1 00:00:11.960 --> 00:00:12.620 Holy 2 00:00:12.620 --> 00:00:14.130 David, thank you so much for joining us, 3 00:00:14.150 --> 00:00:19.010 cuz I am excited to talk about the law and the alternative finance space and it 4 00:00:19.010 --> 00:00:22.410 is great to have you here with us. So first question is, 5 00:00:22.430 --> 00:00:25.290 go ahead and talk to me about what type of law do you practice? 6 00:00:25.990 --> 00:00:28.730 Do a little bit of patent law. That's my background in science, 7 00:00:28.990 --> 00:00:32.690 but primarily I do financial law with, uh, 8 00:00:32.890 --> 00:00:36.050 merchant cash advance agencies, funding companies, uh, 9 00:00:36.160 --> 00:00:39.370 that give sales based financing offers to merchants. 10 00:00:39.630 --> 00:00:44.330 Why is it important for someone in the MCA space to have proper legal advice 11 00:00:44.430 --> 00:00:47.290 or a lawyer that specializes in m c? 12 00:00:47.990 --> 00:00:52.090 The MCA space is fluid, it's constantly moving. You have two main areas. 13 00:00:52.310 --> 00:00:53.210 One is regulation. 14 00:00:53.470 --> 00:00:57.650 You have disclosure requirements that are coming online almost monthly these 15 00:00:57.650 --> 00:00:59.770 days. The second is litigation. 16 00:01:00.430 --> 00:01:03.970 And litigation is when you enforce your agreement against a merchant who's 17 00:01:03.970 --> 00:01:04.660 defaulted. 18 00:01:04.660 --> 00:01:09.490 Would you say having proper legal counsel or proper legal advice is a must have 19 00:01:09.550 --> 00:01:10.383 for businesses? 20 00:01:10.670 --> 00:01:12.290 Oh, no question. A absolutely. 21 00:01:12.790 --> 00:01:17.770 If you aren't using counsel minimally for regulation 22 00:01:17.800 --> 00:01:18.630 work, 23 00:01:18.630 --> 00:01:22.850 you will start to see fines from regulatory agencies coming your way. 24 00:01:23.110 --> 00:01:25.890 Do you think that even if you're a small iso, 25 00:01:25.890 --> 00:01:27.490 you should have proper legal counsel? 26 00:01:27.760 --> 00:01:32.090 Even more so small shops that don't have their own attorneys can 27 00:01:32.600 --> 00:01:34.850 greatly benefit from outside counsel. 28 00:01:35.400 --> 00:01:39.050 What could go wrong if this business does not hire proper legal counsel? 29 00:01:39.420 --> 00:01:41.410 Let's say regulation. Uh, 30 00:01:41.420 --> 00:01:46.010 let's suppose your funding in California and you aren't 31 00:01:46.220 --> 00:01:47.650 disclosing to the merchants. 32 00:01:47.710 --> 00:01:51.690 You might fund four or five merchants and then all of a sudden one of the 33 00:01:51.890 --> 00:01:55.010 merchants turns you in to the regulatory agency, right? 34 00:01:55.180 --> 00:01:59.490 California regulatory agency will come knocking and they'll ask you for every 35 00:01:59.490 --> 00:02:03.610 funding you've made in California over the past two years, let's say. 36 00:02:04.390 --> 00:02:06.410 Uh, and then they'll charge you, you know, 37 00:02:06.470 --> 00:02:10.490 up to $2,000 a shock for each disclosure that you didn't properly make. 38 00:02:10.630 --> 00:02:13.610 So you could be facing tens of thousands of dollars in fines. 39 00:02:13.920 --> 00:02:16.610 What are some common misconceptions about mca? 40 00:02:17.030 --> 00:02:21.610 Mainly it's been regulation. Uh, there's a lot of rumors going around. 41 00:02:21.670 --> 00:02:22.503 For example, 42 00:02:22.570 --> 00:02:27.170 a number of people believe that in order to fund an mca a sales-based 43 00:02:27.170 --> 00:02:30.690 financing in California, that you need to be licensed with the state. 44 00:02:30.950 --> 00:02:33.850 That's not true. And this is one of the things that I, 45 00:02:33.850 --> 00:02:36.330 that I hear quite a lot and I get a lot of phone calls. Oh, 46 00:02:36.330 --> 00:02:39.530 do you know from brokers, let's say a broker will call me and say, oh, 47 00:02:39.570 --> 00:02:42.730 a funder requires me to be licensed in California. Well, 48 00:02:42.730 --> 00:02:46.450 maybe that funder does because that funder wants extra protection, 49 00:02:46.750 --> 00:02:48.410 but the state of California doesn't. 50 00:02:48.720 --> 00:02:50.770 That would be the biggest misconception I hear. 51 00:02:50.780 --> 00:02:51.770 Disclosure laws, 52 00:02:51.770 --> 00:02:55.090 they are big right now in the MCA and alternative finance space. 53 00:02:55.470 --> 00:02:59.940 So what exactly and how is it impacting states like California and New York? 54 00:03:00.400 --> 00:03:03.500 It doesn't matter where the funder is located. Okay, 55 00:03:03.500 --> 00:03:06.580 you could be a funder in New York, you can be a funder in Virginia. 56 00:03:06.640 --> 00:03:11.620 You could be a funder in, in Florida, the disclosure laws apply to the merchant. 57 00:03:11.920 --> 00:03:16.740 The merchant is key. So let's break it down. Utah and Virginia, 58 00:03:17.560 --> 00:03:21.140 uh, they were the first to sort of come online. Uh, 59 00:03:21.140 --> 00:03:25.300 they don't require APRs and they give you five disclosures in those states 60 00:03:25.360 --> 00:03:29.940 before you have to register. Uh, California and New York, as you mentioned, 61 00:03:30.170 --> 00:03:34.940 they came a little later. Uh, California came online, uh, 62 00:03:35.260 --> 00:03:36.220 December of last year. 63 00:03:37.130 --> 00:03:41.380 What you need to do in California is you need to disclose the amount of funding 64 00:03:41.850 --> 00:03:43.900 that the merchant will receive. In other words, 65 00:03:44.280 --> 00:03:47.820 what's the dollar amount that goes into the Merchant's bank account? 66 00:03:48.160 --> 00:03:52.460 So the disclosure is usually a one to two page disclosure. Very straightforward, 67 00:03:52.680 --> 00:03:57.220 as I said, right at the top on most of the fundings I'm aware of. It says, 68 00:03:57.220 --> 00:04:00.380 this is what's going into your bank account, right? Basically, 69 00:04:00.400 --> 00:04:03.220 not in those exact words, but they get, they get that. Now, 70 00:04:03.560 --> 00:04:08.020 New York and California are somewhat different because they require also what's 71 00:04:08.020 --> 00:04:08.853 called an apr. 72 00:04:09.160 --> 00:04:13.780 The reason the regulatory agencies want an APR is because they want the 73 00:04:14.020 --> 00:04:18.380 merchant, the merchant who's considering whether to take this type of funding, 74 00:04:18.380 --> 00:04:22.980 maybe factoring or M C A or maybe they're just looking at getting a credit card. 75 00:04:23.410 --> 00:04:26.180 They want that merchant to be able to compare that number, 76 00:04:26.210 --> 00:04:29.580 that a p r to other financing opportunities. 77 00:04:29.920 --> 00:04:33.860 The other things you have to put in the agreement are, uh, and again, 78 00:04:33.860 --> 00:04:36.820 this is for both states. A reconciliation provision. 79 00:04:36.820 --> 00:04:39.940 You have to have a citation to your reconciliation provision. 80 00:04:40.360 --> 00:04:44.460 New York and California require that you have a reconciliation provision, uh, 81 00:04:44.460 --> 00:04:45.380 listed on, on, 82 00:04:45.380 --> 00:04:49.340 on your disclosure so that the merchant understands there's a reconciliation 83 00:04:49.340 --> 00:04:50.500 provision. Again, 84 00:04:51.440 --> 00:04:54.980 the statutes and the regulatory agencies that, that, that, 85 00:04:54.980 --> 00:04:55.940 that promote the rules, 86 00:04:56.610 --> 00:04:59.420 they assume that the merchant is not reading the agreement. 87 00:05:00.280 --> 00:05:02.540 So they put that on the, uh, on the disclosure. 88 00:05:03.160 --> 00:05:07.100 And the other aspects of the disclosure are what's the daily payment gonna be? 89 00:05:07.290 --> 00:05:11.780 What was that payment gonna be, and if you amortize it over a month, 90 00:05:12.320 --> 00:05:13.153 et cetera. 91 00:05:13.320 --> 00:05:17.180 So walk us through each law, the laws in New York, the disclosure laws, 92 00:05:17.320 --> 00:05:18.820 and then the laws in California. 93 00:05:19.400 --> 00:05:23.100 The first aspect of California, like I said, is, uh, the funding. 94 00:05:23.290 --> 00:05:27.140 What funding is actually going into the merchant's bank account. Uh, 95 00:05:27.380 --> 00:05:32.260 the second is what funding is being given to a third party or 96 00:05:32.260 --> 00:05:37.100 paying off a, a previous, uh, funding. The third would be the a p r. 97 00:05:37.200 --> 00:05:40.620 You need to have the a P R and you're gonna have to have an a P R calculator. 98 00:05:40.740 --> 00:05:45.380 A way to calculate the a p r. Uh, fourth would be the, 99 00:05:45.680 --> 00:05:50.260 uh, reconciliation provision you need the reconciliation provision. And then, 100 00:05:50.600 --> 00:05:55.260 uh, fifth I could say in a, in a miscellaneous category, 101 00:05:55.560 --> 00:05:58.620 all the other aspects of the funding. Funding, how much you pay each day, 102 00:05:58.680 --> 00:06:00.900 how much you pay over a month. Uh, 103 00:06:01.000 --> 00:06:04.980 but then maybe we can slip in a six bullet point that just says if there's any, 104 00:06:05.280 --> 00:06:10.100 um, early payment fees. So New York has exactly the same. 105 00:06:10.330 --> 00:06:13.780 It's very, very similar. You have to say what's going in the bank account. 106 00:06:14.120 --> 00:06:18.180 You have to say whether you're paying off somebody else. Uh, 107 00:06:18.200 --> 00:06:20.780 you have to actually have the APR as well. 108 00:06:21.360 --> 00:06:24.980 You need to have all the other funding metrics. You know, what you pay in a day, 109 00:06:25.200 --> 00:06:27.460 how long the term is gonna be. Uh, 110 00:06:27.460 --> 00:06:31.860 and then you also have to state whether or not there is a provision for, 111 00:06:32.320 --> 00:06:35.100 uh, any fees if you pay off early. 112 00:06:35.680 --> 00:06:39.260 Now New York has one other requirement that California doesn't have, 113 00:06:39.520 --> 00:06:43.860 but this is primarily a requirement between the funder and the broker in 114 00:06:43.860 --> 00:06:44.693 New York. 115 00:06:45.320 --> 00:06:49.100 The funders must have in their agreement with the broker, 116 00:06:50.020 --> 00:06:54.860 a provision that says that the broker will comply with the disclosure laws 117 00:06:55.280 --> 00:06:59.380 and will report those disclosures to the merchant, back to the funder. 118 00:06:59.530 --> 00:07:02.460 That needs to be in your agreement with the, uh, with the broker. 119 00:07:02.760 --> 00:07:04.900 That's not something that you need for California. 120 00:07:05.110 --> 00:07:07.940 David, thank you so much for joining us because I know that the information you 121 00:07:08.340 --> 00:07:10.820 provided us today is not only a wealth of knowledge for me, 122 00:07:11.200 --> 00:07:12.580 but for all those watching this, 123 00:07:12.580 --> 00:07:15.900 especially when it comes to the legal aspect of it. I appreciate your time.