 4 investor for a whole host of reasons, and I feel like, 5 you know, there is definitely a bridge here to be had 6 between, you know, sort of saying, hey, we should be 7 doing crowd funding, taking a look at a holistic 8 approach, I think, or harmonization, where we're 9 basically looking at the entire range -- and maybe this 10 is the Committee to do it -- of, you know, microcap 11 companies all the way through to start-ups and say that 12 the regime that enables individual investors in this 13 country to get access, again, private all the way through 14 to early stage public, should be rethought. 15 And maybe there's things that are creatively 16 that, you know, we aren't even thinking about today that 17 might help the SEC to give some guidance on how you can 18 bring back the individual investor to invest alongside 19 professional, sophisticated investors. 20 And I think about the success. Everyone wants 21 it to be successful investments. In many instances they 22 all look the same way. There's a dominant investor who's 23 done a ton of work, and there's a bunch of people that 24 ride the coattails. 25 That happens in almost every deal of any size, 0068 1 and maybe there's an opportunity for us to redefine how 2 deals could look not just through exemptions and Reg. D 3 and all the complex legality, but really if you're 4 putting together a syndicate that mixes high quality 5 institutional investors along with smaller investors, 6 that maybe there's an opportunity to do that and relax 7 rules and think about how syndicates are actually put 8 together to benefit people more broadly. 9 It's just an idea, but I don't know where that 10 falls or if that's the purview of this group, but it 11 seems to me that, you know, we could be addressing both 12 investor protection as well as opportunity to get access 13 to good deal flow. 14 MR. LEE: I think, if I may, and just because 15 we're talking about a crowd funding and I'm supposed to 16 be representing the crowd funding industry, so I think, 17 and I'm speaking as a former lawyer myself, when we talk 18 about investor protection, and that term gets thrown a 19 lot, there are some assumptions that are being made, I 20 think, that are just not true in today's world. 21 So, for example, like the Chairman said, if 22 you're rich you can lose money. If you're not rich, you 23 shouldn't be investing anything. 24 Especially for those of you with children, 25 let's say, in college and early 20s, I don't think they 0069 1 would invest in the same things you would invest, right? 2 And would you say that they are stupider than you or no 3 less than you? Maybe in some cases, but probably not in 4 other cases, right? 5 So I think that the idea of, for example, how 6 do we protect investors, in my opinion it should be 7 fundamentally reshaped. Like so anecdotal evidence, 8 we're based in Houston, Texas. We've done about $7 9 million of crowd funding campaigns in Houston. About 70 10 percent of the capital invested in that, in Houston 11 businesses are from literally the Houston metro area. 12 Right? If you're from New York, why would you 13 ever invest in a Houston business? You just don't care, 14 and that's our theme of invest local everywhere, is the 15 idea that when we talk about it, for example, when Bill 16 said 100 and 10 million in regulation crowd fund, yes, 17 that's nothing in the world of capital markets. That's 18 $100 million that probably went to cities and businesses 19 that would never ever otherwise have that capital. 20 And the flip side, are we saying as an industry 21 if those are not crowd investors, they didn't know 22 better? That's just not true, right? Like somebody in 23 Houston knows exactly that block is happening. I would 24 have to have a bar in that location or with an alternate 25 location. 0070 1 The second point is technology, which is 2 another, as he says, tons of communities about that, but 3 the way we perceive trust is very different, right? For 4 myself, I don't walk into a fancy building and say, "Oh, 5 this is a fancy building and really expensive paper. I'm 6 going to trust that person." No. 7 I value a technology based on the interface, 8 the streamline, and that's how every single millennial 9 thinks about it. 10 So when we try to incorporate this technology 11 into online capital formation, which is basically 12 regulation crowd fund in Reg. D, 506(c), give that some 13 credit, right? 14 I mean, I think all of us, even though it's not 15 in the SEC laws, you can look at two Websites and know 16 one is a trustworthy company and one is probably not, and 17 I think those elements, kind of to summarize, the 18 incentive isn't aligned or at least as the regulations 19 are put, the incentives that the law is providing for 20 participants isn't aligned to the reality of who's 21 participating specifically in those transactions. 22 And maybe that's generational at least to some 23 degree. Maybe it's just people are changing where some 24 countries become more diverse, but I do think that 25 fundamentally the assumptions that we are thinking of 0071 1 when we say investor protection aren't necessarily 2 reflective of the reality that I think we're living in 3 today. 4 MR. SEATS: I have a comment from the phone. 5 Sorry to break in. It's hard to raise your hand from 6 this point. 7 This is Jason Seats from Techstars. 8 So I think it's a really interesting topic, and 9 I appreciate a bunch of the perspectives, and one thing 10 I'll react to quickly, I think, Martha, it was you that 11 brought up sort of the question of whether or not some of 12 the capital movement that's happening in the private 13 side, if those are market forces or if those are related 14 to regulatory, and I think a lot of it actually is 15 market. 16 It's interesting, some of the dynamics and the 17 way that the venture capital world works. 18 But then sort of the bridge to talking about 19 investor protections, I think, is really an interesting 20 one, and I wonder, and maybe this could be something to 21 clarify a little bit, is the focus of this group. How 22 much of it is based on or faced towards the small 23 business need versus faced towards thinking about what 24 the investors' experience is or access is in the capital 25 markets. 0072 1 I mean, one of the things that was exciting to 2 me about sort of being a part of this is that I do feel 3 that the retail investor is losing out on the opportunity 4 to invest in growth because it's staying private now. 5 And I wonder how much that falls on the agenda for us to 6 think about, and to the extent that it does, I think 7 there is a lot of work to do there. 8 And then just one point I'll raise on the 9 investor protection side. I guess maybe I'll make this 10 quick point, which is I wonder how much we're helping 11 protect investors if the way we're protecting them is 12 preventing them from investing in growth. 13 So I wonder if this paternalism is potentially 14 backfiring in some cases. 15 And then one other related item is, you know, 16 being a fund manager, raising investment funds to put 17 money to work, we don't talk to retail investors to put 18 money into funds, and so when you're thinking about these 19 protections, it's easy to picture someone investing 20 directly into a start-up by themselves, but I think 21 probably the safest way to do it is for them to put money 22 in the hands of a professional who's aggregating that 23 money. 24 And right now the limitations around how that 25 money can be aggregated makes that not a feasible path 0073 1 for most funds. 2 CHAIRMAN CLAYTON: Let me just chime in. It's 3 Jay, and I have to go to another meeting. 4 But I want to say that retail access, whether 5 direct or indirect, through a professional intermediary 6 is something that I know is important to me. I've talked 7 to Commissioner Peirce and Commissioner Roisman about 8 this as well. 9 It's important to all of us that our retail 10 investors have an opportunity to participate in the 11 growth stages of companies, and since the growth stages 12 of companies are largely happening outside of our public 13 capital markets, we need to find a way to facilitate 14 that. Otherwise the wealthy continue to get wealthier, 15 while the retail investors have fewer opportunities. 16 In terms of protecting those people in these 17 types of businesses, it's been a theme, but I want to 18 make sure that I state it because I believe it very 19 clearly. They get a lot of protection when the interest 20 of the retail investor is aligned with management and 21 aligned with the institutional investor, when they're in 22 the same share class, when the fees are mostly the same, 23 when the incentives are mostly the same. 24 Where I worry is when the retail investor can 25 get primed, to use the pejorative term, or otherwise 0074 1 disadvantaged by the people who have more information or 2 more capital. 3 So as we look for creative solutions or new 4 ways to approach this, let's think about alignment of 5 incentives of management, institutional capital, and 6 retail capital, and how we can align those incentives in 7 a way that doesn't create a whole lot of drag for the 8 retail investment. 9 Thank you. 10 MS. MILLER: Thank you. 11 MS. HANKS: Just to go back to your original 12 question on the gray areas, I'd like to say 12(g) is 13 probably one of the grayest. The point at which a 14 company has acquired certain assets, certain number of 15 shareholders, holders of record, and the pretzels that 16 those of us who are advising companies in the early 17 stages have to twist ourselves into to say can we use a 18 custodian, for example, which the answer is yes, but only 19 if the only reason to use the custodian was not to avoid 20 12(g). 21 Some kind of clarity in this area would be 22 great. I mean, my own objective would be a company 23 should not be forced into '34 Act registration until it's 24 ready, but you've got a whole range of people 25 interpreting those rules in very different ways at the 0075 1 moment, and some clarity would be great. 2 MS. MILLER: Anyone else have any further 3 topics or areas they wanted to delve into? 4 MR. TORBERT: Martha, if I may. 5 MS. MILLER: Yes. Thank you, Hank. 6 MR. TORBERT: There are two things that are 7 important to a lot of the folks from the Gulf area, one 8 of which is, which I think we've alluded to as well, 9 making sure that we increase our local investing in 10 certain markets and ecosystems and doing whatever we can 11 structurally to encourage that, whether it's folks who 12 are outside of that region or within. 13 So the whole idea that Mr. Lee brought up about 14 the Austin market, if there's a way to create the same 15 sort of interest in investment in certain markets, we 16 should try to do that. 17 Secondly, I'd also like to have some focus on 18 better managing intermediaries. I know exactly why they 19 put the investment advisory documentation, rules and 20 regs. there, but you still have a lot of nefarious people 21 out there who go to small businesses and promise the 22 world, that I'll do this or I know that or I play golf 23 with such-and-such, and so on, who do incredible damage 24 to small businesses because these companies are relying 25 on these people to raise capital, save their business, 0076 1 restructure the business, whatever it is. 2 But better management and regulation are, quite 3 frankly, punishment, severe punishment for people who 4 mislead companies. 5 That's it. 6 MS. MILLER: Very helpful. 7 Just to ask a follow-up question, in terms of 8 the importance of encouraging local investments, that is 9 one thing. I mean, the statistics bear it out that 10 people, you know, operate on a local level both 11 psychologically as well as investing, and they feel 12 affinity to local businesses. It's easier to be involved 13 with them, to sit on the boards, and we heard about that 14 this morning. 15 But when you have a board member or an investor 16 who would need to fly out, that may change their 17 calculation. 18 What do you think that we need to do from a 19 regulatory perspective to increase opportunities for 20 greater investments, recognizing that most of that 21 investment capital is deployed locally? 22 MR. TORBERT: If I may, there are two ideas, 23 one of which is actually -- so quick disclosure. The 24 owner of our company is 87 years old. He's like a second 25 father to me, and we spend many hours discussing the 0077 1 issues he's seen over time as he's gotten to where he is 2 now, one of which he always talks about is, in fact, 3 artificially incentivizing people to invest in these 4 markets. 5 I don't care whether it's tax incentives, I 6 don't care, whatever works, but also talking to our 7 colleagues with regards to banking so that banks, too, 8 see real value in investing in these businesses. 9 Back in the day, you could put your suit on and 10 you go to your local little bank, and you talk to the guy 11 and say, "Hey, this is what I expect for the crops this 12 year. This is what we're doing," and those people 13 actually understood their local market. Their job was 14 partially to help grow that market economically. 15 That has been lost with large banks. They're 16 looking for customers and deposits. They're not looking 17 to be value added stakeholders as many of us are sitting 18 at this table. 19 And so if there's a way to incentivize banks as 20 well, more than just incentivize, strategically 21 encourage them to support these local businesses and 22 other functions that we can use the government, too, to 23 support, I think you can encourage people within certain 24 markets to put more money to play. 25 MR. LEE: I think just on that though, I agree 0078 1 with you 100 percent. I know SEC isn't the regulator for 2 banks, but it's directly related, especially for us. 3 We work with a lot of small businesses like 4 restaurants, bars, gyms, not tech businesses, not any 5 businesses that VCs would invest to, and that's I would 6 say whatever, 95 percent-plus of all small businesses in 7 U.S., right? 8 And the reality is they need that. They need 9 bank capital because it's their family business. They're 10 not trying to grow it to something. They want income to 11 send their kids to college. 12 If the banking gap is there and the big banks 13 are bigger -- the irony of the Great Recession, they're 14 bigger than ever -- that's why businesses come to us, is 15 I can't get a bank loan, right? And I've got merchant 16 cash events calling me a million different ways. I've 17 got alternative lenders giving me, you know, income or 18 whatever, loans that are 100 percent interest rate or all 19 of the above. 20 So I don't think we need to create like a 21 completely new solution, but for example, regulation 22 crowd funding, we've been using it as a debt crafting 23 product, and other platforms are starting to do so as 24 well. 25 But for example, the regulation crowd funding, 0079 1 the underpinning was the assumption that it would be used 2 for equity raises for mostly tech companies, I assume. 3 So things like that I think are sort of easy wins, 4 potentially to say this capital potentially when 5 structured under the regulations are clearly, you know, 6 correct. 7 I think a lot of local platforms and local 8 businesses, local investors would love to do that because 9 on the flip side of non-crowd investors, I don't maybe 10 feel comfortable investing in a crazy idea that might be 11 successful, but you know, it's a long shot versus here's 12 a cash flowing gym, and I'm going to get 12 percent 13 interest on my money. That's a very attractive 14 investment opportunity for a local investor, local 15 community member who wants to support their community as 16 well. 17 MR. GRAHAM: I wonder how the facts would bear 18 this out, but it seems to me that, you know, one of the 19 issues with respect to getting more people to invest 20 locally kind of goes back to our paternalistic approach 21 to who can and who cannot invest. 22 I think oftentimes you have in these smaller 23 communities people that are doing just fine for purposes 24 of that community. Maybe they couldn't afford a house in 25 the middle of San Francisco, but that really shouldn't be 0080 1 the focus. That really shouldn't be kind of the defining 2 factor. 3 And related to that is what we've already 4 talked about in terms of the definition of accredited 5 investor. That plays into this as well. 6 MR. YADLEY: Just picking up on accredited 7 investor, that's something that there's lots of 8 information out there, and I know that will be part of a 9 concept release, but that's a way that I think you can 10 structurally maybe, in addition to the financial tests 11 that are there now, and it was mentioned this morning, 12 you know, people who can understand what they're 13 investing in. 14 And I shared at lunch when we were just 15 chatting working on a deal now where all the investors 16 are doctors, and it's expansion of a medical practice 17 group, and it's risky except that these doctors 18 understand that risk because it's what they do, and yet 19 they have some junior people in their practices who are 20 not yet accredited, and so they're not going to be able 21 to invest. 22 MS. MILLER: Catherine. 23 MS. MOTT: So I think the HALOS Act, if I can 24 go -- or not the HALOS Act. It's another bill that I 25 can't remember now. It recently was presented to the 0081 1 Senate Finance Committee, and testimony was about how to 2 expand that definition, how to expand sophistication or 3 even have some kind of a qualification for accredited 4 investor. 5 The other thing I wanted to offer here, there's 6 two things I was thinking about as I was listening to 7 everybody. One is, you know, I've heard incentives for 8 bringing more investors into the marketplace, you know, 9 and it's not something that SEC can do, but it's 10 something that state governments can do. 11 And while we're out there talking about, you 12 know, the Small Business Advocacy Office, you can 13 obviously offer that there is good data that shows that 14 more angels come out of the woodwork when there is a tax 15 credit. 16 Ohio is a good -- there's 22 states that have a 17 tax credit. Ohio has great data around what they had, 18 the kind of angels that existed prior or the number of 19 angels that existed prior and after the tax credit, and 20 the number of jobs they created, and the number of 21 companies they invested in. 22 Now, it restricted them to Ohio, which meant 23 for us, me in Pittsburgh, I could coinvest in their 24 companies, but they couldn't syndicate and coinvest in my 25 companies in Pennsylvania, although we were like, you 0082 1 know, 15 miles from each other. 2 So that's one. That's one. Second is I heard, 3 I think Terry mentioned it and someone else, about 4 everyone heard about that gap, that three to $20 million 5 gap for those. The tech companies that are out there, 6 they need to scale, but they can't find specifically, you 7 know, that. The number of funds that exist in that that 8 are like 100 million or less to get that three to 20 9 million are far and few between. 10 And I think that's a market factor, you know. 11 There aren't incentives or rewards for institutional 12 capital to invest in those funds, and so I'm not sure 13 that this Committee can do anything about that, except 14 for one thing, is we used to have liquidity and, you 15 know, be able to take companies public in a smaller 16 market. There used to be a smaller marketplace where 17 companies could go public. 18 But that doesn't exist now. If you aren't a 19 company that has a valuation that's in the billion 20 dollars, you cannot go public and expect to make a 21 significant amount of money and get the return on 22 investment that you have promised your investors that 23 you're managing the money for. 24 So those are two things I thought about. 25 MS. MILLER: And I think that as you bring up, 0083 1 we've heard a couple of different points. You bring up 2 tax credits, which, you know, certainly falls outside of 3 what we're doing, but I think it goes to the broader 4 point and actually harkens back to what Youngro started 5 with. When you talk to a company, they're not coming in 6 thinking about, well, I'm really excited about this 7 specific regulatory exemption under which I'm going to 8 raise money. 9 They're raising money, and in the same way, 10 when we go out and we meet with businesses, they don't 11 see us as just the SEC. In some ways we are SEC, we're 12 White House, we're Treasury, we're SBA. We're just like 13 tell me what you can do to help small business. 14 And so one of the things that our office is 15 prioritizing this year is collaborating across the 16 federal government with those who are working on small 17 business and making sure that we are working together 18 because the issues don't exist in a vacuum. 19 When you tweak something with one agency, it 20 has ripple effects over into what policy, you know, 21 impacts you're seeing in another. And so I appreciate 22 you bring that up. That is something that while it does 23 fall outside of what we can do as a Committee, it is 24 important to be aware of the impact of market forces of 25 other regulators, both state and federal. 0084 1 Yes, Carla. 2 MS. GARRETT: Hi. I would just add that I 3 think it is very important for companies -- various ways 4 that they can get money, and it's not always just by 5 going to the markets and raising capital and issuing 6 equity or debt or by going to a bank and getting a loan. 7 But you know, I have even learned over the last 8 few years how many small business resources and programs 9 there are out there and also how many states' incentive 10 programs there are out there. 11 And sometimes for my companies that come to me 12 in the first stage, maybe the best thing isn't always 13 just to go and get investors in the company, but make 14 sure that those companies understand that there's a lot 15 of other vehicles, too. 16 And I'm not sure that that is generally 17 available information, and so that would be one thing 18 that I would think might be useful for companies, small 19 businesses to know as you're stating. 20 Another thing I just wanted to talk about was I 21 really latched onto when you guys have talked about the 22 patchwork of exemptions, and I will say as somebody 23 that's been a corporate securities lawyer for 20 years, 24 wow, they're hard to understand. 25 And so when you put them all together, it sure 0085 1 will be nice to see how they're harmonized, and I look 2 forward to providing, you know, input on that because I 3 do think it has become quite a patchwork of different 4 exemptions. It would be very hard for an investor or a 5 young company to understand those exemptions if 6 securities lawyers have trouble understanding them. 7 And the last thing I would just raise is I'm 8 not sure we've talked about yet a liquidity for employees 9 or other people in private companies, and that's a 10 question I get a lot with my private companies and people 11 that have been employees for a long time, have options, 12 have restrict stock, but there has not been a liquidity 13 event yet, and what can they do? Should they exercise 14 the options? Can they sell the stock? 15 They don't even know that securities laws exist 16 for the most part, the employees, and so educating people 17 and understanding if there are different ways that we can 18 provide liquidity for people in private companies. 19 MS. MILLER: I think a secondary market 20 liquidity is something we haven't yet touched on today, 21 but it is absolutely critical because as you put money 22 in, the next question is when can you take it out or when 23 is it coming out, and thinking that you can only think 24 about the investment piece without the how do you 25 actually realize the return on investment, everyone loves 0086 1 to talk about ROI, but when do you actually get to see 2 that dollar amount? 3 That's a critical question, and I would welcome 4 any thoughts that those in the room have right now in our 5 Committee, suggestions or topics that we could take up in 6 that space more specifically. 7 More to come. How about that? Jeff. 8 MR. SOLOMON: Well, there's been a lot of work, 9 just to answer your question. There's been a lot of work 10 around venture exchanges, and I mean, just on a personal 11 level, a personal observation is that so much work went 12 into venture exchanges and the idea of creating venture 13 exchanges, particularly around Reg. A two or three years 14 ago, and there was all of this legislative furor, you 15 know, positive legislative furor actually, in trying to 16 create this small company exchange area. 17 A lot of money was spent. A lot of venture 18 capitalists looked at it. It went absolutely nowhere 19 because sadly, most companies don't want to sit at the 20 kids table. 21 And so I'm not sure. You know, I've burned a 22 fair amount of calories trying to figure out if there's a 23 way to create something that's attractive, you know, like 24 used to be the NASDAQ small cap or the NOI market or AIM, 25 and unfortunately a lot of investors just look at that in 0087 1 the public market, and they say, you know, they had bad 2 outcomes across the board because it's adverse selection. 3 And so there's some structural impediments to 4 that. I mean, we can certainly look at it, but you know, 5 I think a lot of you have looked at that, and we haven't 6 gotten there. 7 The other thing I would say is that I think, 8 you know, it's going to be the -- the charge of this 9 Committee to look at everything that has yet to be done, 10 and I think that's an important part. But we should 11 recognize the things that have been done that worked and 12 see if we can extend on it. 13 So I want to sort of pick up on that theme. I 14 will just say, you know, the number of companies that 15 have used the EGC exemption since the Jobs Act is really 16 actually tremendous when you think about it. You know, 17 I'll just say we look a lot at biotech companies, and 18 there's a reason I think why biotech actually works. 19 Most biotech companies go public, and they 20 raise between 75 and $125 million, and they sell about 15 21 or 20 percent of the company. And the reason it works is 22 because, you know, that ecosystem is relatively small. 23 The investors, everybody knows everybody. 24 And when they work, you probably get, you know, 25 multiples of return on your investment as opposed to 20 0088 1 or 30 percent returns on your investment. So there's a 2 reason why it works for small companies. 3 But to be clear, there are about 4,100 or so, 4 4,200 public companies in the United States today, which 5 is about half of what there was in 1998. But 300 of 6 those or 400 of those companies are health care companies 7 that have come public in the last six years. And 300 of 8 those 400 are biotech companies. 9 And so it's been, for that particular sector, 10 it's been remarkable what's actually happened in terms of 11 opening up access, and a lot of individual investors 12 participate in that. They do. A lot of them participate 13 in the public offerings at reasonable valuations because 14 there's almost always a carveout. Somewhere between ten 15 and 20 percent of almost every public offering goes to 16 retail somewhere. 17 And so there is that. That element of it is 18 working in that sector. Now, there's a lot of reasons 19 why it might not work in other sectors, but the fact of 20 the matter is if we find the right mix, there's no 21 question that it can work. 22 And I think, you know, a lot of us have been 23 trying to figure out how do we get that to work in other 24 sectors. How do we get that to work for other things? 25 And I will just say it could work. At the end 0089 1 of the day if a lot of the private people who fund 2 companies privately and carry them all the way through 3 were less selfish, but you know I don't know that that's 4 the purview of this Committee. 5 They could take their companies earlier if they 6 wanted to. They've chosen not to, and then we can 7 certainly address that, but I think it would be remiss if 8 we didn't look at at least one model that since the Jobs 9 Act and since the good work that's actually happened in 10 terms of clarification around rulemaking here at the SEC, 11 it's worked, and that's something if we can pick up on 12 that theme would be really helpful. 13 COMMISSIONER ROISMAN: So, again, thank you. 14 This has been a great discussion just because I think 15 you've laid out a lot of the issues that are important to 16 you and that you've been in your expertise in your 17 practice. 18 I think one of the best things about this 19 Committee is you guys just have such a diverse set of 20 experiences and also touch different places with I'd say 21 the emerging growth company or, you know, emerging 22 privately held small business, I think is the text of the 23 statute -- life cycle. 24 And so some of you guys have seen things that 25 have worked for, you know, companies that are really, 0090 1 really nascent to the point where some of you have seen, 2 you know -- you know, public markets, and frankly, we 3 have COs here from that. 4 It would be real interesting to see if you 5 think back about through the different stages or for your 6 particular expertise what you think has worked really 7 well and what you've see that's given you pause. Because 8 it's just as important I'd say to say identify things 9 that you think could be bolstered, as Jeff was saying, 10 but also things that have, you know, raised concerns for 11 you. 12 And someone asked earlier about, you know, how 13 does investor protection fit in all of this. It fits 14 everywhere. Everything we do, you know, has to have 15 investor protection, but we're also tasked with 16 facilitating capital formation. 17 So to me one of the things that you guys can 18 provide is saying, look, there's been a concern about 19 access potential for investor protection, but really, you 20 know, it can be addressed or mitigated through these 21 following steps. 22 And if we get that feedback, we can hopefully 23 calibrate accordingly, or you can say I've seen, you 24 know, to Hank's point, there's certain people who are 25 intermediaries that are really bad for companies, and 0091 1 they're providing bad advice. 2 How do we kind of ensure that people are aware 3 of that? And ultimately, you know, they're prevented, 4 hopefully, from engaging with these. 5 But because you guys touch upon so many 6 different places, it would be really interesting to me to 7 see kind of in the evolution what you think would be the 8 most helpful. Because, as I said, you come from 9 different places and different perspectives. 10 To your point about, you know, secondary market 11 liquidity, I do think there was, you know, a lot of 12 interest in venture exchanges. I'm not sure that's the 13 answer or not, but I do think it's important for us to 14 kind of tackle secondary market trading because I think 15 it's not just enough to get capital raised. You need to 16 have some kind of exit through some kind of liquidity 17 event. 18 And if we make it less costly for investors to 19 do so, or if we enable companies to have a better way of 20 reaching a liquidity moment, I think that will increase 21 the ability for companies to grow, which is ultimately 22 what everyone wants. 23 So I encourage you to kind of take that 24 framework, and I think Bill also said, you know, we're 25 trying to kind of reengage our system based upon where 0092 1 you are in the life cycle of a company, and I think it 2 would be really helpful to kind of get the perspective of 3 what's best for each stage of that cycle. 4 But, again, I think, you have great ideas. I 5 could already tell that you guys are working off each 6 other's, you know, discussions, and I think I look really 7 forward to hearing more about what you think could 8 actually be really helpful to these markets and to these 9 companies. 10 MR. LEE: I apologize for speaking so much, but 11 because you asked the secondary trading and we're again 12 representative platform. So regulation platform, there's 13 no second exchange, and I think this I kind of, again, 14 the reality, which is if you're raising capital less than 15 a million dollars, I mean, and generally no matter what, 16 you're an early mover if you're investing in regulation 17 crowd funding deals. 18 So I don't think anybody's looking at it as a 19 stock market, for example, where I'm going to invest in 20 this company today and, oh, my God, I wish I have, you 21 know, ability to get out in a year, right? 22 So I think the reality is let's just call it 23 the sub-million dollar raises. The emphasis on second 24 trading, in my opinion, as a platform operator for the 25 last five years, is probably less than a priority list 0093 1 because if you don't want to do it, people just don't 2 invest. People that are participating in it are doing it 3 with the expectation of one day hoping to do well. 4 The adverse effect of trying to fit in a 5 secondary trading mechanism for a sub-million offering is 6 now you have these disclosure requirements that even if 7 you raised $50,000, you have to publish an annual report 8 of your cap table and debts and equity and whatever and 9 lawsuits, all of it, on the public. 10 So a small business owner who raised $50,000 11 now has to put their entire life on blast to the world to 12 see, right? 13 So that's an example of why the emphasis on the 14 principal secondary trading, which I agree is important, 15 perhaps might not be best forced into a sub-million 16 dollar offering. 17 COMMISSIONER ROISMAN: And that's perfect. I 18 mean, as I said, your perspective can provide really good 19 insight to, I'd say, folks that are trying to raise a 20 certain amount and an earlier stage in life. 21 I'm also interested in crowd funding. We talk 22 about equity, but debt is another important instrument 23 for capital raising, and you know curiously for you guys, 24 you know, do you think debt raising through crowd funding 25 is working well? 0094 1 MR. LEE: I mean, so there's just -- kind of 2 overly generalizing, of course, to make a point -- but 3 it's so early, right? It's so premature that there is 4 not even the right actors, in my opinion, in the industry 5 because there's no incentive, right? 6 So every single regulation crowd funding 7 platform I would venture to say -- I'm sure all the COs 8 will agree with me -- nobody's making a profit. All 9 right? Nobody's making money. Everybody did it because 10 they believe in the idea, and folks like myself. Like I 11 gave up an eight-year career in a private law practice 12 because I want to do this. 13 I didn't want to work for a massive private 14 equity firm. Like I wanted to do this, but financially I 15 think this as Jason's point or maybe Hank's point as 16 well. The incentives aren't aligned to reward 17 participants to try to make this work. 18 And in fact, I guess if the law were agreed, 19 big banks and Wall Street firms and maybe independent 20 broker-dealers would love to get into regulation crowd 21 funding, but they're not because the math doesn't work 22 out. 23 And I think it's things like, you know, 24 secondary trading issues and, you know, offering or 25 accounting issues, legal issues. Right now there's no 0095 1 easy answer to this, but I think all of at least the 2 platform operators would agree, in my opinion, that the 3 risk-reward analysis of running a platform for small 4 offerings is not there. 5 And so I understand this is probably biased 6 from a prospective platform operator, but the incentives 7 aren't aligned to help businesses operate versus long- 8 term reward of running that kind of business. 9 MR. SEATS: I'll react quickly to the question 10 of secondary. From our perspective, I mean, we manage 11 venture funds, investing very early, with the phenomena 12 of sort of later state investment, you know, getting 13 mature companies that aren't going public as much. 14 The average life cycle of a venture fund is 15 extending. It used to be ten years, and it's 12 years, 16 and now a lot of LTs picture 15-year time horizons, and 17 that is an impact on early stage investing because when 18 we go out to the market to raise a venture fund and we're 19 investing ahead of those big guys, the question we get is 20 how long is the time horizon going to be. 21 And so a lot of times that liquidity comes in 22 the form of secondary, and so thinking about how to make 23 secondary be a less friction-ful way to liquidate 24 positions that we've already held for potentially eight 25 years at this point, could be useful. 0096 1 MS. MILLER: Thank you, Jason. 2 I think continuing on, I think we could wind up 3 just delving into further different rabbit holes. What I 4 think we've done is really teed up a number of different 5 topics that go in a lot of different directions for how 6 the system could potentially be benefitted from some 7 policy recommendations and changes that could ultimately 8 be implemented. 9 And so with that, I think it's a lot of food 10 for thought for each of the Committee members to take 11 away and to reflect on so that when we do come together 12 next time, we can really start delving into the substance 13 of how do we want to tackle certain issues and approach 14 different recommendations that could be made where we 15 think it's the right time and we can make an impact with 16 a specific area. 17 Before we do wrap up, we do need to finish with 18 a bit of administrative housekeeping by adopting the 19 bylaws, which each of our Committee members received as a 20 proposed draft prior to today. 21 And these look very similar, if you have looked 22 at them, to the prior bylaws that were proposed for and 23 adopted for the prior Advisory Committee on Small and 24 Emerging Companies, as well as the other Advisory 25 Committees that are here at the SEC. 0097 1 So I wanted to ask if anyone had any specific 2 questions or comments on the draft. 3 MR. GRAHAM: I have one. I guess it's a bit of 4 a nit. 5 MS. MILLER: Okay. 6 MR. GRAHAM: And that is do we really want to 7 talk about Robert's Rules of Order. 8 MS. MILLER: A good nit. 9 MR. GRAHAM: I mean, I personally, I'm not sure 10 who knows Robert's Rules of Orders. 11 MS. MILLER: We hope Carla. 12 (Laughter.) 13 MR. GRAHAM: She doesn't want to know. 14 MS. GARRETT: I actually when I read these 15 bylaws last night, I was just like, oh, do I need to go 16 read Robert's Rules of Order again, which I know I did 17 about 20 years ago. 18 I would welcome your thoughts on that as the 19 previous chair of this Committee. 20 MR. GRAHAM: I think it's unnecessary. I think 21 that the Chair can do a good enough job in structuring 22 and managing the meetings. I don't anticipate this being 23 an unruly group. So I think it's just a matter of how 24 best to manage the room, and I don't think you need to 25 get bogged down in these kinds of technicalities in order 0098 1 to do that. 2 MR. YADLEY: Yeah, the last time I had a 3 Robert's Rules of Order issue it was because there was an 4 unruly member, and he read them, and he came and co-opted 5 the meeting, and we figured a way to get him off the 6 Committee. 7 (Laughter.) 8 MR. GRAHAM: Yeah, I don't think anybody looks 9 at them anymore, and I think we've elected a great Chair 10 and a Vice Chair, and I would support not including them 11 unless we have to, do you think? 12 MS. DAVIS: No, you don't have to at all. This 13 is a provision that's in the Investor Advisory Committee 14 bylaws, and in moving it over here, we thought if there 15 were to be some kind of dispute, then at least you'd have 16 a guide to go back to to figure out how to resolve it. I 17 don't think -- 18 MR. GRAHAM: But if you don't have that, then 19 it's up to Carla to resolve it. 20 MS. DAVIS: Then I think she's way better than 21 Robert. So. 22 (Laughter.) 23 MS. DAVIS: Whoever Robert was. 24 MR. SOLOMON: I definitely vote for Carla. 25 MS. MILLER: All right. 0099 1 MR. McNEW: Martha, I just had one. 2 MS. MILLER: Yeah. 3 MR. McNEW: Again, it's a little bit of a nit. 4 The notice of the meetings, is it possible to give us 5 notice more than two weeks in advance? 6 MS. MILLER: We will endeavor to absolutely do 7 that. 8 MR. McNEW: I have to give my board a year's 9 calendar, and I'm on four other boards, as you guys are, 10 and that would be helpful because we're all busy. 11 MS. MILLER: So that is statutorily mandated, 12 that time period, but we will hope that that is the 13 minimum, which we hope to exceed and exceed expectations 14 with advanced notice for meetings going forward. 15 So certainly grateful to everyone for working 16 within the very short time period for today's meeting, 17 and we will hope to have a longer period of time going 18 forward. 19 All right. Carla, as our Chair, would you like 20 to call a motion on the bylaws to wrap up the meeting? 21 MS. GARRETT: Yes. Thank you very much. 22 I'd like to call a motion on approving the 23 bylaws and operating procedures with the deletion of 24 Section I, which would be Robert's Rules of Order, and so 25 the bylaws would be the same bylaws with that deleted and 0100 1 J becoming I. 2 And do I have somebody to make that motion? 3 VOICE: So moved. 4 VOICE: Second. 5 MS. GARRETT: And all in favor? 6 (Chorus of ayes.) 7 MS. GARRETT: And all opposed? 8 (No response.) 9 MR. YADLEY: As the Secretary, just the people 10 on the phone, could you two please say aye so we can 11 record it? 12 MS. PATODIA: Yes. 13 MR. SEATS: Copy. 14 MR. YADLEY: And Mike? 15 MS. PATODIA: Aye, aye. 16 MR. YADLEY: Great. Thanks. 17 MS. GARRETT: Okay. So the bylaws as we've 18 amended them have been approved. Thank you. 19 MS. MILLER: Wonderful. We've done something 20 productive today. Congratulations, Committee, but more 21 importantly, we have laid out a framework for really 22 fruitful discussions going forward and a very actively 23 engaged Committee. 24 The SEC is certainly looking to you to be a 25 powerful voice for small business and to use the very 0101 1 insightful experiences that you have to date to improve 2 our capital formation landscape. 3 With that our meeting is adjourned, and we will 4 look forward to our next meeting together. 5 Thank you all for being here today and 6 participating remotely. Thanks, all. 7 (Whereupon, at 3:08 p.m., the meeting was 8 concluded.) 9 * * * * * 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0102 1 PROOFREADER'S CERTIFICATE 2 3 In the Matter of: SEC SMALL BUSINESS CAPITAL FORMATION 4 ADVISORY COMMITTEE 5 File Number: OS-0506 6 Date: Monday, May 6, 2019 7 Location: Washington, D.C. 8 9 This is to certify that I, Christine Boyce 10 (the undersigned), do hereby certify that the foregoing 11 transcript is a complete, true and accurate transcription 12 of all matters contained on the recorded proceedings of 13 the meeting. 14 15 _______________________ _______________________ 16 Proofreader's Name) (Date) 17 18 19 20 21 22 23 24 25 0103 1 REPORTER'S CERTIFICATE 2 3 I, Kevin Carr, reporter, hereby certify that the 4 foregoing transcript is a complete, true and accurate 5 transcript of the matter indicated, held on 6 __5/6/2019___________, at Washington, D.C., in the 7 matter of: 8 SEC SMALL BUSINESS CAPITAL FORMATION ADVISORY COMMITTEE. 9 I further certify that this proceeding was recorded by 10 me, and that the foregoing transcript has been prepared 11 under my direction. 12 13 14 Date: 5/6/2019 15 Official Reporter: Kevin Carr 16 17 18 19 20 21 22 23 24 25