Wilson Sonsini Goodrich & Rosati is pleased to present the June 2017 issue of the WSGR Fintech Update. This latest edition features an article discussing recent statements by SEC Commissioner Michael Piwowar and the SEC staff regarding simple agreements for future equity (SAFEs), as well as an article addressing recent fintech innovation programs announced by the U.S. Commodity Futures Trading Commission (CFTC) and the Financial Industry Regulatory Authority (FINRA). In addition, this edition includes an article on Vision 2020 initiatives, a set of recently announced efforts spearheaded by the Conference of State Bank Supervisors (CSBS) to update and harmonize state regulations applicable to non-bank financial entities, such as lenders and money transmitters.
SEC Commissioner and Staff Question Whether SAFEs Are Safe
Companies that raise money by issuing simple agreements for future equity (SAFEs) should take notice of recent statements about SAFEs by SEC Commissioner Michael Piwowar1 and a SAFE-focused Investor Bulletin published by the SEC staff.2 A SAFE is an agreement between an investor and a company, usually a start-up or an early-stage business, in which the company agrees to provide the investor with equity in the future upon the occurrence of certain events (e.g., the company is acquired by, or merged with, another company, or the company has an initial public offering or another round of equity financing).
On May 9, 2017, Commissioner Piwowar noted in a speech that, until recently, SAFEs were offered exclusively to sophisticated venture capital investors in private offerings. With the 2015 adoption of Regulation Crowdfunding, which permits a company to offer its securities to non-accredited investors through a non-accredited investor crowdfunding platform, non-accredited investors now are being offered the opportunity to invest in SAFEs, even though they may be unfamiliar with the risks of these investments.
Published the same day as Commissioner Piwowar's statements, the SEC staff's Investor Bulletin emphasized the following aspects of SAFEs that the SEC staff thinks a potential SAFE investor should understand:
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that a SAFE represents the possibility of a future equity stake if certain triggering events occur;
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what the triggering events are;
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that the triggering events may not occur; as a result, the SAFE investor will likely receive nothing;
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the SAFE's conversion terms (i.e., what amount is converted to equity; for instance, solely the amount invested or is there imputed interest)
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how future company valuations could affect the amount the investor will receive upon conversion;
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to what extent can an investor's future right to equity be repurchased by the company and at what price;
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what happens to the money invested and the SAFE in the event of the company's dissolution;
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what voting rights does the investor have with respect to SAFE matters;
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that the terms of a SAFE may vary from deal to deal and that reading the disclosures carefully is important; and
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that a SAFE does not necessarily represent a safe investment.
To the SEC staff's last point, Commissioner Piwowar questioned whether the term SAFE is appropriate, as these investments can be "high-risk, complex, and non-standard."
In light of Commissioner Piwowar's statements and the Investor Bulletin, companies offering SAFEs, whether pursuant to Regulation Crowdfunding or not, should review their disclosures about SAFEs and evaluate whether those disclosures should be enhanced or modified.3
For more information about SAFEs, Regulation Crowdfunding, or any other fintech regulatory matter, please contact Robert Rosenblum, Susan Gault-Brown, or any member of the firm's fintech regulatory practice.
Susan Gault-Brown and John Sullivan authored this article.
3 For example, Rule 201(f) of Regulation Crowdfunding requires a company to provide to investors a discussion of the material factors that make an investment in the company speculative or risky.
CFTC and FINRA Announce Fintech Initiatives
In May 2017, both the U.S. Commodity Futures Trading Commission (CFTC) and the Financial Industry Regulatory Authority (FINRA) announced fintech innovation programs along the lines of the regulatory sandboxes currently being implemented by regulators in the United Kingdom, Hong Kong, and Canada, among others.1
The CFTC recently launched its LabCFTC initiative, the objective of which is to make the CFTC "more accessible to FinTech innovators and [serve] as a platform to inform the CFTC's understanding of new technologies."2 LabCFTC consists of two components: GuidePoint and CFTC 2.0. GuidePoint serves as the CFTC point of contact for fintech companies seeking to work with the CFTC and learn about applicable regulations and how they may apply to their business models. CFTC 2.0 is the CFTC's effort to explore how it could adopt new technologies to advance the agency's own mission.
FINRA's Innovation Outreach initiative, announced by FINRA CEO and President Robert Cook, will seek to engage fintech companies and establish a "collaborative environment for productive interactions."3 Mr. Cook stated that FINRA may consider modifying its regulatory approach to fintech companies based on their business models and risks, and referred to FINRA's July 13, 2017, Blockchain Symposium as an important step in its outreach efforts. He also indicated that FINRA is undergoing its own internal review of, among other things, how FINRA uses data and technology to "best support efficient operations, decision-making, and policy-making."
For those keeping track, that makes the Office of the Comptroller of the Currency (OCC), the CFTC, and FINRA the only federal regulators with formal fintech initiatives.
For more information about the CFTC and FINRA initiatives or any other fintech regulatory matter, please contact Robert Rosenblum, Susan Gault-Brown, or any member of the firm's fintech regulatory practice.
Susan Gault-Brown and John Sullivan authored this article.
States Seek to Harmonize Multi-State Regulation of Fintech Companies
Fintech companies subject to multi-state regulation should take note of Vision 2020, a set of recently announced efforts spearheaded by the Conference of State Bank Supervisors (CSBS) to update and harmonize state regulations applicable to non-bank financial entities, such as lenders and money transmitters. The CSBS is a nationwide organization of financial regulators from all 50 states, the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands. Vision 2020 likely is a response by state regulators to the Office of the Comptroller of the Currency's efforts to provide certain fintech companies with special purpose national bank charters as a means of easing the regulatory burdens of being subject to multi-state licensing and regulatory compliance.1
Vision 2020 initiatives will focus on the following:
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Examination Practices. The CSBS has established working groups to develop standard approaches for non-bank oversight. The groups' objectives are to make consistent examination practices among state regulators, share best practices, and report on trends in non-bank violations. The CSBS also intends to create a common technology platform for state examinations.
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Coordination with State Banking Authorities. The CSBS will sponsor education programs to foster comparisons among state banking regulators in their oversight of non-bank entities as a means of assessing and addressing weaknesses, identifying areas where expertise is needed, and improving supervisory practices.
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Federal Legislation. The CSBS supports federal legislation that encourages federal and state regulators to enhance their coordination of supervising bank third-party service providers, such as fintech companies.
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Licensing. The CSBS has begun a technology redesign of the Nationwide Multistate Licensing System (NMLS), the shared platform for non-bank state regulation. Among other things, the redesign seeks to provide greater automation of the licensing process for new applicants (such as money transmitters) and to streamline multi-state regulation.2
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Industry Panel. The CSBS will institute a fintech industry advisory panel designed to provide counsel on licensing and multi-state regulation and state efforts to modernize their regulations. The panel will concentrate on money transmission and lending concerns.
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De-Risking. To mollify banks' concerns about partnering with non-banks, the CSBS is seeking to raise awareness among banks that non-banks too are subject to substantive regulations such as the Bank Secrecy Act and other regulations aimed at preventing money laundering and cybersecurity breaches.
According to the CSBS, these initiatives will help create a more cohesive state regulatory system that supports business innovation, economic growth, and key protections for consumers. Whether these initiatives will lessen or increase the regulatory burdens facing multi-state-regulated fintech companies is an open question.
For more information about Vision 2020 or any other fintech regulatory matter, please contact Robert Rosenblum, Susan Gault-Brown, or any member of the firm's fintech regulatory practice.
Susan Gault-Brown and John Sullivan authored this article.
1 See the April 2017 WSGR Fintech Update, which includes an article about special purpose national bank charters.
2 See the May 2017 WSGR Fintech Update, which includes an article about uniform reporting for money transmitters through the NMLS.
