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Columbia Law School’s Blog Introduces Regulatory Entrepreneurship, a Business Model Predicated on Changing Existing Laws through its Stakeholders

Airbnb and Uber, among others, have strong incentives to push back against laws and regulations with asymmetric costs and benefits.

Columbia Law School’s “Blue Sky Blog” on corporations and the capital markets earlier this month highlighted an article on “Regulatory Entrepreneurship” by law professors Elizabeth Pollman and Jordan M. Barry. The authors have examined the increasingly popular phenomenon of companies pursuing a line of business in which changing the law is a significant part of their business plan, and theorized when this so-called regulatory entrepreneurship is most likely to be a viable business strategy. Among the regulatory entrepreneurs and larger public companies that have adopted such characteristics are:

Airbnb – it expanded the use of short-term rentals over restrictive zoning regulations.

DraftKings and FanDuel – they overcame illegal online betting for their paid-entry fantasy sports sites.

Uber – it overrode taxicab regulations that limited the number of taxicabs (through the issuance of medallions) in an area.

Tesla – it opposed regulations that required car manufacturers to sell exclusively through independent dealerships.

Alphabet (formerly Google) – it is pushing for legislative changes to allow for the future use of self-driving cars.

We can also think of other business models pursued by regulatory entrepreneurs in industries such as marijuana and related services, internet pornography and cryptocurrencies, and, once upon a time, in transactions that introduced online sales of securities and generally solicited private placements. We are less sanguine with respect to companies seeking to challenge occupational licensing for lawyers, medical doctors and similar professionals.

According to the article’s authors, there are three common characteristics of successful regulatory entrepreneurs:

  • They choose businesses that can grow quickly, that enable interaction and that appeal to an economically diverse audience because they can rapidly accumulate a large body of stakeholders and then mobilize them politically for regulatory change.
  • They avoid pursuing businesses where there could be large or criminal penalties (and substantial litigation risk), and instead opt to push the boundaries of the law when only small civil penalties are at stake and the laws in question, especially at state and local levels, may be unpopular.
  • They are generally startups who, with their investors, may be more inclined to take on the uncertainty of changing or shaping the law, and have less to lose economically than more established companies.

The concept of regulatory entrepreneurship is subtler than standard dogma that reminds us that our laws and regulations always trail behind the latest technologies and business models as legislators could never have conceived of such advancements. Here, regulatory entrepreneurs pursue lines of business that reside in the gray areas of established law, or are even legally prohibited, with the mission of changing the laws to their benefit. This is also not a new phenomenon as the authors note. One example of note from the last 30 years would be how many Asian and South American industrial companies lobbied their governments to amend laws to permit foreign ownership in conjunction with seeking to go public by selling securities in the United States.

The authors predict that regulatory entrepreneurship is likely to increase in the coming years. They write, “[A]s information technology continues to advance, companies will likely continue to gather user data, make people more connected, and make it easier for citizens to express their preferences to policymakers. This creates new opportunities for companies to mobilize large groups of people on their behalf and to act as agents for legal change.”

A link to the CLS Blue Sky Blog is here.

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