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115th Congress    }                                {          Report
                        HOUSE OF REPRESENTATIVES
 2d Session       }                                {          115-887

======================================================================



 
                MIDDLE MARKET IPO UNDERWRITING COST ACT

                                _______
                                

 August 3, 2018.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 6324]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 6324) to require the Securities and Exchange 
Commission to carry out a study of the direct and indirect 
underwriting fees, including gross spreads, for mid-sized 
initial public offerings, having considered the same, report 
favorably thereon with amendments and recommend that the bill 
as amended do pass.
    The amendments are as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Middle Market IPO Underwriting Cost 
Act''.

SEC. 2. STUDY ON IPO FEES.

  (a) Study.--The Securities and Exchange Commission, in consultation 
with the Financial Industry Regulatory Authority, shall carry out a 
study of the costs associated with small- and medium-sized companies to 
undertake initial public offerings (``IPOs''). In carrying out such 
study, the Commission shall--
          (1) consider the direct and indirect costs of an IPO, 
        including--
                  (A) fees, such as gross spreads paid to underwriters, 
                IPO advisors, and other professionals;
                  (B) compliance with Federal and State securities laws 
                at the time of the IPO; and
                  (C) such other IPO-related costs as the Commission 
                determines appropriate;
          (2) compare and analyze the costs of an IPO with the costs of 
        obtaining alternative sources of financing and of liquidity;
          (3) consider the impact of such costs on capital formation;
          (4) analyze the impact of these costs on the availability of 
        public securities of small- and medium-sized companies to 
        retail investors; and
          (5) analyze trends in IPOs over a time period the Commission 
        determines is appropriate to analyze IPO pricing practices, 
        considering--
                  (A) the number of IPOs;
                  (B) how costs for IPOs have evolved over time, 
                including fees paid to underwriters, investment 
                advisory firms, and other professions for services in 
                connection with an IPO;
                  (C) the number of brokers and dealers active in 
                underwriting IPOs;
                  (D) the different types of services that underwriters 
                and related persons provide before and after a small- 
                or medium-sized company IPO and the factors impacting 
                underwriting costs;
                  (E) changes in the costs and availability of 
                investment research for small- and medium-sized 
                companies; and
                  (F) any other consideration the Commission considers 
                necessary and appropriate.
  (b) Report.--Not later than the end of the 360-day period beginning 
on the date of the enactment of this Act, the Commission shall issue a 
report to the Congress containing all findings and determinations made 
in carrying out the study required under subsection (a) and any 
administrative or legislative recommendations the Commission may have.

    Amend the title so as to read:
    A bill to require the Securities and Exchange Commission to 
carry out a study of the costs associated with small- and 
medium-sized companies to undertake initial public offerings.

                          PURPOSE AND SUMMARY

    On July 10, 2018, Representative Jim Himes introduced H.R. 
6324, the ``Middle Market IPO Underwriting Cost Act''. H.R. 
6324 requires the U.S. Securities and Exchange Commission 
(SEC), in consultation with the Financial Industry Regulatory 
Authority (FINRA), to study the costs associated with small- 
and medium-sized companies to undertake initial public 
offerings (``IPOs'') and to report to Congress with its 
findings and recommendations.

                  BACKGROUND AND NEED FOR LEGISLATION

    The goal of H.R. 6324 is to better understand the costs 
associated with small- and medium-sized companies to undertake 
IPOs and become public companies.
    When a company decides to sell its securities to the 
public, they incur various costs to comply with the 
requirements to conduct the IPO, as well as to enhance the 
ability for the IPO to price and market successfully. Various 
studies have focused on the costs of being a public company, 
but recent data may be helpful to better understand the 
regulatory and professional services costs of actually 
undertaking the IPO and becoming a public company. The SEC 
itself has estimated that the average cost of just achieving 
regulatory compliance for going public is $2.5 million, which 
may not include additional costs of hiring professionals to 
help undertake the IPO.
    For example, companies looking to undertake an IPO often 
hire an underwriter to serve as the intermediary between the 
company and prospective investors. The underwriter helps 
prepare the IPO, to help decide the amount of capital to be 
raised and the type of securities to be issued. Additionally, 
the underwriter often helps with the company's ``road show'' 
and other marketing efforts, as well as post-IPO support in the 
form of research coverage and preparations for investor 
meetings and earnings calls. For these services, an underwriter 
typically receives a ``gross spread'' as a form of 
compensation, which is the difference between the underwriting 
price and the actual price offered to the public. This 
compensation covers the underwriter's expenses and fees. The 
underwriter, though, generally only receives a fee if the IPO 
occurs and ultimately prices, which are far from a certainty 
considering that companies sometimes miss its earnings goal, 
decide to stay private, or accept an offer to sell.
    According to some research, the gross spread for middle-
market IPOs in recent history often has remained flat, whereas 
the gross spread for underwriting a larger IPO, where the 
company may have greater ability to negotiate for lower fees, 
is more likely to be a lesser percentage. This bill will 
provide a fuller understanding of such costs and trends by 
requiring the SEC to: (1) consider the direct and indirect 
costs of an IPO, including fees such as gross spreads paid to 
underwriters, IPO advisors, and other professional, costs of 
complying with Federal and State securities laws at the time of 
the IPO, and other costs the SEC determines are relevant to 
undertaking an IPO; (2) compare and analyze the costs of an IPO 
with the costs of obtaining alternative sources of financing 
and of liquidity; (3) consider the impact of such costs on 
capital formation; and (4) analyze the impact of these costs on 
the availability of public securities of small- and medium-
sized companies to retail investors. Further, to better 
understand the evolution of costs related to undertaking an 
IPO, the SEC must analyze trends in IPOs over a time period the 
SEC determines is appropriate and consider: (1) the number of 
IPOs; (2) how costs for IPOS have evolved over time, including 
fees paid to underwriters, investment advisory firms, and other 
professions for services in connection with an IPO--i.e., legal 
counsel and accounting; (3) the number of brokers and dealers 
active in underwriting IPOs; (4) the different types of 
services that underwriters and related persons provide before 
and after a small- or medium-sized company IPO and the factors 
impacting underwriting costs (which could include services and 
risks that must be priced into the underwriting activity); (5) 
changes in the costs and availability of investment research 
for small- and medium-sized companies; and (6) any other 
consideration the SEC considers necessary and appropriate.
    The SEC will report to Congress with its findings and 
recommendations within 360 days of enactment, and in doing so, 
will provide the Congress and market participants a broader 
understanding of the regulatory and professional services costs 
associated with undertaking an IPO.

                                HEARINGS

    The Committee on Financial Services or the Subcommittee on 
Capital Markets, Securities, and Investment held hearings where 
Members raised matters relating to H.R. 6324 on November 15, 
2016, March 22, 2017, October 4, 2017, November 3, 2017, May 
23, 2018 and June 21, 2018.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
July 11, 2018, and ordered H.R. 6324, as amended, to be 
reported favorably to the House by voice vote.

                            COMMITTEE VOTES

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. A 
motion by Chairman Hensarling to adopt the amendment in the 
nature of substitute was adopted by voice vote. A subsequent 
motion by Chairman Hensarling to report the bill, as amended, 
favorably to the House was agreed to by a voice vote, a quorum 
being present.

                      COMMITTEE OVERSIGHT FINDINGS

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the findings and recommendations of 
the Committee based on oversight activities under clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
are incorporated in the descriptive portions of this report.

                    PERFORMANCE GOALS AND OBJECTIVES

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 6324 
would direct the SEC to study the costs associated with small- 
and medium-sized companies to undertake IPOs and to report to 
Congress with its findings and recommendations.

   NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                 CONGRESSIONAL BUDGET OFFICE ESTIMATES

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, July 17, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3555, H.R. 6177, 
H.R. 6319, H.R. 6320, H.R. 6321, H.R. 6322, H.R. 6323, and H.R. 
6324.
    If you wish further details on these estimates, we will be 
pleased to provide them. The CBO staff contact is Stephen 
Rabent.
            Sincerely,
                                             Mark P. Hadley
                                        (For Keith Hall, Director).
    Enclosure.

Securities and Exchange Commission Legislation

    On July 11, the House Committee on Financial Services 
ordered eight bills to be reported related to the rules, 
regulations, and operations of the Securities and Exchange 
Commission (SEC). The bills are:
           H.R. 3555, the Exchange Regulatory 
        Improvement Act, would require the Securities and 
        Exchange Commission (SEC) to issue regulations 
        regarding its definition of what constitutes a facility 
        used by a national securities exchange;
           H.R. 6177, the Developing and Empowering our 
        Aspiring Leaders Act of 2018, would direct the SEC to 
        conduct a rulemaking to expand what types of asset 
        acquisitions are considered qualifying investments for 
        a venture capital fund;
           H.R. 6319, the Expanding Investment in Small 
        Business Act, would require the SEC to conduct a study 
        on the limitation on the amount of outstanding 
        securities a closed-end fund may hold from a single 
        issuer and still be classified as diversified;
           H.R. 6320, the Promoting Transparent 
        Standards for Corporate Insiders Act, would require the 
        SEC to conduct a study of various proposals to change 
        agency rules regarding the use of written trading plans 
        by certain securities traders;
           H.R. 6321, the Investment Adviser Regulatory 
        Flexibility Improvement Act, would require the SEC to 
        revise the definitions of a small business and small 
        organization applicable for assessing the effect of the 
        agency's rulemakings under the Investment Advisers Act 
        of 1940 on those entities;
           H.R. 6322, the Enhancing Multi-Class Share 
        Disclosures Act, would direct the SEC to issue a rule 
        requiring securities issuers with multi-class stock 
        structures to make disclosures regarding the voting 
        power of certain individuals;
           H.R. 6323, the National Senior Investor 
        Initiative Act of 2018, would direct the SEC to 
        establish a taskforce to identify challenges that 
        senior investors face and to report on its findings 
        every two years; and
           H.R. 6324, the Middle Market IPO 
        Underwriting Cost Act, would direct the SEC to study 
        the costs associated with small and medium-sized 
        companies undertaking an initial public offering and to 
        report on its findings.
    Using information from the SEC regarding the costs of 
similar activities, CBO estimates that implementing seven of 
those bills--H.R. 3555, H.R. 6177, H.R. 6319, H.R. 6320, H.R. 
6321, H.R. 6322, and H.R. 6324--would each have a gross cost of 
about $1 million for the agency to conduct the required studies 
and rulemakings and to issue reports. CBO estimates that 
implementing the eighth bill--H.R. 6323--would have a gross 
cost of $7 million over the 2019-2023 period for the SEC to 
establish and carry out the functions of the taskforce 
established under the bill.
    However, the SEC is authorized to collect fees sufficient 
to offset its annual appropriation; therefore, CBO estimates 
that the net effect on discretionary spending of implementing 
each of those bills would be negligible, assuming appropriation 
actions consistent with that authority. H.R. 6323 also would 
require the Government Accountability Office (GAO) to conduct a 
study on the economic costs of the financial exploitation of 
senior citizens and CBO estimates that implementing that 
section would cost GAO less than $500,000; such spending would 
be subject to the availability of appropriated funds.
    None of the bills would affect direct spending or revenues; 
therefore, pay-as-you-go procedures do not apply for any of the 
eight bills.
    None of the bills would increase net direct spending or on-
budget deficits in any of the four consecutive 10-year periods 
beginning in 2029, CBO estimates.
    None of the bills contain intergovernmental mandates as 
defined in the Unfunded Mandate Reform Act (UMRA) and would not 
affect the budgets of state, local, or tribal governments. All 
of them would require the SEC to take actions that could raise 
the agency's administrative costs and the fees it collects to 
offset those costs. If the SEC increased fees, it would 
increase the cost of an existing mandate on private entities 
required to pay those fees. CBO estimates that none of the 
bills would increase fees in an amount that would exceed the 
annual threshold for private-sector mandates established in 
UMRA ($160 million in 2018, adjusted annually for inflation).
    The CBO staff contacts for this estimate are Stephen Rabent 
(for federal costs) and Rachel Austin (for mandates). The 
estimate was reviewed by H. Samuel Papenfuss, Deputy Assistant 
Director for Budget Analysis.

                       FEDERAL MANDATES STATEMENT

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995.
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                      ADVISORY COMMITTEE STATEMENT

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  APPLICABILITY TO LEGISLATIVE BRANCH

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         EARMARK IDENTIFICATION

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                    DUPLICATION OF FEDERAL PROGRAMS

    In compliance with clause 3(c)(5) of rule XIII of the Rules 
of the House of Representatives, the Committee states that no 
provision of the bill establishes or reauthorizes: (1) a 
program of the Federal Government known to be duplicative of 
another Federal program; (2) a program included in any report 
from the Government Accountability Office to Congress pursuant 
to section 21 of Public Law 111-139; or (3) a program related 
to a program identified in the most recent Catalog of Federal 
Domestic Assistance, published pursuant to the Federal Program 
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No. 
98-169).

                   DISCLOSURE OF DIRECTED RULEMAKING

    Pursuant to section 3(i) of H. Res. 5, (115th Congress), 
the following statement is made concerning directed rule 
makings: The Committee estimates that the bill requires no 
directed rule makings within the meaning of such section.

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title

    This section cites H.R. 6324 as the ``Middle Market IPO 
Underwriting Cost Act.''

Section 2. Study on IPO fees

    This section directs the SEC in consultation with the FINRA 
to carry out a study on the costs associated with small- and 
medium- sized companies that are conducting an IPO and to 
report to Congress with its findings and recommendations.

         CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows: H.R. 6324 does not 
repeal or amend any section of a statute. Therefore, the Office 
of Legislative Counsel did not prepare the report contemplated 
by Clause 3(e)(1)(B) of rule XIII of the House of 
Representatives.

                                  [all]