Death By Regulation: FaceCash Is Shutting Down in California

https://www.facecash.com/legal/ca.html

by thinkcomp • 15 years ago

132 33 15 years ago

tudorachim• 15 years ago

For more background from the founder of FaceCash:

http://www.quora.com/Aaron-Greenspan/Why-Im-Furious-with-Sil... http://www.quora.com/Aaron-Greenspan/In-Thirty-Days-Payments...

CamperBob• 15 years ago

From the first link: "Rather than invest in a productive, useful and frankly unprecedented product such as FaceCash, venture capital and angel investors have focused their time and billions of dollars of their money in companies and entrepreneurs that have, in serial fashion, deceived co-founders, deceived employees, and deceived customers. In many cases, shareholders are next. Meanwhile, they've left companies like my own for dead."

Whining-like typing detected.

tzs• 15 years ago

I find two things odd about this.

First, in one of his articles he says 43 states already have such laws, and you need to be licensed with them to do business nationwide.

So, why is one more state (California) adding licensing a big deal?

Second, when I Google for more information I come across almost no one complaining about this bill other than this one guy. If the bill is anywhere near as bad as he claims it is, I'd expect to see a lot of discussion.

The last attempt to discuss it here on HN was quickly flagged and killed.

thinkcomp5• 15 years ago

Problem 1: California has a tangible net worth requirement and surety bond requirements. Most states have the latter, but not the former. Some states have asset requirements, but that means counting assets on the balance sheet, not shareholder equity. California counts shareholder equity, so essentially you have to have $500,000 in cash in the bank that isn't from a loan.

Problem 2: It's not really $500,000. The DFI uses its own non-published standards which are much higher. This makes it impossible to know how much you really need to raise.

Problem 3: Silicon Valley is in California.

Most of the people who should be complaining about this bill either don't know enough about the law to know what to do, or they're just too small to know that the law even exists. That's precisely the problem, though: sometimes great innovations happen where you least expect them, and by regulating small companies out of existence, they're not very likely to ever come up with anything.

Also, VC-backed payments companies that have recently disappeared (Bling Nation, for example) have no incentive to explain the true reasons behind their disappearing.

mikeryan2• 15 years ago

So I'm unclear (really - I'm not being obtuse) is the new law actually impacting this or not? It sounds like the DFI has their own terms, how does the law make a difference?

If the California DFI were to deny our application for a license, we would be at risk of being denied licenses in every other state in which we apply. (Each state's license application asks whether the applicant has been denied any other kind of license for any reason.)

If this is a problem why not just get all your applications in now before you've been denied?

marshray• 15 years ago

If this is a problem why not just get all your applications in now before you've been denied?

Right, just submit an application now for everything you think you might ever need to apply for in the future, everywhere. Imagine how many denials you will have on your record then.

Not a good strategy.

mikeryan2• 15 years ago

A. Its a limited problem set. There's only 50 states.

B. Considering the alternative seems to be shutting out the 8th largest economy in the world, as smart ass as my comment was it seems to be worth considering.

tptacek6• 15 years ago

I think the suggestion was, get the license for Rhode Island and North Dakota and Maine before going for California. According to their Legal page, Think is only licensed in Alabama now.

tptacek6• 15 years ago

The law specifically states that the tangible net worth requirement is a floor, not a ceiling; like the surety bond requirement, it scales up with transaction volume and net receivables. The DFI FAQ basically says that in practice the minimum is more like $1MM.

There is a reasonable-seeming concern in this post: the California DFI has effectively unpublished tangible net worth requirements, and ostensibly the only way to find out what they are is to apply for a license and be rejected --- which is something you have to disclose on all future applications even in other states.

The notion of "tangible net worth" requirements is the flip side to the 2008 complaint about banks being able to overleverage and thus create "too big to fail" scenarios. The subtext, I think, of the DFI's fuzzy requirements is: if you meet the tangible equity requirements, you know you do. For the types of businesses we're talking about, $500k is a joke (can you imagine Paypal being backed by sums denominated in the single-or-double-digit hundreds of thousands?) It's simply very expensive to be a money transmitter in a state as big and dynamic as California.

Zak2• 15 years ago

This seems to be the same sort of thing people were[0] complaining about with Apple's app store policies; that it was effectively impossible to know the outcome of the approval process without having to invest a large amount of time and money in advance.

[0] It is my impression that the process has been improved to the satisfaction of most people who can be satisfied with such a process.

tptacek6• 15 years ago

The public interest in regulating funds transfer companies seems to outweigh --- by, like, a lot --- our interest in a well-orded iOS App Store.

r00fus• 15 years ago

It looks as though it's less "regulation" rather than regulatory capture and lack of transparency.

Why can't CA DFI actually state and publish the rules which would guarantee licensing?

hirokitakeuchi• 15 years ago

Something that confuses me is that FaceCash seem to be the only company that is (outwardly) complaining/worrying about this.

Presumably this regulation will affect all of the other payments companies in this space. (e.g., WePay, Venmo, Dwolla etc). It would be interesting to hear their thoughts on this.

tptacek6• 15 years ago

According to the CEO of WePay, they have confirmed with the DFI that they do not require a money transmitter's license:

http://www.quora.com/Does-WePay-have-a-money-transmitter-lic...

Aaron himself says Square isn't a money transmitter:

http://www.quora.com/Square-company/Will-Square-be-subject-t...

Payment processors are regulated differently than money transmitters:

The money transmitter definition also provides that “the acceptance and transmission of funds as an integral part of the execution and settlement of a transaction other than the funds transmission itself ... will not cause a person to be a money transmitter.”

[...]

FinCEN has already concluded that a merchant payment processor acting exclusively on behalf of merchants receiving payments for goods and services, rather than on behalf of consumers making payments to merchants, is not a money transmitter.

thinkcomp5• 15 years ago

Rich can confirm this (or not), but WePay is an agent of The Bancorp, Inc. (http://www.thebancorp.com), which is a bank, so it's exempt from money transmission regulations. The Bancorp told me this morning that they consider WePay an exception and that they don't do it for anyone else anymore. I'd talked to them a while ago, but they're not so good about returning phone calls or e-mails.

Venmo doesn't have any licenses to the best of my knowledge. Maybe they're an agent of someone, too.

Dwolla thinks that they're exempt but I'm not entirely sure that's true. They have a credit union service provider as one of their investors, but that's not necessarily the same as being an agent of a federally chartered bank or credit union.

Noca, Xipwire, Cimbal, LendingKarma, KoolWallet and others are affected as well.

narrator• 15 years ago

Walmart has been trying to get into banking in the U.S for a number of years. They have had to deal with a lot of regulatory hurdles. They already have banking operations in Mexico and Canada. If Walmart is having a hard time getting past the regulators to disrupt this space, it's probably much harder for a startup.

http://www.americanbanker.com/usb_issues/120_9/wal-mart-gets...

http://www.washingtonpost.com/wp-dyn/content/article/2006/04...

ahi• 15 years ago

Not really. Walmart's difficulties are because it's a real business. Typically, non-banking entities are not allowed to own banking entities. There are some very good reasons for this, primarily that if the non-banking entity struggles they have a very good incentive to raid the piggybank and/or take it down with them. After the past couple years it is easy to forget that banks are supposed to be more stable and less risky than other industries.

Clarification: Walmart's difficulties are unrelated to a banking startup's difficulties.

mahyarm• 15 years ago

You see all of these small banks and credit unions with 1-5 branches in total, what prevents them from getting into this business? Or facecash doing something similar? Get silicon valley bank involved as an investor/backing bank or some other small bank?

tptacek6• 15 years ago

Nothing stops them from doing this. What they're upset about is that there is no regulation that says "if you raise X x $1MM, you will receive a money transmitter's license"; they'd like to do it on their own.

latch• 15 years ago

I still think we're crossing a line where innovation is going to cost more/slow down - like it has for a lot of technologies before the internet (see airplanes). Regulation is one of the two reasons I think this happens (complexity being the other one).

davidu2• 15 years ago

I've seen this post, and your other posts on this subject.

I'm sorry to say it, but it seems like regulation is not why you are shutting down, but inability to execute on your business is. WePay managed to not have this be an issue. No VC I know has raised this as an issue of concern.

I'm not trying to troll, but startups are realy hard dude. Shit happens. Move on. Find an alternate path. If you believe in the vision, you'll find a way.

thinkcomp5• 15 years ago

David,

I posted this to raise awareness about regulatory issues, not to solicit pity or life advice.

I know that startups are hard; that's why I do them. It's just bullies like you who make them especially so.

Aaron

davidu2• 15 years ago

Again, you're focusing on the wrong thing. Being honest (or "sharing my opinion") doesn't make me a bully. You titled your post "Death by regulation" and I think you're doing yourself a disservice by choosing to believe that regulation is the reason why FC hasn't succeeded.

I'm happy to help. I'm a mentor at I/O Ventures where I hold office hours periodically -- please feel free to drop in, or shoot me an email and I'll let you know next time I'll be there. Even if you don't think I'm qualified to mentor, I'm certainly a good person to bounce ideas off of, and you can probably guess, I bring a healthy dose of reality to discussions. ;-)

mmatants• 15 years ago

I think that the complaint is not with regulation in general - it's with poorly executed regulation.

We can all benefit from a discussion about good ways to regulate.

adrianwaj• 15 years ago

Aaron - if a customer shows a shopkeeper a picture of a face that is not them, what happens if the shopkeeper is tired or hungover and can't distinguish up from down? Or, the shop just needs the money? If I was managing a shop, I wouldn't want a hungover teenager "confirming faces." What am I missing here? The only person I'd want confirming faces are customs officials and police officers - where there's a clear need to show the right ID to such a person and a clear disincentive to show the wrong one. At the same time, the checker is compelled not to mess up. As a shopkeeper using facecash, what happens if myself or my staff mess up, is there a liability? Why would I want that liability? And if there's no liability, what's negating a potential fraud? What happens if there is a dispute between a customer and a shopkeeper as to the face in question?

epscylonb• 15 years ago

It is stuff like this that makes bitcoin look like it has potential.

I agree financial regulation is mostly a good thing, but I am also happy with the concept of a financial wild west in the form of a crypto currency. As long as people know what they are getting in to.

Death By Regulation: FaceCash Is Shutting Down in California

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