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 be able to 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 available, 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 held -- 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 interpretation and other interpretation by the regulator in that area. >> mr. moscovitz, 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 investors do not engage themselves in the price discovery and price setting. that is restricted too, and i assume from your comments you feel that that model is an

appropriate way to set prices? but many countries have a specific traunch for retail investors for which they can buy at basically the same price, and can you comment about how comment and successful that is? is that something we should look at in terms our approach to ipo's? >> i'd like to see it considered here, especially for larger offerings. smaller ipo's are already marketed more toward retail. i contacted facebook, they never got back to me. i tried to talk them into this so everyone has a fair chance to participate. without -- the problem that's occurred with auctions is that when you get -- retail investor demand is very uncertain, can you get these floods investors coming if, and pushing the price

up at a sustainable level, and then people lose money, and then the retail will go away again, because they're scares of the process. there needs to be some coordination. we can open up allocation to 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 around lifts are able to quiz management as ms. buyer suggested. it may be important to make that much more accessible. i know with facebook, there was a version put on the net but it negtsed to have the questions of the analysts, which is probably the most important part of the

demonstration. is the road show process the best mechanism in your view? >> i think it's important, and i would like to see the question and answer. if you look at the road show, they go to get a feel for the people. you're not just investing in the idea or the product, you're investing o betting on the management team. and facebook, their first day fort road show, replaced a lot of the q & a with this 30 minute video. and investors were very unhappy about that. by the next day in boston it was gone, because there's -- i watched the online road shows. then you're seeing management scripted and rehearsed. it's different to see them on their feet and responding to questions. retail investors should get the chance to do that about. >> we have the jobs act now, you

suggested it's opening up new opportunities. is one opportunity to -- as lise suggested is to take a shell company effectively, that is already the registered db and simply do some type -- i have a reverse merger, and so you get -- you don't have to have ordered it -- in some cases, you don't have to have the rigors of sarbanes oxley, yet you don't go through the traditional ipo process of the book building, the analysis or offering. is that something that concerns you about how -- either willingly or unwittingly this new act could be used? >> well, 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 shell companies. they've always been subject to sec reviews. before they can register they go through the same type of process, where they have to provide disclosures to their investors. and in terms of sarbanes oxley compliance by shell companies, they almost exclusively are smaller reporting companies, so they have already been exempted under dodd frank from the internal control audit. and so none of those aspects relating to shell companies has changed as a result of the jobs act. >> but one of the -- and there may be the most ironic aspect of the jobs act. there's nothing in the bill that requires any creation of jobs to qualify for all the protections and all the benefits of the jobs act. is that accurate? >> i think the premise

underlying the ipo wrong ramp is that again going back to the competitive nature of the capital formation process, and the fact that if you have an early stage company that needs to provide a return to early investors who bet on the company when it was just an idea that type of company can pursue one of two paths, can sell the company to an acquirer and be part of a larger enterprise and have them absorbed. or it can raise its own capital to be independent. and in raising your own capital to become an independent enterprise, you're going to grow the business. when you do that, you're going to need more employees to help you run your growing business. you're going to need to hire people. if you think of cities around our nation that are almost anonymous with certain major companies today, and those -- almost every case, they started out as fledgling enterprises,

nobody would have guessed would have become household name companies today. when you think about the connection between ipo's and job creation, can you pick your favorite city, wage it's seattle or cupertino or austin texas and you'll think of a company that's changed the landscape of that city. >> but specifically, all of the provisions of the jobs act can be accessed by companies that do not grow one additional job. they can avoid sarbanes oxley reports, they can do this until they get to the size of $1 billion in revenue. it would seem to me the company that has $1 billion in revenue could afford to have audit standards and could afford many other things which would protect their shareholders. the reality is that you don't have to have one extra job to be an emerging growth company, is that correct? >> yes, sir. and 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, and people now in hindsight talk about certain dot com companies, and how they are examples bad ideas. well, nobody knew for sure at the outset whether they were bad ideas, investors had to choose and pick the winners and losers. and some of those companies are long forgotten, many those companies are around today and have even created new industries and changed the way we purchased products. so that's one point in response. another one on the issue of sarbanes oxley compliance. remember the president's jobs council headed by mr. immelt

from general electric recommended a permanent exemption from sarbanes oxley, the audit requirement for all companies below a billion dollars in revenue. so the jobs act provision that gives this onramp of one to five years depending on the size of the company is much more limited than that recommendation from the president's jobs council. and again, any newly public company has up to two years under prior law before it has to comply. it's really changing two to five in terms of sarbanes oxley. >> one could argue, given the two-year exemption for all companies, before the jobs act that the requirement to eliminate that for the initial public offering, for the two succeeding years may have been a little more generous than was necessary. we already recognized in dodd -- in sarbanes oxley that companies coming online may not be as well

prepared. mr. moscowitz, your comments about this whole area? >> with regard to the jobs act, you're referring, i believe to some of the reporting in the wall street journal about the jobs act, jobs free companies as well as some other articles that are describing companies that were describing themselves as blank check companies or trusts and the like. and there's a quote in that article, actually from the nasdaq vice chairman who lobbied hard for the passage of the jobs act, he said he didn't think this was going to be applied to reverse mergers and the like. and i guess i would say that we should be very careful about what the emerging growth company exemptions are being used for. we've seen trouble in china, for example with sort of their reverse merger disaster.

we had -- reporting in china and the accounting standards in china just aren't at the same level that ours are. and we saw when investors very suddenly realized this, very suddenly acted on this, starting in late 2010, shares of 93% of these companies fell by an average of 50% for chinese emerging growth companies. any of them that wanted to raise capital after that point became very difficult to do that. have you companies that are presumably growing at 50% or 60% a year, that have a gain of two. and the only reason that happens is if people just believe that they can't trust any of the numbers coming out of china. you're investing in a small chinese company right now, the first risk factor you consider is whether or not it's a fraud. i would just say that we should

be very careful about how we -- we don't want to move in that direction is all i'm saying. >> let me just -- you brought up merit regulation chks , which iy understanding is there is not merit regulation, is that correct? >> that's correct, mr. chairman. it's a matter of degree. when you require -- for example -- there are instances where disclosure to veer into merit regulation. depending on whether the requirement is simply to provide all investors with all material information about the company, that would be pure disclosure. requiring specific disclosure about specific topics -- or requiring companies to comply with substantive standards that are not simply about disclosing to investors, all their material information, then you're veering into merit regulation. >> well, i -- my

understanding -- and again, might be outdated is that the the sec cannot refuse a cannot registration because they object to a business model or anything else. they just can require you to spell out in excruciating detail. and that's not merit regulation. so it's setting up a sort of a straw man in saying well, the fight is against merit regulation and disclosure. i'm for disclosure, but not -- we don't have merit regulation. dr. sherman do, you consider we have merit regulation here for federal securities laws? >> no, i don't think so. and that's very important. having seen a lot of other countries, particularly in asia, they give investors much less information, and instead rely on metrics such as has the company earned a profit for the last three years, and if not, you can't go public. and it closes out a lot of good companies, and yet doesn't improve pricing because people

don't have enough information to judge. so i think a strength of the u.s. is that we do have disclosure and not merit. >> and because of that, there is a strong emphasis on very thorough disclosure. and as mr. trotter points out, it leads to long prospectuses. but my feeling, and i'll ask both you and ms. buyer, these perspectives are read very closely by very sophisticated institutional investors, so the information is not gratuitous or ignored. frankly, if i was presented 200 pages, i would quickly -- evelyn wood would be proud of me. but when you have these road shows, when you have this process of iteration that these prospectuses ultimately are very, very useful, i presume. that accurate? >> i think so. i tell my students in ipo and

venture capital class you get more information when a company does an ipo than any other time there is so much in the prospectus. when we go through case studies, we'll go through the risk factors and they'll have stories and extra detail. you find out a lot more about how the company does business, how the model works from all of that detail disclosure. and you don't necessarily have to read all of it, but you can look through and look for what you need and hopefully it's there. so i think that's very important. i would hate to see us losing that. >> ms. buyer, your comments? >> yes, as an institutional investor, would we read the prospectus cover to cover prior to meeting with the company so as to be able to use the meeting time most effectively there is a tremendous amount of information available, and yes, it is written times in arcane form. but it's tremendously important. and brings up another question about the jobs act, and of course that people now have -- investors now have less time to study the prospectus given that they can now be filed confidentially. >> yeah, what is your reaction to the confidential filing?

how is that going to practically impact an institutional investor like you who is, you know, wants to invest perhaps, but also, you know, theoretically is helping to find the right price because you have all these details. what effect will it have practically on you? >> i would say mostly institutional investors read the prospectus when it is in its final form. for most part, the confidential filing doesn't much matter. however, from time to time the initial filing differs quite widely from the final filing thanks to commentary from the s.e.c. and investors learn a great deal in watching the changes. an example would be the company groupon, which suffered mightily between filing its initial s-1 and the final s-1 as it became apparent that their relationship with the accounting rules was somewhat flexible. i would argue that that -- that knowledge watching that process was very valuable to

institutional and retail investors. >> it just strikes me too, that, again, we have a system which is based on transparency, disclosure, basic economic theory is perfect information which drives competitive marks. and here we have basically said this is all going to be confidential until very late in the process, et cetera. i don't see how that accomplishes significantly informing investors, either institution investors or retail investors. >> i would -- mr. chairman, i would agree with you. and i would further comment that by allowing them to keep those facts hidden until later in the process while concurrently encouraging research provisions that allow research during that period, we're actually asking investors to make their decisions based on opinion as opposed to the facts that they could have had. we have exactly flipped the arrangement i believe should be

in place. >> i know you have a position on this. >> well, i guess what i would say is that this was the confidential submission process is based on an s.e.c., the historical process that s.e.c. issued to foreign issuers. unlike in the case of the foreign private issuers, in the case of emerging growth companies under the jobs act, they are required to provide the original submission plus all amendments that resulted from the s.e.c. process approximately a month before the ipo will price. so all the information ms. buyer was referring to is publicly available in sequence, and investors will have a month to pore over all of that information. >> let me ask you another question there is the presumption that the jobs act has -- proponents would argue that it reduces cost. in fact, estimates i think of 30 to 50% of the costs, i think

that's when you were suggesting in your testimony, where are these cost savings come from? investment banking fees you believe would be lowered because there is not the requirement to do these elaborate road shows? is it because information -- where are the savings coming from? >> it's princecally mri from two sources. the data is based on surveys of pre and post ipos who responded to specific proposals and provided estimates of how much cost savings they would recognize. but it's first through the deferral of the sarbanes-oxley internal control audit requirement, which, again, for companies of this size, the president's job council recommended a permanent exemption from sarbanes-oxley. and then second the benefits available from the scaled disclosure system that the s.e.c. has adopted for smaller reporting companies. and so in the case of -- you

asked about merit regulation versus disclosure. if you think about some of the disclosures that are required of very large enterprises, and applying those disclosure requirements to much smaller enterprises, and i think it's worth noting that all of the companies that are captured within the definition of emerging growth company represent approximately 3% of total market capitalization. so there is this -- there is a concern expressed by my fellow witnesses here that the bar, that the definition is too broad. but i think you have to take into account the fact that that definition captures roughly 3% of the total market capitalization of the united states. so that's not a very large number. >> this is one of those issues which is -- it depends on what you're measuring and what you're comparing to. mr. moscovitz, my sense was having limits up to a billion dollars in revenue captures a

lot of companies in the united states. not just in capitalization, but just sheer numbers of companies. and probably captures every potential ipo company. >> so i'm not familiar with the 3% number, but it could be right. it's -- in terms of the ipo task force, they said it was 14% of companies. but in terms of ipos it's about 90%. >> so essentially the world -- we're talking about ipos, most of them, 90% of them. and the issue about cost savings. this goes to -- and ms. trotter i think pointed it out very accurately. one, it's the internal controls. and two, it's sort of disclosure requirements that one could argue are more appropriate to large corporations, et cetera. but still it goes to the issue of disclosure and governance of the company. that's where the savings are

going to be. i don't think we'll see any savings from investment banking fees or from anything else. and does that, you know, for the investing public, both the initial investors and the ongoing investors, does that make sense? >> the investment banking field in terms of the compliance cost, you know, a company that is doing a billion dollars in sales, whose market cap is 7 million, the upper limit here can really afford to comply with sarbanes-oxley. that's my opinion. >> again, having participated with both chairman sarbanes and chairman oxley in the legislation is that this was a direct response to abuses and lack of controls and those things that ultimately cost shareholders dearly when the companies cratered because they