Compliance Programs for Startups

Compliance and Cybersecurity Program and Support for Crypto and Blockchain Assets Lender and Custodian

Background/Opportunity

• A global innovator in the use of blockchain and cryptocurrency holdings needed support to ensure two core elements of its business. First, as both a lender and a custodian of assets, it needed to meet the compliance requirements of the many national and local jurisdictions where it operates. Second, it required a cybersecurity approach to meet global financial standards.

Challenge/s

• Operating in the world of cryptocurrencies creates potentially higher degrees of risk in the prevention of money laundering.
• The client’s business model and global scope required a complex regulatory structure across countries and, in the U.S., individual states.
• Operating globally also entails adopting and complying with data protection and data security best practices.
• The client works with a wide range of affiliates and distribution partners as well as customers of its white label solution.

InnReg's Solution

• InnReg completed a full risk assessment of the client’s business.
• InnReg designed an end-to-end outsourced compliance and cybersecurity program, including:
  • Regulatory filings and updates
  • Anti-Money Laundering and Suspicious Activity Reporting
  • Management and protection of client and transaction data
  • Vendor and partner management
  • Marketing and advertising compliance

Client Results

• The client has the ability to manage thousands of end users and millions of dollars in assets in a compliant manner where it does business.
• The client has successfully avoided the risks inherent to their business model.
• The client has saved extensively by using dedicated, outsourced compliance professionals rather than building an in-house team.

Testimonial

“Francesco and his team helped us build and scale a global crypto company, navigate the many complex legal and regulatory challenges, and design a product that helped us satisfy our many constituents – customers, partners, local, national and international regulators. The team also provided critical guidance in the areas of risk management, security, HR, and strategic roadmap considerations.  They have become a full extension of our team and we would not be in the same place today without their endless guidance, support, and great judgement.”

-- Client CEO

InnReg helps innovators succeed in regulated markets. We do not publicly disclose client names in order to protect their confidentiality and their unique business models. We rigorously guard our clients’ intellectual property and competitive advantages. However, we can make references available to prospective clients by request.

Fractional Shares Trading

Objective: Launch a revolutionary new equity stock trading platform for retail investors.

Background/Opportunity

• The client wanted to create a trading platform that would be fun, easy, and affordable. The platform needed to deliver their mission to help new investors learn about stock trading in a low risk and low-cost environment. Their goal was to make Wall Street accessible to a wider Main Street audience. The product design included online brokerage accounts, plus gifts of stocks delivered via gift cards and e-cards.

Challenge/s

• In pursuit of their mission, the client had to build a platform attracting younger and lower net worth investors to equity trading but at the same time avoid raising regulatory red flags or generating negative press. Given their business model and plans for growth, they had to create a cost-efficient operational system, but with a complex product design including custodial accounts for minors, shares of stock in the form of gift cards and e-cards, fractional trading, and other areas that required a clear regulatory strategy.

InnReg's Solution

• Designed and deployed a compliance platform that supported accurate transactions at high speed and with a high level of information security.
• Advised on the negotiation of profitable vendor contracts, including a multi-year clearing agreement.

Client Results

• Raised $15 million in Series A funding after their successful launch and positive press.
• Stock shares delivered via gift cards contributed an incremental $50 million in revenue from sales at partnering national retail outlets such as Target, Safeway, and Staples.
• Won numerous awards in fintech trade publications including Product of the Year and Most Disruptive Company.

Testimonial

“Francesco has been the driving force in establishing our compliance, legal, and risk management functions. His experience and profound knowledge of the industry have been instrumental in protecting our brand during high-growth periods, as well as through challenging times. A clear communicator, Francesco has established strong relationships with industry regulators. In addition to his experience and knowledge of business, law, and regulations, Francesco has an extremely organized approach to problem-solving. I have been very happy to work with Francesco and look forward to doing so again in the future.”

-- Client President and COO

InnReg helps innovators succeed in regulated markets. We do not publicly disclose client names in order to protect their confidentiality and their unique business models. We rigorously guard our clients’ intellectual property and competitive advantages. However, we can make references available to prospective clients by request.

Equities Gifting Solution

Objective: Launch a new service that makes it easy to give stocks and index funds as gifts.

Background/Opportunity

• The client was a start-up supported by the Y Combinator incubator program. Their mission was to design a new service for people who wanted to give the unique gift of equity stocks, using an easy and fun platform. Their product strategy blended retro and fintech because it hearkened back to the days when parents and grandparents gave bonds to children to seed their college fund.

Challenge/s

• The client needed to manage numerous compliance regulations spanning the brokerage/investment advisory environment to support stored-value gift cards and the trading environment to support online investing, including custodial accounts for minors.

InnReg's Solution

• Established a manageable set of regulatory requirements.
• Advised on the adoption of the most efficient regulatory structure to accommodate the desired business and revenue model.

Client Results

• The company was acquired by a competitor based on their successful product launch with substantial positive press, and their potential to become a viable competitor in their own right.
  
  

InnReg helps innovators succeed in regulated markets. We do not publicly disclose client names in order to protect their confidentiality and their unique business models. We rigorously guard our clients’ intellectual property and competitive advantages. However, we can make references available to prospective clients by request.

Robo Advisor

Objective: Launch a micro-investing app designed to increase portfolio growth potential compared to conventional savings and investment accounts.

Background/Opportunity

• The client believes every single person would benefit from an investment approach that includes small, daily contributions. However, decades of experience as investment advisors had taught them this level of discipline is rare even with seasoned investors. Their platform solves this problem by rounding up a client’s credit and debit card purchases to the next dollar, and then automatically depositing this “small change” into a passively managed investment account.

Challenge/s

• The client needed guidance on how to identify and address potential regulatory compliance issues related to targeting international users. They also asked for support in identifying the best vendors to support the international launch of an innovative investment program and product in a regulated environment.

InnReg's Solution

• Conducted a comprehensive gap analysis. 
• Ensured that the compliance program was implemented in accordance with all SEC requirements for a Registered Investment Advisor.
• Addressed all compliance issues related to targeting and managing international accounts.
• Sourced and introduced regulated vendors who could support international clients.

Client Results

• The client was successfully launched in 2016 on a strong compliance foundation.
• They closed their first round of VC seed funding soon after launch and have moved on to securing Series A funding.

Testimonial

“InnReg understands fintech, online brokers and robo-advisors like no other compliance consultants we approached. They keyed in immediately on all the potential regulatory issues that could affect our business when targeting international users. Their CEO Francesco Matteini has built a substantial network of third-party providers. He helped us evaluate and select the right vendors to meet our needs within our budget and timeline."

-- Client Founder and President

InnReg helps innovators succeed in regulated markets. We do not publicly disclose client names in order to protect their confidentiality and their unique business models. We rigorously guard our clients’ intellectual property and competitive advantages. However, we can make references available to prospective clients by request.

How InnReg Helped a Global Crypto Unicorn with Blockchain Compliance

Objective: To support a non-U.S. blockchain innovator through complex operational planning to apply and obtain state and federal money transmitter licenses.

Background/Opportunity

A leading global digital gaming company with attractive offerings such as downloads, sports memorabilia, and NFTs pursued a business expansion strategy in the U.S. They understood the difficulty of this process and approached InnReg for help in managing the compliance requirements involved with obtaining state licenses and federal registrations for money transmission activities.

The company’s key differentiator is to make it as easy as possible for customers to make payments for digital products through their platform while maintaining privacy.

Engaging in this business model requires operating as a money transmitter, acquiring separate licenses in 50 jurisdictions, and meeting appropriate compliance, operational and staffing requirements according to each jurisdiction’s specifications.

Challenges

As a non-U.S. based company, the client requires guidance in successfully navigating the rules and requirements of both state and federal regulators. FinCEN registration and state licensing requirements differ widely in the number of rules to follow, their type, and complexity.

Licensure-related costs and processing times can differ significantly from state to state, and acquisition of each license may take from several months to two years.

The client requires support to understand and address the many obstacles of this complex process. They needed a multi-pronged, multi-jurisdictional approach requiring diligent program management, governance support, and in-depth experience with the nuances of money transmitter regulations as they apply to blockchain platforms—a need which InnReg was well-positioned to address.

InnReg's Solution

InnReg has provided project management and compliance expertise to fulfill the client’s regulatory and licensing requirements necessary to engage in money transmission payment activities across all relevant U.S. jurisdictions.

This role encompasses business planning, compliance advisory and project management services to support the execution of the tasks associated with the acquisition of money transmitter licenses, while serving as a centralized point of contact with the Client’s leadership team to maintain alignment with Client’s strategic goals. InnReg has also helped the client ramp up their compliance function with best-in-class advisory, processes, and procedures.

The scope of our services over the course of the engagement has included the following key components:

• Compliance and operational expertise, including policy development and regulatory advice
• Project management and governance
• Resource assignment and management
• Centralized communication
• Executive reporting

Why InnReg?

InnReg has supported the launch and growth of disruptive fintech companies operating under the MSB/Money Transmitter regulatory framework since 2013, and developed expertise in understanding its clients’ business requirements while mitigating risks and managing the impact of regulations.

Our competitive advantage and unique experience provide us with the ability to manage a project on behalf of a client operating in a gray and rapidly evolving area for both regulators and businesses.

Finally, our experience with crypto and digital assets since 2014 and with the challenges of successful money transmitter license applications allows us to guide this complex project to success.

Project Duration

In progress

Client Results

The client is making significant progress in an unfamiliar area of regulation and compliance, and in this process, InnReg is providing key know-how to build the internal resources needed for successful licensing application at both federal and state levels.

In addition, InnReg is contributing expertise and know-how around key compliance requirements such as information security, reporting, and vendor management.

Behind the Scenes

With limited exceptions, any business that accepts and transmits funds, including cryptocurrencies, such as bitcoin, will be considered an MSB and require an MTL in each U.S. state where the business operates. Money transmitters are a part of a specific category of MSBs.

Money transmitter regulations can be a complex challenge for fintechs that wish to operate at the national level within the U.S. Each state has its own requirements. While there are many similarities from state to state, there is no “one size fits all” approach.

Even more complicated for leading-edge businesses operating in crypto or Decentralized Finance (DeFi), the application process was designed for traditional finance businesses rather than online fintechs dealing with digital assets.

At the same time, businesses must be able to comply with other related regulations, most importantly those issued by FinCEN, a department of the U.S. Treasury that oversees the prevention of money laundering and other financial crimes.

The application process itself requires gathering significant amounts of documentation. In addition, businesses must be ready for the interactive review of their applications, which typically involves in-depth regulatory scrutiny and several rounds of questions.

Readiness involves having appropriate staff and processes in place so that regulators can confirm key facts about the business.

In the application process, the applicant is required to submit documents including business plans, financial statements, financial records of officers, directors, board members, and owners, and proof of compliance policies, procedures, and controls. To make the process go smoothly, all of these must be in place with a clear understanding of the factors that lead to the approval of an application.

Applicant companies should also consider building a compliance and risk management foundational framework prior to engaging in the license application process, so as to minimize regulatory questions and scrutiny at a later stage.

Given the above, money transmitter licensing projects not only require rigorous program management, but also differ from other projects because the most important tasks go beyond the application process. It takes experienced compliance expertise to understand the process and resources companies need to put in place before a single application can be filed.

Team members who can meld their understanding of the operational requirements with the operational and governance elements needed to secure the licenses needed to operate legally.

In InnReg’s experience, all of these components combined tend to challenge the capacity of the client’s in-house compliance leadership and staff, who are already handling day-to-day business activities. Bringing dedicated resources to the table allows clients to stay focused on business priorities even while they plan and execute their strategic evolution with the support of additional compliance experts.

InnReg Money Transmitter Services

InnReg’s core services for businesses involved in money transmission include:

• Compliance policies development and management, including federal (BSA/AML, UDAAP, etc.) and state regulations
• Federal and state regulator compliance facilitation including licensing, filings, exams and audits, consumer complaints, and regulator responses
• Fully and partially outsourced compliance leadership, management, and staffing
• Monitoring for regulatory changes
• Marketing, advertising, and content compliance (UDAAP, social media, endorsements, etc.)
• Employee onboarding (including background checks) and training
• Risk assessment and quality control
• Electronic books and records management
• Information security and data protection procedures
• Technology and vendor review
• Suspicious activity detection, monitoring, and reporting

Interested in learning more? We have developed a detailed guide for crypto fintech founders and leaders.

Cryptocurrency Laws and State Money Transmitter Regulation
for Fintech Leaders

Contact InnReg for more information about managing complex money transmitter license requirements.