Chair Hudson, Vice Chair Christ, Ranking Member Barnes, and members of the House Committee on Economic Development, thank you for the opportunity to submit this testimony in relation to House Bill 268.
My name is Agnes Gambill West, and I am a visiting senior research fellow at the Mercatus Center at George Mason University. My expertise is in blockchain, regulatory sandboxes, and innovation policy. I have shared my expertise to help other states in the process of enacting regulatory sandbox legislation, including North Carolina and Ohio. I have attached a policy article that highlights the factors that make state regulatory sandboxes successful.
Today I would like to offer the following takeaways about regulatory sandboxes:
- Universal sandboxes offer potential benefits, including increased innovation and efficiencies in regulatory relief for multiple and hybrid industries.
- Residency and reciprocity are important considerations in regulatory sandbox design.
- States should partner with nonprofits, such as innovation hubs, that support sandbox participants beyond the sandbox.
BENEFITS OF A UNIVERSAL SANDBOX
A regulatory sandbox offers temporary relief from regulations to businesses in a specific industry to test a product or service before making it available more broadly. A universal sandbox expands this definition by offering time-limited regulatory relief to businesses in any industry.
One benefit of the universal sandbox model is that it increases efficiency in the provision of regulatory relief for businesses that are regulated by more than one state agency. Hybrid industries with innovative business models, such as agricultural technology (AgTech) or medical technology (MedTech), may experience higher regulatory burdens than traditional single-industry firms and may welcome this type of multi-agency regulatory relief. An AgTech business, for example, could be subject to regulatory oversight for products or services that incorporate elements of fintech or other emerging technologies in addition to being subject to regulatory oversight for existing agricultural and environmental regulations. Cutting red tape for hybrid industries and innovative businesses will encourage experimentation, discovery, and innovation.
Another benefit of a universal sandbox might include cost savings for legislating. If a state initially adopts an industry-specific sandbox, such as a fintech sandbox, and subsequently decides to expand the scope of the sandbox to insurance or real estate, lawmakers and the public will incur certain costs. It takes research specialists, legislative counsel, clerks, representatives, senators, and other participants to draft and debate new bills, resolutions, or amendments. There are also other costs at play: the time expended on the lengthy process of legislating, fees for bill drafting and enactment, and opportunity costs. By adopting a universal sandbox at the outset, a state does not need to relegislate when new industries and innovative businesses seek entrance into a sandbox in search of regulatory relief.
SANDBOX DESIGN: RESIDENCY AND RECIPROCITY ARE KEY
At least 11 states have regulatory sandboxes; however, rates of participation in each state sandbox vary widely. One determinant of the variance is the degree of flexibility in the residency requirements of state sandboxes.
Sandbox legislation should have flexible residency requirements. It might seem that a requirement that sandbox applicants establish a physical presence in a state would lead to job growth and economic activity and be worth including in the program, but strict residency requirements may actually be a disincentive for out-of-state participants who do not want to relocate for the temporary duration of the sandbox.
For example, Wyoming’s legislation stipulates that applicants must have a physical presence in the state. By contrast, Arizona and Hawaii allow out-of-state applicants to participate in the sandbox. Arizona and Hawaii have accepted in-state and out-of-state participants into their sandboxes since the inception of those programs, whereas Wyoming’s sandbox has had no participants at all.
The present bill contains provisions that allow flexible residency. For example, the bill requires an applicant to establish either a physical residence or virtual location in the state. At the same time, the bill provides that the applicant is still subject to the jurisdiction of Missouri by consenting to the state’s jurisdiction in the sandbox program’s application form.
Provisions that support reciprocity with other state sandboxes could also attract sandbox participants. Statutory reciprocity allows states to form reciprocity agreements with other states, which would allow sandbox participants to access those states’ sandboxes and markets. In doing so, reciprocity multiplies the benefits of a sandbox by allowing participants to engage in experimental sandbox activity across multiple states, rather than in just one.
Currently, 8 out of 12 states that have regulatory sandboxes allow for reciprocity, including Arizona, Florida, Ohio, Nevada, North Carolina, Utah, West Virginia, and Wyoming.8 Reciprocity gives startups cost-effective access to a larger market at an early stage and exposure to a variety of valuable business insights. Such reciprocal arrangements might be particularly beneficial to entrepreneurs who live in less populated or rural states and who desire access to a different geographical market and other regions with diverse economic activity.
The present bill contains a reciprocity provision, which allows the regulatory relief office to enter into agreements with other states that have similar sandbox programs. This reciprocity provision gives instate and out-of-state participants the opportunity to test innovative products and services in a flexible regulatory environment across a broader region. However, according to the present bill, reciprocity agreements must be supported by a two-thirds majority vote of the advisory committee and can only proceed with an order from the governor of Missouri. These additional layers of approval may present barriers for other states intending to enter into reciprocity agreements with Missouri and may hinder regional economic growth.
NONPROFIT PARTNERSHIPS CAN SUPPORT AN ENTREPRENEURIAL ECOSYSTEM BEYOND THE SANDBOX
The duration of a regulatory sandbox is limited by design, can last on average from 12 to 24 months, and can be extended another 12 months upon request. This limited program duration is important because although sandboxes give entrepreneurs an opportunity to test innovative products and services in a modified regulatory environment, not all sandbox participants succeed by the time their regulatory waivers expire.
Upon completion of their participation in a sandbox, entrepreneurs need to plan for an exit strategy, and states can help with that transition. By partnering with nonprofits, such as innovation hubs, that support sandbox participants and innovation in general, states can build more effective entrepreneurial ecosystems.
Although regulatory resources may be constrained, nonprofits—especially innovation hubs—can fill an important gap by helping promote innovation and support sandbox participants before, during, and after participation in the sandbox. Specifically, nonprofits can shepherd applicants through the application process, give guidance on regulatory issues, provide contacts at regulatory agencies, and furnish technical and fundraising assistance.
For example, in creating a regional drone sandbox, Arkansas and Oklahoma have partnered with Tulsa Innovation Labs to establish a “launch pad” at the Helmerich Research Center at Oklahoma State University-Tulsa to fuel research and commercialization in the region.9 The collaboration also taps educational institutions, including community colleges, to support workforce development opportunities. In North Carolina’s regulatory sandbox bill, designated nonprofits can help sandbox participants with the design and implementation of products and services and with the sandbox application process.
The present bill does not specifically acknowledge the importance of public-private partnerships that might support sandbox applicants and the successful implementation of the regulatory sandbox. Working with universities, incubators, and economic development organizations, such as Missouri Partnership,10 will support sandbox-led entrepreneurial activity in the state and region and will amplify the growth and sustainability of innovation in Missouri. However, the present bill does allow sandbox participants to apply for a series of extensions that amount to a cumulative maximum of seven years inclusive of the original 24-month sandbox demonstration period. This generous extension scheme coupled with the support of public-private partnerships may give sandbox participants a greater chance of success.
Regulatory sandboxes can promote innovation and regulatory reform, but the design and execution of a sandbox matters. The universal sandbox model may provide efficient regulatory relief to hybrid industries and innovative businesses that are regulated by multiple agencies. The universal sandbox model also avoids the costs of relegislating the expansion of scope for industry-specific sandboxes. To attract applicants to its universal sandbox, Missouri should recognize the importance of flexible residency requirements and reciprocity provisions. Nonprofit partnerships can also create value by supporting applicants beyond the universal sandbox and creating a sustainable entrepreneurial ecosystem in Missouri.
Agnes Gambill West, “States Can Attract More Entrepreneurs by Sharing Sandboxes,” RealClearPolicy, September 22, 2022