A cyber security FinTech uses software and blockchain technology to protect data and guard businesses against hacking. Many cyber security businesses aim to partner with financial services providers (like banks) to provide solutions on a business-to-business (B2B) basis.

If you are setting up a cyber security FinTech, you should be aware of the legal requirements and issues at each stage of growth. This article provides guidance on the four development stages of your FinTech startup.

1. Research and Development (R&D)

First, do your research. Cyber security FinTechs can innovate in various areas using different technology, so completing market research is a key ingredient to your product’s success. Research can help you figure out how you want to differentiate your business, such as developing:

  • authentication software (like biometrics);
  • machine learning to detect cyber security threats; and
  • distributed ledger technology to protect data.

Importantly, research will also help you figure out what security solutions you want to focus on building. For example, the business Identitii undertook research that identified issues with their payment verification system. As a result, they developed distributed ledger technology. This technology verifies transactions from all parties in real-time and works alongside existing central bank systems.

Legal Needs

You will have to address different legal requirements or issues at each stage of your business’ life cycle. The table below identifies key legal requirements at the R&D stage.

 

Legal Need Purpose
Business Structuring Setting up your business structure correctly can help your company grow quickly. A good business structure can also can help:

  • protect your company’s assets;
  • limit your personal liability; and
  • benefit you from a tax perspective.
Australian Financial Services Licence
(AFSL)
Generally, you will only require an AFSL if you are providing or trading in financial services. However, you may also need an AFSL if you are:

  • using blockchain technology; or
  • issuing tokens that are viewed as derivatives.

The Australian government has a regulatory sandbox for FinTech startups. For the first 12 months of your FinTech startup, you may not need to apply for a licence. This means you can conduct detailed R&D without complying with AFSL regulations.

Confidentiality Agreement In your R&D stage, you will probably talk about your business with:

  • developers;
  • potential investors; and
  • other key personnel.

Signing a confidentiality agreement with these parties can help protect your innovative ideas in these initial conversations.

 

2. Pre-Minimum Viable Product (Pre-MVP)

At this next stage of development, select your developers and get your technology development rolling. While this is happening, finalise your branding and kick off your marketing campaigns to generate interest in your product. You should also figure out how you can protect your intellectual property (like your business logo) before you officially launch.

Additionally, you may want to think about holding a soft launch with a test business or early adopter. This will let you work out any issues with your technology before you scale to other businesses or launch to consumers.

Legal Needs

The table below identifies key legal requirements of the pre-MVP stage.

 

As an employer, you will also need to comply with the national employment standards and any relevant awards.

Legal Need Purpose
Trade Marks A trade mark lets you build brand identity and loyalty. Registering a trade mark gives you the exclusive right to use your mark for a renewable period of time. It also protects your mark from being used by your competitors.
Development Agreement If you are engaging an external developer for your website and software, you should have a development agreement which details:

  • the scope of work;
  • the assignment of the IP to you on completion (otherwise the developer may own the IP); and
  • cancellation rights.
Employment Agreement Use formal employment agreements when hiring staff.
Patents

A patent is the exclusive right to monetise an invention for up to 20 years.

If your platform is a novel form of software or technology, you may be eligible for patent protection.

 

3. Launch

At this stage, you are ready to launch your products to consumers or businesses. Make sure your terms and conditions reflect your startup’s operations. For example, if your FinTech runs an ID verification platform, your terms and conditions should reflect not only how the platform works for your consumers, but also their payment obligations.

Legal Needs

The table below identifies key legal requirements of the launch stage.

 

Legal Need Purpose
Website Terms of Use This document protects the IP on your website. It also limits your liability in regards to the content on your website.
Website Privacy Policy This document ensures that your business complies with the Privacy Act. It is particularly important for a cyber security FinTech, as you will be processing large amounts of data with personal information. You should also have a privacy policy on your website if you are solely operating online.
Software as a Service (SaaS) Agreement SaaS agreement is the contract between you and your clients. If you are providing services through an online platform to large businesses, you will need an enterprise SaaS agreement.
End User Licence Agreement (EULA) A EULA is a contract between a software developer and the end user. Therefore, when you have an enterprise SaaS agreement with a large business, you will also need a EULA. The business’ employees or customers (the end users) will need to sign up to the EULA.

 

4. Growth Stage

You may be thinking about raising capital once your cyber security FinTech has hit the growth stage. You can achieve this in various ways, including by acquiring equity investment from venture capital funds and other professional investors. The result of injecting money into your business in this way is often rapid expansion and growth of your operations.

For example, Agridigital is a private blockchain platform for supply chain finance in the grain industry. The platform already had over 1,300 users, but wanted to expand to North America. A Series A funding round of $5.5 million helped Agridigital with its international growth plans.

Legal Needs

The table below identifies the key legal issue of the growth stage.

 

Legal Need Purpose
Capital Raising When looking for investment to raise capital, you may need to:

  • finalise a pitch deck or information memorandum;
  • negotiate a shareholders agreement; or
  • draft or finalise a share subscription agreement, SAFE note or convertible note.

 

Key Takeaways

Starting up your own cyber security FinTech does not have to feel like an intimidating task. You can set yourself up for success by being aware of what legal requirements and issues you should meet at each step of your business’ growth. For further advice on how to start your business, or help with meeting legal obligations, contact LegalVision’s startup lawyers on 1300 544 755 or fill out the form on this page.

Sam Auty
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