and i would also like to respond to the gentleman's comments about electricity rates being increased in new england. they're declining rapidly after thousands of new megawatts constructed of gas, solar and wind in new england over the last decade. we just across the board had a 15% reduction in our electricity rates. and that's without coal. again, the coal industry now has 75,000 workers, but the wind industry has 75,000 workers and the solar industry has 100,000 workers. we have to say the market is moving away from coal because the coal industry refused to accept the $0 billion that would help them make the transition. >> i thank the panel for their testimony today. additional members may have additional questions for the record.

i urge you to answer them in writing. if there is no further business, the committee stands adjourned. in a few moments, a hearing on the process for initial public offerings. after that, jpmorgan's ceo jamie dimon testifies before the house financial services committee. later, john hickenlooperer on the oil and gas technology known as tracking. how do you approach book interviews differently than news interviews. >> i think of book interviews as history. i think of interviews for the news side as gather iing

information for the short term. i'm going to try to give people a full as understanding of what is happening in this campaign. it's not that difficult to put your biases to the side. >> how has social media changed your line of work, in terms of reporting and getting your news information. >> twitter in particular is now a primary news source for anybody who covers politics and anybody who with pays attention to politics. twitter didn't exist fwour years ago for all practical purposes. >> saturday night, what's newsworthy and the rise of social media, sunday at 8:00 on c-span. next, a hearing on the process for initial public offerings of stock, known as ipo's. over the next hour, the senate subcommittee on securities, insurance and investment looks at recent ipo's, including facebook.

let me call the hearing to order. my ranking member, senator crapo, is delayed. we anticipate that other colleagues will be arriving shortly. but since the panel is assembled and the time has come, and it's appropriate to begin the hearing. let me welcome everyone to the hearing. it's a very important topic examining the ipo process, is it

working for ordinary investors. i've had the opportunity to read your testimony, and let me thank you all for very thoughtful and insightful comments. i appreciate it, and i look forward to the questioning. the number of individuals participating in our capital markets has grown substantially, especially for investors trying to save for their retirement through 401(k) plans and other retirements. once an opportunity that was limited primarily to institutional investors, now the chance of participating in an initial public offering is increasingly available to ordinary investors. the essential question i want to -- this hearing to answer, is the system fair and transparent, and is it working for everyone, particularly individual investors? a dysfunctional ipo market can harm our economy, while the summer is typically the peak season for ipos in the wake of facebook's highly publicized ipo's troubles which was marred by technical mishaps, many planned ipos have been cancelled

by more americans, and many are questioning the ipo process. and frankly, i think we all recognize that without confidence by investors, the ability to officially form capital and to generate jobs is impaired. that confidence is fundamental to our free market system. regulators continue their investigation into some of the specific problems surrounding the facebook ipo. this hearing is a chance to broadly and publicly examine the procedures for taking a company public. that's one data point, but it's a much, much broader set of issues we want to confront this morning. there's also concern that the jobs act recently passed made some of the biggest regulatory changes to u.s. capital markets in decades, and weakened some key investor protections. it may have caused some other new problems, such as allowing more shell companies for reverse mergers to go public in the united states. indeed, a recent "wall street journal" article quoted special purpose acquisition companies

and blank check companies, basically empty shells with almost no employees used as mergers or back door for u.s. stock listings have been quick to identify themselves for regulatory filings as, quote, emerging growth companies. the new law uses that label to describe companies when they decide to go public should be exempt from financial reporting and corporate governance rules. companies with less than $1 billion growth are eligible for the less restricted rules. a standard that would have been met by the majority of companies conducting an ipo in the last several years. so this is a very high threshold, obviously. companies that qualify as emerging growth companies don't have to comply with the sarbanes oxley act. it also allows them to make fewer financial disclosures, use a new confidential s.e.c. review process for ipos and let's their banks communicate more freely. the more sophisticated players under investment bank. underwriting the growth

companies is a big business on wall street. investment banks are expected to take full advantage of the new, less stringent requirements. as a result, retail investors may be denied critical information that is essential to making sound investment decisions. unfortunately, during the expedited process used to pass the jobs act, improving the efficiency and transparency of the existing ipo system was not really discussed. with full and fair information for investors, our capital markets are more efficient and transparent and can better facilitate the capital formation so important to our nation's economy. clearly, all investors face certain risks when contributing capital to either small or large companies. in fact, the panel has made the case quite clearly that risk is inherent in all of these ipos and that should be acknowledged. however, we need to ensure there isn't one set of rules for sophisticated wall street clients and another set for ordinary investors. everyone should have access to the same set of data and disclosures or at least equivalent data and disclosures.

chairman johnson has instructed committee staff to conduct its due diligence regarding issues raised in the news about facebook's ipo. this hearing would be part of that, but the focus is on the broader issue of ipos. and many have stated once these briefings are concluded, we'll determine if a full committee hearing is necessary. so today's hearing will serve as a jumping off point, broadly examining the procedures for taking a company public. and i think it will be a very productive hearing. when senator crapo arrives, if he is able to arrive or my colleagues, if they wish to make an opening statement, i'll interrupt your statements and give them that opportunity. but let me now proceed to introduce witnesses and ask for your statements. our first witness is dr. ann sherman. dr. sherman is the associate professor of finance at depaul university. she received her phd in economics from the university of minnesota. had he she was a consultant on the google ipo.

dr. sherman has taught finance at the university of wisconsin-madison, university of notre dame and hong kong university of science and technology. and next witness in line is ms. lease buyer lise buyer. founding principle of the class five group, providing strategic and logistical guidance in official public offerings. ms. buyer has firsthand experience in venture capitalists, board member and internal coordinator/analyst and employee. previously ms. buyer was the director of business optimization for google, inc., where she was one of the chief architects of the company's innovative ipo. our next witness is mr. joe h. trotter, a partner at lathe am watkins and co chair of the practice group and deputy chair of the corporate department in

the washington, d.c. office. his focus is on capital markets transactions, mergers and acquisitions, securities regulation and general corporate matters. thank you. and finally, our last witness is mr. ilan moscovitz, a senior analyst for the motloey fool, a global financial services company and is a tireless advocate for investors specializing in financial reform, macro economics and shareholder rights. his research has been cited numerous times in the national press. we thank you all for being here. all of your testimony will be made part of the record in its entirety, and i would ask you to summarize it within five minutes. and we'll begin with dr. sherman. dr. sherman. >> chairman reid, thank you for inviting me to testify today. my research has been primarily on ipo methods in various countries with different methods. one of the points i want to make

today is that the u.s. method called book building is the most common method in the planet. and it wasn't always that way. if you go back to the early 1990s, it was used really only in the u.s. and sometimes canada. by the end of the 1990s, it was the dominant method, and it's become even more popular since then. now, the difference between book building and the other methods is that with book building, the underwriter gets feedback from investors before setting the offer price. and it's not always easy to get people to honestly tell you they like an offering if you know that you're going to use that information to raise the price. and that's why it's important that the underwriter also controls allocations. who gets what. so by controlling allocations, the underwriter can favor regular investors that don't just try to cherrypick the hot offerings. can favor investors that give feedback that help to set the price, and can favor long-term investors. so there are reasons why the underwriter may favor institutional investors. ordinary investors may not have

the expertise or resources to play the same role in an ipo. that doesn't mean they can't participate. if you look around the world, most countries open up the ipo process to all ordinary investors. but the key is that they open up the allocations but they do not control the price setting. the ordinary investors don't help to set the price for ipos, they just get a chance to get shares. so the most popular method outside the u.s. is a hybrid or a combination, where they have a tranche that uses book building and they use that to set the price and allocate to institutional investors. and then for ordinary investors, they have a separate tranche. ahead of time it's announced what proportion of shares will go into each tranche, and everyone is allowed to order shares in the retail tranche. and if it's oversubscribed, they have basically a lottery. so it's open, it's transparent, everyone has a chance to get shares. but they don't disrupt the

price-setting process. that's a method that has worked well over in the world. the method that has not worked well around the world is to use an auction that's open to everyone, so that everyone has an equal say in setting the price. i don't want to use up too much of my introductory time, but i would be happy to answer questions on that. and the auction method has been used in more than two dozen countries, and they've pretty much all abandoned it, because of huge problems. when i was doing literature searches, or newspaper searches to find out more about various ipo auctions, i learned that good search terms were flop disaster, debacle, catastrophe, calamity. the auction method is one that has blown up in people's faces around the world, which is why countries stopped using it. retail investors should be allowed to participate, but you have to be careful about giving them a major role in the price-setting process. so what should the u.s. do? frankly, i'm neutral on whether the u.s. should require issuers

to give a bigger role to ordinary investors. but i feel strongly that if we're going to do that, it should be through the hybrid method with a separate tranche so that everyone has an equal chance of getting shares, but it doesn't disrupt the price setting. last, on the role that small investors should play in private equity, and in particular crowd funding, where you have a -- maybe a website and a bunch of people put up a few hundred dollars each, i see two big problems with that. the first is who is going to do the due diligence? fraud is a major problem with these. someone needs to screen these offerings before they get funding, and someone needs to continue to monitor them. and if we don't find a way to do that, crowd funding could be a disaster for ordinary investors. and second question is who is going to set the price? i hope that i've communicated that letting ordinary investors price ipos has been disastrous.

and if they're not good at pricing relatively sophisticated or advanced ipos, then there's even less reason to think that they can price early-stage start-ups. again, thank you, and i would be happy to answer any questions. >> thank you very much, doctor. ms. buyer, please. >> chairman reid, thank you very much for inviting me to be here today. i'm honored to submit my commentary to such an important discussion of the ipo process. which is clearly such a important rite of passage for so many companies. having been an institutional investor responsible for deploying the assets of aggregate individuals, and investment banker, part of the team that designed and implemented a unique and high-profile ipo and a board member of a company as it transitioned from private to public, i've looked at the process from a variety of perspectives, and it is from that combination of perspectives i offer my comments today.

ipos, as you mentioned are always and inherently very risky. riskier than investing in had seasoned companies. in fact, if we look at the class of 2012 as of a day ago, the best-performing ipo year-to-date was a buffalo, new york based company, sinacore, had a difficult time going public, traded up 5% day one. and now is up in incremental 162%. and then there is cirrus, up 14% day one, currently down 31%. and then there's the higher-profile spelunk up 90%, meaning those people who participated in the frenzy of day one may be under water, even though the stock has nearly doubled from its initial public offering. the point of that is to say, it's very difficult to predict what any stock will do on its ipo. and, in fact, there is no right answer. there are always winners and losers. so i believe that -- in fact, the people who invest since day

one are really speculators, not investors. investors need be in for a longer period of time. i believe the importance here is for overseers to make sure that up front, anyone who chooses to participate in an ipo fully consider not only the possible rewards, but also the very, very real risks. in fact, if i may make only one suggestion here today, i would suggest that before confirming an order, be it by phone or in person or online, every individual be asked to read or be read to, acknowledge and confirm agreement with a very short, simple, bold statement along these lines. i fully acknowledge that this stock has an equal chance of trading up or trading down from my purchase price. and furthermore, i acknowledge the shares of newly public companies routinely trade below the prices at which they are initially offered. my hope is that 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 and not on thoughtful analysis. with my remaining time, i would add two other comments. first, as we know, some institutions have the chance to meet with management teams to see a presentation and ask them questions during a road show. clearly, it's not possible for individuals to have that same exposure, although with the advent of the retail road show, they now have the chance to watch the presentation, even though i suspect most of them don't. i wonder if there is a chance to level the playing field by adding -- suggesting to companies going public that they add an hour or offer an hour of q & a -- online q & a for individual investors during which time they could respond to presubmitted questions from any investor who had actually watched the retail road show. just a chance to level the playing field. and finally, a third comment i would make echos what you just said. i have significant concerns about many of the provisions of the well-intentioned, recently passed jobs act as they both -- 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 aggregated 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, bedrock 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 capital formation. emerging growth companies have two alternative paths for providing liquidity to their early-stage investors. they can either pursue an ipo or they can pursue a sale of the company.

an inhospitable ipo environment sends more stage companies toward a sale process and away from the ipo alternative. and that's exactly what we have seen in recent years. 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 onramp is an important step in making 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 savings 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 is ilan moscovitz senior analyst of the mottly 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 eager 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 ultimately depend 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 global research analyst 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 preventable 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, morningstar 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 pre-ipo insiders, which would expend 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 company exemption serves its intended purpose and not to insi