The Changing FinTech Landscape

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19 The Changing FinTech Landscape: A Snapshot of M&A Themes and Trends FinTechs may engage in activities that are subject to specialized licensing and regulatory regimes. For example, if a FinTech engages in money transmission, lending, loan brokerage, loan servicing, or cryto- asset activities, separate licensing may apply. In any transaction, it is essential that a buyer or investor identify where a FinTech target is licensed. If it is asserted that a license in a particular jurisdiction is not required, diligence should be conducted to understand how that assessment was made and whether it is correct. In addition, a buyer or investor should understand whether the FinTech's business plan involves new activities or services that will eventually require licenses and in which jurisdictions. Understanding the scope of a target's licenses will inform a buyer or investor whether any approvals or consents are required to close a transaction. For example, nearly every U.S. state must be notified of a change in "control" of a FinTech with a money transmitter license, and some states, such as New York and California, must approve the transaction prior to closing. A determination of control depends on each state's statute. Although most states will find control has been triggered based on 25% or more of voting ownership, some states use lower thresholds. The process of obtaining regulatory approvals can be time-consuming and costly. This should not be underestimated. Applications generally require background information on the acquirer and its plans for the business. This usually entails the submission of detailed information regarding the acquirer's organizational structure and on parties in the "chain" of ownership. Significant investors in the acquirer may also be required to submit background information, including personal biographical and financial information for individuals who are ultimately deemed to control the acquirer. FinTech transactions involving bank-affiliated buyers or investors raise additional complications and, in some cases, may narrow the scope of eligible buyers or investors. Control under the U.S. Bank Holding Company Act (BHC Act), for example, is implicated if a bank holding company or any of its affiliates acquires 25% or more of the FinTech target's voting stock, controls a majority of the board, or otherwise has a "controlling influence" over the company. Controlling influence can be found at extremely low levels, even for an investment between 5% and 24.99% if the bank has significant business relationships or contractual arrangements that restrict the FinTech's ability to make major operational or policy decisions. The legal and regulatory ramifications of a FinTech being deemed to be controlled by a bank holding company can be significant: the FinTech would be subject to comprehensive regulation and oversight by the Federal Reserve, and its activities would be limited to those permissible under the BHC Act. In some cases, this may be incompatible with a FinTech's business model or culture, but not always. Therefore, careful attention will need to be given to structuring issues to ensure each party's objectives can be achieved. REGULATORY CONSIDERATIONS MAY AFFECT DEAL TIMING AND NARROW THE SCOPE OF ELIGIBLE BUYERS

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