Legislative Testimony: LB1127, Adopt the Regulatory Sandbox Act

 Chairman Williams and Members of the Banking, Commerce, and Insurance Committee,

My name is Nicole Fox, Director of Government Relations at the Platte Institute, and I testify today in strong SUPPORT of LB1127. I’d like to take this opportunity to say my sincerest thank you to Sen. Wishart not only for introducing this proposal, but also for her support for entrepreneurs and her embracing innovation in our state.

In 2019, Blueprint Nebraska released a public report listing a variety of strategic initiatives to promote economic growth in our state.[i] While the report mentioned some of the good things Nebraska has in its favor, it also noted that Nebraska faces some challenges. Nebraska has not kept pace with peer states on metrics that assess how well we are fostering innovation and welcoming workforce talent.

Nebraska’s venture capital funding remains low compared to the rest of the nation. In fact, Nebraska has one of the lowest startup densities in the country. To remain a vibrant place for business, the state must create an environment that better enables entrepreneurs and their companies to succeed.

LB1127 is a tool in the toolbox to promote economic growth and to foster a more thriving innovative culture that is welcoming to new business ventures. It would add Nebraska to the growing list of “sandbox states.”

A regulatory sandbox has also been called an “opportunity sandbox” in the literature. Every Nebraska entrepreneur deserves an opportunity. Senators, as you ran for the very legislative seat you hold, wasn’t part of the drive the “opportunity to serve,” and didn’t you ask your constituents to give you an “opportunity to serve them?”

Sandboxes may be industry-specific (fintech, insurance, health care, or agriculture, for example) or all-inclusive. Entrepreneurs are constantly thinking of innovative ways to address consumer needs, often at a pace at which regulators cannot match. The goal is to provide a temporary space giving entrepreneurs the opportunity to develop a new product or service under some degree of regulatory supervision.

Like a driver’s learning permit or a provisional occupational license, potential sandbox participants must meet certain criteria to be allowed entry. Because there is an element of supervision and a requirement that the participant be able to demonstrate they will protect consumers from harm, it is reasonable to allow temporary regulatory flexibility.

Why should Nebraska establish an “opportunity sandbox?”

The advantages of establishing a sandbox are many.

Sandboxes provide an opportunity for collaboration. Regulators can obtain early insight pertaining to market trends, including changes in technology and consumer preferences. They provide an early opportunity for regulators to keep the market on the correct side of the law while allowing startups entrance into the market with compliance in mind.

Sandboxes encourage evidence-based policymaking and actively provide cost-benefit insight for rules and regulations that are on the books. A burdensome regulatory environment can create barriers to entry that are disproportionate to risks. Sandbox participants are the litmus test for arbitrary regulatory assumptions. Outcomes may reveal that, yes, regulations are appropriate, or no, they are outdated, burdensome, and/or costly. Having this information allows the Legislature to better assess what laws are working and what laws may benefit from repeal or updating.

Sandboxes provide a means for government transparency. Novel ideas are made public, and a framework for dealing with innovations promotes open communication between regulators and innovators.

Lastly, venture capitalists may be apprehensive about investing in companies affiliated with highly regulated industries. Participation in a sandbox sends a signal that the company wants to play nice with regulators and therefore can improve their ability to raise capital.

Who is a typical sandbox participant?

Many proposals for sandbox participation are for the provision of application-based services and have included the following:

• An application connecting motorists to towing companies. A model that is very much like Uber. Whether it’s a motor vehicle accident or car trouble, the application provides for a convenient way to connect motorists with towing companies.
• An application connecting consumers with lenders for the refinancing of auto loans similar to how mortgages can be refinanced. This sandbox participant ultimately exited the sandbox learning that they could outsource to lenders and not be the lender. During their time in the sandbox, 120,000 consumers accessed their website.[ii]
• An application to connect financial advisors with access to digital asset depositories. This applicant noted that consumers were increasingly interested in investing in cryptocurrency, but they were apprehensive about doing so on their own.[iii]

Who are the “sandbox states?”

Arizona established the nation’s first sandbox in 2018, and since then, 11 states, including two of Nebraska’s neighbors have established regulatory sandboxes of varying industry-specific types.[iv] These states include California, Florida, Hawaii, Kentucky, Nevada, North Carolina, South Dakota, Utah, Vermont, West Virginia, and Wyoming. South Dakota adopted an insurance sandbox in 2021, and Wyoming adopted a fintech sandbox proposal in 2019. The most recent sandbox was established by North Carolina in the fall of 2021.

2021 saw the nation’s first all-inclusive sandbox in Utah, and LB1127 is modeled after this approach. Mississippi and Tennessee also introduced all-inclusive sandbox legislation in 2021. The all-inclusive sandbox trend is gaining momentum. So far in 2022, Indiana, Missouri, and Virginia have introduced all-inclusive sandbox legislation, and 2 more states may follow suit.

I strongly urge the committee to give serious consideration to Sen. Wishart’s proposal. It provides a tool for the state to work with entrepreneurs to facilitate a culture of innovation, attract and keep talent, and boost our economic competitiveness nationally.

[i] https://blueprint-nebraska.org/wp-content/uploads/2019/08/BlueprintNE_Public.pdf

[ii] https://www.engine.is/news/startupseverywhere-sanfrancisco-ca-withclutch

[iii] https://www.freedomtrust.com/

[iv] https://mspolicy.org/regulatory-sandbox-reforms-advance-across-the-nation/