Technology Boom in NC? What You Should Know About the Proposed Regulatory Sandbox in the Tarheel State
Technology is evolving and advancing at a dizzying pace across the globe. Emerging technologies are reimagining everything from how we interact with each other to how we interact with businesses and institutions. Given the upward trajectory of technology, it seems that the “innovation” business is ripe for opportunity — an opportunity that appears poised to take off in North Carolina.
In 2021 alone, North Carolina has been the target for some very high-profile technology announcements, including Google’s plans to open a cloud engineering hub in Durham and Apple’s new campus in Research Triangle Park. These exciting developments are now coupled with recent proposed legislation that would create a “regulatory sandbox” further incentivizing technological economic development to expand North Carolina citizens’ access to products and services or unique business models not currently widely available.
A regulatory sandbox allows companies and entrepreneurs to test emerging technologies, products, services, or business models at the leading edge of (or even outside of) an established regulatory framework. Sandboxes have popped up across the country — from Arizona in 2018 to Kentucky, Nevada, Utah, Vermont, and Wyoming in 2019 to Florida and West Virginia in 2020 — as a way of spurring economic growth and breaking down the barriers to market access often faced by creative business models and startups. North Carolina is one of the most recent states to investigate the potential economic benefits of becoming an innovation hub. Although North Carolina tried and failed to implement a sandbox in 2019, the 2021 iteration seems more likely to succeed given the growing number of peer states that have since adopted, or are currently working on, comparable sandbox-creating legislation.
North Carolina’s Regulatory Sandbox Act of 2021 (the “NC Sandbox Act”) seeks to establish a more flexible regulatory environment for the financial services and insurance industries within the state. Here is what you should know about the proposed NC Sandbox Act, which is currently pending before the Committee on Commerce:
Purpose and Applicability
The NC Sandbox Act would permit an applicant to temporarily test an innovative financial product or service, making such product or service available to consumers on a limited basis without subjecting the applicant company to certain licensing or other regulatory obligations otherwise imposed under applicable state law.
The NC Sandbox Act would apply to entities regulated by the Office of Commissioner of Banks or the Department of Insurance and offering a product or service that falls within the definition of an “innovative product or service,” i.e., the entities are using a new or emerging technology, or are providing products, services, business models, or delivery mechanisms not currently widely accessible to the public.
Establishment of North Carolina Innovation Council
To govern the program, the NC Sandbox Act proposes to create an “Innovation Council,” which would be tasked with supporting innovation, investment, and job creation within North Carolina by encouraging participation in the regulatory sandbox. The 11-person council would set standards, principles, guidelines, and policy priorities for the types of innovations that the regulatory sandbox program would support. Interestingly, early analysis of the bill expressly mentions authorizing the Innovation Council to focus on blockchain initiatives (here’s a legislative analysis of SB470). The Innovation Council would also be responsible for approving admission into the regulatory sandbox program.
Innovation Waiver Applications
For $50, an innovator can apply for admission into the regulatory sandbox program. In determining whether to admit an applicant, the Innovation Council will consider:
The nature of the innovation product or service proposed to be made available to consumers, including the potential risk to consumers;
The methods that will be used to protect consumers and resolve complaints during the sandbox period;
The entity’s business plan, including availability of capital;
Whether the entity’s management has the necessary expertise to conduct a pilot of the innovative product or service during the sandbox period;
Whether any person substantially involved in the development, operation, or management of the innovative product or service has been convicted of or is currently under investigation for fraud or state or federal securities violations; and
Any other factor that the Innovation Council or the applicable state agency determines to be relevant.
By tasking the Innovation Council with the responsibility of considering consumer protection in addition to economic growth when evaluating applicant entities, proponents of the legislation seemingly attempt to avoid some of the criticisms that surrounded the 2019 sandbox proposal.
Applicants must also have a physical presence in North Carolina. A waiver of specified requirements imposed by statute or rule may be granted as part of entry into the program and would be valid for the duration of participation in the regulatory sandbox, but typically not to exceed 24 months.
More to Come
The proposed legislation also addresses sandbox program requirements, consumer protections, record requirements, privacy, and other initiative and obligations in more detail. As mentioned above, the legislation is currently pending before the committee, and Bradley is closely monitoring this legislation and will provide continuing coverage of the proposed bill in the coming weeks and months. If passed, the legislation could become effective October 1, 2021.