The Securities and Exchange Commission (‘SEC’ or ‘the Commission’) recently announced a new set of Guidelines for a Regulatory Incubation program for FinTech companies seeking to provide innovative capital market services. The SEC noted that the purpose of the Guidelines is to provide a controlled environment for the FinTechs to provide capital market services in a limited form, before they become established. The services would be financial services which ordinarily fall under the SEC’s oversight, albeit, offered in an innovative form by FinTechs.
The Guidelines details the eligibility criteria, restrictions and application requirements for prospective FinTech participants in the incubation program. The FinTechs would be required to, amongst other requirements, present a business plan, a risk management framework, comply with anti-money laundering (AML) and countering terrorist financing (CFT) requirements, and undertake not to promote guaranteed returns, in order to participate in the incubation program. After the one-year incubation period, a company can either be deemed eligible for full registration and allowed to continue operating that activity, or required to discontinue services if the SEC finds the entity ineligible.
The Commission expects its Regulatory Incubation program to commence in Q3 2021.
The SEC promotes the incubation period to accommodate innovation while ensuring investor protection and market integrity. The Guidelines did not come as a surprise as the Commission had issued a number of directives in its attempt to regulate the fast growing industry. SEC Regulatory Incubation might be a way for regulation to evolve alongside the industry and its fast-changing technology. It echoes the Framework for Regulatory Sandbox Operations issued earlier in the year by the Central Bank of Nigeria for FinTechs.
The stated aims are commendable. However, the Guidelines appears to be a stopgap until the SEC can formulate more detailed rules for FinTechs providing Capital Market services. Overall, it is hoped that the introduction of this Regulatory Incubation program would drive interest by FinTechs in designing novel services for the capital markets and enhance the confidence of the investing public in FinTechs operating in that space.
Please click here to access the SEC Guidelines on Regulatory Incubation.
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