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Digital markets, funding and payment services

The funding for fintech initiatives can come from a variety of sources that track traditional funding for new and growing businesses, including private equity funds and hedge funds, financial institutions, corporates, family offices and high net worth individuals. Such capital raises are used to both finance the company itself, and for lending purposes, where the company is engaged in lending activities.

i Crowdfunding

Crowdfunding, which generally refers to the use of the internet by small businesses to raise capital through limited investments from a large number of investors, is permitted under SEC rules and regulations. The Jumpstart Our Business Startups Act (the JOBS Act), established provisions that allow early-stage businesses to offer and sell securities, and the SEC subsequently adopted Regulation Crowdfunding to implement these provisions of the JOBS Act. The Financial Industry Regulatory Authority (FINRA) oversees the registration of crowdfunding portals. Broker-dealers and funding portals that are registered with the SEC and are FINRA members are permitted to offer and sell securities on behalf of issuers to the investing public using crowdfunding.

ii Peer-to-peer lending

Peer-to-peer lending and crowd-lending are also permitted in the United States. Examples of peer-to-peer lending include Lending Club and Prosper. Online lending marketplaces often rely on bank partners to actually originate loans, and thereby rely on the licensing and regulation to which those banks are already subject. However, even such marketplaces are subject to a wide range of regulations, including state licensing statutes that can impose requirements relating to record keeping, servicing practices, disclosure requirements, examination requirements, surety bond and minimum net worth requirements, financial reporting requirements, change in control notification requirements, restrictions on advertising, and requirements regarding loan forms. Peer-to-peer lenders are also subject to consumer protection laws, including state usury limitations, state disclosure requirements and other substantive lending regulations, Truth in Lending Act disclosure requirements, Equal Credit Opportunity Act non-discrimination provisions, and Fair Credit Reporting Act, Fair Debt Collection Practices Act and CFPB regulations.

iii Sales, transfers and securitisations

Such loans and financings can generally be traded on a secondary market, subject to certain limitations. So, for example, securities purchased in a crowdfunding transaction generally cannot be resold for a period of one year, unless the securities are transferred to the issuer of the securities, an accredited investor, as part of an offering registered with the SEC, or to a family member of the purchaser. Loans that are originated as part of peer-to-peer marketplaces can be subject to limits on the ability to 'export' the interest rate at origination upon a sale or transfer of the loan. Transfer to securitisation vehicles is not uncommon, and is generally subject to risk retention rules that require the securitiser or sponsor of the securitisation transaction to retain at least 5 per cent of the credit risk of the securitised assets.

iv Payments services

Payments services are also subject to state licensing requirements. So, for example, states may license payment services as money transmitter businesses in the relevant states where money transmission services are provided. Such activities can also trigger registration requirements with FinCEN as a money services business. The board of governors of the Federal Reserve System has adopted Regulation E, which specified requirements for mobile banking or mobile payment transactions made via electronic fund transfers from a consumer's asset account.