my purchase d , i ackwledge the shares of newly public ans routinely tradew the prices at which theey ar initially offered. my hop ihat a cigarette box type warning of this nature could just at a moment of pause to transaction decisions that are too often based on emotion ant on thoughtful analysis. with my remaining time, iould add o other comments. first, as we knowome teams toons have the chance tme arenk them quesons dung a road show itotdividuals to have thatsame exposure, although t th advent of the ravnce to h theprestion, en thghpe mstf i wothe a level t playing field adding -- suggesting to companies goingblic that they an hour offer an hour of q -- onne q & a for individunvestors during h y cld respond to

esubmitted questions from any investor who had actually watched the retail road show. g el a chance to level the d finay, a third comment i would make echos at you just said. i have siict about manye of th provisns of the -intoned, recently passeds act as theyoth -- these provisions reduce transparency and really roll back important, in my opinion, investor protections. i would suggest that act may need some refinement. and the question for our initial invitation which dr. sherman addressed in the pricing allocation, based on my years of watching ipos, i would suggest that needs to be completely in the hands of professionals who have a fiduciary obligation for those whose money they are overseeing, the management of the company selling stock, and the investment bankers who have the best aggravate gated information about the market and interest in a particular security. i do not think it is appropriate for retail to be able to set the price in ipos. in summary, i think general the process works very well for both

companies and for informed, and i would underline informed, investors. i would recommend one that we add a request for a signed, straightforward acknowledgment of risk. two, perhaps management teams offer a q & a session for individual investors, and three, we revisit the provisions of the jobs act. thank you very much. >> thank you very much, ms. buyer. mr. trotter, please. >> thank you, very much, and my thanks also to ranking member crapo and other members of the subcommittee and their staffs. i've provided you all with detailed information in my written testimony, and i want to highlight four key areas that bear emphasis. first, the national importance of our ipo markets. second,ck principle of our system and federal securities regulation, which is disclosure, not merit regulation. third, another bedrock principle, which is the concept of materiality in that disclosure. and finally, i want to comment on the nature of risk, reward and capital formation.

so the first point i would like to make is that ipos must compete with other forms of capitaltir emerging growth companies have two alternative pas f providingdity liqui to their early-stagvestor they can eitr pursue an ipo or ey can pursue ale of the company. more stage companies nvironmend toward a sale ocess d away from the alternate. and that's exactly what have seen in recenars. this matters a lot, because ipos play an important role in fostering innovation and job growth. as president obama said when he signed the jobs act into law, new businesses overall account for almost every new job that's created in america and going public is a major step towards expanding and hiring more workers for those companies. the ipo on ramp is an important step in making it easier to go public, while maintaining important investor protections and providing significant cost

savings in the ipo process. the second point i'd like to address is what else we can do to help ipos. we can return some bedrock principles of federal securities regulation. from the beginning, congress has mandated a disclosure regime, rather than merit regulation. my mentor and former partner, john huber, used a memorable anecdote to contrast disclosure with merit regulation. john is well-known for a distinguished career and his distinguished service as director of the s.e.c.'s division of corporation finance, a disclosure regulator. but earlier in his career, he worked for a state securities commission, a merit regulator. his co-workers proudly refused to approve the shares of an untested, upstart company whose name today everyone in this room would recognize. they had rejected that company's request to sell shares to residents of their state, because the ceo's compensation was too high.

what was the ipo price, john asked them? answer, $22 per share. well, john responded to his colleagues, the stock is now trading at $60 per share, so how exactly did we help investors in our state by preventing them from buying at $22? that anecdote sums upper writ regulation, and it highlights the benefits of a disclosure regime that let's investors choose the winners and losers. the third point i want to make is about disclosure, and what information companies must provide to investors in a regime that takes the path of disclosure rather than merit regulation. the tried and true answer to that question is that disclosure of all information that is material is required. well, anyone who has looked at an ipo prospectus may wonder whether we've gone far afield from that central principle of disclosing material information. an ipo prospectus today is a

lengthy and detailed document running as much as 200 pages or more often. brevity may be the soul of wit, but it's hardly the hallmark of an ipo prospectus. a balanced and reasonable approach to materiality is -- an avalanche of trivial information obscures truly important information and does nothing to increase the protections to investors. my last point is about risk. it's a simple fact of economic life that not all ipos succeed. any commercial enterprise that can earn a profit can also earn a loss. like any business and newly public company, may or may not make money for its investors. for precisely that reason, cover page of every ipo prospectus says this is our initial public offering. no market currently exists for our shares. and the prospectus has many pages of detailed risk factors

highlighting the risks that relate to the company and the offering. in addition to transparency, our capital markets must offer investors the opportunity to take risks. risk-free capital markets have no future as s.e.c. commissioner daniel gallagher recently said. even if we could create risk-free capital markets, he said, they would not offer enough up side to attract companies or investors, because investors would do just as well or better putting their money into saving accounts or treasury bills. thank you very much, i welcome your questions. >> thank you very much, mr. trotter. mr. moskowitz, please. >> mr. chairman and members of the committee, i want to thank you for the opportunity to offer testimony and recommendations today. my name islon months co vits, senior analyst for the motley fool. founded in 1993, the motley fool's purpose is to help the world invest better. millions of individual investors rely on the motley fool, not

only for guidance on how to manage their money, but also as an advocate for their rights as shareholders. for years, we've worked to create a level playing field in the market. it's for this reason that we are eaganer a eaganer and grateful to discuss whether the ipo process is working for ordinary investors. it goes without saying that ipos are critical to developing public markets and helping businesses raise the capital they need to grow and hire. from our vantage point as retail investors, the overarching problem with ipos is that there is an imbalance of both information and access. although issuers and venture capitalists depends on us for liquidity, the deck is stacked against us in at least two major ways. first, insiders, underwriters and their favorite clients have access to more and better information than do ordinary investors. this gives them an advantage in estimating a company's fair value. reports of facebook's recent ipo provide a prominent example of this.

second, there's inequal access to shares. the initial offering is limited to preferred clients of underwriters. by the time we can buy shares, there's already been a significant mark-up. it's estimated from 1990 to 2009, the first day pop averaged totalling $124 billion. that $124 billion didn't go to the company's public, but to clients and the underwriters. unfortunately, the ipo process is likely to get worse for individual investors as a result of the recently passed jobs act. the on ramp section of the act is intended to spur economic growth by lowering the bar that a company must meet in order to go public. but weakening reporting requirements means less information for investors and a lower quality pool of ipos. think more pets.com than google. when we lost faith in the quality of ipos in the late '90s, ipo volume crashed 75% in 2001.

it's worth pointing out that ipos doubled from that level following the research and passed sarbanes oxley. addressed some of the worst abuses of the dot com bubble in ensuing years. but the jobs act does many of these reforms for nine out of ten companies coming public. to remedy these problems, our objective should be to level the playing field and restore trust in the ipo process by maximizing transparency and useful disclosure. there are three recommendations. first, extend the application and enforcement of regulation fair disclosure to the beginning of the ipo process. this will help to improve the flow of information to all investors and reduce one of the most preventful information asymmetries between underwriters and their favorite clients versus ordinary investors. second, require the companies and underwriters allocate shares to the initial offering in a more inclusive and efficient manner. companies like google, morning star and interactive

brokers have successfully employed variations on a dutch auction process which give all investors the opportunity to participate in buying shares at the same price, under an equitable plan of distribution. an added benefit is that it lowers the cost of going public for companies by more than half. finally, fix the most troubling portions of the jobs act from the retailer's perspective. while there are a number of improvements that can be made, if you're looking for the most straightforward remedies there be two. one would be to decrease the size threshold in order to increase the amount of information available to investors as the chairman has previously recommended. the current definition needlessly encompasses virtually all ipos. second remedy would be to implement a lock-up period covering preipo insiders, which would extend from the offering to at least 180 days after an issuer is subject to normal reporting requirements. similar to common practice

before passage of the jobs act. this will better align the incentives of insiders and ordinary investors. it will also help ensure any capital raised via the emerging growth capital serve its intending purpose and not to insiders exiting the ipo on ramp. as the ipo process currently stands, ordinary investorses have unequal access to information and unequal access to the market. we're asking for a level playing field, disclosure and transparency. we believe that the lack of these qualities is what's most troubling about the ipo process right now. i appreciate the opportunity to submit testimony in how ipos affect investors is and would be happy to answer any questions. >> thank you all very much for your excellent testimony, both your written testimony and comments this morning. let me begin with a question for the whole panel. it focuses on the issue of how do we best protect the retail investor, given that the

prevailing model, with variations now, because of the jobs act, is a book-building, where managers of the ipo, with -- clients and as -- the theory in order to advance price discovery, conduct all these road shows, et cetera. but as the facebook ipo suggested, some critical information, particularly the very last minute, was available to favorite investors, and not widely disseminated to the public. so i just want your thoughts, each one of you, about, you know, if -- if we are involved, retail investors, how do we do it in a way that they're confident, they're getting a good deal, and they'll continue to invest in ipos. dr. sherman. >> certainly, it's important to level the playing field.

in terms of information. and i was very surprised with facebook, that analysts were allowed to talk to institutions, but not individuals. i can see why that is there, because individuals, if they're allowed to be given these forecasts -- because it wasn't hard information. it was expectations of the future. individuals might not understand that these are speculative and might not appreciate it. but i do think the same information should be available to everyone. one of the unusual things about the u.s. is the quiet period regulation and as joel said, this disclosure and not merit. so it's very important that we try to give everyone the same access to information. and i would second what liz said about the q & a from the road show. i think that should be able, even to retail. >> let me just follow up. under the jobs act, there is a less -- there is a loosening of the analyst's role, as i read

the act. that they -- they now can be, unlike the universal settlement that mr. moskowitz talked about, they now can be sort of compensated or at least -- it's not the strict wall between the analyst and the promoter. is that accurate? from your reading of it? >> mr. trotter would probably be -- >> well, let me just -- if you don't know, that's fine. >> i don't know. >> ms. buyer, your comments in general. >> on the follow-up question or the whole question? >> the whole question. >> number one, let's all remember that individuals do have the ability to participate in ipos, through mutual fund, the favorite clients we keep talking about are really those big firms that have aggregated many thousands of individuals' investments. so the firefighters and teachers all actually do get to participate in ipos, just through the screen of a professional investor. the equal distribution of information is difficult. and i understand this is not about facebook. but let's remember that everyone

had access two days before that deal to the information that general motors was pulling their advertising off. that was a huge material piece of information that didn't seem to in any way quell the enthusiasm. the issue at hand in that particular case was morgan stanley's estimate which, of course, morgan stanley offered to the clients who pay them. the estimate is a product that morgan stanley sells to its customers. and i don't know that we ought to be regulating what information customers can share with their -- or companies can share with their clients. so i think it's a little bit of a slippery slope. and if we insist that all investment banks give their estimates to everyone, what incentive do they have to come up with estimates? i think they'll find other places. so the jobs act issue that i find of greatest concern, and you mentioned the global research settlement, is that many banks are still hell bound by that. so the analysts of the banks who have the most information about the potential ipo are still

restricted from talking. the only ones who can now publish research are those who are farther away from what's actually happening. and i'm not sure that that serves anyone's purpose. >> okay. mr. trotter? >> well, as i indicated in my written testimony, i'm not in a position to talk about any particular ipo or company. but i will say that in the area of analyst research, by far and away, all of the protections that were developed in the last decade remain in place. and are unchanged as a result of the jobs act. there were some changes, and many of those changes relating to that area still need to be implemented through interpretation and other interpretation by the regulator in that area. >> mr. moskowitz, your comments. >> with respect to the global analysts' research settlement, yes, that's my understanding, as well. one concern with the changes that were made in the jobs act is that if you allow analysts to

meet with prospective clients, that there's a possibility you can have analysts meeting clients -- meeting companies that want to come public, and that way the underwriters can say here's our analyst, he's got a nice suit, he'll write nice things about your company and we'll give you a strong buy recommendation. obviously, during the '90s, lots and lots of companies were coming public, and they were sort of indirectly promising -- they got good buy recommendations from analysts. and then with respect to facebook, i agree the problem is not with facebook -- the problem is note that shares went down. because that can happen in any ipo. i would just say that there is a problem with equal access to this information. when reports from analysts are issued by analysts who have special access to management,

they can get information that is not really available to all investors, and when you see something like facebook, there is a problem where you have -- you have multiple analysts from various underwriters who all cut their estimates from pretty much the same number to pretty much the same number. you have reports that, you know, people from facebook may have indicated to them they should, you know, go over their estimates. and meanwhile, the public gets sort of some vague line in a massive s1 amendment about our subscribers are continuing to grow at a faster pace than our revenue. so the quality of information that's being presented to prospective clients of the underwriters just isn't on the same level as the information that investors would have if they have to dig through the s1

to try to discern what that means. >> dr. sherman, you point out that in other countries that the retail discern what that means. >> you pointed out in other countries that the retail investors do not engage themselves in the price discovery and price recovery and that's stricted to, i presume from your comments, that model is an appropriate way to set prices. many have a specific way in which they can buy at the same price. can you comment about how effective and successful that is? is that something that we should look at in terms of our approach to ipos? >> i'd like to see it considered here especially for larger offerings. a lot of the smaller ones are offered. i tried to talk facebook into doing this. that way every one has an equal

chance to participate. when i lived in hong kong, i went and placed orders. all you need was a hong kong i.d. number. everyone had an equal chance. the problem with auctions is when you get, retail demand is uncertain. you can get them pushing the price up and people lose money and the retail go away again because they're scared of the process. there needs to be some coordination. we can open up allocations and give everyone a chance without disrupting the process which isn't good for anyone. >> one of the other aspects of the american model is the road show in which analysts are able to quiz management. it might be appropriate to consider making that much more

accessible. i think on facebook there was a version put on the net, but it neglected to have the question of analysts, the most important part. is the road show process the best mechanism in your view? >> i think it's important. i would like to see the question and answer. if you look at why investors go to the road show, it's so see the management in action and see how they respond to tough questions and get a feel for the people. you're not just investing in the idea or product. you're investing on the management team. facebook, their first day for the road show replace a lot of q and a with this 30-minute video, and investors were happy by that. by the next day in boston that was gone. i've watched the online road

shows, but then you're seeing management scripted and rehearsed and filmed. it's different to see them on their feet and responding to questions and retail investors should get the chance to do that. >> thank you. we got the jobs act now. you suggested it's opening up new opportunities. one opportunity that's been least suggested and reported by the wall street journal to take a shell company effectively that's already registered and simply reverse merger. you don't have to have ordered it. you don't go through the traditional ipo process of the book building, analysis or

offering. is that something that concerns you about how either willingly or unwittingly this new act would be used? >> mr. chairman, many of the things you said about shell companies are, in fact, true. they were true before april 5th, 2012, and they continue to be true today. the jobs act didn't change the dynamic with shell companies. they've always been part of the system. they've been subject to scc reviews. they almost exclusively are smaller companies so they have already been exempted under dodd-frank from the internal control audit. none of those aspects relating to shell companies has changed as a result of the jobs act.

>> one of the, this might be the most ironic aspect here of the jobs act, there's nothing in the bill that requires any creation of jobs to quality for all the protections and benefits of the jobs act. is that accurate? >> i think the premise under lying the ipo onramp is going back to the competitive nature of the capital formation process is that you have an early stage company that needs to provide a return fo inverss who bet on the company when it was just an idea, that type of company can pursue one or two paths. it can sell the company and have redundant positions eliminated in the short term or raise its own capital to be independent.

you're going to grow the business and you're going to need more employees to help you run your growing business. you're going to need to hire people. in almost every case they started out as fledgling enterprises. you can pick your favorite city and you'll think of a company that has changed the landscape of that city. >> specifically, all of the provisions can be accessed by companies who do not grow one additional job. they can avoid, they can do this until they get to the size of $1 billion in revenue, which would seem to me that company that has $1 billion in revenue could

afford to have standards and afford many other things which would product whatever their shareholder, but the reality is that you don't have to have one extra job to be an emerging growth company, is that correct? >> yes, sir. several points in response to your very good questions there, the profit and loss system of the capital markets and our free enterprise system entails both profit and loss. we cannot, this goes back to the distinction between merit regulation versus disclosure. people now in hindsight talk about certain dot com companies a and examples of how they were bad ideas. the investors had to choose and pick the winners and losers.

some of those companies are long forgotten, but many of the companies are around today and have created new industries and change the way we purchase products. that's one point. for all companies below a billion dollars in revenue. the jobs act provision that gives this onramp of one to five years depending on the size of the company is much more limits than that recommendation from the president's job council. new public company has two years. it's really changing two to five internal control. >> given the two-year exemption,

that requirement to eliminate that to the initial of the offers of the two succeeding years might have been a little more generous than necessary. we already recognize that companies coming online maybe not as well prepared. your comments about the area. >> with regards to the jobs act, i believe some other reporting in the wall street journal about jobs act as well as some other articles that are describing companies that are describie ii themselves as blank check companies. there's a quote in that article from the nasdaq vice chairman of the jobs act and said he didn't think anybody