Jeff Weninger
Common Sense for Arizona

Watch Out San Francisco. Here Comes Arizona.

Watch Out San Francisco. Here Comes Arizona.

Creative new policies have the Grand Canyon State primed to be the fintech capital of the U.S.

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5:30 AM, FEB 16, 2018 | By BEAU BRUNSON

In 2015, Arizona became one of the first states to adopt an intrastate equity crowdfunding policy, which permits state residents to buy stock in a startup.

Arizona State Representative Jeff Weninger, a small business owner who knew firsthand the need for new ways to raise capital, authored a crowdfunding bill that he and his cosponsors intended to help make Arizona the first-choice home of the nation’s small businesses.

The crowdfunding bill allowed non-accredited investors to purchase up to $10,000 in equity in small companies based in Arizona. It also limited the investment pool to Arizonans—as required by federal law—and limited the maximum crowdfunding amount to $2.5 million per business. Weninger found a great partner in Arizona Senator David Farnsworth, who pushed the bill through the State Senate. The state’s crowdfunding portal came online the next year.

But the Grand Canyon State is not content to be a leader only in small business capital access. In September 2016, state Attorney General Mark Brnovich wrote in American Banker that he was committed to pursuing a forward-looking approach to financial innovation known as the regulatory sandbox.

The regulatory sandbox relies on two important principles. First, state governments must recognize that their regulations cannot keep pace with the rate of advancement in financial technology, but they can build a framework within which innovators can operate and bring their concepts to market responsibly. Second, the regulatory sandbox is predicated on the notion that consumers stand to benefit greatly from innovation, and it is vital that regulators allow for sensible leeway so that consumers can enjoy more advanced, secure, affordable, and efficient services.

A recent example at the federal level is the Consumer Financial Protection Bureau’s (CFPB) “No-Action Letter” to Upstart, a finance company that uses alternative forms of data to issue credit. In the letter, the CFPB lays out the specific requirements Upstart needs to meet to obtain a three-year exemption from onerous regulatory underwriting supervision. As per the letter, “Upstart will share certain information with the CFPB regarding the loan applications it receives, how it decides which loans to approve, and how it will mitigate risk to consumers, as well as information on how its model expands access to credit for traditionally underserved populations.” With this action, the CFPB recognizes the potential that Upstart brings to the consumer credit market, and rather than stifle or snuff out innovation by overregulation, the CFPB has paired reasonable oversight with a focus on consumer well-being.

This new regulatory paradigm has the potential to rapidly shift the command-and-control model of today’s regulatory system toward an environment that uses a case-by-case approach to nurture rather than restrict financial innovation, while prioritizing consumer protection. Arizona knows that other states are considering regulatory sandboxes, and the policy leaders from Attorney General Brnovich on down intend for Arizona to be a leading launch pad for FinTech companies nationwide. On January 17, 2018, Brnovich announced the introduction of Arizona House Bill 2434, which directs the state’s Attorney General to establish a regulatory sandbox program to temporarily exempt innovative FinTech products from the state’s standard licensing requirements while they are tested in the marketplace.

The regulatory sandbox program would require companies to thoroughly describe their products, outline barriers to market entry, and explain how their products would improve consumer well being. It would also limit companies to a total of 10,000 consumer transactions per product with additional restrictions on dollar amounts serviced. This more permissive regulatory structure has the potential to encourage investment into technology products that increase the availability of credit to those consumers without access to traditional financial services products.

Ultimately, the success of Arizona’s regulatory sandbox depends on the state’s policy leaders. Fortunately, the author of the bill is none other than Jeff Weninger. He brought equity crowdfunding to Arizona and is now, alongside Attorney General Brnovich, leading Arizona’s pro-consumer, pro-innovation regulatory reform. Policy makers looking to spur economic growth and technological innovation through regulatory reform would do well to look to Arizona, whose government is taking bold steps to make the state more welcoming to financial technology.

Beau Brunson is a Senior Policy Adviser at Consumers' Research