The Changing FinTech Landscape

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18 FinTechs that have access to personal and proprietary information are attractive targets for cybercriminals to steal valuable data and disrupt critical operations. Acquirers and investors need to probe these issues when evaluating FinTech transactions. Specialized diligence should be made into the history of data breaches and cyber incidents, as well as related governmental enforcement actions and private litigations, as these may materially alter the economics of a deal. In addition, there should be visibility into the results of any gap analyses or "tabletop" exercises, including the status of any open or ongoing remediation efforts. The adequacy of existing staffing, policies and procedures, and insurance coverage should also be understood, especially if the target is to be operated on a standalone basis post-acquisition. An effective diligence exercise will also aid buyers and investors in assessing the robustness of cyber/data- related representations and warranties, indemnities and other contractual provisions in relevant deal documentation. A FinTech's value may be rooted in its IP and the strength of its customer relationships. These are two distinct areas that need to be given early attention in the diligence process. Adverse findings may significantly affect deal value. They can also delay a transaction's closing until resolved or mitigated. First, an effective IP diligence process will need to examine how a target's IP was developed. Acquirers and investors must gain comfort that the FinTech company has full ownership of its IP assets and that no party has viable claims to assert joint ownership or other rights. A FinTech company's use of open source code must also be understood, as it could result in its proprietary IP having to be made available freely, including to competitors. In addition, if the FinTech company relies on any licenses of other parties' IP assets, then the terms and conditions of those licenses must be analyzed. A second important item relates to customers. Acquirers and investors in FinTech companies need to have a full inventory of all material customer relationships, including the contracts that memorialize those relationships. Customer contracts should be analyzed from economic, legal, and operational perspectives. Among other things, diligence should uncover any contractual "landmines" that may restrict a change of control of the target or assignment of the contract or attempt to bind affiliates. SECURITY AND OPERATIONAL RESILIENCY ISSUES ARE PARAMOUNT DUE DILIGENCE OF IP ASSETS AND KEY CUSTOMER RELATIONSHIPS IS CRITICAL

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