KF27 I554 19799 COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE HARLEY O. STAGGERS, West Virginia, Chairman JOHN D. DINGELL, Michigan RICHARDSON PREYER, North Carolina ANTHONY TOBY MOFFETT, Connecticut JIM SANTINI, Nevada ANDREW MAGUIRE, New Jersey EDWARD J. MARKEY, Massachusetts THOMAS A. LUKEN, Ohio DOUG WALGREN, Pennsylvania ALBERT GORE, JR., Tennessee BARBARA A. MIKULSKI, Maryland RONALD M. MOTTL, Ohio PHIL GRAMM, Texas AL SWIFT, Washington MICKEY LELAND, Texas JAMES T. BROYHILL, North Carolina TOM LOEFFLER, Texas WILLIAM E. DANNEMEYER, California Carson, Russell L., on behalf of National Venture Capital Association... 124, 177 Liftin, John M., counsel, American Council for Capital Formation. Little, Arthur D., president-elect, National Association of Small Business 124 Loomis, Hon. Philip A., Jr., Commissioner, Securities and Exchange Com- Lybecker, Martin E., Associate Director, Division of Investment Manage- ment, Securities and Exchange Commission Mann, Bruce Alan, Pillsbury, Madison & Sutro. Mendelsohn, Sydney H., Director, Division of Investment Management, Securities and Exchange Commission Wallison, Peter J., counsel, American Council for Capital Formation Attachments to Mr. Heizer's prepared statement: Attachment I-Statement of E. F. Heizer, Jr., before the Securities and Exchange Commission, May 9, 1978 Attachment II-Testimony of E. F. Heizer, Jr., before the Subcom- mittee on Consumer Protection and Finance, Committee on Interstate and Foreign Commerce, September 27, 1978 Summary of discussions with the Division of Investment Management concerning relief for Heizer Corp. and other business development 191, 209 124 National Association of Small Business Investment Cos.; attachments to Correspondence between Chairman Scheuer and Commissioner Loomis with attached excerpts of the report of the Commission's Division of Investment Management on venture capital companies and the Investment Company Act of 1940 Correspondence between Congressman Broyhill and Commissioner Rules, rule proposals and interpretive releases developed by the Invest- 030 SMALL BUSINESS INVESTMENT INCENTIVE ACT WEDNESDAY, NOVEMBER 7, 1979 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CONSUMER PROTECTION AND FINANCE, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, Washington, D.C. The subcommittee met, pursuant to notice, at 10 a.m., in room 2123, Rayburn House Office Building, Hon. James H. Scheuer, chairman, presiding. Mr. SCHEUER. This hearing of the Subcommittee on Consumer Protection and Finance of the Committee on Interstate and Foreign Commerce will come to order. We are considering today the Small Business Investment Incentive Act, H.R. 3991, whose author is Congressman Jim Broyhill of North Carolina. Anybody who is at all familiar with the workings of our economy now knows of the dearth of investment capital available for small business. The difficulty of small business entrepreneurs in aggregating capital has long been a source of concern, and in the last few months as prime has soared from 6, 7, 8 percent that has been customary for many years, to 15 percent, the preponderance of that impact has been on the small businessman and his ability to aggregate capital. In efforts to make our country productive, Congress has looked into the business of the way the capital markets are providing capital. They are not doing it terribly well for large business but doing it even worse for small business and has had a great deal of difficulty in aggregating capital for investment in new plant and equipment, research and development, even though recent investigations have shown that most new jobs come from small business and not from big business. Two-thirds have reported new jobs come from this old pluralistic heterogeneous community of small business firms that are comparatively labor incentive and where expansion does provide jobs, so this is an urgent matter that has been made even more urgent by the development of the last few months in the changing conditions of the investment capital marketplace, so to speak. The Member of Congress who has really taken the initiative in this matter is Congressman Broyhill from North Carolina, so I am going to take the liberty of turning the Chair over to him to conduct this hearing. This is somewhat unusual for a committee chairman to turn over the Chair to a member of the minority, but Congressman Broyhill's (1) record has been of such involvement in this matter, of such continuous thoughtfulness, fairness, equity, and evenhandedness, that I don't have the slightest doubt under his chairmanship the hearing will be successful and productive. He has been an outstandingly fine colleague on this subcommittee with whom to work. We have had occasional disagreements on substantive matters, but as to his intellectual fairness and total integrity of his approach to congressional matters in committee affairs there has never been the slightest doubt, so it's a great pleasure for me to turn this hearing over to the Honorable James Broyhill of North Carolina. Mr. BROYHILL [presiding]. Thank you very much, Mr. Chairman. I wish it were possible that you could stay with us today, but I do understand that another emergency has come up requiring your presence in another part of the Capitol. I do appreciate the complimentary remarks of the chairman. I just wish he could have seen fit to cosponsor this bill with me in this Congress as he did in the last Congress. I am delighted to welcome my old friend, Mr. Loomis, here today. He has been a friend of mine for many years, going back into past Congresses when we worked out other amendments to the act. We are here for somewhat different purposes. I am concerned about treatment of small businesses by our Federal Government in today's planning, and I am very concerned about the availability of venture capital for small businesses. And, of course, the Securities and Exchange Commission can and does play a key role in the availability of venture capital for small businesses. I am also concerned about the regulatory climate at the SEC and to what extent the agency has contributed to the inability of small business to provide money or to raise money in the capital markets. There is a serious capital shortage for young businesses today, and I think it can be shown that there is a direct correlation between this factor and the demanding complexity of Federal securities regulations. I am particularly sympathetic to the problems of small business. I feel that many of its problems are not of its own making, and that many of its difficulties can be traced right back to Washington. I just don't like to see creative ability or innovation or hard work surrender to lawyers or accountants or redtape or paperwork. There was a recent study on small business financing by the National Association of Securities Dealers, and in that study we do find a very steep drop over the last 10 years in the number of firsttime stock offerings, and we also find a similar drop in regulation A offerings, and we also find that the costs associated with those offerings is skyrocketing every year. It seems to me that we are going to have to take some action to reverse this trend. Piecemeal regulatory adjustments are not sufficient, in my judgment. It seems to me that we should pass legislation similar to that that I have introduced in order to try a different approach. I do note that, and I don't know if it is a coincidence or not, Mr. Loomis, it seems that the threat of legislation has spurred the SEC into action. I understand you have proposed rule 242 and, of course, |