0001 1 U.S. SECURITIES AND EXCHANGE COMMISSION 2 3 4 5 6 MEETING OF THE SEC ADVISORY COMMITTEE 7 ON SMALL AND EMERGING COMPANIES 8 9 10 11 12 13 14 Wednesday, December 17, 2014 15 9:30 a.m. 16 AMENDED: 1/5/2015 17 18 19 20 21 22 23 24 U.S. Securities and Exchange Commission 25 100 F Street, N.E., Washington, D.C 0002 1 PARTICIPANTS: 2 3 Mary Jo White, Chair 4 Commissioner Luis Aguilar 5 Commissioner Daniel Gallagher 6 Commissioner Kara Stein 7 8 Luis Aguilar 9 Charles Baltic 10 John Borer 11 Dan Chace 12 David Certner 13 Julie Davis 14 Daniel Gallagher 15 Stephen Graham 16 Shannon Greene 17 Sebastian Gomez 18 Rachita Gullapalli 19 Sara Hanks 20 John Hemphill 21 Keith Higgins 22 Marianne Hudson 23 Christine Jacobs 24 Richard Leza 25 Sonia Luna 0003 1 PARTICIPANTS (cont.): 2 3 Catherine Mott 4 D.J. Paul 5 Timothy Reese 6 Javier Saade 7 Michael Seaman 8 Kara Stein 9 Timothy Walsh 10 Mary Jo White 11 Gregory Yadley 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0004 1 C O N T E N T S 2 PAGE 3 Welcoming Remarks and Introductions 5 4 Background on Accredited Investor Definition 5 from SEC Staff 44 6 Presentations and Q&A on Accredited 7 Investor Definition by Marianne Hudson 8 and David Certner 65 9 Committee Discussion of Accredited Investor 10 Definition 129 11 Discussion of Next Steps 181 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0005 1 P R O C E E D I N G S 2 MR. GRAHAM: So why don't we get started. I 3 think it's about 9:30. I assume we have a quorum. 4 MR. GOMEZ: We do. 5 MR. GRAHAM: Well, I'm Stephen Graham. I'm a 6 partner at the law firm of Fenwick and West. I am one of 7 your co-chairs, and to my left is my able co-chair. 8 MS. JACOBS: Thank you. Oh, Christine Jacobs. 9 I was the longest-seated female CEO of a public company 10 for 20 years. My company was just purchased. I also 11 serve as a member of the Compensation and Governance 12 Committee of McKesson, another New York Stock Exchange 13 Company. Thank you. 14 MR. GRAHAM: Thank you, Chris. 15 Chair White, other commissioners, staff, those 16 in the audience, I extend a welcome to today's meeting of 17 the SEC's Advisory Committee on Small and Emerging 18 Companies. I, of course, extend a welcome to the 19 members. It's nice to see a number of familiar faces, 20 and I'd like to offer a special welcome to those who are 21 here for the first time as members of this committee. 22 It -- this is not the best time for running off 23 to Washington and having meetings. And we recognize 24 that, and we appreciate your willingness to take this 25 time. It's a particularly busy time of year we all know, 0006 1 but I think the work of this committee is also important. 2 And we felt it was a good idea to at least get started in 3 2014 so we can hit 2015 running. 4 The -- it's -- the -- 5 ELECTRONIC VOICE: Welcome to Unified 6 Conferencing. 7 MR. GRAHAM: Okay. So we're not going to start 8 all over. (Laughter.) But I just want to say that I do 9 look forward to working with you as a team to ensure that 10 this committee accomplishes something meaningful. 11 (Interruption to proceedings.) 12 MR. GRAHAM: That's nice. (Laughter.) That 13 was good. I think we all agree that contributing to the 14 facilitation, the formation of capital for small 15 businesses is important work. Finally, I want to make 16 sure that I do thank the SEC staff. They're 17 extraordinarily helpful. They do an incredible job. I 18 always appreciate their incredible level of dedication as 19 well as their professionalism. 20 A couple of administrative items. Once we 21 start having discussion, please, before you start 22 talking, wait to be recognized, and when you're not 23 talking, please make sure your mics are turned off. And 24 I also would ask you that you put your cell phones on 25 silent. 0007 1 One thing I forgot to mention as far as members 2 are concerned is that one member that some of you may 3 have expected to see but you will not see is Heath 4 Abshure. He resigned recently, and so therefore he will 5 not be serving with us. Heath was one of our observer 6 members. He was representing NASAA. Heath was with us 7 from the beginning. He was an able contributor. We 8 enjoyed working with him, we will miss him, and we wish 9 him well. 10 We have a full agenda for today as we dive into 11 the timely topic of accredited investor definition. And 12 as we will discuss in more detail later, we will want 13 this committee to formulate recommendations on the issue. 14 And to help frame our discussion, we have arranged for 15 presentations from AARP as well as the Angel Capital 16 Association. 17 But first, we're honored to kick things off 18 this morning with remarks from Chair White as well as 19 Commissioners Aguilar, Gallagher, and Stein. 20 Commissioner Piwowar wanted to be here, but his schedule 21 did not permit it, so he sends his regrets. And so with 22 that, I'm going to turn it over to Chris. 23 MS. JACOBS: Thank you. And I would like to 24 echo Stephen's welcome to new members and those returning 25 members. But first I'd like to introduce Chair White. 0008 1 Chair White was appointed in March of 2013 by President 2 Obama to serve as the 31st chair of the SEC. She arrived 3 at the SEC with decades of experience as a federal 4 prosecutor -- excuse me -- and securities lawyer. Prior 5 to serving as the chair of the SEC, Chair White was the 6 U.S. Attorney for the Southern District of New York, the 7 only woman to hold that position in the 200 year-plus 8 history of the office and the chair of the litigation 9 department at Debevoise & Plimpton in New York. 10 Chair White. 11 CHAIR WHITE: Thank you very much for that very 12 kind introduction, and thank you, all of you, for being 13 here today. Welcome to the meeting. I want to also 14 extend a special welcome to the new members of the 15 committee as well as those members who are returning. 16 Each of you really do bring to this committee a wealth of 17 knowledge, expertise, and insights about the needs of 18 small businesses and the impact that our rules at the SEC 19 can and do have on this very important part of our 20 economy. 21 I know you have extraordinarily busy schedules 22 and multiple demands on your time, so I do want to 23 express my deep appreciation for your willingness to 24 serve and especially to be here at this time of year, 25 which I know is an -- even more difficult, although 0009 1 Stephen assures me that was part of your doing, that you 2 did it to yourself, too. But in any event, thank you. 3 Your thoughts, ideas, and recommendations will help the 4 Commission's thinking on many of the important issues 5 affecting small businesses. 6 I also want to thank Stephen Graham and Chris 7 Jacobs for agreeing to lead this committee again as its 8 co-chairs. They really do a tremendous job. I'd also, 9 as Stephen did, like to take a moment to recognize the 10 invaluable contributions of Heath Abshure, who yesterday 11 I think announced that he will be moving on from his 12 current position as Arkansas securities commissioner and 13 as the NASAA representative for this committee. 14 He's been a dedicated and energetic advocate 15 for investors throughout this distinguished career 16 starting as an SEC attorney and then as the Arkansas 17 securities commissioner and president of NASAA. He's 18 always been a friend of this agency, and we'll all miss 19 having him on this committee as well. 20 Lastly, I would like also thank the staff, 21 Keith Higgins and the staff of the Division of 22 Corporation and Finance for their hard work in supporting 23 the activities of your committee and helping to organize 24 this meeting. I'll try to be brief in my remarks. You 25 certainly don't need any of us to tell you that small 0010 1 businesses play a crucial role in the growth of our 2 nation's economy and the creation of new jobs. Small 3 businesses are a vital, but often under represented 4 segment of the American economy. 5 This committee plays a critical role in 6 ensuring that the views of small business owners, 7 investors, and other stakeholders in the business 8 community are clearly heard by the Commission. I want to 9 take just a few moments to provide you, actually, with a 10 very brief update on a few of the initiatives that have 11 been of interest to this committee starting with the JOBS 12 Act rule makings. 13 We're working hard to finalize the JOBS Act 14 rule makings. Last summer, as you know, we adopted the 15 final rules that eliminated general solicitation, the 16 general solicitation prohibition in Rule 506 offerings 17 designed to help small business solicit new investors 18 more easily. We also have a pending and related rule 19 proposal. We know many of you are eager for us to 20 finalize the rule makings for Regulation A-Plus, as we 21 call it, and crowd funding. We are, too. We've received 22 lots of thoughtful and varying comments on both 23 proposals. Completion of these rule makings remains an 24 important priority, and the staff is working very hard on 25 the recommendations for final rules. 0011 1 Tick size, tick size is another important issue 2 that the committee has considered, and the Commission has 3 considered earlier this year. Again, I think as most of 4 you know, if not all of you, the Commission directed the 5 exchanges and FINRA to develop and file a plan for a 6 pilot program that would widen the quoting and trading 7 increments for certain smaller cap stocks. 8 In November, the Commission published a notice 9 soliciting comment on the plan. The comment period will 10 run until December 22nd, which I guess is next Monday. 11 We appreciate the feedback we've gotten already and 12 welcome more. I'm hopeful that a pilot program will 13 yield data that will better inform our thinking about 14 ways to build more robust markets for smaller public 15 companies. 16 Next, our disclosure effectiveness review, 17 staff and the Division of Corporation Finance is 18 currently conducting a comprehensive review of the 19 disclosure requirements for public companies. The goal 20 is to find ways to improve the disclosure regime for both 21 the benefit of companies and investors. This includes 22 looking at whether additional scaling of disclosure 23 requirements for smaller companies would be appropriate. 24 I look forward to reviewing the staff's 25 recommendations on how to update the requirements to 0012 1 facilitate timely material disclosure by companies and 2 shareholders' access to that information. 3 Accredited investor, which is obviously the 4 focus of your meeting today, is a very important topic 5 for us as well. As you know, the Dodd-Frank Act requires 6 the Commission to undertake a review of the accredited 7 investor definition in its entirety as it relates to 8 natural persons. And the Commission staff, including the 9 staff from the Division of Corporation Finance as well as 10 the Division of Economic and Risk Analysis is conducting 11 a comprehensive review of this definition. 12 The goal of the review is to assess whether we 13 are properly identifying the population of investors who 14 should be able to purchase securities in offerings 15 without the protections afforded by the registration 16 requirements of the Securities Act. A critical part of 17 the staff's review is soliciting and considering input 18 from the public and other interests parties. And again, 19 there are varying views on this topic. 20 We recently received recommendations regarding 21 the definition from the SEC's Investor Advisory 22 Committee. Those recommendations are very helpful, and 23 we'll be very interested to hear this committee's 24 insights at today's meeting. 25 A word just about outreach. Public outreach to 0013 1 small businesses really is essential to our efforts to 2 inform ourselves. Just last month we held our 33rd 3 Government Business Forum here at the SEC headquarters in 4 Washington. This forum brought together really from 5 across the country small business executives, their 6 advisors, investors, and government officials to discuss 7 and really think creatively about how our rules might be 8 improved to help small businesses. I look forward to 9 reviewing the recommendations from the forum participants 10 once they have been finalized as well. 11 We also recently launched a new initiative with 12 the U.S. Small Business Administration to host public 13 events across the country, to inform small business 14 owners and entrepreneurs about the options for capital 15 raising. SEC staff members including from our Office of 16 Small Business Policy work -- are working very closely 17 with the SBA staff to highlight the ways that small 18 businesses can raise funds and to answer questions from 19 small business owners really in the field. 20 We already have had two of these very well 21 attended events with more in the works to come. So let 22 me stop here and thank you again for your service on this 23 committee. I look forward to receiving the report from 24 your meeting today and continuing our dialogue to help 25 small businesses in America. Thank you. 0014 1 MS. JACOBS: Thank you. And I think I can 2 speak for the committee in appreciating the update. So 3 thank you very much. 4 Next I would like to introduce -- Keith, is 5 Commissioner Aguilar on? Are we -- 6 COMMISSIONER AGUILAR: I am. Hopefully you can 7 see me. 8 MS. JACOBS: We can. 9 COMMISSIONER AGUILAR: I'm behind you, I think. 10 MS. JACOBS: Behind us and down the row a 11 little bit, but good morning. Thank you. Commissioner 12 Aguilar has been a commissioner of the SEC since 2008. 13 Prior to serving as a commissioner, he was in private 14 practice specializing in securities and corporate law, 15 international transactions, investment companies, and 16 investment advisors. Welcome. 17 COMMISSIONER AGUILAR: Thank you. And thank 18 you for that introduction, and good morning to everyone. 19 I wanted start by welcoming the members of the Advisory 20 Committee on Small and Emerging Companies to today's 21 meeting. Like my colleagues, I very much appreciate your 22 efforts, and I look forward to today's discussion. And 23 of course, I also want to thank the staff of the Division 24 of Corporations Finance Office of Small Business Policy 25 for organizing this meeting. 0015 1 Since its formation in 2011, this committee has 2 provided the Commission with advice related to privately 3 held small businesses and the smaller publicly traded 4 companies. It is well known that these businesses have 5 an outside impact on the growth of our country's economy 6 and job creation for all Americans. And as you know, 7 today's meeting will focus on the definition of 8 accredited investor, a definition that is critical to the 9 Commission's Regulation D exemption from the registration 10 requirements of the Securities Act of 1933. Regulation D 11 may be the Commission's most widely used exempted 12 offerings, and it is regularly used by small businesses 13 to raised needed funds in the capital markets. 14 As many of you know, and as Chair White alluded 15 to, roughly one month ago today this topic was a subject 16 of a lively discussion at the Commission's Forum of Small 17 Business Capital Formation. And at the November 20th 18 forum, I spoke about the urgency and importance of 19 improving upon the accredited investor definition. The 20 accredited investor definition is critical for the 21 protection of investors. At its essence, the definition 22 attempts to identify those individuals who are expected 23 to be able to defend for themselves and protect their 24 interests. 25 The current accredited investor definition 0016 1 attempts to do that for individuals by focusing on 2 whether an individual has either an annual income of at 3 least $200,000 per year or $300,000 with their spouse or 4 a net worth of at least $1 million. Generally speaking, 5 securities offerings made to accredited investors under 6 Rule 506 are exempted from the registration and 7 disclosure requirements of the federal securities laws, 8 and the securities purchase cannot be freely resold. 9 Because of the importance of the accredited investor 10 definition, Congress has mandated that the Commission 11 undertake a periodic review of the definition as applied 12 to natural persons to determine whether it should be 13 modified for the protection of investors. 14 And notwithstanding the congressional mandate, 15 there are those that think that the Commission should not 16 review the income and net worth test contained in the 17 accredited investor definition. The view is that we 18 should not examine a definition that identified eligible 19 purchasers to be millionaires and other affluent persons 20 and that these individuals simply did not need to be 21 protected. While that may make for a nice sound bite, it 22 simply fails to convey who is really impacted. 23 Accredited investors are not only individuals 24 like Bill Gates or Warren Buffett, but rather constitute 25 a large pool that includes a large swath of Americans. 0017 1 For example, the following individuals would be eligible 2 accredited investors: first, a single working parent of 3 three children with an annual salary of $205,000 and 4 likely with a home mortgage to pay; second, a recent 5 widow who inherited $1 million, but is not otherwise 6 earning any separate income; and third, a senior retiree 7 who has accumulated over $1 million in his or her 8 retirement account during their working life and needs 9 that money for the retirement years. 10 While these individuals qualify as accredited 11 investors under the income and net worth test, there is 12 nothing in definition that helps to identify whether 13 these individuals have the financial sophistication 14 and/or investment experience to be able to assess whether 15 any particular investment is appropriate for them. Many 16 observers believe that the definition's failure to 17 consider an investor's actual financial sophistication is 18 a serious flaw. 19 As the SEC's own Division of Economics and 20 BRICs analysis has reported, many investors whose 21 financial worth gives them accredited investor status 22 have limited investing experience. In addition, other 23 studies have shown that accumulated finances will -- is 24 not necessarily correlated with intelligence. One 25 financial professional has found that -- and I quote -- 0018 1 "There are often people whose net worth puts them in the 2 accredited category. They may be smart and successful in 3 their fields, but most are confused about the basics of 4 investing and managing money." 5 I am supportive of the Commission's efforts to 6 review the appropriate conditions for determining whether 7 someone is or is not an accredited investors. Beyond the 8 fact that Congress has mandated a review of the 9 definition, it is an appropriate task to be undertaken by 10 the agency responsible for regulating the capital 11 markets. Investors who are considered accredited under 12 these rules are carved out from the basic investor 13 protections that the securities laws mandate, which 14 regard to registered securities offerings. These 15 protections, provided in part to mandatory filings and 16 required disclosures, simply do not exist with those 17 deemed to be accredited investors. As a result, the 18 simple working parent with three children, the widow with 19 the inheritance, and the retiree all deserve the 20 Commission's attention to make sure that they are not 21 made more vulnerable by an accredited investor definition 22 that may fail to distinguish between individuals who can 23 protect their own interests and those who cannot. 24 For these reasons, it is entirely appropriate 25 for the Commission to review whether the accredited 0019 1 investor definition is accomplishing its intended goals. 2 Moreover, as the Commission's Investor Advisory Committee 3 has pointed out, the current accredited investor 4 definition may also be under inclusive. Potential 5 investors who most people would consider to be 6 financially sophisticated, such as a chartered financial 7 analyst or a graduate professor of corporate finance may 8 not have the income or the accumulated net worth to be 9 eligible to be accredited investors, but they may 10 actually be in a better position to protect their own 11 interests. 12 This is why the AIC has recommended changes to 13 the accredited investor definition that take into account 14 other ways of measuring financial sophistication. These 15 recommendations include assessing individual special life 16 work experience or their investment experiencing or their 17 licensing or other professional credentials. 18 Ultimately, it is important that we get this 19 definition right. There is no doubt that the definition 20 for accredited investors under Rule 506 of Regulation D 21 will remain critical to the success of capital formation. 22 In the long run, the continued success of Rule 506 will 23 depend on whether the accredited investor definition 24 appropriately identifies individuals who do not need the 25 protection of the Commission's securities, registration, 0020 1 and disclosure requirements and those who do. For those 2 reasons, I am pleased that this committee would today 3 focus the entire day on the definition of accredited 4 investors, and I very much look forward to your 5 discussions and recommendations. Thank you. I join 6 Chair White in being grateful that such busy people have 7 taken their time to be with us today and to share their 8 intellectual thoughts and their experience. I wish you a 9 very productive day, and thank you for having me here 10 this morning. 11 MS. JACOBS: Thank you, Commissioner. We 12 appreciate those comments, and we'll do our best today. 13 Next I would like to introduce Commissioner 14 Daniel Gallagher. Commissioner Gallagher has been a 15 commissioner of the SEC since 2011. Prior to serving as 16 a commissioner, he was a securities lawyer both here at 17 the SEC where he served as deputy director of the 18 Division of Trading and Markets and in private practice. 19 Commissioner. 20 COMMISSIONER GALLAGHER: Well, thanks so much, 21 Chris, for that introduction. To borrow the opening words 22 of my alma mater's fight song, "It's been so long since 23 last we met." At a critical time of importance for small 24 business capital formation with our implementation of the 25 JOBS Act, it's unfortunate that the last meeting of this 0021 1 body or, to be precise, its predecessor, was in September 2 2013, and I applaud Chair White for getting this on the 3 calendar in 2014. I will be glad to see more regular 4 meetings in 2015. This group's work is very important, 5 and we do well to solicit, receive, an heed its advice. 6 Of course, today's meeting, as has been 7 discussed, is set to discuss that old chestnut, the 8 accredited investor definition. And after shocking the 9 attendees of the Small Business Forum last month with my 10 views on this topic, it should come as no surprise to 11 those of you who follow me, that these views haven't 12 changed in the last few weeks. I still do not believe we 13 need to be spending our time protecting millionaires. I 14 respect the views of Commissioner Aguilar, and I 15 understand why accredited folks like him want more 16 attention. 17 But the rest of us would like to focus on 18 things like Reg A and public offerings that we are 19 allowed to participate in. We have Reg A-Plus to finish, 20 we have venture exchanges to create. We have crowd 21 funding to fix. We have disclosures to scale, and the 22 list goes on and on. So by way of priority, this at 23 least to me, is near the bottom somewhere right above the 24 pay ratio disclosure. 25 Nonetheless, there was one critique of my 0022 1 position that I did and do take to heart. Am I refusing 2 to consider a potential expansion of the pool of 3 accredited investors to learned professionals and others 4 who have the education or skills such that they, too, 5 might be able to fend for themselves in the markets. 6 Refusing is a strong word, and let's just say I'm 7 extraordinarily skeptical. 8 I worry about getting the government more 9 deeply involved in defining who is sophisticated and who 10 is not. Net asset and income tests are a very hands-off, 11 unobtrusive, and value-neutral way for the government to 12 define who is accredited. Having the SEC place its 13 imprimatur on certain forms of education or training and 14 not others is a dangerous path. Do we accept FINRA or 15 CFA exams? Do we administer our own program? I have a 16 better test, real world experience. 17 If a learned professional has investment 18 aptitude, then what prevents him or her from prudently 19 building an investment portfolio in the public market 20 sufficient to pass our asset test as a ticket into the 21 private markets. This operates both as proof of 22 knowledge and skill in investing and also as a buffer 23 against risk of loss in the private markets. 24 Moreover, I am simply incredulous that an 25 expansion of the categories of persons deemed accredited 0023 1 can be achieved without compromising on the asset and 2 income test. It is much more likely that there would 3 need to be a bargain which would be somewhat more 4 Faustian in nature. This seemed to me to be the clear 5 import of the SEC's Investor Advisory Committee 6 recommendation from earlier this year. 7 For example, the asset test could be raised to 8 an inflation-adjusted $2.5 million, but I'm more 9 concerned about the effect of cutting those individuals 10 out of the market than I am eager to try some new 11 combination of rules that might loop some different 12 subset of people in. Just on its face, like scooting a 13 successful business person with 1.5 million in assets in 14 order to include a first-year lawyer with $150,000 in 15 student loan debt doesn't seem to be a trade-off that 16 makes sense. 17 Or, as some have suggested, we could tier the 18 asset test and tie it to investment limitations. So an 19 individual with barely over a million in assets could 20 only invest 10 percent of their wealth. As wealth 21 increased, so would the percentage in age. While such an 22 approach made limited sense in the context of crowd 23 funding or small investments across a number of companies 24 is at the heart of that approach to capital raising. 25 Importing that approach to private investments in general 0024 1 goes back to my first concern about the proper role of 2 government. Here it would put the government squarely in 3 the position of dictating portfolio theory to 4 millionaires. It's the nanny state at its worst. 5 So if we could change the definition of 6 accredited investor by a means that does not result in a 7 more intrusive role for government or involve any cutback 8 in the number of accredited investors or quantity of 9 investable assets today, I'd be open to having that 10 debate. But so far, I have seen no indication that that 11 would be the case, and so I believe we should spend our 12 limited bandwidth focusing on more critical matters. In 13 sum, what we have by way of the accredited investor 14 definition today is good enough. It's not perfect, but 15 it's also not broken. So I hope you have a good 16 discussion today, but I also hope we can turn to more 17 productive issues in the future. Thanks very much. 18 MS. JACOBS: Thank you, Commissioner. And now 19 I would like to ask Commissioner Kara Stein to make some 20 comments. Commissioner Stein has been a commissioner of 21 the SEC since August 2013. Prior to serving as a 22 commissioner, Ms. Stein served as staff director for the 23 Securities Subcommittee of the Senate Banking Committee 24 where she worked on many financial service issues, 25 including the legislation that became Dodd-Frank and the 0025 1 JOBS Act. 2 Commissioner Stein. 3 COMMISSIONER STEIN: Thank you, Chris. I want 4 to thank everyone here for your pro bono work and for 5 agreeing to be with us today and engage in this 6 discussion and I hope many others during the course of 7 the committee's tenure. I'm -- certainly share your 8 focus on an interesting capital formation, and I'm 9 particularly interested in helping to provide more and 10 better options for smaller businesses and for those who 11 invest in them. Smart rules, smart policies around 12 capital formation will lead to both jobs and investment 13 opportunities across the country, and I think we all know 14 that, and that's why you're here. 15 I've said this before, and I'll say it again. 16 Over the years we've created a jumble of overlapping and 17 sometimes inconsistent options for both private and 18 public capital raising. The system has become 19 increasingly complex and at times even irrational. This 20 potentially inhibits efficient capital formation in some 21 areas, while needlessly exposing investors to undue risks 22 in others. We can and we should rationalize this jumble. 23 It will benefit both entrepreneurs and investors. 24 Excuse me. I have a cold. I'm very focused on 25 working through these issues, and as part of that effort, 0026 1 I, like my fellow commissioners, want to see the 2 Commission move quickly towards finalizing three very 3 important rules related to capital formation: ground 4 funding, the new Reg A-Plus, and investor protections 5 under 506 -- Rule 506. I'm glad to see this committee 6 tackling the very important issue of the definition of 7 accredited investor. I think it's an important topic 8 because it gets to the heart of how we think about 9 investor protection, and I think part of the conversation 10 is should we rethink that or not, especially in the space 11 of what divides public from private capital raising, 12 because to some degree, that's the been the way we've 13 decided which way you capital raise and who you can raise 14 from. 15 In effect, should we be trying to protect 16 people who need protection, and who are they, and how do 17 we identify them? One of the things the Investor 18 Advisory Committee was talking to us about was 19 sophistication, which a couple of my colleagues have 20 talked about today. And it comes in all shapes and 21 sizes. And another way we've talked about is through 22 income or net worth, either high or low. We did, I 23 think, receive very thoughtful recommendation on the 24 definition of accredited investor from our investor 25 advisory committee. So if it's not in your packet, I'd 0027 1 recommend it to you to think through and comment on. 2 But I'm very much looking forward to your 3 ideas, your analysis and recommendations today as well 4 and whether we should be thinking about this. I think 5 that's fair as well. Congress has asked us to think 6 about it. That doesn't mean we need to do anything about 7 it, but it means we need to think about it, and I think 8 it's becoming increasingly important as more of them -- 9 more and more capital raising is done in the private 10 space. I think that's part of the reason people want us 11 to have that discussion. 12 I say this in many contexts, but I really 13 believe we get to better public policy choices when we 14 hear from a variety of participants from different 15 viewpoints in the market. So I'm, again, very 16 appreciative that you're here today, that you're offering 17 us your guidance and wisdom, and I look forward to 18 meeting each of you individually, and hopefully being 19 people I can reach out to to sort of think through things 20 as we go through the process. So thank you for your 21 time. Hopefully, we'll result in better rules and better 22 policy because we're taking into account your views. 23 MS. JACOBS: Thank you, Commissioner Stein. We 24 appreciate the comments from all of the commissioners 25 today and showing your interest in our work as we start 0028 1 today. 2 Next, I would like to introduce Keith Higgins. 3 Keith is the director of the SEC's Division of Corporate 4 Finance. Keith with introduce the rest of the staff 5 joining us today. 6 MR. HIGGINS: Thanks, Chris. Good morning, 7 everyone. I'd like to add my welcome to all of you, and 8 thank you for taking the time during this season to come 9 and attend this meeting and share your views with us 10 today. We have a very full agenda, so I'll keep my 11 remarks brief. 12 Before we begin, I should start with the 13 standard SEC disclaimer that the things that you'll hear 14 today from the SEC, the SEC staff represent their views 15 alone and don't represent the views of the Commission, 16 any of the commissioners, and any of our other colleagues 17 on the staff. 18 So with that dispensed, let me -- since this is 19 the first meeting of this renewed committee, I thought it 20 would be a good idea to go back to basics, and I pulled 21 out the committee charter and took a look at it. The 22 committee charter, as charters tend to do, provides what 23 the objective of the committee is, and that's to provide 24 the Commission with advice on its rules, regulations and 25 policies to advance the mission of the Commission, 0029 1 protecting investors, maintaining fair, orderly, and 2 efficient markets and facilitating capital formation in 3 three specific areas: capital raising, securities 4 trading, and public reporting of smaller private 5 companies or emerging private companies and smaller 6 public companies. 7 So the Commission is very fortunate to have 8 such a diverse and accomplished group of representatives 9 of that community to participate on this committee. The 10 committee provides a mechanism through which the 11 Commission can get thoughtful recommendations and advice 12 from those who are most directly affected by the rules 13 and regulations and help us set interests and priorities 14 for those important constituencies. 15 As you commence your work in the new term, I'd 16 ask that each of you, as we do, at the Commission and the 17 staff, keep in mind in formulating the recommendations 18 that the effect of the recommendations on both capital 19 formation and investor protection, marrying capital 20 formation and investor protection, and finding the right 21 balance between those -- and we've heard a little bit 22 about it already this morning -- is really the key to 23 successful markets and a healthy economy. Before we 24 start, 25 I'd like to also thank -- be a little 0030 1 self-congratulatory, but really to give a shout-out to 2 the Office of Small Business policy here at the 3 Commission. It's really the SEC's office that's the main 4 point of contact for small companies. It always has in 5 mind the interests and priorities of that constituency. 6 At the same time, it works to facilitate capital 7 formation and consider investor protection at the same 8 time. 9 The office answers countless questions from 10 companies and their advisors about capital raising, how 11 to raise money through exempt or a small registered 12 offering. It plays a key role in the Commission's rule 13 makings, many of which were mentioned today, and acts as 14 the liaison with the state securities regulators and the 15 Small Business Administration, and really day to day does 16 a great job of reaching out and working with and 17 advocating for the needs of smaller companies. 18 In addition to these efforts, the office 19 supports the work of this committee and, as Chris and 20 Steve have noted, and it also organizes such events as 21 the Government Small Business Forum on small business 22 capital formation that continuously -- where we solicit 23 the views and recommendations from that community. 24 So I'm joined today by two members of that 25 office. Sebastian Gomez to my right is the chief, been 0031 1 chief of the office for about a year now. And Julie 2 Davis, who is special counsel in the Office of Small 3 Business Policies. So thank you two, and others -- there 4 are other members of the office in the audience, and I'd 5 like to thank them for their work. 6 So with that, I'd like to turn it back to Steve 7 and Chris and kick off the more formal part of today's 8 meeting. 9 MS. JACOBS: Thank you, Keith. Next we would 10 like to take a short period of time, and we thought it 11 would be helpful to go around the room, starting with 12 you, Charles, for introductions so that we get to know 13 each other as quickly as possible and get to know one 14 another a little bit better and a little bit about your 15 relevant experience, because I think that's what's so 16 important right now for our work is that we have boots on 17 the ground experience for the topics today. 18 While you all have more experience that's going 19 to be able to fit into the time allotted, in order to 20 keep these introductions into a 15-minute window, but we 21 would like to ask you to introduce yourselves. 22 MR. GRAHAM: That's not 15 minutes apiece. 23 (Laughter.) 24 MS. JACOBS: Isn't he a jokester? 25 MR. GRAHAM: Okay. 0032 1 MR. BALTIC: Thank you. Good morning, Chair 2 White, Commissioners, and Committee Co-Chairs Graham and 3 Jacobs. Thank you. I'm a new member of the committee. 4 My name is Charles Baltic. I'm co-head of healthcare 5 investment banking at Needham & Company focused on the 6 emerging growth companies in both healthcare and 7 technology. I've been involved in the investment banking 8 investment banking industry for approximately 20 years, 9 and prior to that practiced corporate and securities law. 10 I also sit on the boards of a public emerging growth 11 company, a private company, and two nonprofit 12 organizations involved in fostering life sciences and 13 research? Thank you. I look forward to my service on 14 the committee. 15 MS. JACOBS: Thank you. 16 John. 17 MR. BORER: Good morning. This is my second 18 tour of duty here. I am the head of investment banking 19 at the benchmark company in New York, which is a boutique 20 investment bank, educated as a lawyer, never practiced, 21 was in commercial banking and leverage finance for 13 22 years and then have been in investment banking for 23 23 years since, and have also served on the boards of small 24 public companies, private companies, and taking companies 25 public, not only our own company when I was CEO at one 0033 1 time, but involved in the IPO practice and raising 2 capital principally is our business. 3 MR. CHACE: Hi. Thanks. Dan Chace, along with 4 John, my second time here. I'm a portfolio manager at 5 Wasatch Advisors which is an investment manager in Salt 6 Lake City focused on public markets. I manage our 7 microcap fund which is focused on the smallest public 8 companies that are out there, typically between 80 9 million to 600 and above. I hope to be able to 10 contribute in terms of prospective on those types of 11 issues. Thanks. 12 MS. HANKS: I'm Sara Hanks. I'm a CEO of 13 Crowdcheck. We do due diligence on companies raising 14 funds in the new online investment market. I have 30 15 years of experience in corporate and securities matters, 16 mostly on huge IPOs, and what we're doing now is focusing 17 very much on the tiny little companies, seed-stage 18 companies who are encountering securities regulations for 19 the first time. 20 MR. HEMPHILL: Hi. My name is John Hemphill. 21 I'm a partner in Sheppard Mullins New York office. 22 Unlike my predecessors here, I'm still a lawyer and have 23 been for my entire career, and I've been working with 24 small and emerging growth companies for over 20 years, 25 and that ranges from two kids in a dorm room all the way 0034 1 to smaller public companies, sometimes larger public 2 companies. And I've also been working with Reg D since 3 October 1982 when I worked on the offering for 4 Cablevision of Boston representing Drexel Burnham. And 5 that offering was interesting not only because it was 6 early on with Reg D, but it was also the company ended up 7 having over 500 investors, so it also had to register as 8 a public company. Not -- it really didn't like that very 9 much either. So in any case, I'm glad to be here. Thank 10 you very much for inviting me onto the committee. 11 MR. LEZA: Hi. I'm Richard Leza. I spent the 12 first 12 years of my career and started six start-up 13 companies. Then I went over to the venture capitalists, 14 and I spent 15 years in the venture capitalist business. 15 I sit on five boards, one public, two private, two -- one 16 educational and one non-profit, and I'm now the chairman 17 of Exar Corporation in Freemont, California. 18 MS. LUNA: Hi. My name is Sonia Luna. I'm the 19 owner and founder of Aviva Spectrum. We're a boutique 20 compliance consulting firm based in sunny Los Angeles, 21 California. And our bread and butter is coming from 22 smaller reporting companies that need to comply with SOX 23 404 or other operational compliance issues. 24 MS. MOTT: I'm Catherine Mott. I'm the founder 25 of Bluetree Allied Angels and the Bluetree Venture Fund 0035 1 in Pittsburgh, Pennsylvania. Bluetree Allied Angels was 2 formed in October 2003 when there were about 90 3 professionally managed angel groups in the country. 4 Today there's over 400. Bluetree Allied Angels has 5 invested in 46 regional companies, roughly $30 million, 6 so -- and have created thousands of jobs in the 7 Pittsburgh region. 8 MR. PAUL: Good morning. My name is D.J. Paul. 9 I'm the chief strategy officer for Propeller, which is a 10 real estate and alternative investment craft funding and 11 Reg D platform based in New York. I'm also the co-chair 12 of CIFRA which is a craft funding advocacy organization. 13 My first exposure to this was probably when I passed my 14 Series 7 and Series 63 in 1991 as a would-be 15 mortgage-backed securities salesman, which I did for 16 several years. 17 And my first exposure to Reg D was when I left 18 that to become an entrepreneur and actually had to go do 19 a raise at 27 in 1994 and that was my first introduction 20 to the rather arcane and complicated universe that we're 21 going to be discussing in part today. I'd like to thank 22 all those involved for inviting me to participate, and 23 I'm looking forward to lending my shoulder to this. 24 MR. REESE: Good morning. And thank you for 25 having me. I'm here because I do want to make a 0036 1 difference to this issue. I built my success as an 2 entrepreneur over 21 years. I've exited both publicly 3 and privately through six ventures, all using Reg D as a 4 beginning to get my ventures off the ground. 5 And my second part of my life is I've been an 6 angel investor since 2002 and have both formally and not 7 formally participated in angel funding, crowd funding, 8 and through the development of a national minority angel 9 network model focused on minorities, women, and veterans. 10 Thank you. 11 MR. WALSH: Good morning. Tim Walsh, my second 12 stint here on the advisory commission. I've been in the 13 investment world for about 30 years. The first 15 was 14 out of Chicago. I was in the options, derivatives, and 15 currency markets. And the last 15 years I've had a sort 16 of -- as my wife would say a too varied of a career, but 17 it's encompassed from being a trustee of a pension -- a 18 public pension fund in Indiana to most recently being the 19 CIO of the State of New Jersey $75 billion pension fund. 20 I'm currently the president of Gaw Capital. 21 It's a commercial real estate investment firm outside of 22 Los Angeles. I recently resigned from a public board. 23 I've been on very many private boards, and I'm currently 24 on two advisory boards as well. And I've been an 25 investor in small businesses. I've formed a few a few 0037 1 years ago, and I've made money on some of them, and I've 2 lost money on some of them. 3 And listening to the varied -- Commissioners 4 Aguilar to Gallagher, I'm not sure what the answer is on 5 accredited investor. I did hear an interesting line 6 yesterday with an investment manager in New Jersey, said 7 that, "I'm sick and tired of billions being spent to 8 protect millionaires from billionaires." So that's maybe 9 paraphrasing Commissioner Gallagher's line. Thank you. 10 COMMISSIONER GALLAGHER: I think you just 11 weighed in on my side. I just want that reflected on the 12 -- (laughter). 13 MR. WALSH: I feel -- Commissioner Aguilar's 14 side is well, so I'm not sure there's an easy answer. 15 MR. YADLEY: I'm Greg Yadley back for my second 16 stint on the committee. I'm a private -- in private law 17 practice in Tampa, Florida with Schumaker, Loop & and 18 Kendrick, medium-size firm. As I was running this 19 morning by 500 North Capitol Street, I remembered back to 20 40 years ago about this time when I received my first job 21 offer at the Commission, and my first boss was Justin 22 Klein, who I know Commissioner Gallagher knows, and I 23 have felt ever since that time that the Commission is a 24 great agency who does an excellent job of doing its best 25 to protect investors. 0038 1 At the same time, I also learned that rules 2 need to work in the real world and being practical is 3 very important. I also found that most people are honest 4 and that you need to write rules that work for most 5 people, and you need to spend certainly enforcement and 6 regulatory efforts for the bad guys. But if you write 7 all the rules for the bad guys, our economy will come to 8 a halt. 9 I left the Commission and was assistant general 10 counsel at Freddie Mac, which I was proud to say. I'm 11 not so sure anymore after what's happened. But I spent 12 my time in private practice working on everything from 13 soup-to-nuts starting companies, helping them get funded, 14 raising money privately, publicly, counseling boards, 15 helping companies reorganize through the bankruptcy 16 process. 17 And like Tim, I've invested successfully and 18 lost money and the times that I've been unhappy have been 19 times when I felt that there were conflicts of interest 20 where people made money on the side and where there was 21 lack of disclosure. So where I lost money because the 22 deals didn't work, that was my decision and my personal 23 loss. So I'm probably mostly on Commissioner Gallagher's 24 side, but a little bit with you, Commissioner Aguilar, 25 too. Thank you very much for having me on the committee. 0039 1 MR. SAADE: Good morning. My name is Javier 2 Saade, and I hold an observer seat in this committee, so 3 thank you for inviting me, and I look forward to 4 observing. I'm the associate administrator of the Small 5 Business Administration, and we are very excited to be 6 working with a lot of the folks at the SEC educating 7 folks on the new options that we're going to be talking 8 about here and that dance that has been discussed before 9 as to the excitement of capital formation with the 10 prudence you need to do to implement the rules so that 11 that balance is critical. 12 I run a couple of programs that are relevant to 13 this. One is called the SBIC program which is a 290 14 alternative investment funds, managing about $23 billion, 15 all of them doing private investments from early-stage 16 venture capital all the way to structure lending. 17 Another program I run is called the SBIR program. It's 18 essentially the largest seed fund in the world. It takes 19 a slice of the federal R&D budget, which this year 20 President Obama requested 135 billion from Congress. 21 We're still figuring out the budget. 22 But in general terms, it's basically $2 and a 23 half billion that is made as grants to companies that are 24 pre-commercial. So before any venture capitalist in 25 their right mind would write a check to a company, the 0040 1 government is there to de-risk some of that technology. 2 Many of those people are very excited about Title 3, 3 because the world of venture capital has changed, and I 4 hear a lot about crowd funding in Title 3 over and over 5 again. A lot of the companies that are funded through 6 these programs are very interested in what this committee 7 is doing and the Commission. 8 Before I was appointed by the White House to 9 this role about a year ago, I've done a lot of different 10 things. I'm kind of ADD. I started my career as an 11 engineer at a pharmaceutical company, Abbott Labs. Then 12 I did some consulting at two firms, Booz Allen Hamilton 13 and McKinsey & Company. That's kind of the first half of 14 my career was kind of big company advising. The second 15 half of my career has been investing. I have worked two 16 venture capital firms, one private equity firm, and one 17 hedge fund, and I've started three companies, two 18 spectacular failures. And I've invested in many around 19 the world. 20 One thing that I would like to say that I know 21 the commissioners know is that a lot of the work that's 22 done by the SEC is looked at by your counterparts all 23 around the world. I used to do deals in emerging 24 markets, and a lot of the stuff that comes out of here 25 and the stuff that the SEC does is -- actually indeed 0041 1 informs a lot of the commissions, the CBM in Brazil and 2 so and so forth. So I'm very thrilled to observe this -- 3 in this area also. Thank you for having me. 4 MS. JACOBS: Thank you. And we are slightly 5 ahead of schedule, which I appreciate, but not as much as 6 your backgrounds and experience. This is going to be a 7 great day. We are going to -- I promise you 8 commissioners and Chair White, we will get it up and get 9 it down today. So thank you for staying on time and 10 being brief, and at the same time giving us a sense of 11 your experiences. With that now, I'm going to turn this 12 over to Stephen who is going to bring the issue forward 13 for today. 14 MR. GRAHAM: Thank you, Chris, and thank you 15 all. I mean it is clear that you represent a broad 16 spectrum of the small business community. It is clear 17 that you have an awful lot to offer, and we all look 18 forward to receiving your input. 19 Everyone today understands how critical it is 20 for small business to be able to raise capital. And the 21 overall majority of capital raising by small and emerging 22 companies is done using the safe harbors under Regulation 23 D, especially for rule 506(b) and the new provisions 24 under rule 506(c) of which the accredited investor 25 definition is of course a central component. 0042 1 The concept behind accredited investor is 2 intended to encompass those individuals -- entities with 3 financial sophistication and ability to sustain the risk 4 of loss and fend for themselves and gain access to 5 information. And under the current definition, as we all 6 know, but just to tee it up, I'll repeat it, and that is 7 that natural persons are accredited investors if their 8 income level exceeds $200,000 per year or $300,000 with 9 their wife or a million dollars net worth excluding their 10 primary residence. 11 For investors, qualifying as an accredited 12 investor has significant consequences because it allows 13 them to participate in investment opportunities that are 14 generally not available to non-accredited investors such 15 as offerings by private funds or seed investment in early 16 stage companies. 17 The flip side is that investors who participate 18 in unregistered offerings can be subject to increased 19 investment risk. They generally do not receive 20 information comparable to that in a registration 21 statement, and the SEC staff does not review whatever 22 information is provided to them. 23 For companies and other market participants, 24 the size of the accredited investor pool is of 25 significant interest, and given the critical importance 0043 1 of the exempt offering market to the economy, that 2 interest is not confined to the small business community. 3 The current definition was adopted by the SEC 4 as has been mentioned in 1982. Many feel it is in need 5 of updating, and the topic is particularly timely now 6 because the Dodd-Frank Act directed the SEC to undertake 7 a review of the definition as it relates to natural 8 persons, and the SEC staff is currently conducting that 9 review. The results will help to inform the Commission's 10 considerations of possible changes to the definition. 11 We have with us today as staff from the SEC's 12 Division of Corporation Finance and the Division of 13 Economic and Risk Analysis who are working in that study. 14 They'll give us an overview of what the review 15 encompasses and some of the data that they're using. 16 It's important for us to remember, though, that the study 17 isn't done until the Commission releases it, and these 18 professional staff members can't front-run the 19 commissioners. 20 In other words, they won't be able to tell us 21 the timing or what the conclusions will be or even what 22 they think the conclusions might be, but they can give us 23 an overview of the topics they're looking at as well as 24 the data that will be integral to their recommendations. 25 One of -- one final note. In October of this 0044 1 year, our colleagues from the SEC's Investor Advisory 2 Committee put forward a set of recommendations regarding 3 the accredited investor definition. Chair White has 4 asked for our committee -- for its recommendations on 5 this topic as well. So by the end of today, I suspect 6 that we'll be in a position to at least have a sense of 7 this committee and be on our way to developing and 8 formulating recommendations. 9 Now we'd like to turn it over to the SEC staff. 10 First, from the Division of Corporation Finance, which as 11 most of you know is the division in charge of disclosure 12 operations and rule writing under the 33 Act. As Michael 13 Seaman -- Michael is a special counsel and part of the 14 team working on the study. Also, we have Rachita 15 Gullapalli, a financial economist from the Division of 16 Economic and Risk Analysis, which is the division in 17 charge of data and economic analysis. So with that, I 18 would like to turn it over to Michael and Rachita. 19 MR. SEAMAN: Thank you. I'm going to speak 20 very briefly this morning about some of the work that's 21 going on at the Commission with respect to the accredited 22 investor definition, and then I will turn it over to 23 Rachita to share some interesting information about the 24 numbers the Division of Economic and Risk Analysis has 25 found. 0045 1 As everyone knows, the Dodd-Frank Act requires 2 the Commission to conduct a review of the accredited 3 investor definition every four years as the definition 4 applies to natural persons to determine whether the 5 requirements of the definition should be adjusted or 6 modified for the protection of investors in the public 7 interest and in light of the economy. 8 Chair White has asked the staff to conduct a 9 study of the definition as part of this first required 10 review. That study is ongoing now and involves staff 11 members from a number of divisions and offices throughout 12 the Commission. In connection with this study, the staff 13 is considering the many recommendations received over the 14 years regarding the definition and is considering whether 15 and if so how the definition should be modified. 16 More specifically the staff is considering 17 whether the income and net worth thresholds should be 18 adjusted or left where they are. The staff is also 19 considering the manner in which those metrics are 20 calculated. For example, are there components of the net 21 worth threshold such as retirement assets that should be 22 not included in the calculation? The staff is also 23 considering whether there are alternative financial 24 measures such as investment assets that could be used as 25 an alternative method of qualifying as an accredited 0046 1 investor. 2 The staff is also considering whether there are 3 alternative nonfinancial attributes, the means by which 4 the certain individuals could be qualified as accredited 5 investors based on attributes that they have such as 6 education, business experience, professional 7 certifications, and investing experience. 8 Finally, in order to provide a more complete 9 review, the staff is also considering the definition as 10 applied to entities. We look forward very much to the 11 recommendations that this committee will provide. Thank 12 you. 13 MS. GULLAPALLI: Thank you. I'm -- yes, 14 thanks. So I'm going to be providing some perspective on 15 how the pool of accredited investors, as it pertains to 16 natural persons, changes under different recommendations. 17 So very quickly, and then as Michael just explained and 18 as its told in the room. The accredited investor is 19 basically an SEC-defined investor category as to who 20 companies can sell to in their offerings under Rule 505 21 and Rule 506 of Regulation D. And this definition was 22 established in 1982, and the Dodd-Frank Act requires us 23 to do a comprehensive review. 24 So I'm just going to step back for the next few 25 slides and provide some context about the Regulation D 0047 1 market and why we consider this category of accredited 2 investors to be so important. Now the chart here shows 3 capital raisings in billions of dollars in the way -- 4 with capital markets. As you can see, Regulation D, the 5 amount of capital raised has averaged about a trillion 6 dollars in the past three or four years, and Rule 144(a), 7 which is another private capital market, but it's 8 primarily brown securities, which are sold to qualified 9 institution buyers that also has an extremely high rate 10 of capital formation. 11 But if you want to compare Regulation D like 12 the public markets, like in 2013, a little over a 13 trillion dollars was reported to be raised in the 14 Regulation D market. Whereas public equity and debt 15 raisings amounted to about $1.3 trillion during the same 16 year. So clearly Regulation D market is a very -- 17 extremely important capital market in terms of financing 18 issuers. 19 It has to be also noted that on those 99 20 percent of capital raisings in Regulation D market are 21 made under Rule 506 offerings, which is the primary 22 market for accredited investors. And last year a new 23 marker -- a new exemption, Rule 506(c) came into 24 existence, and in that market, offerings are to be sold 25 only to accredited investors. 0048 1 So not only is it a very important market for 2 capital formation; it's especially important for small 3 business capital formation. So if you broadly divide the 4 market into pooled investment funds and non-fund issuers 5 -- and non-fund issuers are like operating companies and 6 financial companies -- we saw that during the period 7 September 2013 to September 2014, more than 70 percent of 8 the offerings in Rule 506 market were by non-fund 9 issuers. 10 And even in terms of numbers, if you see, they 11 were like more than 15,000 new offerings that were 12 initiated by non-fund issuers. And if you look at the 13 age profile of non-fund issuers in Rule 506 market, 14 almost two-thirds are like less than two of age since 15 incorporation. And firms that are over five years of age 16 are less than a quarter of all non-fund issuers in the 17 Rule 506 market. 18 And even if you look at pooled investment fund 19 issuers, they are like primarily venture capital funds, 20 private equity funds, hedge funds, and all these issuers 21 have proven to be an important source of financing for 22 early stage, small, and immature firms. So clearly this 23 market has proven to be a very important source of 24 financing for small and emerging companies. 25 So here I'm going to provide some information 0049 1 about investors in the Regulation D market. So all this 2 information that I'm presenting here today is basically 3 based on Form D filings of issuers. So we find that 4 based on the initial Form Ds that are filed by issuers 5 for the new offerings, there are about -- they report 6 about 250,000 to 300,000 investors. And of course, this 7 includes double-counting since we don't know the identity 8 of investors, and we also do not know whether these 9 investors are entities or natural persons, so we don't 10 know the breakup. 11 But I have provided some information on the 12 average number of investors and offering by industry 13 type. And as you can see, it ranges between 9 in 14 operating companies to about 38 in banking issuers. So 15 for Rule 506(b) also allows up to 35 non-accredited 16 investors, but less than 15 percent of offerings in any 17 industry category, you have non-accredited investors in 18 their -- participating in their offerings. 19 And if you look at the last column, you can see 20 that the total number of non-accredited investors are 21 really small in comparison with the total investors. So 22 clearly accredited investors are like by far the main 23 participants in the Rule 506 market. So given this 24 context and background, and also the fact that this is a 25 private market and there is like less information, in 0050 1 this environment the broad characteristics that probably 2 underlie the definition of accredited investors can be 3 broadly -- to see like do these investors have the 4 sophistication to understand the risk-reward tradeoff in 5 any opportunity and also do they have the ability to 6 withstand losses. 7 So in 1982 when the definition was established, 8 the Commission relied in income and net worth as a proxy 9 for these two characteristics. So as has already been 10 mentioned, like the standard that was established, was 11 having individual income of at least 200,000, joined 12 income of at least 300,000, or net worth of $1 million, 13 excluding primary residence and any indebtedness 14 associated with it. 15 So a natural question is: How many people in 16 the U.S. would qualify to be accredited investors? So to 17 understand that, we relied on the survey of consumer 18 finances. It's a triennial survey conducted by the 19 Federal Reserve Board, and it has detailed information on 20 income and financial assets of U.S. households. And the 21 sampling and weighting is done in such a way that it's 22 representative of all households in the U.S., which 23 amount to about 122.5 million in 2013. 24 So the last column basically shows how many 25 households would qualify under each of these categories. 0051 1 So under the individual income threshold of 200,000, a 2 little over eight million households would qualify, under 3 the joint income, a little over four million households, 4 and for the net worth of 1 million, more than 9.2 million 5 households would qualify under that standard, and if you 6 see like any under any of those standards, it would be 7 about 12.4 million households, which represents a little 8 over 10 percent of U.S. population in terms of 9 households. 10 So for perspective, I've also provided how many 11 households would have qualified in 1982 when the 12 definition was established. So again, we relied on the 13 1983 survey of consumer finances to get that information. 14 And as you can see -- this is the third column. As you 15 can see, it was about 1.5 million households that would 16 have qualified at that time under the definition 17 established, which is a little less than 2 percent of 18 U.S. population in terms of households. 19 So as the Dodd-Frank Act requires us to review 20 the definition, there have been a lot of recommendations 21 by various entities as to how we can refine the 22 definition. So in the next few slides, we have like 23 tried to see how the pool changes if we look at various 24 recommendations. So one of the recommendation, which has 25 also been proposed earlier has been to adjust these 0052 1 thresholds by inflation. So the table here shows what 2 would happen to the thresholds if we look at them in 3 current dollars. 4 So individual income would increase by almost 5 2.5 times. So from 200,000, it would be close to 500,000 6 in today's dollars. Joint income would amount to 7 628,000, and net worth in today's dollars, 1 million 8 would be equivalent to about $2.5 million. So to see how 9 the pool is affected by these recommendations, the chart 10 here basically shows the different recommendations, how 11 the pool changes. So the lighter part of the bar shows 12 how many million households qualify under the income 13 standard, and the darker part of the bar shows how many 14 qualify under the net worth standard. And the slimmer 15 gray bar provides information on the pool of accredited 16 investors that is either under income or net worth 17 standard. 18 So the first two you have already seen. Like 19 in 1983 about 1.5 million households qualified, and today 20 like under the current standard it's about 12.4 million 21 households that qualify. The third bar shows what would 22 happen to the pool of accredited investors if we just 23 adjusted inflation. So clearly the pool for both like 24 income-based threshold and net worth-based threshold 25 shrinks considerably. And it shrinks to about 4.4 0053 1 million households. 2 So another recommendation that has been in the 3 public domain is to adjust the net worth standard by 4 retirement assets. So retirement assets being a source 5 of stable income for people in their golden years, they 6 should not really be used for investment and riskier 7 activities. So if we look at net worth excluding 8 retirement assets, the pool shrinks even more, and the 9 pool of accredited investors would be about 3.8 million 10 households. 11 So lastly, it has been argued that income and 12 net worth is a good proxy for ability to withstand 13 losses, but not so good a proxy for sophistication, and 14 that there are better and more direct measures of 15 sophistication. And some of these that have only been 16 floated are like education or some professional 17 certification, professional experience or even investment 18 experience. 19 So in 2007 there was a proposal to adjust the 20 accredited investor definition by also including a 21 minimum investment experience standard for at least 22 750,000 in assets. So I've included that to see how the 23 pool of accredited investors changes. So the new shaded 24 line on top basically represents the number -- the 25 millions of U.S. households that would qualify under the 0054 1 minimum investment standard, which is about 8.9 million 2 households. And that would, again, increase the pool of 3 accredited investors to about 9.1 million households. 4 MR. WALSH: Can you explain that 750,000 5 minimum? I don't understand that. 6 MS. GULLAPALLI: So it's basically investments 7 and financial assets or other assets totaling at least 8 750,000. So -- 9 MR. WALSH: I still don't understand -- 10 MS. GULLAPALLI: So households invest in 11 various assets. It could be stocks, bonds, mutual funds, 12 could be real estate, and so on. So the survey provides 13 us information on where individual households invest. So 14 based on that, we can see how many households have 15 investments of at least 750,000. 16 PARTICIPANT: Does that also exclusive of 17 equity-related investments -- primary residence, or -- 18 MS. GULLAPALLI: Yes, it excludes investment 19 and -- 20 PARTICIPANT: Nothing to do with 21 sophistication, it's just if they've been able to invest 22 750,000 that they -- 23 MS. GULLAPALLI: Right. The idea is that if 24 you have experience in investing in various assets, it 25 provides you some understanding of risk-reward tradeoffs 0055 1 of investing in various assets. 2 PARTICIPANT: (Off-mic.) 3 MS. GULLAPALLI: Yes, it was a proposal in 4 2007. 5 MR. GOMEZ: If you could, when you speak, if 6 you could turn on the mic. That way our court reporter 7 could get it. 8 MS. GULLAPALLI: Yeah. This is the last slide 9 I have. Basically all this was just to provide a 10 perspective as to how the pool changes based on various 11 recommendations. And as we tried to balance issuers' 12 interest in terms of capital formation with investor 13 protection in terms of their suitability to invest in a 14 less informed environment. Thanks. 15 MR. GRAHAM: Sure. We have time for that. 16 Will you take some questions? 17 MS. GULLAPALLI: Sure. 18 MS. HANKS: Okay. So I've got a couple of 19 questions on methodology there. When you do the 20 inflation adjusting, do you also have numbers for the 21 impact of taking out the principal residence under 22 Dodd-Frank? Because I think to get a true 23 apples-to-apples comparison, you'd need to start with 24 inflation adjusting and then inflation adjusting on a 25 medium house value to take out the impact of the 0056 1 Dodd-Frank impact. Because we don't have an 2 apples-to-apples comparison that way, because if you 3 can't include the house, then we should be assigning a 4 value to the house and then taking that out on an 5 inflation adjusted basis from '82 to whenever. 6 And then the second question on methodology is 7 when you say retirement assets, we're just talking about 8 things that fall within IRA or Roth or whatever? Because 9 it's just -- when you talk about stable -- you can put a 10 whole load of really weird stuff into an IRA. You can 11 put Bitcoin into -- 12 (Interruption to proceedings.) 13 MS. GULLAPALLI: So all the calculations that 14 I've shown here excludes -- 15 (Interruption to proceedings.) 16 MS. HANKS: It's censorship. 17 MR. GRAHAM: I don't mind that -- I don't mind 18 music. I do mind that music. (Laughter.) 19 MS. GULLAPALLI: So yeah -- so all the 20 calculations that I've shown excludes the value of 21 primary residence from the beginning to -- 22 MS. HANKS: From the beginning to -- thank you. 23 MS. GULLAPALLI: So the issue is that in the 24 1983 survey of consumer finances, that information is not 25 as well populated. So the numbers could be slightly 0057 1 higher, the net worth numbers than what they could be. 2 MS. HANKS: Okay. So -- but -- so the 3 methodology is good. It's just -- 4 MS. GULLAPALLI: But everything from there on 5 -- 6 MS. HANKS: -- the basis from -- 7 MS. GULLAPALLI: Exactly, yeah. It excludes 8 that. And with respect to retirement accounts, yes, it 9 is primarily IRA or Roth accounts and so on. They 10 identified specifically these are retirement assets in 11 the questionnaire. So yeah, we're able to exclude those. 12 MR. GRAHAM: D.J. 13 MR. PAUL: So my question is -- and this has 14 been something that's been ongoing as some of this data 15 has been released is that we are looking at the entire 16 pool of eligible investors. 17 MS. GULLAPALLI: Right. 18 MR. PAUL: As opposed to -- and so you quite 19 definitely showed how it would be lessened if some of 20 these suggestions were implemented. But is there data 21 available that looks at what the actual pool of not 22 likely -- of actual investors are? Are we looking at a 23 lot of people that are at 220,000 in individual income or 24 a million two of net worth? 25 Or is it perhaps more likely -- is there any 0058 1 data to show that maybe most of the individual investors 2 in Reg-D actually have net worths well in excess of the 3 current limit or individual income well in excess of 4 200,000 so that by adjusting the numbers, it might not 5 have as much of a practical effect or that the market is 6 actually adjusting for it already? Is there anything on 7 that aspect of it? 8 MS. GULLAPALLI: Yeah, unfortunately, we do not 9 know the actual number of investors in private markets. 10 I mean even from Form D, like we get very little 11 information, and we do not have any closing amendments 12 for an offering, so we do not know like the totality of 13 the investors. And there's no information on the 14 breakdown of entities and individual investors, so we 15 don't know that. 16 But we can make some informed guesses as to how 17 many people are likely to invest in private markets, 18 which would be considerably smaller than the actual pool. 19 Like one way how can do, and we have presented this in 20 like rule making for general solicitation, the Title 2 21 rule making earlier, was like if you look at direct 22 equity investment as a gateway to perhaps investing in 23 private markets, then we did provide some data based on 24 some brokerage accounts, retail brokerage accounts that 25 the number of households that would invest in direct 0059 1 equity is much smaller. 2 Like if you look at 100,000 as the minimum 3 amount invested in retail equity, it's less than 3.3 4 million households. So the actual numbers are likely to 5 be much smaller than the pools that I've shown here. 6 MS. LUNA: So this is Sonia with Aviva 7 Spectrum. I had a question. On your aged pie that you 8 had, you had five years and you had the -- did you take a 9 look at some of the dollar amounts that they were trying 10 to raise by age group? 11 MS. GULLAPALLI: I do not have a direct answer 12 for that. No, we haven't done that specifically by age 13 group how much they're raising, but non-fund issuers tend 14 to raise much smaller amounts than fund issuers. 15 MS. LUNA: Yes. Okay. And then I had another 16 question. So there were -- you took apart the investment 17 experience of 750K and you showed a delta that got us to 18 9.14. So -- or the cap was 9.4, so there was a delta of 19 8 million households that would be in addition. Did you 20 take a look at other items such as the education 21 certificate work experience? Did you also do an analysis 22 in terms of households that would be able to meet that 23 threshold to create that delta as well? 24 MS. GULLAPALLI: So the data that I presented 25 here is based on survey of consumer finances. Data on 0060 1 like work experience and education, it's not available -- 2 MS. LUNA: On that. 3 MS. GULLAPALLI: -- on a very fine level in this 4 survey. 5 MS. LUNA: So of the three, you only took a 6 look at the investment experience? That is all? 7 MS. GULLAPALLI: Right. That was the easiest 8 with this survey, yes. 9 MS. LUNA: Okay. 10 MR. GRAHAM: I think Tim has a question. 11 MS. REESE: Yes, thank you. Thank you. I 12 don't think I said my name the first time. I'm Tim 13 Reese. I just have a question. Can you help me in terms 14 of the assumptions around the 750 just so I have a 15 clarification of where do you cut off someone's personal 16 finances and then it becomes investment finances for this 17 calculation? 18 MS. GULLAPALLI: So the definition I meant can 19 vary based on how we look at it. So I just made a few 20 assumptions and looked at financial assets, including 21 real estate, but excluding primary residence. So that's 22 what we looked at. 23 MR. REESE: So just clarification is saying 24 that if you looked at a household and to include them in 25 this new number, the first thing is that the buildup, 0061 1 that they don't have to have 200,000 of income, they 2 don't have to have a joint income of 300,000, and they 3 don't have to have a million dollars outside of the main 4 property, they're included in this 750? 5 MS. GULLAPALLI: Right. Yes. 6 MR. REESE: And then so in the second portion 7 of the buildup from an assumption basis, so you throw 8 everyone in, and then you look at -- and I'm asking the 9 question. It will sound like I'm -- but I just need to 10 understand the assumptions -- is then you build up and 11 you say who in America in these 125 or 122 million 12 households owns property or some other alternative 13 investment that could qualify them to be an investor. Is 14 that correct? 15 MS. GULLAPALLI: Yes, right. So we just look 16 at do they have assets worth 750,000, at least -- 17 MR. REESE: Or a combination. Not a single 18 asset, it could -- 19 MS. GULLAPALLI: Right. 20 MR. REESE: -- be multiple assets. Okay. But 21 they can't be -- so -- but the whole criteria is they're 22 not associated with your home. So it could be a 23 building, it could be real estate, it could be a fleet of 24 cars or something like that? 25 MS. GULLAPALLI: Right. I have assumed real 0062 1 estate to be included other than primary residence. But 2 of course, based on recommendations, yeah. 3 MR. REESE: Sure. Okay. Thank you. 4 MR. YADLEY: Can I ask a follow-up to that on 5 the same calculation? Family businesses, would they be 6 included or excluded for the 750? 7 MS. GULLAPALLI: So in my calculation, I've 8 included business interest, yeah. 9 MR. GRAHAM: Okay. I think Chris has a 10 question. 11 MS. JACOBS: One quick question. When you were 12 running comparisons of the percent of households 1982 13 forward or 1983 forward, did you do any kind of 14 normalization for population growth so that it could 15 appear apples to apples rather than population '82 versus 16 today? 17 MS. GULLAPALLI: Yeah, so the -- 18 MS. JACOBS: Total population. 19 MS. GULLAPALLI: -- population that I looked at 20 that time is, yeah, a lot smaller. It was like I think 21 about less than 100 million households in 1983. So 1.5 22 million households could be apples and oranges, but if 23 you look at percentage of U.S. households, it is like 24 relative to what it was at that time, the total. 25 MS. LUNA: So this is Sonia. I have another 0063 1 question about the study. So this is an aggregate review 2 of households. Have you thought to maybe consider 3 looking at where those households are physically located? 4 For example, if we start making recommendations and we 5 find out really the people who meet these threshold are 6 all in metropolitan cities, then what we're really saying 7 is everybody in non-metropolitan cities have to create a 8 network outside and go to New York, LA to find the money 9 for those accredited investors with a new definition. 10 Did you take a look at kind of geographic location of 11 changes? 12 MS. GULLAPALLI: Yeah, we are considering those 13 as well, yes. 14 MR. GRAHAM: Okay. I want to take a -- I want 15 to offer you a short break. Let's take five minutes 16 before we have our presenters. So actually about seven 17 minutes. We will reconvene promptly at 11:00. 18 (A brief recess was taken.) 19 MR. GRAHAM: We'd like to reconvene. And 20 Chris, I'll just hand it to you. 21 MS. JACOBS: Thank you. We have since had one 22 of our prior members, Shannon Greene, join us. 23 Shannon, in five, ten seconds, would you give 24 your background to the committee? 25 MS. GREENE: Ten seconds. I'm Shannon Greene, 0064 1 chief financial officer of Tandy Leather Factory, 2 headquartered in Fort Worth, Texas. We are a very small 3 public company, run retail stores in 41 states and five 4 countries. 5 MS. JACOBS: Thank you. And welcome. You 6 missed all the other great comments. We'll fill you in 7 at lunch. 8 Now we have two speakers slated to address the 9 committee. We're going to begin with David Certner. We 10 are pleased to have with us today David, legislative 11 counsel and legislative policy director at AARP. AARP is 12 a nonprofit, nonpartisan membership organization that 13 helps people 50 and over improve the quality of their 14 lives. With 40 million members, AARP advocates for 15 policies that enhance and protect the economic security 16 of individuals. David has been with AARP since 1982. He 17 has served as chairman of the ERISA advisory council of 18 the Department of Labor and has been appointed three 19 times as a delegate to the National Summit on Retirement 20 Savings. 21 David, thank you in advance for joining us 22 today. We look forward to your comments. And when 23 David's finished with his presentation, we will invite 24 you to ask questions, comment, dialogue, and Stephen and 25 I will then be watching the clock for us. So we -- if 0065 1 you have questions, comments, we'll invite you to make 2 them. 3 David. 4 MR. CERTNER: Thank you. As mentioned, my name 5 is David Certner, and I'm the legislative counsel and 6 legislative policy director for AARP, and I appreciate 7 the opportunity to join you today to discuss the issue of 8 accredited investor. 9 Let me just talk a minute about AARP's 10 interest. One of AARP's central priorities is to assist 11 Americans in accumulating and effectively managing 12 adequate retirement assets. Essential to achieving that 13 goal is helping individuals better manage their financial 14 decisions as well as supporting efforts to protect 15 individuals from investment fraud and abuse and erode 16 savings and financial assets. 17 But at the outset, let me make clear that AARP 18 agrees that facilitating assets to capital for new and 19 small business is a worthy goal. Small business, 20 including startups with high growth potential continue to 21 have difficulty obtaining access to capital. We 22 recognize this. And policy makers are certainly 23 justified in exploring new, innovative ways to help them 24 get access to capital. 25 However, it's imperative that we do so in a 0066 1 careful and deliberate fashion balancing the goals of 2 capital formation with investor protection. AARP agrees 3 that investors should have the opportunity to invest in 4 small business, including emerging business so long as 5 those investors adequately understand risk and have the 6 financial ability to potentially absorb losses. 7 By definition, as you know, small and emerging 8 businesses are risky investments. Indeed, statistics 9 show that roughly 50 percent of small businesses fail 10 from the first five years. Moreover, within this sector 11 of small business investment, those startup businesses 12 with no track records are particularly speculative and 13 prone to failure. If efforts to promote access to 14 investment capital for small business are to be 15 successful, investors need to be confident that they're 16 protected to the fullest extent possible from fraud and 17 undisclosed risk. Such assurances encourage investment 18 and in turn will increase the availability of investment 19 capital. 20 In proposing its rules to implement the JOBS 21 Act, the Commission itself acknowledged increased risk of 22 fraud associated with lifting the ban of widespread 23 marketing of securities that, by definition, are intended 24 only for a specific segment of the investing public. 25 Unregistered securities, such as private placements, have 0067 1 emerged as one of the main vehicles for fraud involving 2 older investors. Even before the general solicitation 3 rules went into effect, the private placement market 4 exhibited a significant amount of fraud. 5 Of the enforcement actions taken by state 6 securities regulators in 2010 involving investors age 50 7 or older, cases involving unregistered securities 8 outnumbered those related to ordinary stocks and bonds by 9 a ratio of five to one according to the North American 10 Securities Administrative Association. Ensuring that 11 investor vulnerability in these offerings is mitigated to 12 the greatest extent possible is therefore of tremendous 13 interest to AARP. 14 Older investors with a lifetime of savings and 15 investments are simply disproportionately represented 16 among the victims of securities fraud. Indeed, under a 17 recent estimate, at least one in five Americans over the 18 age of 65 have been victimized by financial fraud. And I 19 think you understand this, it's older Americans, 20 particularly, who have accumulated assets over a 21 lifetime, and quite frankly tend to sometimes be a more 22 trusting population, are often the victims of fraudulent 23 actors. 24 Now key to AARP's investor protection concerns 25 with respect to the growing private securities market, 0068 1 the size of which, as you know, rivals that of the public 2 markets is this matter of who qualifies as an accredited 3 investor and is thus able to "fend for themselves" 4 without the protection of the 33 Securities Act. Now the 5 1953 Supreme Court ruling at the availability of the 6 private offering exemption turns on whether the investor 7 can "fend for themselves" have generally been interpreted 8 as requiring the following four elements: one, the 9 ability to hold these typically illiquid investments over 10 the long term; two, the ability to withstand a total loss 11 on investment; three, an understanding of the potential 12 risks of the investment; and four, the ability to gain 13 access to information needed to assess the investment. 14 Now these criteria seem to be generally 15 appropriate in determining who can fend for themselves in 16 the securities market. However, the current accredited 17 investor definition, which intended to define a 18 population of investors that meet the standard, uses 19 financial thresholds based on both income or net worth as 20 proxies for the tenets of accessed information, 21 sophistication, and so forth. We believe this definition 22 is ineffective at best. 23 For example, an individual with 200,000 in 24 income but fewer or no financial assets cannot easily 25 shoulder the risk associated with private offerings, 0069 1 particularly if that individual was near retirement. 2 Also an individual with a million or more in relatively 3 liquid financial assets may not be able to withstand 4 potential losses in private offerings if that million 5 dollars is a retirement nest egg that has been 6 accumulated over a lifetime of savings and must provide 7 income throughout that individual's life. 8 At the same time, many individuals who 9 satisfied the current accredited investor definition do 10 not have the financial sophistication to assess the risks 11 and merit of an offering based on the limited disclosures 12 available in private offerings. Lacking this 13 sophistication, such individuals are unlikely to be able 14 to negotiate access to even more comprehensive 15 information. 16 If the current definition of an accredited 17 investor, as we believe, fails to effectively define a 18 class of individuals capable of fending for themselves, 19 then the question is: How can the definition be adjusted 20 to better meet its goals taking into account the reality 21 of today's investment marketplace. So let me talk about 22 some possible approaches. 23 One obvious update, as we heard this morning 24 and perhaps the simplest, is simply to adjust the 25 existing thresholds. When the current thresholds were 0070 1 set in 1982, an income of 200,000 or millionaire status 2 covered a relatively limited number of very well off 3 people and did not affect that many retail investors. As 4 you know, that dollar amount hasn't changed in the three 5 decades since while inflation has brought more and more 6 individuals within this definition, effectively extending 7 its reach deeper into the population of those with 8 smaller real incomes. 9 Indeed measures of percentage of the pool of 10 individual tax payers, the number of individuals whose 11 income is 200,000 or above is now 20 times larger as we 12 saw this morning, at the time -- since the Regulation D. 13 So raising the thresholds to account for inflation would 14 increase these thresholds as we saw this morning in the 15 charts by roughly two and a half times. 16 Now while it may make sense to update the 17 financial thresholds, we don't believe that that approach 18 alone necessarily will resolve the shortcomings in the 19 definition. First of all, we don't really know with any 20 certainty whether the Commission got that threshold right 21 in the first place. And second, many individuals who 22 meet the net worth threshold will do so based on a 23 retirement nest egg that they will have to rely on to 24 last through their remaining years. 25 For example, while approximately 7 percent of 0071 1 all households have a net worth of 1 million or more, a 2 household headed by 65 or older meet that threshold as do 3 approximately 12 percent of households headed by someone 4 between the ages of 50 and 64. While some of these 5 retirees and near retirees may be able to absorb the 6 potential losses associated with private offerings, 7 others who may meet the threshold would see their 8 retirement security put at risk as a result of losses. 9 Finally, the investing population has changed 10 significantly since the 1980s with a larger percentage of 11 financially unsophisticated middle-income individuals 12 turning to the capital market to save for retirement than 13 they did 30 years ago and the complexity of financial 14 products, including those sold to private offerings, has 15 also grown in the intervening years. And I think this is 16 really a critical point here if you're thinking about 17 some of these older individuals. 18 In 1982 when these definitions were first set, 19 we essentially didn't have individual account plans like 20 401(k) plans and IRAs, which were basically just being 21 put into the tax code. And I don't think anyone would 22 have foreseen some of the changes that we have seen over 23 the last three decades and how people accumulate assets 24 for retirement moving away from the traditional to find 25 benefit plan with basically annuity for life to now 0072 1 individual account arrangements where individuals have to 2 save for themselves through their 401(k) plans with that 3 money very often being rolled over to IRAs. 4 Many of you may know that actually the amount 5 of money in IRAs now exceeds the amount of money in 6 401(k) plans. The amount of 401(k) plans exceeds the 7 moneys in traditional defined benefit plans. So we have 8 moved almost entirely towards an individual account 9 arrangement where, quite frankly, if you have accumulated 10 a million dollars for retirement -- and we're going back 11 to say a typical 4 percent rule I'd say, which is maybe 12 throwing off for someone who has a million dollars, 13 $40,000 a year -- this is not your high income person. 14 This is a person who's done the right thing with their 15 retirement savings their whole life and can be firmly 16 established as a middle class person. 17 And we don't think that these are folks who are 18 necessarily the ones meant to be under this definition in 19 the first place. So we've just seen a dramatic change, I 20 think, in the marketplace. 21 If the Commission sticks with the financial 22 thresholds test, therefore, we recommend that we look at 23 limiting investments and privative offerings to a 24 percentage of assets or income and that strong 25 consideration be given to eliminating the retirement 0073 1 accounts, the net worth calculation altogether. We 2 recognize that moving beyond the simple net income net 3 worth test may add complexity to the definition and will 4 make the definition's implementation more difficult. 5 However, we believe that given the potential harm to 6 investors, these options are well worth consideration. 7 As the Investor Advisory Committee, on which an 8 AARP representative does sit, noted in its discussion, 9 the risks associated with investing in private offerings 10 are greatly affected by how heavily the individual 11 invests in the offerings, so that obviously an individual 12 with 200,000 in income who invests $5,000 is unlikely to 13 suffer irreversible harm. But the same cannot be said if 14 you were investing 50,000 or $100,000. 15 The difference in risk isn't reflected in the 16 net worth definition either. So someone with a net worth 17 of $999,000 can't invest a dime, but someone with a net 18 worth of $1,000 more, a million dollars can risk it all. 19 To us this doesn't make sense, doesn't seem logical. We 20 believe it would make sense to allow some investments in 21 private securities once a person reaches an initial 22 threshold based on a percentage of income or assets with 23 restrictions being reduced or eliminated as income or 24 assets arise. 25 Another problem with this definition, of 0074 1 course, is that it treats the 1 million net worth the 2 same for a 35 year-old and a 65 year-old. This, too, 3 seems illogical. It's quite apparent that a 35 year-old 4 who has accumulated that much money likely has more 5 opportunities not only to make up money and make up 6 losses that the person in retirement certainly does not. 7 And so I do want to -- and this was even I think 8 confirmed by some of the data that we saw this morning 9 for the first time about retirement income assets and how 10 much that has increased the number of potential people 11 who can be in this marketplace. So we would strongly 12 recommend excluding retirement income assets from this 13 definition. 14 As I said earlier, I don't think anyone would 15 have foreseen back in 1982 how these plans would have 16 basically exploded in growth and become the main form of 17 retirement income. Of course, even there, we know there 18 might be challenges associated with that. People 19 certainly could, for example, be encouraged to remove 20 money from an IRA in order to make an investment as an 21 accredited investor. So we would believe we would need 22 some protections against that as well even if we were to 23 eliminate retirement income assets from the definition. 24 We also encourage the Commission to consider 25 allowing individuals to invest in private offerings upon 0075 1 the recommendations of a fiduciary advisor with no direct 2 -- who had no direct or indirect financial stake in the 3 offering. A fiduciary advisor would have to consider key 4 questions related to the appropriateness of the 5 investment, including questions like: Can you withstand 6 potential losses? Can you deal with illiquidity? Is the 7 investment appropriate given your financial goals and 8 risk tolerance? And what portion of your portfolio 9 should be invested in such assets? 10 Finally, we agree it's worth exploring this 11 issue also raised this morning about whether there's some 12 way to qualify individuals as accredited investors based 13 on their financial sophistication or knowledge and 14 experience. Individuals who have earned certain 15 professional credentials or have relevant professional 16 experience may be candidates to qualify without regard to 17 the strict income or net worth test. 18 We understand this will be a question about 19 line drawing how to define this, but another approach 20 might be to enable individuals who qualify based on their 21 investment experience, and the question is: What form 22 and level of investment experience qualifies? We 23 understand that, but we believe that these are certainly 24 questions that are worth pursuing. 25 In concluding, we believe that updating and 0076 1 strengthening the accredited investor standard to ensure 2 it fairly reflects the financial sophistication is a key 3 way in which the Commission can counter the adverse 4 effect on investor protection and efficient markets that 5 are limiting the 506 general solicitation that an 6 advertising ban may cause. 7 And as the Commission conducts its review of 8 the accredited investor definition, we encourage you to 9 fully explore whether the definition truly achieves the 10 goal of identifying those investors who do not need the 11 33 Act protections in order to make informed decisions 12 and make sure that their interests are protected. 13 We strongly encourage you to consider some of 14 the outlines, approaches -- various approaches I've 15 outlined as together they will better financially -- 16 protect the financial vulnerable investors without 17 necessarily constraining the ability of capital in the 18 private offering market. So I thank you and happy to 19 take any questions. 20 MR. GRAHAM: Thank you, David. 21 D.J. 22 MR. PAUL: Hi. Thank you for that. So just so 23 I'm clear, the AARP is advocating for excluding 24 retirement savings from the computation of net worth. 25 MR. CERTNER: That's correct. 0077 1 MR. PAUL: Would AARP also support excluding 2 the ability to invest retirement income in private 3 placements, or is that a bridge too far? 4 MR. CERTNER: I'm not sure what your question 5 -- I mean obviously -- I mean most -- you're not going to 6 -- most people are not going to have accumulated hundreds 7 of millions of dollars in these retirement plans. They 8 all obviously have limits of how much can go in in the 9 first place, but we certainly -- I mean middle-income 10 people are encouraged to shoot for a million dollars as a 11 goal in order to provide a 40 or 50 or $60,000 a year 12 annuity. 13 So remember -- I mean I understand we have -- 14 most of the people in this panel have come from a 15 securities perspective. I come from a retirement income, 16 protect older Americans perspective. We obviously have 17 -- we have government purposes in both. We have, as you 18 well know, a strong regulatory and tax favored sphere of 19 retirement income assets. So it is a governmental 20 objective to encourage people to contribute to plans. 21 We give them tax favored benefits, and this is 22 all designed to ensure that people get a nice stream of 23 retirement income. So we think that's almost a separate 24 regime. We would very much like to see those retirement 25 income assets pulled out of that completely. Now I think 0078 1 you -- I'm not sure if you were asking whether maybe we 2 could tap some of those assets if that was your question. 3 MR. PAUL: If the concern is that a retirement 4 income is inappropriate to -- or rather retirement assets 5 shouldn't be at risk because of this so-called riskier 6 pool that are Reg D offerings, why not exclude retirement 7 savings from being able to be allocated towards this in 8 the first place? 9 MR. CERTNER: I think that certainly one idea 10 to contemplate -- I mean quite frankly if people have 11 $100 million and want to also use some money in their 12 retirement plan, I don't know if it's that big a deal, 13 but I think the blanket rule you're suggesting probably 14 makes sense. 15 MS. LUNA: This is Sonia with Aviva Spectrum. 16 Aren't -- what checks and balances are not in place with 17 a retirement account that should be there? For example, 18 I thought that when someone does retire, right, and let's 19 say they've accumulated a million dollars. Are you 20 telling us that they could pull out 100 percent of that 21 money without any penalties whatsoever? I mean usually 22 there's a check and balance. You can't take out 100 23 percent of your million dollars once you reach a certain 24 age. There's got to be some tax penalty, isn't there? 25 MR. CERTNER: Not really. I mean once you're 0079 1 59 and a half, you can take your money out without any 2 tax penalties. You of course would have to pay income 3 taxes on any money you take out. 4 MS. LUNA: Then there is a tax penalty. If you 5 take 100 percent of your -- 6 MR. CERTNER: It's not necessarily a penalty; 7 it's a -- you have to pay income on that money whenever 8 you take it out. 9 MS. LUNA: Right. 10 MR. CERTNER: The sooner you take it out, the 11 sooner you pay taxes on it. I'm not sure I would 12 consider it a -- that's not a penalty. If you take it 13 out prior to 59 and a half, there is a tax penalty of an 14 additional 10 percent for taking that money out. 15 MS. LUNA: Okay. 16 MR. CERTNER: Of course, you could also be 17 investing some of this money through your individual 18 retirement accounts, for example, in some of these 19 offerings, too, I think. 20 MS. LUNA: Right. And did your organization 21 take a look at -- so on the financial fraud analysis that 22 you were providing us earlier, did you take a look at how 23 much of that was attributable to this type of offerings 24 versus let's say other types of financial fraud that are 25 not related to these offerings? 0080 1 MR. CERTNER: I appreciate that question, and I 2 was actually curious to hear some of the questions 3 earlier at the panel because we don't have access to that 4 detailed level information about which of the -- which 5 types of securities we're talking about. And one of the 6 numbers I cited was not aimed at this, but for seniors in 7 general, so even those who aren't meeting this threshold. 8 We know that that population is a very frequent 9 target of fraud because of who they are, how much they've 10 accumulated of their lifetime if they've done the right 11 things. They've obviously accumulated more than 35 year 12 old would have in most circumstances, and also quite 13 frankly you're dealing with issues such as mental 14 capacity sometimes with these folks as well. So there is 15 a lot of other issues that go into play there that make 16 this a target population for scams and fraudsters. 17 So Catherine. 18 MS. MOTT: Thank you. Actually my question was 19 a follow-up to that. I really was trying -- I wanted to 20 try to understand this study with the fraud cases, like 21 would you be able to identify like how many of them came 22 from -- the percentage that came from brokers versus from 23 the issuer themselves, like the entrepreneur who's 24 pitching for money. For something like that, it would 25 help me understand. Or how many of them were simply 0081 1 fraud cases because they were excessive fees or something 2 like that? If we could understand the study a bit more, 3 I think I would -- because the five to one seems pretty 4 high. I don't know. I'd like -- I'd just like to 5 understand. 6 MR. CERTNER: Yeah, no that is a broader -- I'm 7 trying to see if I can find the study here offhand -- but 8 that's a broad issue not specific to this issue of 9 accredited investor. But just making the larger point of 10 how many seniors in this country are subject so financial 11 fraud and scams of any type. 12 MS. MOTT: So we don't even know how many of 13 them are just -- it was just inappropriate, it was high 14 fees, Nigerian prince scams, or we don't know -- 15 MR. CERTNER: This is the whole range of scams 16 we're talking about. I can't tell you -- 17 MS. MOTT: Is there some way you can get access 18 to the details of that? I would very much like to see 19 that. 20 MR. CERTNER: The report that I'm referring to 21 is an Investor Protection Trust 2010 report that 22 estimated at least one in five Americans over the age of 23 65, so 7.3 million seniors in particular, have been 24 victimized by financial fraud, and we'd be happy to 25 provide a copy of that report to the advisory council. 0082 1 MR. REESE: Yeah, this is a -- 2 MR. CERTNER: This -- again, I want to be clear 3 that that was -- those are -- not all those people would 4 be subject to this definition. 5 MR. GRAHAM: Can we get Tim and then go to 6 Greg? 7 MR. REESE: Okay. Most of my colleagues are 8 talking about the issue that's in my mind, is 9 understanding what's -- I really recall that retail -- 10 it's retail -- what are the retail, what are the brokers 11 selling retail to seniors versus someone sitting in a 12 room coming to hear a pitch by a private placement or 13 going online to a portal and then being subject to fraud 14 of that type of magnitude. I think that number is going 15 to probably be important to understand that magnitude. 16 And then listening to the earlier presentation 17 around -- by Rachita. The number that she showed for 18 folks who were investing beyond their home, beyond just 19 their home of 750,000 or so is roughly -- and so maybe 20 these folks are below 750. Maybe they're below. Maybe 21 they're falling into fraud at a smaller number, 10,000, 22 5,000. I don't know the number. 23 But what it showed to me if you take her 24 numbers is that roughly 8 million -- there were 8 million 25 households that fit the 750,000. That's 6.5 percent of 0083 1 American households. So what I would be looking for is 2 something that would show the magnitude so that we can 3 get a better picture if it's now -- if it goes from 8 4 million by adding these folks who are following into 5 these private non-retail offerings that they may produce 6 up to 32 million or something, I think that would be 7 important to understand that magnitude. 8 MR. CERTNER: And I think -- and this was the 9 first we were seeing some of the numbers this morning, 10 because I think the first time I think I saw numbers with 11 -- if you pulled retirement accounts out what that would 12 mean. And I think you saw a pretty significant reduction 13 in the number of people. 14 And I think the point that I'm trying to 15 emphasize is that we -- if you go back to 1982, the 16 people who had a million dollars to invest was a much 17 different story than today, that we now have what I would 18 call middle-income people who have done the right thing 19 through their individual retirement accounts. They've 20 been putting in certainly -- not even hitting the 401(k) 21 limits, but putting amounts and had matching 22 contributions and diversified investments. 23 But even more than that now, I mean if you 24 think about what's going on and even in the 401(k) 25 universe now, if you're just contributing 10 percent or 0084 1 15 percent of your salary, and it's going into a default 2 target date fund where you're not even paying attention 3 to this thing, and it's accumulating, getting matching 4 contribution, individuals don't even have to manage their 5 401(k)s in many cases anymore. You just put them in a 6 target date fund based on your life or balance fund, and 7 you just let it go. These are not people who are 8 sophisticated investors who may have accumulated a 9 million dollars if they've done the right thing over the 10 time who we think should really be under this kind of a 11 definition. 12 And I think that's a huge number and a growing 13 number of people, because the IRA and 401(k) market is 14 just now hitting maturity. Right? It's been in place 15 now for about 30 years. So going forward, I think we're 16 going to see more and more people we hope -- we're all 17 encouraging people to do the right thing and save more 18 over time because we know how much is needed. But I 19 think we're going to see more and more people who are not 20 sophisticated investors who are not the targets, we think 21 originally, of what an accredited investor is falling 22 under these definitions if it's not updated. 23 MR. REESE: Thank you. 24 MR. YADLEY: Greg Yadley. When I was on the 25 staff, we were always trying to protect the little, old 0085 1 lady with tennis shoes. That was sort of what we talked 2 about, and the wealthy widow that somebody mentioned 3 earlier that had no financial sophistication but now all 4 of the sudden has assets. And I think your presentation 5 was excellent and raises a lot of good points. I think 6 the financial fraud data will prove that much of that is, 7 in fact, public market fraud and brokers who are calling 8 people to make investments, certainly down in Florida, 9 which a hotbed of fraud. That's a lot of what we see. 10 The percentage limitation certainly has some 11 appeal. It's easy to understand. It's rational. But 12 I'm troubled by what that could mean in the real world, 13 and remember we are talking about offerings without 14 general solicitation or up to 35 -- well, we're talking 15 about 506(b), so there's no general solicitation. Okay. 16 At the very early stage of companies where the 17 failure rate is great, most of the investors aren't 18 solicited; they're well known to the issuer. In fact, 19 they're friends and family. And guess what, those people 20 are providing more than 10 or 15 percent of their net 21 worth to their son or their daughter or their niece or 22 their best friend. 23 The rationale for making those investments 24 isn't necessarily made because of financial 25 sophistication. And in fact, if you get the most 0086 1 sophisticated investors, no matter how good the idea is, 2 the first thing that the better investors on this panel 3 will tell you is you're investing in management, who they 4 are, and what their accomplishments have been and what 5 their talents are, and you're making a bet sure on the 6 concept or the product, but also on those people. 7 So I think we should be very cautious in having 8 the government set percentage limitations or take away 9 from the calculation retirement assets and look at the 10 effect that that would have on early stage companies and 11 that would just be a blow if you can't go to the people 12 that the issuers know the best for more than whatever the 13 government says is the correct percentage of investments. 14 MR. CERTNER: I appreciate your comment and 15 concern. I would just add that it's a very large 16 percentage of the fraud that occurs with the elderly 17 people, occurs through family members. 18 MR. GRAHAM: Let's go with Charles, then back 19 to, Tim. 20 MR. BALTIC: Thank you, Mr. Certner for your 21 presentation. Very thoughtful. I just wanted to ask as 22 a matter of factual history if in the buildup to 23 Dodd-Frank in 2010 and 2011, did the AARP weigh in in the 24 legislative debate about the exclusion of retirement 25 assets from the definition of accredited investor at that 0087 1 time as we ultimately know primary residence value was 2 excluded from the definition? And if you did weigh in, 3 what was the consideration around that, and how was it 4 disposed of? 5 MR. CERTNER: I don't believe that we weighed 6 in at that issue at that time. I wish we probably had 7 seen more of where we were headed and maybe had raised 8 that earlier, but we have raised the issue about 9 retirement assets in other contexts in trying to protect 10 it, but not in this instance. 11 MR. GRAHAM: Tim. 12 MR. WALSH: Good morning. Why do you say that 13 private investments are riskier than public investments? 14 And how do you define risk? 15 MR. CERTNER: Well, I think this is -- I mean 16 it's a good question, but if you're talking about the 17 people I'm talking about, which is folks who really don't 18 have the financial sophistication, then these are not 19 even questions I think they could ask, more or less 20 answer. So I appreciate your question to me. 21 I don't know if I can give you the right 22 definitions for risk or talk about what's available in 23 the marketplace, but for most of the people we're talking 24 about who have grown up in a -- particularly in a 25 retirement, income, and asset world, have really grown up 0088 1 in more of a plain, vanilla, 401(k) plan. These are 2 kinds of investments that are quite frankly beyond what 3 they've even been exposed to, more or less really should 4 have their money invested in. 5 So I appreciate your question, but I think the 6 people we're talking about, these questions are well 7 beyond their level of financial sophistication. 8 MR. WALSH: But I agree with -- you're saying 9 -- your target audience, but as a general rule, we're not 10 talking just retirees, but say private investments, 11 that's incorrect. Depending how you want to -- if you 12 look in at risk as volatility or a long-term risk 13 adjustment return, you could probably -- two out of three 14 private investments have done better than public 15 investments. That's -- you can go to various different 16 stats on that. 17 MR. CERTNER: Maybe I'm incorrect myself, but I 18 was under the impression these investments were more 19 illiquid. 20 MR. WALSH: As a general rule, you're 21 incorrect. But where I think you are correct, and you 22 did make a comment that I agree 100 percent on, is the 23 ones that are sold through non-investment advisors and 24 through broker-dealers, that's something I'm with you 100 25 percent. I mean 10 percent lows on these things with 0089 1 usurious expenses, that's a different -- but to just 2 carte blanche say that private investments are risky in 3 my opinion is incorrect. 4 I invested in New Jersey and Indiana billions 5 of dollars both in public and private, and the concept, 6 as Greg was saying, it's really the management team 7 you're backing. Great public ones you trust -- I mean 8 there's a lot of poor public ones out there, too, as well 9 as private, but that one is one that I think you're 100 10 percent correct on. I'd love you to spend your resources 11 focusing on that because of the -- these -- there's many 12 of these retail retirees and non-retirees get sold these 13 private investments with 10 percent commissions going in 14 and 2 to 300 basis points annuals in poor performance, 15 too. 16 MR. CERTNER: I think you're just raising 17 another issue we're talking to the Commission about right 18 now in terms of making sure people are investing in the 19 best interests of their clients. 20 MS. HANKS: Just to go back to the fraud issue, 21 do you have any data on the correlation of fraud on 22 seniors and whether or not they fall on one side or the 23 other of the accredited definition? Because it seems to 24 me that it's quite possible -- when you commit fraud on 25 seniors, you're just taking advantage of their age and 0090 1 their inability to assess the situation as opposed to 2 whether they are or are not accredited. I think a lot of 3 fraudsters are not actually doing the calculation as to 4 whether they're accredited or not. Any data on that? 5 MR. CERTNER: I don't know that I've seen any 6 data on that, so I don't think there's any available that 7 I'm aware of. And part of our concern, of course, here 8 is that we think the number of people who are 9 accumulating these sort of individual retirement accounts 10 will be growing I the future and that we'll have more and 11 more people who would meet the -- at least the million 12 dollar test here, a million dollars, which is really a 13 retirement account that we really think is not by 14 definition of a sophisticated investor who can fend for 15 themselves. 16 MS. HANKS: But it would seem like the bad guys 17 are not going to sit down with a calculation of whether 18 you're a one million or two million or whatever. They're 19 just going to sit down and go you're old so I'm going to 20 take advantage of you. 21 MR. CERTNER: Well, that's part of it, too. 22 You would not believe how sophisticated some of these 23 fraudsters are. It's just incredible how many scams -- 24 we have a whole fraud watch network that we've been 25 developing, and it's really just absolutely incredible to 0091 1 us the kinds of things that we see and then you shut one 2 scam down, another one grows up, and they're really 3 incredible. They're very sophisticated. 4 MR. GRAHAM: D.J. 5 MR. PAUL: Yeah, just I think that we're 6 talking about -- first of all, fraud, what's illegal is 7 illegal, it's always going to be illegal, and someone who 8 is inclined to commit such a fraud is not going to be 9 dissuaded by raising a limitation, particularly in the 10 506(b) universe where it's a box check. So I'm not sure 11 if this would -- I appreciate the goal, I agree with the 12 goal, but I'm not sure whether or not playing with the 13 definition, at least with respect to the dollar amount 14 limitations, is going to have a real impact on someone 15 who is dead set on committing fraud on -- elder fraud. 16 I don't think they're going, oh, okay, well now 17 it's 2 million or whatever the number is, now I'm not 18 going to make that phone call. So that's -- I'm not sure 19 that this is going to achieve the end -- that this might 20 achieve the end that -- your worthy end that you're 21 trying to achieve. 22 MR. CERTNER: And let me be clear here. Fraud 23 is obviously a problem and a big problem and one we're 24 concerned about, but it's not just fraud. There are many 25 things that are not fraudulent that are legal that are 0092 1 just simply inappropriate. And that's really what we're 2 talking about, thinking more than anything else, because 3 some of the things that Mr. Walsh was referring to and 4 some of the high fees or certainly lower returns and 5 someone who -- taking advantage of people. Some of these 6 things are not illegal. They're certainly inappropriate, 7 perhaps immoral, but they're permitted, and you're taking 8 advantage of basically investors who are not 9 sophisticated and cannot absorb the losses if you want to 10 go with these definitions. 11 MR. GRAHAM: Okay. Let's take one more 12 question, and then we'll -- 13 MR. LEZA: It's not a question, but a basic 14 point. In Northern California, they did the analysis 15 just to see on the 506 for accredited investors as what 16 kind of fraud they were seeing. This was done about two 17 years ago. And they basically from the data that they 18 got, they found zero. So a lot of the scams are 19 happening to the non-accredited investors. Okay? 20 MR. GRAHAM: Thank you, Richard. 21 Thank you, David. 22 MR. CERTNER: Thank you very much for your 23 time. 24 MR. GRAHAM: We're going to move into our next 25 speaker. 0093 1 MS. JACOBS: Marianne Hudson. Good morning, 2 and thank you for coming. We're pleased to have with us 3 today Marianne Hudson, the executive director of the 4 Angel Capital Association. The Angel Capital Association 5 is a professional and trade organization supporting the 6 success of angel investors in high-growth, early stage 7 ventures. ACA's membership includes more than 160 groups 8 and 20 affiliate organizations across North America. The 9 member angel groups represent more than 7,000 accredited 10 investors and are funding approximately 800 new companies 11 per year and managing an ongoing portfolio of more than 12 5,000 companies. Prior to her current position, Marianne 13 was the entrepreneurship director at the Kauffman 14 Foundation, and prior to that she was VP of the 15 Mid-America Manufacturing Technology Center. 16 Marianne, welcome. Thank you for coming today. 17 MS. HUDSON: Thanks so much for having me. I'm 18 really thrilled to be here and really appreciate the work 19 the Commission is doing. We've really enjoyed working 20 with the staff in particular. I had the opportunity, I 21 guess, to be at the most -- at the last meeting, so thank 22 you for inviting me again from September. So I do come 23 with a slide deck. I'll try to get through it quickly 24 and look forward to the dialogue. 25 So just to maybe update you on the Angel 0094 1 Capital Association, we have 12,000 member angels doing 2 -- in about 208 angel groups and angel platforms. Our 3 members are individual angels, those who belong to 4 groups, and those who belong to accredited platforms, 5 angel list, funders club, and organizations like that, 6 and we're really here to help them be better angels and 7 kind of be their voice so that they can be -- they can 8 select the best opportunities, they can support the 9 entrepreneurs that lead them to the best exits. And our 10 members are in every state and actually a few Canadian 11 provinces. 12 I'm going to just tell you up front we have 13 three main recommendations as it relates to the 14 accredited investor definition. The first one is to 15 leave the thresholds -- the financial thresholds as they 16 are. We think they work well, particularly in the angel 17 field, and I'll have some data to talk about that, and 18 we're not seeing fraud in our area. And we really 19 believe that if you increased those financial thresholds 20 for inflation, it would have a huge impact on the market, 21 particularly for the startups that create the jobs in 22 this country. 23 The second one is to consider adding 24 sophistication criteria to grow the base of individuals 25 who don't meet those thresholds, but to make sure that 0095 1 you put things together that are somewhat simple to 2 administer and that the market understands and to make 3 sure that there's multiple criteria that are available so 4 you don't hem certain people out of being sophisticated. 5 And the last one is to I guess really expand 6 investor education that's available, make it free, and 7 make it easier for more people to find it. So I'll come 8 back to those in more detail in a little bit. But if we 9 just think about the life of a company, they're getting 10 money and growth throughout the time. So as they're 11 coming up with ideas, they're working with their own 12 money, the friends and family, which actually we 13 understand to be something like $60 billion a year to 14 support those organizations. 15 And then as they grow, they start getting 16 capital from angels and angel groups, seed funds, and 17 then once they really have a product ready to go, they 18 might be getting venture capital and moving onto a lot of 19 other institutional equity. Now hopefully, eventually 20 you get -- start working with the investment bankers down 21 the way there so that they're acquired or go public. 22 Maybe to put in context a little bit, too, I'm 23 talking about an estimated market really of $25 billion 24 which we think of as real important money and certain 25 venture capital which is about the same size. I know 0096 1 we're really talking about private offerings on the 2 equity side. Private equity is probably pushing $350 3 million. And if you're looking at Reg D or private 4 offerings, I know it's more than a trillion dollars. So 5 yes, we are a small piece of that, but we think we're 6 pretty important in there, because we are driving most of 7 the startup funding that's available. 8 Estimates are last year that angels invested 9 about $25 billion and about 71,000 deals. Actually there 10 might be more -- fewer companies there. Majority of net 11 new jobs really come from those startups, so companies 12 are less than five years old, and most of those are 13 getting their capital from angels if they have equity 14 capital before they go to the VC round. And we believe 15 that angels provide about 90 percent of the outside 16 equity raised by startups. So after friends and family, 17 angels are putting in that money. And then we're hoping 18 that the companies that do well go onto VC money to 19 expand. 20 We're taking our own money and making our own 21 investment choices, and while data is still developing on 22 angel investing, there's somewhere between 200,000 and 23 300,000 angels across the country pretty much everywhere. 24 And we really think that these startups are important 25 that I just talked about because they're creating the 0097 1 most net new jobs in the country. 2 This is a chart from the Kauffman Foundation 3 from a few years ago looking at 25-year timespan, really 4 found that the blue is the job creation that came from 5 startups, and the red is from job creation from everyone 6 else. So really it's -- if you take out the startups, 7 we're actually losing jobs even in some good economy 8 years. 9 So we're focusing on the startups, and then 10 we're combining with the venture capitalists to take the 11 most successful startups and really expand where they're 12 going, and so we're helping create those billion dollar 13 companies that are creating jobs pretty much as we come 14 out after the fifth year, and a lot of those companies 15 are some of the brand names that you've heard about. So 16 angel backing started groups like Facebook and companies 17 you may not even kind of think about that much like Home 18 Depot or Best Buy. But a lot of them are tech or life 19 science based. 20 And just kind of quick thing to think about 21 where startups get their funding, angels and venture 22 capitalists are investing about the same amount of money 23 per year in total, but we're seeing that angels are 24 making smaller deals, so 71,000 a year as opposed to 25 venture capital, which is about 4,000 a year. So they're 0098 1 really focusing on the expansion capital. And I think 2 these slides will be available for you at some point. 3 Another thing to think about is that a trend in 4 angel investing is the formation of angel groups where 5 people typically in one community kind of pull together 6 to look at investments together, learn from each other, 7 and combine their capital and find a way to work with the 8 companies together. In fact, I'll talk about that a 9 little bit here. 10 So if we think about it, sophisticated angel 11 investing is really hands-on work. So we're not just 12 writing a check. We're providing ongoing support, 13 mentoring, we're on their boards, we're helping them 14 figure out getting customers, finding the right people 15 and additional capital as they grow. And we're working 16 hand in hand. We're part of the ecosystem of these 17 communities. We're working with universities' economic 18 development, accelerators and incubators and figuring out 19 a way to support these companies throughout their life 20 cycle. 21 But we're really focusing on having the best 22 practices for active deal and risk assessment. So we're 23 taking in deals, and we have strong processes to look at 24 how these deals are going to work. Do they have the 25 right entrepreneurs? Do they have great markets to grow? 0099 1 And so that does mean that we're funding probably few 2 than 5 percent of the opportunities that we're seeing and 3 really understanding from our own experience how we can 4 support those companies. 5 So we're really seeing almost no fraud in what 6 we're doing based on the processes we have, the 7 relationships that we have. In fact, it's kind of hard 8 to prove a negative. I just really haven't seen fraud in 9 our industry. I've taken a few calls in my job over the 10 last ten years about fraud, and the couple times I can 11 remember, it was entrepreneurs who are approached by 12 people representing themselves as advisors and thinking 13 something sounded funny in what they were hearing about 14 fees and a couple times a similar situation on the 15 investor side. So we're trying to be able to give them 16 the best information that we can and follow your gut if 17 you're calling me about that. But we're just not seeing 18 the fraud. 19 We're also working on extensive due diligence. 20 We have put together a lot of education on how to do that 21 and really understanding the entrepreneurs doing 22 background checks and understanding their capabilities. 23 And then also putting together the terms of the deal, so 24 the issuers aren't setting those. We are, and we're 25 negotiating those together. We're making sure that we 0100 1 have information rights, and typically if we're enough 2 into the deal -- we're on the board or an observer, and 3 we're just working directly between the investors and the 4 issuers. We're really not working with intermediaries. 5 And finally, I mean I think that's a way that 6 groups are working. We're seeing accredited platforms 7 are working very well, too. They found super experienced 8 angels who are doing a lot of that work and allowing some 9 smart people to follow on with them with additional 10 information. And we're finding kind of over time -- some 11 studies from Harvard and MIT are finding that when we as 12 angels get involved, the entrepreneurs are going to be a 13 lot more successful. 14 So we do have -- I'm going to click through 15 this very fast. We do have a couple stats just to kind 16 of get you kind of a background on angel group 17 investment. And it's called the HALO Report. It's now a 18 three-year study that comes up quarterly that's a 19 combination of the Angel Resource Institute, CB Insights, 20 and Silicon Valley Bank. I'll just show you a little 21 bit. So for -- we're just looking at 2013. It looks 22 like the average-size angel group deal is about $600,000, 23 or if we co-invest with a venture capitalist, it's just 24 under a million dollars. And it's been that way for the 25 last three years. 0101 1 Where we invest -- this is a map from 2013 -- 2 you can see that angel investing really is not just in 3 the typical venture areas of California, New York, and 4 Boston. It's really all over the country. That's both 5 by deal and by dollar. That's one of the reasons I love 6 being an angel investor. 7 When you look at the sectors that we're in, 8 this is kind of a busy chart, so I'll make sure you have 9 copies of this to look at, but the point is that 10 internet, kind of IT, healthcare, which would be both -- 11 internet, healthcare, and mobile are two-thirds to 12 three-quarters of our investments for the last three 13 years, and it's flipped a little bit with growth really 14 coming in mobile. And so we're really looking for the 15 kinds of companies that can scale and deliver some 16 returns. And that was in terms of deals. This is in 17 terms of dollars, and the numbers really go up. So last 18 year, those three sectors that I mentioned were 80 19 percent of the deals in this data set that we have. 20 The other thing is we're really trying to make 21 sure we have good data and best practices that we can 22 learn from. This is a somewhat old study, but this is 23 what we know about risks and returns for angels. So this 24 data set had I think more than 600 investors who had done 25 more than 3,000 deals, but about 1,300 of them had exited 0102 1 at this point, good and bad. 2 So we found in this dataset that 52 percent of 3 the investments had lost some or all of their money. The 4 businesses went out of business. And -- but they did 5 that in three years or so, whereas over to the right, 6 just under 8 percent of those deals had a 10X 7 cash-on-cash return or more and provided the vast 8 majority of the return. 9 We were able to kind of look at that as a 10 portfolio in understanding the IRR, but I think the point 11 we wanted to do was really understand the risk that was 12 there, and the education we've pulled from that is if you 13 as an angel investor could understand the risk that's 14 there we're recommending that you make multiple 15 investments and use certain processes that are there. 16 And if we had more time, I could show you more of what 17 we've learned, but we're really trying to build from data 18 and understanding and hope to have a new study next year. 19 So that's just a little background on angel 20 investing. So let me just get to a little bit about the 21 impact of the definitions that we're thinking about. So 22 if we think about the regulatory objectives that we've 23 heard, I think we've heard a lot about that today. It's 24 about investor protection, it's about capital formation 25 and just good integrity in the market. 0103 1 I think our goals are somewhat similar, but 2 I'll kind of take them out a little bit more. So we want 3 to make sure that knowledgeable investors that fund 4 startups can keep doing that because we think it's 5 important to job creation and the economy. And we want 6 to make sure there aren't undue obstacles for that 7 relationship so that we can keep funding those important 8 companies. And we want to make sure there's good 9 education and best practices to make sure that the number 10 of sophisticated investors grows. 11 And if we look at 2010 Dodd-Frank, we think 12 about that, I think we find that removing the primary 13 residence that started the conversation in 2010 and came 14 into effect in 2011 was a major shift. The data we've 15 seen was that that cut back about 20 percent of eligible 16 households that were there. I guess the other things I'd 17 want to remind you is that the act asks the SEC to review 18 it, and I think it sounds like we're doing some really 19 good work there, but not necessarily to alter it. Take a 20 look at that combination of investor protection, public 21 interest, and the economic environment that we're 22 participating in. 23 So I'm going to go back to those three 24 recommendations and put a little bit of data behind it. 25 So our first recommendation, again, is to leave the 0104 1 thresholds alone. I think I've talked a little bit about 2 that. We really do think the issue is it would have a 3 major market impact and reduce the pool of capital for 4 entrepreneurs that we think are incredible important for 5 the economy. 6 So we actually took a look at our own data, our 7 own membership. We did a survey about a year ago. We 8 had 109 accredited investors who are writing checks. 9 They're located in 41 states and a great range of ages. 10 I believe the average age of investor here was 58, 11 58-plus, something like that. So we found if you raised 12 them for inflation, which we understood to be 400,000 in 13 income and 2 and a half million in net worth, we found 14 that a lot of our members did continue to qualify, but 15 that there would be 28 percent that would no long 16 qualify. I happen to be one of those people. So I guess 17 I have a personal interest in making sure that that 18 doesn't happen. But we try really to have our data and 19 really compare it, who met one or the other or both. So 20 we do skew a little bit larger than the numbers that we 21 saw this morning. 22 We also wanted to understand what the impact 23 would be if it was raised on a geographic level. And so 24 what we really found is that if you were in California, 25 New York, or New England, that took out about 26 percent 0105 1 of the investors, and if you were pretty much anywhere 2 else in the rest of the country, that would affect 32 3 percent, so basically a quarter versus a third, which we 4 think is a pretty big deal in important parts of the 5 country. 6 Kind of as an aside, too, we also saw a skewing 7 that the impact would be a little bit more on women and 8 also younger people. So we found that there was an 9 average age of about 48 for people who were qualifying by 10 income, but not net worth. And they seem to have been 11 impacted just a slight amount more, so something else to 12 think about as I think a lot of younger people are 13 starting to get involved in supporting startups. 14 We also thought we'd take a look at some of our 15 members and what they did. So AngelList is one of our 16 members, the largest accredited platform. They have 17 created a term they call mere accredited, which I guess 18 I'll say is just somebody who meets the -- who's at the 19 lower end and would be basically wiped out if they had -- 20 they have less than $2 million in net worth. So they 21 found that they had about 46 percent of their members who 22 qualify by net worth just at kind of $2 million or less, 23 and I think that funded about 23 percent of their 24 investments. 25 Our second recommendation is to think about 0106 1 adding sophistication criteria to expand the class. We 2 really do think there are some smart people out there who 3 are left out, or I suppose I put it this way, too. If 4 there were some changes to the thresholds, perhaps this 5 is a way to make sure you keep the class at the same size 6 as it is. So we're talking about people who have -- who 7 really understand the industry. So they've been on a 8 board or an executive or financial responsibility -- P&L 9 responsibility at a for-profit company. Or they've got 10 relevant degree or training, so they've been in a -- 11 they've had MBA finance training, or they have some 12 certification, CPA, that kind of thing, previous 13 investment as a Reg D offering, and membership in an 14 established angel group, which has the strong processes 15 I've talked about not just in investment, but how they 16 make sure that their members are accredited. 17 And we think it's important to have a simple 18 way to look at the sophistication. So have them 19 certified via detailed questionnaire -- this is 20 information we've provided to the SEC before -- just to 21 validate the sophistication and just make it reasonable 22 for administration. The other point would be once you've 23 done one of these things from experience or education, 24 you're accredited for life. No need to kind of 25 continually do that. 0107 1 This is not readable, but it is kind of a -- 2 basically what we actually submitted to the SEC before as 3 a potential certification form. So kind of somewhat 4 similar to the past self-certification, check the box. 5 But you could probably add with that easy checks, like 6 these days it's easy to see things by LinkedIn and other 7 publicly available databases. And we think -- maybe this 8 is not only common sense, but common ground for thinking 9 through sophistication. 10 Maybe this does work for a lot of people with 11 different views on this issue. From the same database 12 and the same research that I talked about about a year 13 ago, this is our membership. We took a look at, well, 14 how would we meet some of these requirements. So we 15 really found if you take away past investment, I think 16 it's 95 percent of our members would hit one of those 17 criteria that I talked about. So they've been a board 18 member of a for-profit entity more than 60 percent, or 19 they hold a business degree, which is more than 50 20 percent, and certainly more about two-thirds have held a 21 C-level position or a P&L position in a company. So I 22 think those are common sense and easy things to work 23 through. 24 AngelList looked at similar sophistication and 25 really found that a lot of its members had a lot of past 0108 1 experience from founding companies to being tech execs to 2 founding companies. They're entrepreneurs, and they 3 understand the class. 4 Our last recommendation is really to think even 5 more about education. It was neat to hear this morning 6 about the partnership between the SEC and SBA to do a lot 7 of education, and I know there's a lot more out there. 8 But if we could just think creatively about more ways to 9 get education to the people where they are, easy and 10 free, I think that brings more education. An example is 11 the Kauffman Foundation's Investor IQ program, which is a 12 free web-based program that really helps you understand 13 where you stand sophistication-wise now, what your gaps 14 are, and then provide you some education via reading and 15 some really cool videos. And I'm sure that there's a lot 16 of other things that could be done there. But we need to 17 think more about how do we get that information to the 18 right set of people. 19 I would also just comment that the 506(c) issue 20 or verification does complicate things and has us 21 thinking the way we are. So if you just think about the 22 verification that's required there, you already have to 23 kind of think about how you're going to verify whether 24 somebody is an accredited investor. And so if I think 25 about some of the other limitations that we've talked 0109 1 about today, we start thinking, well, how are you going 2 to verify that. And so that makes us want to be I think 3 a little bit more simple in our recommendations, and it 4 probably relates to just a few comments on the Investor 5 Advisor Committee recommendations. 6 I think removing retirement assets from the net 7 worth calculation is very problematic for us. There's a 8 lot of sophisticated angels who invest in those -- 9 through their accounts, and you'd be surprised of the 10 people who do that, and many of them have been advised by 11 their tax experts to make those investments through Roth 12 IRAs or others. And remember, we've got a lot of them 13 that are in the older categories. So I do think that 14 would wipe out a lot of people, and it would already take 15 out a lot of people who already make their investments 16 through that. 17 Kind of two other things to say. The IAC did 18 recommend finalizing the proposed rule about Regulation D 19 and Form D providing 15-day advanced Form Ds, et cetera, 20 and we think that that is unworkable in the startup 21 arena. It might work in other areas, but we would not 22 like to see that. And any other thing we would say is if 23 the SEC did decide to make some big changes, we do think 24 they should be phased in gradually so that there's not a 25 huge disruption of the private market. So kind of think 0110 1 about that. 2 So thank you for your having me be here. I 3 think we really believe in keeping the thresholds as they 4 are. We like the idea of sophistication and education, 5 and I'm here to take questions. 6 MR. GRAHAM: Thank you, Marianne. I'm sure we 7 have some questions. 8 Sara. 9 MS. HANKS: A quick one. Do you have any data 10 on ACA members who do hold their angel investments 11 through retirement funds? 12 MS. HUDSON: Not very good. We have anecdotal 13 information. Unfortunately we did not collect that in 14 the study I had, but probably one we could do down the 15 road. 16 MS. HANKS: Be nice to have. 17 MS. HUDSON: I agree. 18 MR. GRAHAM: Charles. 19 MR. BALTIC: Thank you, Ms. Hudson. Very 20 comprehensive and informative presentation. I noted the 21 data around the job creation from the companies that are 22 fostered by angel investments and also the data around 23 geographic diversity or dispersion of angel investing. I 24 was wondering if you had a perspective on institutional 25 VC capital in terms of geographic dispersion. My own 0111 1 experience is that it's heavy concentrated on the coasts, 2 much less evenly balanced than angel capital, and I'd 3 like to know if you have a perspective on that and how 4 that relates to balancing out economic development 5 nationwide as opposed to in centers of financial -- 6 MS. HUDSON: No, I mean I think I agree with 7 you, and I think the data shows that the vast majority of 8 venture capital is in Silicon Valley and Boston with some 9 growth now happening in New York, certainly in Southern 10 California, and then little pockets here and there 11 throughout the rest of the country. So I think what 12 we're finding is that in a lot of parts of the country, 13 companies that need those next rounds of capital either 14 are having to connect up with a really friendly VC who's 15 willing to travel where they are, which isn't that many, 16 or they're having to move out to the coast, which 17 disrupts kind of local economic areas. 18 Or what we're really finding is angels then are 19 working together in groups, and they're syndicating 20 between groups. So you're now seeing maybe 75 percent of 21 angel group deals are syndicated between three, four, 22 five angel groups, family offices, and individuals so 23 they can come up with the capital that the entrepreneurs 24 need. And so the economic development communities are 25 trying to make sure that they have enough angel in those 0112 1 -- angel groups in those communities so they can support 2 those companies. And we're starting to find that angel 3 groups are around up several rounds and are really the 4 support for those companies. 5 MR. GRAHAM: Dan, did I -- 6 MS. HUDSON: Did that answer your question? 7 MR. BALTIC: Yeah. 8 MR. CHACE: So it sounds to me like angels are 9 a relatively sophisticated subset of the broader Reg D 10 market. 11 MS. HUDSON: Correct. 12 MR. CHACE: And so you see them as a proxy. 13 How do individual angels treat the typical investment in 14 terms of dollars? Like what's the median? And how many 15 of -- how diversified are they across investments? 16 MS. HUDSON: So I think that is -- that range 17 isn't known exactly, but I think the typical individual 18 investment would be somewhere between 5,000 and $25,000, 19 but the range can be quite wide. So you'll find in a 20 group -- so the typical investment is $600,000. So 21 that's a lot of individuals, and it's probably four or 22 five angel groups. We're seeing -- in my angel group, 23 which is the Women's Capital Connection of Kansas City, I 24 think the average individual investment is $14,000 per 25 person, but the minimum investment is $5,000. And we're 0113 1 seeing that happen in some groups. And on the AngelList, 2 I don't know what the average size investment, but the 3 minimum is 1,000. 4 MR. GRAHAM: John. 5 MR. HEMPHILL: Hi. Thank you very much for all 6 this information. It's really very enlightening. I -- 7 one question I have for you is you mentioned -- a lot of 8 people have been mentioning extending the definition of 9 accredited investor to have some sort of concept of 10 sophistication. What about extending the definition of 11 accredited investor to basically take account for certain 12 types of transactions? 13 For example, where you have a lead investor who 14 is sophisticated that is taking up 60 percent of the 15 deal, and you have 40 percent, and there are limitations 16 on who can invest in that 40 percent. But the fact that 17 you have that lead investor that's doing the diligence, 18 that is making sure it's a good investment basically 19 makes the other 40 percent deemed accredited even though 20 they may not be accredited. There have been certain -- 21 in the history of the creation or the -- looking at the 22 definition of accredited investor, sometimes those types 23 of things have been looked at and rejected. 24 MS. HUDSON: Yeah, I don't know if I'm familiar 25 with that specific one. I think that certainly happens 0114 1 in a lot of deals where everybody is accredited by 2 current definitions, but you do have a leader that's 3 there. I guess that sounds more complicated, and again 4 trying just to figure out how you would verify and really 5 make that work practically -- it just seems a little bit 6 more difficult in the market. But I think in some ways 7 it describes how a lot of angel deals happen right now. 8 MR. HEMPHILL: And what about, for example, 9 friends and family rounds which most people start their 10 business by using their Rolodex or whatever, their 11 LinkedIn. So it's people that they know. So having some 12 sort of preestablished relationship even though those 13 people may not meet the dollar limitations, be it income 14 or net assets. Are you in favor of that type of 15 accreditation for those types of offerings? 16 MS. HUDSON: Well, I mean I'm in favor of 17 making those deals happen some way whether they're 18 accredited or not. I mean I think angels want to make 19 sure that those startups can get backing from friends and 20 family first. If they can't sell them, why should we 21 invest, right? But whether they're accredited or not, I 22 don't know. Right now they're not, and we figure out 23 ways to make sure that the deals can go forward. And so 24 a lot of those investments may or may not be equity 25 investments. 0115 1 MR. GRAHAM: Sonia. 2 MS. LUNA: I really appreciate the PowerPoint. 3 It was really comprehensive, and I want to compliment you 4 on the great job you did. The data point that struck me 5 was that 20 percent of folks that are currently 6 accredited investors would be eliminated if we were to 7 adjust the definition to inflationary rates offered. 8 MS. HUDSON: Right. 9 MS. LUNA: Okay. But they would be back in the 10 pool if we extended the definition, correct, with 11 education, experience, investment experience? Is that 12 correct? 13 MS. HUDSON: If that's -- 14 MS. LUNA: In other words it would balance. 15 MS. HUDSON: Yeah, if that was a choice, yeah, 16 it could work. 17 MR. GRAHAM: Catherine. 18 MS. MOTT: I'm going to maybe make some 19 comments because I'm a member of the Angel Capital 20 Association, and I'm a former chairman of the board of 21 the Angel Capital Association. So let me talk about, if 22 I could briefly, about the 32 percent that Marianne 23 referred to as the middle of the country, the flyover, 24 the 32 percent that would be eliminated. 25 In Pittsburgh, I have doctors and attorneys in 0116 1 my group that probably make somewhere around $250,000 a 2 year. If it was raised to $450,000 a year, I would -- I 3 could lose those members, and we think it's about 30 4 percent of our membership. Doctors, physicians in our 5 region, where in New York City they would make 450,000 or 6 500,000, they make 300,000 in Pittsburgh. So what's 7 representative of Pittsburgh is also representative of 8 Louisville, Kentucky and Oklahoma and some of the other 9 middle -- 10 MS. HUDSON: Kansas City. 11 MS. MOTT: Kansas City. Same thing with net 12 worth. So I can just reinforce that point. The other 13 thing I think Marianne, one of the things that 2007 study 14 that Rob Wiltbank did is the return on investment with 15 the higher -- with the greater amount of due diligence 16 that was done. And that's one of the things that angel 17 -- angel groups, if you ask me today, act a lot like 18 small VCs. We use the National Venture Capital 19 Association's due diligence checklist. We use their term 20 sheets. 21 75 percent of our deals were syndicated last 22 year, and it's all because we were able to use the same 23 term sheet. And it looks like a Series A term sheet. 24 And so this ability, this sophistication that has been 25 brought by the industry coming together under a 0117 1 professional organization as well tends to decrease our 2 losses because of the amount of due diligence that we do. 3 The other thing I would like to point out is 4 areas like Pittsburgh do not have a great deal of VCs. I 5 mean I started a fund last year. It's a small $30 6 million fund to be a follow-on, to be a Series B round, 7 because there is a dearth of VCs in our region, and we do 8 see VCs come in and pluck them out and take them out of 9 the region. I mean as angel investors we might -- that 10 doesn't hurt us so much, but it does hurt the local 11 economy. 12 So one of our deals I was mentioning earlier to 13 Charles is a company called ALung raised $65 million. 14 It's a medical device, by the way, that got compassionate 15 use approval by the FDA and saved the life recently of a 16 transplant patient at the University of Pittsburgh, kept 17 him alive for 22 years because he could not be intubated. 18 And 60 million of that 65 million came from angel 19 investors. We have stayed with that company as it 20 continues to get its approval and continue to make a 21 difference in the marketplace, but that's because we 22 don't have 35 VCs in our backyard, and we know this 23 company, we follow it, it's a spin-out from the 24 University of Pittsburgh, and it's received a lot of NIH 25 money. Thank you. 0118 1 And SBA, SBIR money, so this whole idea of the 2 impact that I guess I'm trying to make here is that the 3 impact on our community, our local economy is very 4 important to Pittsburgh, and changing the accreditation 5 standards would impact my region more so than it would 6 impact New York or LA or San Francisco. Thank you. 7 MR. GRAHAM: Thank you. 8 Tim. 9 MR. WALSH: Which Tim? 10 MR. REESE: Walsh. Thank you. I have some 11 questions. Obviously I'm familiar with your organization 12 and everything, but I'm sitting here to kind of -- we're 13 going to get a -- we'll have a chance to opine on this, 14 so I don't need to sell you on it. But do you have any 15 idea of what the impact is to minority startups if the 16 dollar threshold was increased? And I will make the 17 caveat because I do know that they are less prone to have 18 friends and family money to get their businesses off the 19 ground and they tend to turn to SBIR-type funding. So 20 can you talk to anything about that? 21 MS. HUDSON: Tim, you might probably have a 22 better idea of that than I do, because I think -- there's 23 not good statistics right now on minority entrepreneurs 24 receiving capital, but I believe it is less than 5 25 percent of angel capital is going to that right now. And 0119 1 we're really trying to work to get more minorities 2 involved as angel investors, as smart ones so that we can 3 build that pool. So -- but I would imagine if they're 4 not getting it from friends and family, then angels would 5 really be the top amount that they're getting, but the 6 number needs to grow. 7 MR. REESE: Thank you, and I have a follow-up 8 question. And you talked about portfolio theory to a 9 small degree. Can you inform us on what is the average 10 portfolio balance you should have? I don't mean by 11 sector, but in terms of investments in order to start 12 seeing some returns, do you have an idea of how large a 13 portfolio? 14 MS. HUDSON: Everybody's got a different 15 theory. I think we generally recommend that an investor 16 has at least ten investments over eight to ten years and 17 that that probably should get them to the chance for a 18 decent return. I think there's some others who would say 19 it's a larger number, but for me I think it's ten, and I 20 think that fits with the data and the research that we 21 have. 22 MR. REESE: Thank you. 23 MR. GRAHAM: Mr. Walsh. 24 MR. WALSH: Thank you, Steve. First question 25 is for Marianne, but also for possibly Julie, Sebastian, 0120 1 and Keith as well. You had indicated on one of your 2 slides that you were opposed to the elimination of 3 retirement assets for accredited investor because you 4 thought it was important for someone to have the ability 5 to invest with retirement. That's not my understanding 6 of what the potential proposal is. 7 It doesn't mean you can't invest in your -- it 8 just means you can't use it to see if you're clarified as 9 an accredited investor, correct? So you could still -- 10 you could -- if you had $5 million and you had $2 million 11 in retirement assets, you could still invest -- or the 12 other way around. You could still invest from your 13 retirement as long as you're under the -- over the cap, 14 correct? 15 MR. GOMEZ: That's right, Tim. What we've 16 heard from commentaries is the idea that they would not 17 count towards the determination of accredited investor -- 18 MR. WALSH: Right, but you can still invest 19 from that. 20 MS. HUDSON: You could still invest from it, 21 but I guess the other point really is that would wipe out 22 a lot of potential investors. It certainly would wipe me 23 out as an investor. 24 MR. WALSH: I'm not disagreeing with you, I 25 just want to make sure I'm clarifying. And the second 0121 1 part is the inflation adjustment -- I still -- I'm still 2 trying to find out why in 1982 it was a million dollars. 3 It makes me think of the Austin Powers and the Dr. Evil 4 with the -- (laughter) -- where that number came from, so 5 I'm not sure why we're using that as the focus. And then 6 the other concept of be it 4 and a half million dollars 7 today seems very penurious. It would actually take a lot 8 of investors out. But hypothetically if you took those 9 numbers to 200,000, 300,000, a million dollars, and you 10 used next year as your inflation adjustment, would you be 11 opposed to that? I mean the numbers are the same, and 12 then it goes up 2 percent or 1.5 going forward. It seems 13 to me that might be a nice compromise. 14 MS. HUDSON: It would be -- I guess you could 15 talk about -- I mean we're coming from the same place 16 that you are, was 1982 or 3, did they get the numbers 17 right. 18 MR. WALSH: Well, it was a long time ago, 19 right. 20 MS. HUDSON: When we were involved in the 21 Dodd-Frank discussions four years ago, one of our points 22 was how do we know that that was the right number. Maybe 23 they were just starting to get to be the right number. 24 MR. GRAHAM: D.J. 25 MR. PAUL: I just want to -- I had one point 0122 1 kind of already though we've hit it already to some 2 extent, which is your membership -- correct me if I'm 3 wrong -- is by definition sophisticated. They understand 4 the investment set they're in. If there were, therefore, 5 and just leaving aside the financial test, some sort of 6 written test, some sort of test to demonstrate that they 7 are as smart and sophisticated as they must be in order 8 to participate in your organization, that would mitigate 9 all of this. It would then be 100 percent of your 10 membership if we could come up with some sort of test for 11 that. 12 MS. HUDSON: Maybe. Yeah, I think that that 13 takes away some of the simplicity and some of their 14 already existing things. I guess you could talk about 15 tests or exams or whatever, but I think you're -- just 16 your past experience and just being able to validate that 17 is simpler and keeps the pool larger. 18 MR. PAUL: I mean there's precedent for it, 19 it's just I wanted to note that at some level we all -- 20 any of us have a brokerage account, you can pretty much, 21 once you set it up, invest in anything except options. 22 Options then we have to kind of opt into answering some 23 questions which ask some of the questions that you're 24 talking about. But I'm talking about something like that 25 perhaps in a bridge version of the Series 82 or something 0123 1 that actually is specific to this -- 2 MS. HUDSON: Yeah, I guess the devil's in the 3 details and how difficult is it and all those kinds of 4 things. 5 MR. PAUL: Thank you. 6 MR. GRAHAM: Anyone else? Yes, Catherine. 7 MS. MOTT: I'd venture to say, D.J., that the 8 members -- 65 members of Bluetree Allied Angels, if they 9 had to take a test, they would say I don't need to do 10 this. So I mean it's like, wait a minute, I've been 11 doing this for some time. If I had to take a test to 12 continue doing this, it's like why bother because this is 13 only 10 percent of my total investment assets anyways. 14 I'm doing this trying to enhance my opportunity to create 15 more wealth for myself. So I don't know. 16 MR. PAUL: Well, also I know that your 17 membership also -- it has pushed back on having to -- and 18 perhaps appropriately or not -- for 506(c), actually 19 verify what their income or their net worth is. This 20 would mitigate that as well. So maybe the lack of 21 intrusion into their financial matters, maybe they'd be 22 willing to take a 20 or 30 question multiple choice test, 23 which I'm sure it happened to be a very long time ago 24 since the last time they took -- 25 MS. MOTT: If it was that kind of a test or -- 0124 1 because I've taken the 7 and 63 many years ago. So -- 2 but if it was that kind of -- if it was an easy -- again, 3 the devil's in the details -- would be the important 4 thing. 5 MS. HUDSON: Then yeah, I think you're on -- 6 keeping that balance of ease and the impact it's going to 7 have on the market with the sophistication is clearly 8 something you'll be looking at and something you guys are 9 spending a lot of time on, so it's important. 10 MR. GRAHAM: Keith, did -- 11 MR. HIGGINS: Yeah. One question I had, 12 Marianne, was does the Angel Capital Association have a 13 view on the percentage limitation -- applying a 14 percentage limitation to one's ability to invest in a 15 particular investment. 16 MS. HUDSON: I think our view relates back to 17 that verification thing. Well, it's two things. It's 18 one that does -- it doesn't compare to other kinds of 19 investment. It feels a little bit like a loss of freedom 20 or something like that, but it's really about, okay, if 21 you do that, how does the issuer or whoever verify -- 22 what are the other things it requires. So it makes it 23 just less practical, more complicated for everyone, which 24 could have an impact on the capital pool. 25 MR. GRAHAM: Anything else from your end, guys? 0125 1 Okay. Catherine. 2 MS. MOTT: I was busy talking to D.J., so I 3 think, Keith, your question about verification, the -- 4 one of the things that individual -- was the question 5 about -- 6 MS. HUDSON: Making an investment -- 7 MS. MOTT: Never mind. Maybe I'll just go 8 ahead and finish my comment. So since I brought it up, 9 the verification issue amongst angel investors has been 10 -- it makes them very, very nervous about handing over 11 their tax returns and their private, personal information 12 to entrepreneurs, and how do they know it's going to be 13 guarded and protected and what -- and so. That's what -- 14 the thought I was thinking about. 15 MR. GRAHAM: Okay. 16 MS. MOTT: Sorry I missed your -- 17 MR. GRAHAM: Javier. 18 MR. SAADE: Hi, Marianne. Good presentation. 19 Nice to see you. Not a question, just some comments as 20 an observer. We are focused on the investor discussion 21 because this is the SEC, and we're talking about 22 accredited investors. But at the end of the day, just 23 remember the economic development side of this, and my 24 point is somebody brought up racial minority gaps, 25 women-owned minority gaps, they're getting more than 50 0126 1 percent of the degrees, way more in the STEM field. 2 They're not raising the capital through any avenue. 3 You can look at gaps, geographic. Somebody was 4 talking about venture capital concentration. Four states 5 manage 80 percent of it. And those same four states get 6 80 percent of it. So there is some significant needs, 7 and one of the reasons I think we're having the 8 discussion to figure out the solution. So I don't want 9 us to -- this is just my humble comment. I don't want us 10 to lose sight of the fact that what we're trying to do 11 here is, yes, maybe expand, maybe contract, maybe look at 12 the investor pool differently, but really it's about 13 getting more money to where it's needed, because it's not 14 going, because the assets have been -- 2008 was something 15 we don't want to repeat. 16 That consolidation that has happened in 17 banking, five control half of the assets. The other 15 18 control another 40 percent. So 20 banks out of 7,000, 19 right? So they're not lending to small businesses. It's 20 a very tough situation. Similar things have happened in 21 the alternate investment space. So I just don't want us 22 to lose sight, and that's my comment of what ultimately 23 this is about, which is in a prudent fashion with all the 24 bells and whistles and the controls you need to make sure 25 that as many constituents as you can make happy you make 0127 1 happy is that the capital is not flowing to the small 2 businesses, and that's just a quick observation from this 3 discussion. 4 MR. GRAHAM: Okay. Well, thank you for that, 5 Javier. And with-- oh, we have a couple of minutes if 6 there's more -- anyone has another question. Okay, with 7 that, then we're going to break. Thank you -- 8 MR. YADLEY: Wait -- 9 MR. GRAHAM: What -- oh, Greg? 10 MR. YADLEY: I was just going to say on the 11 percentage limitation, Keith, one of the comments, 12 Marianne, that you made that as quite helpful was in 13 response to how many investments. So the percentage 14 limitation, if you don't win on the first one, you may be 15 out of the box permanently or for a long time, so I think 16 that that is one that would be very hard to sort of 17 regulate, okay, well you can only have this percent, and 18 so if you lose one, so you get one more chance. 19 You get three balls for a dollar, but -- 20 (laughter) -- but another three for 50 cents. So I -- 21 again, the devil is in the details, and the practical 22 effect, as Javier said, is that we're just reducing the 23 pool of money. The education part that shows great 24 promise, and of course that's sort of baked into the 25 crowd funding legislation and the SEC spends a lot of 0128 1 time and actually in some of the materials that we all 2 got, one of the things I looked at was the actual 3 exclusion from the House. 4 And I remember when that was being proposed and 5 drafted and how many different ways you could say that. 6 And the explanation that the SEC has in plain English in 7 about five lines makes it very clear about how that's 8 treated as an asset, how liability is treated. So I 9 think you can get there. One of the things that the 10 gentleman from the AARP talked about is all the changes 11 in the marketplace, and those certainly provide the 12 background. 13 On the other hand, the ability of plain English 14 information that people can get today leaving aside 15 whether Wikipedia tells it truthfully or not -- 16 truthiness as well -- (laughter) -- truthfulness, there's 17 a lot more information that the average person can get, 18 and a lot of it is more convenient and more useful than 19 the footnotes or the financial statements of a public 20 company that are nearly impossible to read, for me 21 anyway. 22 MS. HUDSON: Great stuff. 23 MR. GRAHAM: Okay. So with that, we will 24 conclude. Thank you, Marianne. 25 MS. HUDSON: Thank you for having me. Thanks. 0129 1 MR. GRAHAM: That's all very helpful. What 2 we're going to do now is we're going to break for lunch. 3 We will break until 2 o'clock. In about five minutes the 4 members of the staff will take the committee, the 5 committee only, upstairs for lunch and some 6 administrative matters. So with that, we're adjourned. 7 (Whereupon, at 12:29 p.m., a luncheon recess 8 was taken.) 9 A F T E R N O O N S E S S I O N 10 MR. GRAHAM: Can I ask people to take their 11 seats? Let's get restarted. As we were saying at lunch, 12 the primary focus of this committee has to do with the 13 capital formation and investor protection, and that, of 14 course, leads us to 506 offerings and the definition of 15 accredited investor. So we want to just kind of kick 16 things off for this afternoon, and then get everyone's 17 point of view. It's -- without really expressing a view 18 or just kind of making some observations. I just -- 19 sometimes I wonder if there's a problem with the current 20 definition. 21 I think we heard from a number of people 22 mention is the whole concept of thresholds the 23 appropriate one. Is there anything wrong with the 1982 24 numbers? Is there anything right with the 1982 numbers? 25 Was anything write in 1982 about the 1982 numbers? So 0130 1 it's -- and what does that have to do with access to 2 information in any event, whether it's -- whether you've 3 got $200,000 of income or 300,000 or 750? Does that 4 really solve the problem that we're attempting to solve 5 for? I'm not sure if there is an answer. I think we 6 have a riddle before us. 7 There are lots of thoughts, lots of ideas, but 8 again, I also come back to the question I think we should 9 ask ourselves, and that is: To what extent is there 10 actually a problem? And we hear about fraud, and we're 11 all interested in preventing fraud. Nobody is in favor 12 of not preventing fraud, but there's lots of -- again, 13 there's lots of information that is being floated around, 14 and I still wonder to what extent is fraud actually 15 implicated in the context of private placements to 16 friends and family. 17 It's too easy to kind of paint some of these 18 pictures with a broad brush. And we can talk about 19 raising the thresholds, and if we talk about raising the 20 thresholds, how much does the absolute pool of accredited 21 investors decrease? And how much does the actual -- or 22 how much does the absolute pool -- and then how much is 23 the actual pool? I don't know. I'm not sure who does 24 know, but I think one thing that we can quantify is how 25 much investment is made in this context, and I think we 0131 1 can kind of get a pretty good sense, too, of how much job 2 creation results from the investments that are being 3 made. 4 And so again, these are observations. We can 5 -- we're about to have a conversation about it, but I do 6 sometimes worry about when you're -- not to say that this 7 is where we are, but if you're in a situation where you 8 have a solution and you're kind of looking for a problem, 9 you've got to be careful about unintended consequences 10 and putting ourselves in a position where we run the risk 11 of doing significant harm to an ecosystem which is 12 clearly important to the economy and in many ways seems 13 to be working. That's -- these are just some of the 14 things that are going into my mind, and I'd like to open 15 up the floor for comment. Who wants to go first? 16 MR. YADLEY: Greg Yadley. I'll go first. I 17 think you've teed up the issues pretty well. It is a 18 perplexing issue because if you start from a posture of 19 wanting to ensure investor protection, you would end up 20 one place, and if you want to start with promoting 21 capital formation, you'll end up in another place. I 22 think the place we should start is where we are today. S 23 it's interesting to consider whether a million dollars 24 and $200,000 and $300,000 were the correct metrics in 25 1982. 0132 1 But it doesn't really matter. That's where 2 we're starting today, and I agree with your observations, 3 Steve, that there have not been pervasive abuses in this 4 area. And I think it's worthwhile to talk about. In 5 part, I think it's because in a private placement the way 6 we think of them, there is a relationship between the 7 issuer and the early investors, particularly in the 8 friends and family round, and there is trust, and there 9 is the ability to get information, which, again, where 10 the whole exempt offering, who needs to be protected 11 started. There's a reason for people to trust one 12 another. 13 The gentleman from AARP this morning said a lot 14 of abuse happens in the friends and family situations. 15 Well, that is true, I'm sure, but I don't think that the 16 Securities and Exchange Commission can necessarily 17 regulate how families interact. So I think the numbers 18 are what they are. It was very persuasive to me to see 19 the data from ACA that would show the steep decline in 20 the capital pool if we added the inflation adjustment. 21 So I don't think that's a good idea. I think we ought to 22 keep the numbers where they are. The idea of excluding 23 certain assets has some appeal. 24 There was a significant reduction in the 25 investor pool when the primary residence was taken out. 0133 1 But when you get into the area of investment assets, that 2 becomes problematic because at some point at age 65 or 3 whatever, almost all of your assets are retirement assets 4 because that's what you have to look forward to. 5 Presumably at that point you've paid off your mortgage 6 and you've sent your kids to college and your net worth 7 is your net worth. I've already stated today that I 8 think some of the percentage limitations would produce 9 other issues. 10 The idea of adding to the definition the 11 sophistication qualifications, in a way I mean that's 12 already supposed to be there. It's certainly there in 13 Reg D and all of the rules, and it's there in the case 14 law if you're trying to do a private placement under 15 Section 4(a)(2). I think guidance as to what might be 16 under the facts and circumstances of a particular 17 offering, credentials that would indicate sophistication 18 would be good. But I think for the SEC to be 19 prescriptive would not be good. 20 I think the Commission and some of its recent 21 rules, including in the verification area for 506(c) 22 wisely tried not to be prescriptive. In response to 23 public comments, the SEC gave more guidance than it 24 originally intended to, and I think the Commission was 25 proven right because a lot of people aren't using it 0134 1 because they still believe that if they're not within the 2 safe harbor, they're on their own despite what members of 3 the Commission and the staff have tried to encourage. 4 But it would certainly be good guidance. 5 A test -- if it's a basic test, that's fine, 6 but again, as I commented earlier, it is -- while 7 information is good, I jokingly said I can't understand 8 some of the footnotes and some of the more complex 9 transactions, I'm not ashamed to admit that. I do read, 10 and I get paper copies of 10Ks, and I own stock in Bank 11 of America and other large financial institutions, and 12 those are pretty heady things, and it's very difficult to 13 understand. 14 I've also personally invested in a range of 15 securities, including biotech and other complex matters 16 where I certainly believe I am intelligent enough to read 17 about the business, and just because I am qualified to 18 invest in a real estate deal doesn't mean I'm qualified 19 to invest in a biotech deal. But risk factors do fall 20 into categories, and I think the education idea that I 21 think everybody is in favor of that talks about, as Tim 22 Walsh said, liquidity and ultimate rates of return, 23 things like that, the ability to participate, I think 24 certainly it would be useful to ensure that investors are 25 provided with that information. But to assume that you 0135 1 could come up with a test that would allow you to invest 2 in derivatives and mining companies and everything else 3 would probably be a fool's errand. 4 MR. GRAHAM: Thank you, Greg. 5 Catherine. 6 MS. MOTT: One of the things we -- you 7 mentioned it already, Steve, and about the ecosystem. So 8 think about in -- sort of in a granular way if we can 9 think about how the little fish are eaten by the big fish 10 and are eaten by the bigger fish and then are eaten by 11 the next whatever. If there is a decrease in the amount 12 of angel capital in the ecosystem, there will be a 13 decrease in the amount of companies that can be invested 14 in be venture companies. There will be a decrease in M&A 15 activity, and there will be a decrease in IPO activity. 16 Angels take the early risk. 17 They're first in with a decrease in NIH 18 dollars. We're even investing in a lot of life science 19 companies that require funding for R&D, because the SBIRs 20 aren't enough to do it. And the NIH money is not enough 21 to do it. So whatever we do here and we -- and if the 22 accreditation standards are risen and are, I'm sorry, 23 hiked up and it decreases the pool of angel investors, 24 then just understand there will be an impact on 25 everything else down the way, down the path. 0136 1 MR. GRAHAM: And just to interrupt -- sorry, 2 but if that happens so that we can eliminate 100 percent 3 of the fraud, then I'm all for it. I don't think that's 4 the case. 5 MS. MOTT: It's not going to eliminate 100 6 percent of the fraud. And bad actors are going to exist 7 and find ways. And one of the things I was thinking 8 about when I heard the gentleman from AARP, I was 9 thinking about my parents. And they're not accredited 10 investors, but I know they've been subject to scams. Now 11 fortunately they usually call their children and ask if 12 -- but not everybody does, and so -- and the fraud is 13 going to be committed even with those who are not 14 accredited investors. 15 I will say I have concerns about using or 16 eliminating retirement funds. Many accredited investors, 17 that's part of the picture, that's part of the formula of 18 your net worth. It's the liquid stuff that you have, and 19 quite honestly, I don't know about you, but I try to 20 shelter as much of it as I can from tax income, so a lot 21 of it will be shifted that way. I have concerns about 22 excluding retirement funds from the definition or from 23 investing. One of the things we do at Bluetree Allied 24 Angels as we put our investors through an orientation 25 program, and we talk about -- we basically say all of the 0137 1 principles that you apply to your public stock portfolio 2 you should apply to this asset class as well. 3 So that means diversity, that means limiting 4 the amount of investments that are qualified as 5 alternative investments as 5 to 10 percent of your total 6 investments. So there's already a sophistication process 7 with a good segment of the marketplace that occurs. So I 8 would conjecture also -- one other point I would 9 conjecture that I know that the gentleman from AARP is -- 10 deals with a lot of unsophisticated people. But I would 11 wager to say that over the past 30 years because of the 12 internet and Khan Academy and everything else, a lot more 13 older people are a lot more sophisticated than they would 14 have been 30 years ago without the internet, without 15 access to so much information. 16 So I think there's a lot of people who are 17 retired. I think of people in my church that are very 18 retired, and they're constantly asking me about things 19 that they're reading about investment opportunities 20 because they're reading. They're very informed. So 21 those are my thoughts as I think about this. 22 MR. GRAHAM: Thank you. 23 I'm going to go to Sonia. 24 MS. LUNA: So I wanted -- I don't know if a 25 million dollars is the right number. I don't know if it 0138 1 should have started at that number. I'm not opposed to 2 changing the number as long as we're doing a balancing 3 act by adding something into the mix given the data that 4 we've been shown. So adding to the definition of some 5 sophistication certification, investment experience, et 6 cetera, because then you kind of have a yin and a yang 7 going on, so I am not seeing this problem one way. I'm 8 trying to see a comprehensive solution. 9 Now from a regulator standpoint, I don't know 10 what that would mean day in and day out. I don't know 11 the cost of actually implementing our definition, so I 12 think when we get to writing or making a recommendation, 13 we should probably also take that into account, what it 14 means to a regulator to actually follow through on this. 15 MR. GRAHAM: Okay. Thanks. 16 D.J. 17 MR. PAUL: Yeah, I mean I would echo some of 18 the sentiments that have already been expressed. I would 19 just start from using a different analogy, maybe the 20 Hippocratic Oath, which is, first, do no harm. This is a 21 system that is working. It's a trillion dollar market. 22 It's often described as the crown jewel. It's very 23 functional, and however clunky the definition was in '82, 24 whatever, it's working now, and we would be -- I think it 25 would be a poor choice to mess about with a system that 0139 1 is functional and that is responsible for such a 2 significant portion of capital formation in this country. 3 The metrics speak for themselves in terms of like it 4 compared to the various public markets. So I don't want 5 us to suggest something that is a solution in search of a 6 problem that is not there. 7 However, I do think that there is a problem 8 that needs to be addressed. That's not it. I haven't 9 seen enough data to suggest fraud, so I don't think that 10 that's it. I do think that there's a problem, and the 11 problem is that the definition has strayed from what 12 guidance we do have both statutorily and in the 13 congressional record and specifically from the Supreme 14 Court and the Ralston Purina decision, which is a 15 sophisticated investor is one who can fend for 16 themselves. 17 And the current definition that we have is a 18 definition, a way of arriving at that, but it is clearly 19 not exhaustive. That's rather plain language for the 20 Supreme Court. And if the Supreme Court had meant that 21 it meant someone who could take the financial hit, which 22 is effectively what the definition is now, then I suspect 23 that the Supreme Court would have said that. So I would 24 like to -- I would like to do no harm, leave the system 25 as it is. That would be my first recommendation. And 0140 1 then subsequent to that, I would like to broaden it so 2 that we actually have a definition of sophistication that 3 captures the guidance that we have from the Supreme 4 Court, which I don't feel like we have exhaustively now. 5 And I'll leave it there for now. 6 MR. GRAHAM: Thanks. 7 MS. HANKS: I just wanted to raise something on 8 the exclusion of assets thing that a couple of earlier 9 speakers have raised, those being a couple of big 10 misconceptions about retirement assets raised today. 11 Number one, that retirement assets are a separate asset 12 class, and number two, that they're somehow stable, 13 safer, a nest egg, those words we used. Firstly, they're 14 not a separate asset class; they are a tax treatment of 15 specific assets. 16 And when you go back -- and thank you very much 17 for finding the earlier releases from the 1980s -- you've 18 got the SEC specifically saying with respect to 19 determination of income we are not going to take -- we're 20 not going to use, for example adjusted gross income in 21 determining the income of someone. If someone has 22 shielded their income such that they're not reaching that 23 AGI, we're still going to count it as income. So we're 24 not -- we are going to disregard any tax treatment of any 25 of these metrics. 0141 1 And the second point is that these aren't safe 2 assets. Things you can put in an IRA, you can put race 3 horses in an IRA. You can put startup companies. You 4 can put Bitcoin. You can put gold, you can put anything 5 except collectibles and life insurance proceeds. So 6 there's a lot of self-directed IRAs there which have got 7 a lot of thoughtfully designed, well-taxed, provisioned 8 investments for the future. 9 MR. GRAHAM: Thank you, Sara. 10 Charles. 11 MR. BALTIC: Charles Baltic. I'm very mindful 12 of the need for a balanced perspective and consideration 13 of the joint or dual interests of investor protection and 14 access to capital that, of course, balancing and 15 consideration doesn't dictate an outcome. And I'm also 16 mindful of the ongoing need for maintaining market 17 integrity, and we certainly don't want to taint the well 18 of private capital that has created a lot of benefits 19 that we've talked about today and we've seen some very 20 compelling data in that regard. But I would want any 21 solution or change to be well grounded in evidence. 22 To my mind, the accredited investor definition 23 based on net worth and income thresholds has been an 24 effective tool to balance investor protection and access 25 to capital. It is a proxy. We've all acknowledged that, 0142 1 and so it is not perfect. But I'm not convinced that the 2 measures that have been proposed or discussed today would 3 not have an uncertain and deleterious impact on capital 4 formation. I'm also -- I would also note that we had a 5 recent change with respect to the Dodd-Frank exclusion of 6 principal residence, which changed the number of 7 households covered, I think from 9.4 million to 7.2 8 million. 9 And that is a pretty dramatic increase or 10 decrease in the pool of capital based on households. And 11 we also heard earlier today that for instance something 12 like inflation indexing from 82 to current would have an 13 impact of going from 12.4 million households to 4.4 14 million households, which would be a very dramatic 15 impact. And so I think the current posture is one that 16 has led to a lot of benefits in the investment community. 17 I'm not convinced that there's a clear alternative at 18 this point. Some alternative measures that have been 19 discussed, including, for instance, a liquidity provision 20 don't have the sort of permanence that net worth and 21 income have. Those are less variable over time, I 22 believe, than liquidity, which can change very 23 dramatically even for sophisticated people. And so I 24 think that right now we've been tasked with reviewing 25 this, and that is an ongoing obligation. But my view is 0143 1 that I haven't seen compelling evidence for consensus 2 around a particular change being proposed. 3 MR. GRAHAM: Richard. 4 MR. LEZA: My feeling that -- after seeing all 5 that data and understanding the venture capital business 6 inside of -- we've got to keep the system the way it is. 7 It's been working. We have people now that are much more 8 educated. They understand risk factors much more than 9 they did in 1982. And I don't see that adding any other 10 things to it will protect investors. I think that 11 everybody is -- fends for himself, and most of the people 12 that are accredited investors now seem to keep things in 13 perspective. 14 And I just don't see somebody with a little bit 15 of education and a little bit of having a million dollars 16 in the account, that they would put their retirement into 17 risk. They didn't get to that position by making those 18 kind of decisions. I have faith in the -- on the people 19 that doe these investments, and I think that they look at 20 very closely, and they're getting more and more 21 information. And as far as California, this thing has 22 been working very well, so I don't see whether we should 23 add more criteria to it because I'm not sure that you're 24 going to get the additional protection, and I think it 25 will reduce the capital formation. 0144 1 MR. GRAHAM: Thank you, Richard. 2 John. 3 MR. BORER: So I think D.J.'s point about do no 4 harm is a good one and having been in the industry -- the 5 investment side of it at least for a long time or the 6 brokerage side of it for a long time. When things 7 change, there's always uncertainty. And the caution that 8 may be put into the system because of the problem of 9 identifying the right or wrong way to do something and 10 where the safe harbors are could be problematic and 11 disrupt the flow of capital until things settle out 12 irrespective what the intent of the intent of the rule 13 is. 14 Now with respect to what the -- this provision 15 -- fending for oneself is very subjective. I kind of 16 like it. But in our business, we not only have to follow 17 all these rules, but we also have to evaluate a thing 18 called suitability, which ties into this. Brokers have 19 this responsibility. It's irrespective the wealth of 20 this investor, is this investment suitable for them? And 21 that is the responsibility that's put on the broker to do 22 these things. And it's a highly subjective thing. And 23 because we're to some degree counselors for the 24 investors, more so on the individual side than the 25 institutional investor side which are deemed to be very 0145 1 sophisticated QIB definition. It's -- we take that into 2 account, and if somebody tells me that because a company 3 is a 34 Act registrant on NASDAQ that that's a safe 4 investment, so the most risky biotech in the world that's 5 on the NASDAQ, anybody can go buy on their E*Trade 6 account or Charles Schwab without any further information 7 or advice, and they've never touched that prospectus. 8 And yet that same individual can't buy a newly 9 issued, unregistered bond issued by GE. And I think 10 those two point very clearly as to the distinction. And 11 what are we trying to get into? Now the issue of slicing 12 and dicing, and I listen respectfully to the gentleman 13 from AARP, that setting bright-line tests for retirement 14 assets in this world is very, very difficult. 15 Somebody mentioned a few minutes ago -- maybe 16 it was Greg -- all of my assets are retirement assets, 17 every nickel I have. It's not my 401(k), my IRA, my -- 18 whatever those things are. It's all for retirement. And 19 in many people's cases, those pieces may be very large or 20 very small. If I worked my taxes right, 98 percent of 21 everything I own would be a retirement assets in one of 22 those plans because they would be tax deferred. 23 Sometimes you could have people inherit various of those 24 accounts and roll it again in another generation, et 25 cetera. And on the other hand you have somebody who has 0146 1 zero as defined by this economic study that was reported, 2 so retirement assets, meaning they do not have a 401(k) 3 or an IRA, but might have $100 million. 4 And should we take and automatically deduct 5 some level of what we feel should be their retirement 6 asset to protect them as well when, in fact, this 7 arbitrary housing for tax purposes of these assets hasn't 8 happened? So I think that what I heard from AARP -- and 9 I know this may sound pejorative -- is that the closer 10 you get to retirement and the older that you are, you 11 should have a different standard. And I know they 12 wouldn't -- and most people wouldn't say, well, that's 13 not right, because we're not going to pick on old people 14 because they're old, and they may be more subject to 15 being misled, fraud, they have less sophistication 16 because they aren't familiar with the internet as others 17 may be. 18 And certainly since 1982 and today, the 19 availability of information on every part of our society, 20 including fraudulent people doing bad things who have 21 notorious pasts, it's available all right there in front 22 of us whether it's on file at EDGAR or not. But I think 23 if we all the of the sudden say that somebody who's 65 24 shouldn't be able to do something that a person at 45 can 25 be able to do, because even if they lose all their money, 0147 1 the 45 year old might be able to get it back, it gets 2 very, very hard I think in the individual application to 3 investors, one versus another. 4 And another thing with respect to -- I think 5 this -- I thought this before with respect to the 6 residence and certainly with respect to retirement 7 accounts. You can sell your residence and all of the 8 sudden turn it into an investable asset and you can pull 9 the money out -- you pay the taxes that are owed, whether 10 you pay the 10 percent if you're under 59 and a half or 11 not, you can get that money and take it to the racetrack 12 tomorrow, and we don't do anything about that. 13 And if those people can do that, why wouldn't 14 we, if they have those assets and meet these other income 15 or asset tests be able to apply the same skills or luck 16 that allowed them to create those assets in furthering 17 either building their retirement nest egg or having fun 18 -- I assume a lot of people become part of angel groups 19 the way my mother and her bridge club friends had an 20 investment club in the 1960s. And nobody was telling 21 them what they could or could not do. They were 22 investing individually, but they did it because it was 23 also a social and giving back to society and being part 24 of something. 25 So I think changing the rule to change the rule 0148 1 because it's four years is kind of scary. And investor 2 protection is great. I happen to believe that the free 3 market would allow many of these things to be imposed 4 upon individuals as they're thoughtful. And we're trying 5 to protect people against themselves here as opposed to 6 against the massive fraud that is being perpetrated on 7 people in private placement offerings in my view. And I 8 have heard nothing today that tells me that the loss 9 through these private placements is any greater than the 10 combined loss from Enron, MCI, and HealthSouth, which 11 were fully -- and going back to the old days -- equity 12 funding and Franklin National and all those things, the 13 fully reporting New York Stock Exchange registrants. 14 MR. GRAHAM: Thank you, John. 15 Chris, do you -- 16 MS. JACOBS: Yeah, I'd like to follow up with 17 one example that is I think quite pertinent. We're 18 talking about the retirement funds of folks, their age, 19 et cetera. But nobody was there to stop 90 year old dad 20 from being a day trader and losing 50 percent of his net 21 worth. And I just don't think we can plug that hole. I 22 just -- I think we're attempting here to legislate 23 financial risk, and I just think it's like morality. 24 We're never going to be able to go there. So I will 25 weigh in on where I would come form on today's topic. I 0149 1 am not convinced of proof of failure. 2 I'm just not convinced that we are on a topic 3 with a proven track record of failure, and so I would say 4 don't touch it. Just leave it the way it is. In fact, I 5 might go the other way and say, oh, but let's let the 6 certified financial professionals in because I thought 7 that argument made great sense. These are folks, are 8 CPAs and are folks that are accredited is let them in in 9 the definition, but I wouldn't mess with it. I just -- I 10 don't think it's that broken. 11 MR. GRAHAM: Mr. Reese. 12 MR. REESE: Thank you. I was sitting here 13 thinking about this, and it's -- the issue itself is 14 really rolled into a larger, more complex issue than the 15 issue of just the definition of the accredited investor, 16 which made me just sort of think through that as we've 17 all noted that Reg D and the idea of raising capital 18 through private placements has been successful, it's been 19 a successful model, and it's been a success for some of 20 us at this table, and it's been a success for some of the 21 companies we've invested in, and we've seen the results 22 of what that success has done to their lives and the 23 lives of their families and for the communities they 24 support. 25 I also would not lose sight that Americans and 0150 1 America enjoys a certain marketplace that's been unique, 2 which is the ability to lose money on gambling on risky 3 propositions. That's what made America America and has 4 given us the opportunity to be a leader in so many 5 different financial categories because of that and not 6 losing sight that through some other new legislation in 7 the foreign countries, they're trying to plug that hole 8 using crowd funding and the like. I still think that in 9 the minority communities across America that the need for 10 capital is even larger than the pool of dollars that are 11 available today. 12 Some of this issue that I've come to learn and 13 been educated on is the IPO market for small businesses 14 has shrunk tremendously since 1990s. In the 1990s -- and 15 we can factor in the dot coms, but there were about 2,000 16 small companies that IPO'd. In 2012, there were 750, and 17 I think that number is even getting smaller because the 18 concentration of capital to go public requires an even 19 larger venture, which is why you're hearing about these 20 outsize IPOs. 21 So it leaves to the American public what is it 22 to do to get a return, because your savings is not going 23 to give you the type of return to support your lifestyle, 24 and that's where we're driving at this issue is 1 percent 25 on your money is not going to give you that return, so 0151 1 people are looking at alternative investments in the way 2 to deal with this. Dodd-Frank has created some other 3 issues in my opinion that we should be looking at. I 4 think investor education is the biggest issue right now 5 in America because of these changes. We should be 6 looking at that. 7 And since 2008, I know that I have seen an 8 unprecedented number of companies and minority companies 9 that were looking for equity through the alternative 10 markets to be able to meet their debt covenants. Because 11 with Dodd Frank, the way banks could lend money actually 12 changed, and you had to meet certain thresholds, which 13 meant you needed more equity. But the only way that they 14 were going to get this equity is to be able to do to the 15 angel markets and raise capital. So it also provides 16 another source of funding, because what we raise, what's 17 raised in the private equity realm also allows some debt 18 to come in to meet the thresholds to run business. 19 So I think -- and I do think that the larger 20 issue we'll deal with at another time, crowd funding is 21 supposed to provide if you have a dwindling IPO market, a 22 low savings return because the interest rates and you 23 have a new covenants that have taken away -- to have a 24 certain amount of debt-to-equity ratio we need to find 25 new ways, not contract, but find new ways to provide more 0152 1 equity to the business, small business markets in 2 America. Hence I do -- I don't think we should change 3 the rules around alternative and around an accredited 4 investor. In fact, I think I support the fact that we 5 should increase the pool of investors that would fall as 6 an accredited investor, whether through the certification 7 program, whether it be through some other education 8 initiatives, but we should be looking at a way to bring 9 more capital to the small business market given the 10 economic realities of America competing globally with 11 other faster growing countries. 12 MR. GRAHAM: Thanks, Tim. 13 Before we get -- well, go ahead, John. 14 MR. HEMPHILL: Thank you very much. I just 15 wanted to add my two cents to this, and the first thing 16 is that Reg D is an oxymoron. It's a popular regulation. 17 People love Reg D. My clients love Reg D. They love the 18 fact they can go out and raise capital from people. It's 19 been popular since I started working on it in 1982 using 20 that regulation. It's been -- and it's worked. It has 21 worked really, really well. And it's working really, 22 really well right now, so I would just for the issue at 23 hand whether we should amend the definition of accredited 24 investor, I would lend my support to say, no, we should 25 not do that, certainly not to make it more stringent. 0153 1 And I also support the idea that we should expand the 2 definition of accredited investor. 3 For example, one of my partners who does work 4 in tribal laws came up to me a month ago and said can a 5 tribe qualify as an accredited investor. We took a look 6 and the answer is even though they have some huge assets 7 like casinos, they don't qualify. There's no place where 8 they qualify in the definition of an accredited investor. 9 So I think we need to look be it through some sort of 10 public request, of course, some ideas as to how we can 11 expand the definition of accredited investor or where 12 there are holes to try and get more money into the 13 system, because it's a really popular system. It rivals 14 public offerings, and it's a great way to get money into 15 newly started companies and private companies. 16 MR. GRAHAM: Thanks, John. 17 Charles, could I get you to just say a few 18 words about the demise of the small IPO and the changes 19 that kind of led up to that and kind of where we are with 20 that ecosystem? 21 MR. BALTIC: Sure, Steve. 22 MR. GRAHAM: Because it could be a cautionary 23 tale. 24 MR. BALTIC: Yeah, it's definitely been the 25 case, and I think we heard some numbers cited earlier on 0154 1 the metrics, but that the phenomenon of the small company 2 going public and raising a limited amount of capital in 3 the public markets had definitely been impacted over time 4 I think for a whole host of reasons that don't strictly 5 involve some of the issues that we're dealing with here 6 today. But they do relate to the ecosystem of a company 7 or an idea or a technology or a discovery getting from 8 inception to a point where it can go public. 9 So there's a continuum of capital that ranges 10 from the individual capital, friends and family, angel 11 capital, then structured institutional capital starting 12 with venture capital and then crossover public capital 13 and then full public institutional capital. But to get 14 to those later stages for an entity or a company to be 15 attractive to the public market, to some extent it has to 16 be meaningfully de-risked. And some of that goes on in 17 the private market. Much of that goes on in the private 18 market. 19 Mentioned earlier that from my perspective the 20 venture capital community, which does a fantastic job of 21 fostering innovation tends to be aggregated in the 22 financial centers, and so some of the country is at 23 disadvantage. I would also say that a lot of that 24 venture capital has a time constraint on it, because the 25 life of a fund might be ten years, and so there's a five 0155 1 year investment cycle and then a five-year harvest cycle 2 whereas a lot of these technologies and innovations take 3 longer than that to get to the point of potentially going 4 to the public markets. So I think there is a funding gap 5 in the earlier stages of development that is to some 6 extent addressed by the private capital rules that we've 7 talked about and would be disadvantaged if those rules 8 were changed in such a way that it limited the amount or 9 number of investors that could participate in private 10 capital. 11 So there's a host of things that I think have 12 affected the public markets, but one of them is the 13 ecosystem or the feeder system for getting innovation to 14 a point where the public market is willing to accept that 15 risk, and I do think that that's a very important 16 consideration in this matter. 17 MR. GRAHAM: It's -- I mean we've all witnessed 18 kind of the demise of the small IPO. And we talk about 19 potential solutions having to do with tick size and other 20 things to try to figure out some kind of way to bring 21 that back, and the whole notion that someone mentioned 22 earlier about do no harm, that kind of -- to me, it kind 23 of reminds me of that scenario, and this is a powerful 24 segment of our economy, and do we really want to run the 25 risk of kind of dismantling it. And if there was some 0156 1 certainty that certain things that we talked about really 2 would solve a problem that has been well defined, then 3 you just kind of follow where things take you in that 4 regard. But as you mentioned earlier, I'm not sure about 5 the evidence. 6 Catherine. 7 MS. MOTT: One other thing. There was a very 8 powerful slide that Marianne had shown us, and that was 9 the Kauffman study and the SBA business dynamics 10 statistics report that showed that for the past 30 years, 11 all net new jobs came from companies five years old or 12 less, and if you take that out of the mix, you have net 13 job losses over the past 30 years. And so the other 14 component to this is real job creation that we're talking 15 about. 16 And to me, one of my investor said that slide 17 makes sense to me because large companies are about doing 18 more with less people, and small companies are about 19 doing more with more people, going from five people to 20 ten people to 50, 100. So the other I mean component 21 we're talking about here is beyond the venture and the 22 capital formation market. It's just -- it's job 23 creation. 24 MR. GRAHAM: D.J. 25 MR. PAUL: Yeah, here's the other component 0157 1 we're talking about, which dovetails into what was just 2 said and a couple other points as well, which is we speak 3 of allowing the democratization of capital and access to 4 capital and helping small businesses and SMEs have access 5 to capital through the Reg D market, and of course that's 6 true. But the data is in, and people don't create wealth 7 through savings. That's just not really true. And we 8 have a $1 trillion market that's accessible on a 9 practical basis. They're a couple percent of the 10 population. 11 If we want to do some good here as opposed to 12 doing harm, opening that up for the democratization of 13 wealth creation is an obligation that I think this 14 committee might have at least in terms of its 15 recommendations. And for those who are concerned quite 16 rightly with investor protections and unsophisticated 17 investors being taken advantage of, well, then that's 18 fine. Let us then open up, let us leave in place what is 19 in place, and let us open it up only to those investors 20 who by dint of their education, by dint of their 21 credentials, perhaps by dint of some test if we can agree 22 on what that would be, but through some bright-line 23 metric, right, bright-line test, we can establish that 24 person is sophisticated. 25 That person conforms to the Supreme Court's 0158 1 guidance on someone who can fend for themselves and at 2 least open it up to them, at least open it up for example 3 to registered representatives who can sell these 4 securities. Surely if they can advise their clients to 5 buy them, they ought to be able to buy them for their own 6 accounts. It is nonsensical to think that a young 7 stockbroker who is selling one of these things and then 8 is asked by his client, are you buying it for your own 9 account, can now say I'm not allowed to as opposed to, 10 yes, I am or, no, I'm not, which would be more in keeping 11 with the whole notion of alignment between advisors. 12 And I used the example of a registered rep, but 13 certainly an attorney that advises or a CPA or a CFA. So 14 there are categories that I think are pretty broadly -- 15 can be pretty broadly agreed upon of individuals who 16 because of their education, because of their professional 17 accreditation, because of their demonstrated 18 sophistication should be included in this pool, and I 19 think that that should be something else that this 20 committee is contemplating as a recommendation. 21 MR. GRAHAM: Thank you. 22 Tim. 23 MR. WALSH: Thank you, Steve. I was originally 24 going to go after you, yourself, and Greg just figured 25 we'd go around, and I got beat to the punch, so I figured 0159 1 I'd just keep my mouth shut and wait till the end and 2 take all the opinions and advice together. And what I'm 3 stunned at is there seems to be almost a unanimous 4 opinion to -- I think the paraphrase, Mr. Paul, was do no 5 harm, and I agree with that 93 percent. To -- a couple 6 of the caveats, I think we have to do -- we do have to 7 think what Mr. Certner said today about the AARP, because 8 in some ways -- some of the things he said were correct 9 that here are people being preyed upon, but I don't think 10 Reg D is the reason, and I think the SEC has a lot of the 11 tools to take care of that, which isn't the mandate of 12 this body. 13 But I like Christine and Tim Reese's idea and I 14 guess some others to expand the pool. I think of some of 15 the employees I used to have in New Jersey in their late 16 20s, early 30s that wouldn't meet the criteria but were 17 -- had the responsibility to invest billions of dollars 18 every year of the New Jersey pensioners money into 19 private placements. And they were as sophisticated as 20 many people I know that make 400, $500,000 a year. But 21 their income levels and asset levels, they couldn't 22 invest in something like that, and that just doesn't make 23 sense going back to the stockbroker analogy. But the one 24 -- the 7 percent, which is I think something we should 25 think about, and I mentioned earlier with the lady from 0160 1 ACA is the million doesn't make sense to me. 2 It didn't make sense in 1982 and with these 3 numbers, sometimes you have to just come up with a 4 number, but my concern if we don't think about putting 5 some type of inflation going forward -- and I don't mean 6 this $2 and a half million or $4 and a half million that 7 was in one of the slides, at some point whether it's an 8 advisory body like ourselves or an SEC commissioner or 9 Congress is going to draconian put just some -- another 10 caveat number in, 2 and a half, 4 and a half million, and 11 the ramifications then will be very harmful to the 12 economy. 13 So I think we ought to consider at least 14 putting a CPI adjustment in going forward. So I think 15 CPI is 1 and a half percent. Next year it would be 16 1,015,000. I think if you did that together with the 17 combination of CPAs, registered advisors, it's sort of a 18 good compromise, and it certainly wouldn't be draconian 19 like we've talked about this 2 and a half or 450,000 or 20 2.5 million, which to me just doesn't make sense. 21 MR. GRAHAM: Good idea. 22 Sara. 23 MS. HANKS: Just a quick point on the inflation 24 adjusted thing. I think it's a good idea if it just bear 25 in mind the fact that a lot of the Reg D offerings are 0161 1 done by very tiny, little companies with just a couple of 2 guys who are going to go looking anywhere on the internet 3 for the documentation to put it together. They're going 4 to get into trouble. So if you do have something that's 5 inflation adjusted, there's going to have to be some kind 6 of -- beyond what's already in Reg D so that they don't 7 get into trouble just by saying, oh, yeah, I looked it 8 up, and I found the number, and the number is just over a 9 million, when in fact it's like 1.2 at some point. 10 MR. WALSH: Well, I left this -- I mean the IRS 11 puts out a number every year. This is the number, and 12 it's good for one year. I don't think that's a -- 13 MS. HANKS: It could be on the SEC's website, 14 too. It could be -- you meet the definition as it's 15 posted currently on the site. It's a minor thing. 16 MR. GRAHAM: Is there -- okay. You have 17 something, Tim? 18 MR. REESE: Well, it was just commentary. I 19 think the commentary is the one thing I think about when 20 we talk about allowing individuals in and Paul's sort of 21 analogy of am I buying it, you're buying it, I'm just a 22 little bit -- we've just got to be a little concerned 23 just there in terms of like when you go into a broker, I 24 would just want to make sure either from optics or from 25 graft that you -- that there's -- we -- there's language 0162 1 if we did go through a level of having non-accredited, 2 certified bodies participate, and they happen to be 3 buying and selling securities on their own and also 4 selling to ma and pa that we have to make sure -- because 5 that's why we have FINRA brokers because it makes sure 6 that we sort of separate a little bit of what could be 7 church and state. If you hop in a deal because you're in 8 and you're getting some fees on it, we've got to monitor 9 that. 10 MR. GRAHAM: That's kind of -- it's a good 11 point, I think. It sounds kind of like devil in the 12 details. I think the conceptual point is if someone with 13 these qualifications can make a recommendation for 14 someone else to buy stock, he should be in a position to 15 buy similar securities notwithstanding the fact that it 16 does meet one of these thresholds tests. 17 I haven't heard from Dan. I haven't heard from 18 Shannon. 19 MR. CHACE: You haven't heard from me because I 20 generally agree with all the statements. Just for the 21 same thing, it struck me earlier that there isn't really 22 -- it's not broken as many have said. There's not a 23 dealer problem. I'm not convinced that the fraud amongst 24 the elderly correlates or means that there's substantial 25 fraud in the Reg D market. In fact, it sounds like 0163 1 there's generally not. And also one thing that did 2 strike me is 10 percent of the households that are -- or 3 10 percent of natural persons measured by households that 4 are -- couldn't invest in these seems like actually just 5 a regular guy like an actual reasonable number, it 6 doesn't seem excessive, it doesn't seem -- 1 percent 7 seems quite small, which is what it was initially. You 8 can trust 10 percent of your population to invest in 9 risky securities. You'd sure hope that that's the case, 10 but generally I agree with all the comments, and I would 11 support as well probably increasing the number of people 12 as others have said. 13 MS. GREENE: So I'll be the last one, and I'm 14 the same way. I don't really have any disagreements with 15 anything anybody said. I would I guess at a minimum 16 consider leaving it the same, but probably lean toward 17 expanding it. I'm sitting here making some notes, and 18 I'm thinking about $200,000 or $300,000, if I'm sitting 19 in a little small town in Texas, $200,000 is way 20 different, and I'm in a position to make a 5,000, $10,000 21 investment than if I'm making $200,000 and living in 22 Manhattan. 23 So we don't even -- I mean you said the dollar 24 was set when it was, but if anybody pays any attention to 25 cost of living in the various states, the difference 0164 1 between California and Arkansas is huge. So -- and then 2 if you have $200,000 and you have no debt, your mortgage 3 is paid, you're buying food and utilities, you may be in 4 a position to spend $10,000 on an investment and fend for 5 yourself, survive the loss, whatever. So that's one 6 note. I'm also, as people from the prior term know, I 7 don't really like trying to protect people from 8 themselves. 9 So thinking about -- (laughter) -- which is 10 kind of what we're -- when you think about the investor 11 protection, that's kind of what we're trying to do. When 12 I think about a senior and listening to the guy from AARP 13 today, a senior makes a bad, risky investment, and groups 14 are created to protect that group of people, whereas a 15 younger person, middle age and down, makes a bad 16 investment decision, it's either a bad investment 17 decision or he was stupid, but you go on. There's nobody 18 out to protect the 40 year olds that are doing things. 19 So we can solve the AARP's problem by just eliminating 20 anybody who's over 65 can't invest at all. I mean -- 21 (laughter) -- that's stupid, right? But wouldn't that do 22 it? 23 MR. YADLEY: Shannon, you're absolutely right. 24 Nobody told the kids, and we get those student loans, and 25 then they graduate, they don't have jobs, guess what, 0165 1 they're underwater. 2 MS. GREENE: Yeah, so I'm being facetious, and 3 that's part of the way I make my point, but we can take 4 care of the seniors, but that's not really the solution 5 either. So I'm -- I think the line -- the dollar amount 6 drawn is an arbitrary -- I mean it sounded like a lot of 7 money in 1982 I guess. Maybe it's not so much now, and 8 yet it depends on where you live and where you sit on 9 whether that's a lot of money, not a lot of money, do I 10 -- if I make that much money, I'm automatically 11 considered to be able to make investments. 12 But I'm telling you, if I was trying to live in 13 Manhattan on $200,000, I'm guessing -- never lived there, 14 but I'm guessing I wouldn't have money to make -- I don't 15 care how sophisticated I am. So the dollar amount kind 16 of seems to me an arbitrary number, and I'm with these 17 folks over here. If nothing else, I would expand it, and 18 if people want to be stupid, I mean protect the -- if the 19 SEC wants to work on something work on the bad guys. 20 Don't try to set regulation that protects people from the 21 bad guys. 22 I mean let us -- let whoever make the decisions 23 that feel like financially they can make with 24 investments, et cetera. And then really attack hard the 25 guys that are out there calling the old lady in the 0166 1 tennis shoes and trying to sell her on a $10,000 deal or 2 whatever. Get those guys, but don't try to make it 3 tighter and tighter and raise that bar and drop half or 4 three quarters of the people who could legitimately make 5 investments and take the risk. 6 MR. GRAHAM: Thank you. Does anyone else -- 7 Tim. 8 MS. WALSH: I just had one comment. I think 9 John had mentioned someone buying stocks on E*Trade or 10 Charles Schwab, really made me think of something. The 11 investment firms that issue a lot of these private equity 12 funds, venture capital funds, hedge funds you can buy on 13 your E*Trade account or your Charles Schwab account for 14 5.99. They actually trade on the New York Stock 15 Exchange. There's also many-levered, closed in funds 16 that -- when I say levered, they borrow money, which are 17 risking a lot of the hedge funds I know that you can buy 18 again for 5.99 a click or whatever. And we don't 19 regulate them. 20 So again, it goes to what John was mentioning 21 that we're -- the idea we can regulate just the private 22 side because the private doesn't -- we don't understand 23 it or it's bad is incorrect. There's hundreds of 24 billions of dollars of these traded every year that are 25 on the New York Stock Exchange and NASDAQ. 0167 1 MR. GRAHAM: Thanks. Well, it feels like we 2 have a consensus. It seems to be that the feeling of the 3 group is that we have a system that's almost by 4 definition like any other system is not going to be 5 perfect. There are a lot of things that are noted as 6 issues that are difficult to quantify. 7 There is a benefit that this sector provides 8 that can be quantified, in terms of capital raise, in 9 terms of jobs created. And so the feeling seems to be 10 that no change should be made, and again, in the spirit 11 of doing no harm, allowing the system to continue to go 12 forward and to work. In addition to that, there seems to 13 be a sense that these numbers -- that we can -- again, 14 who knows if they were right, who knows if they are 15 right, but it's the standard that, again, is in place, 16 and it works, but it probably is a good idea to put 17 something in place so that going forward we -- they 18 continue to bump up. 19 And there also seems to be a sense that the 20 expanding could be a good idea. Finding an appropriate 21 definition that is not -- that doesn't replace the 22 existing regime, but is additive, that comes up with 23 definitions that we consider appropriate for 24 sophistication. And there's a -- the notion that we're 25 -- that there could be -- that these are -- that people 0168 1 that have expressed concerns, these are legitimate 2 concerns, but maybe there are other ways to address them, 3 and at the root of some of these issues, maybe Regulation 4 D is part of the problem, maybe not. Again, that gets 5 back to the evidence question. 6 But it does make sense if we feel that for 7 example seniors are being preyed upon, then maybe we need 8 to do a better job of educating seniors. Maybe we need 9 to do a better job, not that anybody was doing a bad job, 10 but perhaps a better job of enforcement. But in terms of 11 taking a system that -- it's a hugely important ecosystem 12 to our economy, and tinkering with it in that -- in these 13 bases is something that we don't agree to. Is that kind 14 of roughly -- yeah. 15 MS. LUNA: I mean I think we reached a 16 consensus to expand the definition because -- 17 MR. GRAHAM: Yeah, that's what I -- 18 MS. LUNA: Okay. Okay. 19 MR. GRAHAM: That's the sophistication part, 20 that's the expansion part. 21 Yes. Charles. 22 MR. BALTIC: The only thing I would add is that 23 in the spirit of the committee continuing to fulfill our 24 obligations, having the requisite data to continue to be 25 informed in this subject would be very important, and so 0169 1 I would encourage that we also be open to ongoing efforts 2 to compile data on numbers of offerings, numbers of 3 investors, actual amount of capital raised in private 4 offerings so that we have the right lens to understand 5 how important this private capital formation is to the 6 economy, and so I think that should be an ongoing effort. 7 I know that the Commission is involved in that, and I 8 would just stress that we should be mindful of that and 9 considerate of that on an ongoing basis. 10 MR. GRAHAM: Good point. 11 MR. PAUL: I just second that and then say that 12 that ought to be one of our recommendations to the 13 Commission specifically. 14 MR. GRAHAM: Yeah. 15 MR. PAUL: For more data. Right? 16 MR. GRAHAM: Yeah. 17 MR. YADLEY: I think that also addresses the 18 point that Tim made that we are in fact doing our work 19 and recommending that the Commission do so, too. This 20 Dodd-Frank requirement is every four years. So I think 21 for now we don't believe that there needs to be a change 22 for the reasons stated, and we do recommend affirmatively 23 that data be gathered so that the Commission will have 24 more hard data about who's investing, how much they're 25 investing. It was pointed out this morning that you 0170 1 don't have to file a Form D at the end of the offering. 2 I've never quite understood that myself, because that 3 would certainly -- the whole purpose of Form D is for 4 gathering data relevant to the SEC's mission, and why not 5 have data about what happens, what actually happened. 6 MR. GRAHAM: Thanks, Greg. 7 Sara. 8 MS. HANKS: Just one point about if the 9 definition is to be expanded, it needs to be expanded in 10 a way that is absolutely certain and gives issuers the 11 ability to say yes or no in a binary way. Because we 12 can't forget that the reason we got into this situation 13 in 1980-wherever in the first place was in response to 14 the fact that the predecessor definition of accredited 15 investor was someone who has sophistication in financial 16 affairs, so issuers tied themselves in knots trying to 17 determine whether someone was sophisticated. So we want 18 to learn from the accredited investor verification 19 process and not get issuers into a situation where they 20 can't rely on something that says definitively this. You 21 can rely on this, and that's the end of it. 22 MR. GRAHAM: I think you make a good point, and 23 it's important that any definition that is developed is 24 one that's going to work. And if people can't figure it 25 out, if it's too subjective, then it's not going to work. 0171 1 But the thing that I would be most concerned about is if 2 you were going to replace a current regime with these 3 sophistication definitions. And so it gives me comfort 4 that if the current system stays in place and this is 5 purely additive, you haven't changed anything. You've 6 only created an opportunity to perhaps expand assuming 7 people can figure out. 8 MS. HANKS: Give some folks more legal fees I 9 suspect. 10 MR. GRAHAM: Thank you. 11 Catherine. 12 MS. MOTT: Perhaps this is what Greg was 13 saying. I think the -- and in light of what Tim was also 14 saying earlier about maybe we should be tying it to some 15 sort of index. We can't do that without the data, 16 without enough data, but I think there is -- there could 17 be a fear that Congress would set it, and without the 18 data, and so maybe that would be a recommendation that in 19 the next -- by the next four years when it has to be 20 under review that we have enough data to make a good 21 recommendation whether or not it's the CPI or something 22 else. I don't know. 23 MR. GRAHAM: Well, I think the recommendation 24 is that we tie it to CPI. 25 MS. MOTT: So that was a recommendation? 0172 1 MR. GRAHAM: Yes. 2 MS. MOTT: I don't know. Does that make you 3 uncomfortable? 4 MR. GRAHAM: I would say let's -- 5 MS. MOTT: I don't feel comfortable without the 6 data. 7 MR. GRAHAM: Yeah, well, it's -- 8 PARTICIPANT: (Off-mic.) 9 MS. MOTT: I know, but is -- 10 PARTICIPANT: (Off-mic.) 11 MS. MOTT: Yeah, but I -- is a million the 12 right number? I don't know. 13 MR. GRAHAM: Well, see, that takes us back to 14 the whole -- 15 MS. MOTT: I know. 16 (Crosstalk.) 17 MR. PAUL: I think that the notion -- and 18 correct me if I'm wrong -- would be we want to do that 19 preemptively so that we don't get something -- I think 20 the word was draconian or additionally arbitrary later. 21 Because at some point in time, whether it's five or ten 22 years, a million dollars is really not going to be a 23 million dollars. So rather than risk some sort of weird 24 action in the future, we could be somewhat proactive. 25 But I do get your -- I would like -- if we had the data 0173 1 now we could address it now. 2 MS. MOTT: That's -- I just don't feel 3 comfortable, but -- 4 MR. PAUL: Okay, no, that's fine. 5 MR. REESE: I feel comfortable. I mean if we 6 -- (laughter) -- because if it works now and build -- so 7 the idea I think is if you start moving that number 8 around, then you're tinkering with the idea that it 9 works. So the idea if it works is we're talking about 10 protecting ourselves or protecting the marketplace so 11 that for further -- if someone else wants to decide on a 12 number, we've at least offered a number that is tied to 13 the consumer price index, which is by all economists, 14 that's what they use to determine growth wages. 15 MS. MOTT: You won me over. 16 MR. GRAHAM: Yes, Richard. 17 MR. LEZA: Well, it seems to me that we do need 18 to put the index. The other thing that it seems to me 19 that we need to keep this number at about 10 percent of 20 the household, because that seems right. I would hate to 21 see this number flame up and in four years we're talking 22 about the people that qualify under this as close to 20 23 percent because we started with 1 percent, but 10 percent 24 of the financial people of the household population seems 25 right to me and being able to do this. 0174 1 MS. MOTT: I wouldn't go there. 10 percent of 2 a million, yes, but 10 percent of 10 million is totally 3 different. I don't think we should put in -- I mean it's 4 a recommendation -- 5 MR. GRAHAM: Well, we don't -- 6 MS. MOTT: It's already a recommendation. 7 MR. GRAHAM: We don't -- I -- 8 MR. LEZA: Making a comment that -- 9 MR. GRAHAM: These are -- we can't predict the 10 future, and I don't -- I think we can anticipate that 11 there could be issues down the road depending on how the 12 economy develops and everything else. And there may be 13 another need for a rule modification, but right now, I 14 think we're talking about today and I think with 15 currently what is on the table makes sense for me today. 16 It's not -- we're not going to put something in place 17 today that's going to work forever, and we're not going 18 to put something in place today that's going to properly 19 address all things unforeseeable because that's just not 20 the way things work. But I think in terms of what we are 21 trying to do today -- I mean we're focused on a sector of 22 economy. We're focused on the job creation. We're 23 focused on capital formation for smaller businesses. 24 We're not unfocused on investor protection. We 25 just don't feel that the evidence is there to suggest 0175 1 that what is currently in place is that big of a problem. 2 And so I think what -- the proposal on the table I think 3 addresses those concerns and allows us to then move 4 forward and discuss other issues. 5 But, Tim, you had something? 6 MR. WALSH: Just a last comment on the 7 expansion. I did notice -- someone mentioned the CPAs, 8 CFAs, MBAs, investment advisors, and just for all my 9 fellow lawyer friends on the -- no one mentioned the JD. 10 Just for your -- 11 MR. GRAHAM: Thank you, Tim. (Laughter.) 12 There's a reason for that. There's a reason for that, 13 Tim. Okay, any other comments? 14 MR. PAUL: I would just say that 15 philosophically if I could have an entire population of 16 America that could take a test and demonstrate their 17 sophistication, I would be comfortable with 100 percent 18 of the population if they could demonstrate their 19 aptitude and their understanding of the risk. So I don't 20 have any arbitrary notion that it ought to be 2 percent, 21 10 percent, or 20 percent. I would just like it to be 22 smart people as opposed to merely rich people. 23 MR. CHACE: I agree, and -- put out the 10 24 percent number, I don't think that's like -- we can call 25 it the right number as much as it doesn't seem an 0176 1 excessive number at all. 2 MR. GRAHAM: So -- oh, Javier. 3 MR. SAADE: Just an observation. I'm not going 4 to take an opposition, but CPAs, JD, whatever the acronym 5 alphabet soup is, when I bought companies for a living, 6 if I was buying some microbiology-based technology, I 7 wouldn't be asking some MBA for advice on how to 8 structure a strippable warrant. I would be talking to a 9 microbiologist to see if the deal makes sense. So as -- 10 if the decision -- it sounds like it is -- is to expand 11 the tent, one of the things I would respectfully -- 12 advice you consider is, yes, you -- it's great to have 13 the financial sophistication, because these are 14 investments. 15 But if it's a -- if you have domain expertise, 16 something that doesn't -- because lot of people will get 17 upset, a doctor that just started his or her career and 18 knows everything about oncology but hasn't made the 19 threshold is not allowed to invest in an oncology deal. 20 So I would say don't think about it so specifically 21 purely financial, because domain expertise sometimes in 22 these early age stage deals is worth a lot more than 23 somebody that can structure a convertible preferred. 24 MR. PAUL: I've got to push back on that for 25 two reasons. The first is that we need a bright-line 0177 1 test, and if we don't have a bright-line test, it's not 2 going to be workable, and domain expertise becomes fuzzy. 3 Who's going to determine whether or not that person has 4 domain expertise. That's first. And second, in the end, 5 you're not buying oncology; you're buying a security. 6 So you do need some specific understanding of 7 the security that's being purchased, and I think that 8 that -- I mean there's no doubt that domain expertise is 9 incredibly important in evaluating an individual 10 investment, but we're not trying to allow people, I don't 11 think, to invest in specific types -- rather specific 12 investments, but rather in an entire asset class. And so 13 we need something a little bit broader. 14 I mean I -- if I could -- if we could come up 15 with something, I'm not opposed to it, but -- that's 16 bright-line, but if it's not then we're going to bump 17 into some of the problems that John mentioned and that 18 Sara mentioned where if it's not bright-line, it's going 19 to cause the people to get jammed up as they did from 20 1974 to 1982. And that would be -- that would create 21 more problems, well, not maybe create more problems than 22 it solves, but it's certainly going to create some 23 difficulties. 24 MR. YADLEY: I think that's, again, both things 25 are important, but in the context, I think of the 0178 1 discussion we're having. We're talking about 2 sophistication in the sense of people understanding the 3 risks of the investment. So while that certainly goes to 4 each specific -- and that was the point I was trying to 5 make earlier about footnotes and financial statements. I 6 think the advice from a lawyer or an accountant or 7 somebody else who is used to giving advice will be it's a 8 security, it's debt, or it's equity, and it's in line -- 9 the ABCD means this. 10 There are risks having to do with illiquidity, 11 how returns are affected. It's all of those sorts of 12 things that go beyond the new doctor that says because 13 she believes this is the cure to cancer, I want to invest 14 all my money in it. Well, wait a minute. You've got to 15 understand what the company is going to do with the 16 money, what the FDA is going to do. You've got to 17 convince Wall Street to -- all those sorts of things, and 18 I think so by expanding the asset class, I think we're 19 trying to do what I think the ACA is doing is that 20 they're taking people who have sort of learned about how 21 to play in this sandbox and what it means, and I think 22 the SEC can have a very important role in education in 23 sectors and so on. 24 So I agree. We don't want to make it so 25 complicated that we're back to what Sara said, and you're 0179 1 making it more difficult for the issuer, and then the 2 data that the SEC is going to get will be a jumble of 3 data that will be inconsistent, and the agency won't 4 really know who's doing what. 5 MR. GRAHAM: Thank you. And the good thing is 6 that we're not going to try to come up with a definition. 7 We're going to come up with an idea, then we're going to 8 recommend that the SEC pursue it. What I would like to 9 -- the resolution that I'd like to put on the table is 10 that we recommend to the SEC that essentially we do no 11 harm, that we work to expand the definition because that 12 part makes sense, that we attach a CPI adjustment to the 13 thresholds going forward, that we continue to gather data 14 on this segment so we understand it better, and that's 15 something that should be ongoing as far as this committee 16 is concerned, ongoing as far as the SEC is concerned, and 17 that we encourage that -- we encourage the SEC to find 18 other ways to address situations involving, for example, 19 fraud on senior citizens, that through -- whether that's 20 through -- well, it should be through, as a minimum, 21 increase investor education and also increased 22 enforcement. Does anyone want to supplement that? Did I 23 get it close? Okay, so that's -- anyone want to second 24 that? 25 PARTICIPANT: (Off-mic.) 0180 1 MR. GRAHAM: All those in favor? 2 (Chorus of ayes.) 3 MR. GRAHAM: All those opposed? Okay. And so 4 what we'll do is we will sit down and try to actually 5 craft a set of recommendations that reflect the sentiment 6 of this committee, and then we'll have it circulated to 7 make sure that everybody's in line with that. And 8 hopefully we should be in a position to submit something 9 to the SEC within how much -- you think we can get that 10 done -- 11 MR. GOMEZ: Steve, would you -- I would think 12 that you would want to have this specific language -- 13 MR. GRAHAM: Oh, yeah. 14 MR. GOMEZ: -- probably approved by the members 15 themselves. 16 MR. GRAHAM: Oh, yeah, absolutely. Yeah, 17 that's what I said. 18 MR. GOMEZ: And that will have to be done in a 19 public meeting. 20 MR. GRAHAM: Yeah, I think -- well, we'll work 21 this. 22 MR. GOMEZ: We'll touch base on that. 23 MR. GRAHAM: But we're going to put something 24 together, and you're going to have an opportunity to look 25 at it and approve it. We'll make sure it's in the right 0181 1 forum, and we'll get that recommendation to the SEC. 2 MS. JACOBS: I think in the past -- 3 MR. GRAHAM: Let's -- 4 MS. JACOBS: We have done it. 5 MR. GRAHAM: Oh, yeah, I know that. 6 MS. JACOBS: Okay. All right. 7 MR. GRAHAM: Okay. Well, the idea was that we 8 would spend the remaining time just touching up on kind 9 of your ideas for some of the issues that we should pick 10 up going forward. I think we've mentioned some of them 11 briefly during the day. Among them are disclosure 12 effectiveness, whether that's scale disclosure, more 13 meaningful disclosure, and the whole notion of a core 14 disclosure document. Secondary market liquidity, 15 codifying the 401 and a half, maybe broadening the use of 16 Form S3, those are just a couple of things that are on 17 top of mine from my point of view, and we'll kind of 18 decide on what the agenda is going forward. 19 But to the extent that you have ideas that you 20 think we should at least consider taking up, you can 21 either let us know in the next few minutes in this 22 context or feel free to shoot us an email. I think that, 23 as I mentioned during lunch, this committee relatively 24 speaking has a short shelf life. Our term expires at the 25 end of September, and we all know what that means. 0182 1 Looking forward, it seems like a long ways away. Looking 2 back, it's going to be just a blink. So there's -- I 3 want to be able to chart a path forward relatively soon 4 so we can start thinking about what -- in what ways it's 5 going to be feasible for us to make a difference as far 6 as our mission is concerned. So with that, I open it 7 back up. 8 MS. LUNA: So as a CPA, some of the items that 9 you were mentioning are a little foreign to me, but I 10 catch on quickly, and I would say we should probably 11 maybe get input from other people on what their one, two, 12 and three are for their priorities for the next meeting. 13 I'm open because I -- these are some of the items that 14 you're bringing up just now are a little new to me. 15 MR. GRAHAM: And we're just -- this is -- 16 nothing is going to be set in stone. This is if you have 17 a comment on what the agenda might look like going 18 forward, then here's your opportunity to make that 19 comment. And -- John. 20 MR. BALTIC: I think the whole idea on the 21 disclosure side of the relationship between S1 and S3, 22 whether it's expanding S3 or forward incorporation in S1, 23 and then the whole issue -- and maybe we can get somebody 24 to come in and give us a history on this, the idea of 25 issuer registration as opposed to individual securities 0183 1 registration, so looking at the Australian model perhaps 2 as to how registration works down there. Is a company's 3 34 Act registrant fully compliant, they want to issue 4 common stock, they can issue the common stock, apply to 5 have it listed or tradable on the exchange, and it's a 6 few days as opposed to having to file a separate 7 registration statement for those. 8 I think if we can get somebody to come in and 9 give us some background on that and then look at that 10 vis-à-vis S1 and S3 eligibility currently and either 11 expanding S3 or making forward incorporation in S1 12 available, I think that's going to make the registrants' 13 and issuers' lives far, far easier. Some of this is 14 pretty esoteric, but it's very, very important for these 15 small companies. 16 MS. JACOBS: John, I think when we're talking 17 about the disclosure, it also is public company 18 disclosure and effectiveness, and if you remember, we as 19 a committee handled this, remember, that 250 market cap, 20 what -- and all of that for the existing public 21 companies. I think that's what -- I think that's what 22 the topic is referring to, not the S1, S2. It's -- 23 (Crosstalk.) 24 MR. GRAHAM: S3 eligibility, that's exactly 25 what I'm referring to. 0184 1 MS. JACOBS: All right. 2 MR. REESE: I was interested in looking at a 3 couple things. One is -- I don't know if this falls 4 under disclosure, the Rule 144(a) and this other notion 5 of large accredited investor, the fact that it represents 6 10 million in assets and it's a different status than 7 what we've been talking about just now. Yeah, to 8 qualify. 9 MR. GRAHAM: To qualify? 10 MR. REESE: Yeah, you're at another level. I 11 don't know what that brings to the market by just coming 12 up with that class. 13 MR. GRAHAM: Okay. Greg. 14 MR. YADLEY: An issue that's been around for a 15 while and is always one of the recommendations that the 16 SEC Government Small Business Forum is finders or private 17 placement brokers, individuals who can help companies 18 access small amounts of capital. The larger brokerage 19 firms and there are a fewer smaller brokerage firms, 20 there's a lot involved for them to try to raise small 21 amounts of money. It's really not their sweet spot, and 22 there are a lot of individuals who have contacts that can 23 bring good investors to smaller companies, are willing to 24 do so on a contingent fee basis. That makes them a 25 broker, which means they need to be registered, and 0185 1 there's not really a category for that. So that would be 2 another piece of the puzzle of how to help smaller 3 companies get access to capital. 4 MR. GRAHAM: Okay. 5 MR. CHACE: On the tick size we addressed last 6 session, and I don't think there's -- what else would 7 there be to do in that? Because we recommended a trial, 8 and that trial is now underway. 9 MR. GRAHAM: Yeah, I don't think there's 10 anything more that we can do. I think the SEC has taken 11 our recommendation. I think that there is a -- is a 12 pilot currently ongoing, or being structured? 13 MR. CHACE: I don't know. 14 MR. GOMEZ: There's a comment right now that 15 it's about to end the comment period on a potential pilot 16 program. 17 MR. GRAHAM: Yeah, and if you recall, we were 18 in favor of just implementing a change in those regs and 19 avoiding a pilot program because pilot doesn't sound very 20 permanent and making these changes is going to require 21 significant investment. As a committee we felt that it 22 was important not to have a pilot, that we actually make 23 a change, but that's not where we ended up. Where we 24 ended up is that we're going to eventually have a pilot 25 in place, and we'll see what happens. But I think that's 0186 1 where we are, good, bad, or indifferent. 2 Anything else? Well, I think we had a good 3 day. This is a good committee. I appreciate everybody's 4 contribution. It's -- again, this is a tough time of 5 year in terms of things on everybody's plate and to take 6 the time to get on planes and trains and show up and 7 spend the day in a productive way is much appreciated. 8 So happy holidays to everyone. We will run the 9 process like it needs to be run, but you will have an 10 opportunity to read some recommendations hopefully before 11 the end of the year. So okay. 12 (Whereupon, at 3:25 p.m., the meeting was 13 concluded.) 14 * * * * * 15 16 17 18 19 20 21 22 23 24 25