FaceCash Founder Claims New Financial Regulation is Unconstitutional

2/2/12Follow @e_craig

For months, Aaron Greenspan, the founder of the now-defunct mobile payments service FaceCash, has been getting deeper into a legal battle with the State of California over the way it regulates money transfers. And he thinks the implications of his fight go well beyond his startup.

According to an open letter Greenspan wrote to Governor Jerry Brown, a new financial regulation enacted in the state last year “makes it nearly impossible for new companies to offer disruptive products and services. By virtue of the fact that Silicon Valley is in California, this means that innovation in the payments sector in this country has more or less stopped.” In November, Greenspan filed a civil complaint against the State of California, claiming that the new law, called the Money Transmission Act, is unconstitutional because it attempts to regulate interstate commerce, and because the burden of the law outweigh the benefits. Greenspan also claims that arbitrary enforcement of the law violates the 14th Amendment.

Greenspan, 28, founded his company with the aim of changing the traditional payment model, creating a system that allowed merchants to accept payments by scanning barcodes off of shoppers’ phones. The bar codes were linked to bank accounts and worked like debit cards, eliminating interchange fees that merchants pay credit card companies (FaceCash charged its own 1.5 percent fee). They also provided a measure of security for consumers, whose photos popped up with their bar codes.

But as Greenspan was getting pilot vendors and users on board in Silicon Valley, the state enacted the MTA, which requires that companies that work as domestic money transmitters within California obtain a license to operate. Under the new legislation, these companies are required to have a minimum net worth of $500,000, as well as bonds or securities on deposit of at least $500,000 or 50 percent of daily outstanding payments, whichever amount is greater. On top of that, companies like FaceCash that receive money to transmit have to have securities of $250,000.

Before the MTA, only companies that provided international money transfers needed to abide by the deposit requirement, and there was no net worth requirement

After seeing news about the change on the Internet, Greenspan set up an appointment with the state Department of Financial Institutions (DFI) to obtain a license so that he could comply with the law by the time it went into effect on July 1, 2011. Since he met the $500,000 net worth requirement—and could afford the bonding requirements—he was unconcerned.

But the meeting did not go well. Greenspan says he soon found that to ensure smooth sailing for his license application, he had to have more than $500,000 on hand. The problem was that the DFI couldn’t tell him exactly how much more—even though he had provided audited financial statements to the state before the meeting.

“It was a pretty epic disaster,” Greenspan says. “From his point of view I was undercapitalized, from mine I was fine, but I didn’t know the number they needed. It clearly didn’t matter what I told them, they still were not able to provide an answer.”

Following through with an application that might fail would cost Greenspan a $5,000 application fee, but it could also affect his ability to get licenses in other states, he says. If he moved on to apply in say, Pennsylvania, he would have to explain why he failed to get a license in California.

“It’s like car insurance,” Greenspan says. “It’s an important factor.”

Not only that, Greenspan also claims the department warned him that if he continued operating in other states where he already had licenses—Idaho and Alabama—he could face jail time in California for operating without a license. But the law was so new, they weren’t sure.

Greenspan wasn’t about to take chances. The day before the law was set to take effect, he shut down his operations, laying off a full-time programmer and six contractors.

The regulatory troubles have been particularly devastating for Greenspan, who was self-funding the company. The 28-year-old entrepreneur is a longtime programmer who created a precursor to Facebook at Harvard—a Web service he called … Next Page »

Elise Craig is a freelance reporter based in San Francisco. Follow @e_craig

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