Q1 2025 Newsletter

Welcome to 2025’s First Edition of the Fintech Legal Quarterly

(a newsletter for the financially savvy, the technologically inclined, and the legally curious)

Let’s face it: when you hear the phrase “quarterly legal newsletter,” your first thought probably isn’t “Oh goodie, break out the champagne.” But stick with us—this isn’t your average compliance snoozefest.

Here at FinTech Law or FTL for those born after 1980, we believe that legal insights should be useful, actionable, and—dare we say it— entertaining. That’s why we’re bringing you The Fintech Legal Quarterly: a curated blend of financial services updates, startup wisdom, compliance curveballs, and the occasional SEC horror story (because nothing says “compliance matters” like a $38 million penalty).

Whether you’re a founder wondering if your Delaware C-Corp needs therapy, or a compliance officer just trying to stay off the SEC’s radar, we’ve got you. This issue dives into capital-raising must- knows, enforcement drama hotter than your Series A pitch deck, and sharp takes on what’s trending in the fintech legal universe.

In this issue, we kick things off with Part 1 of our Legal Essentials Series for Fintech Startups, guiding founders through the regulatory jungle that awaits anyone bold enough to combine code and capital. We unpack everything from choosing the right business entity (spoiler: not all LLCs are created equal) to the legal fine print that keeps your startup out of the courtroom and in the boardroom. Too many startups ignore legal and regulatory matters until they become expensive roadblocks. So, add a little lex to your latte and enjoy.

We also break down the SEC’s Q1 enforcement blitz, which—let’s just say—sets the tone for a no-nonsense 2025. You’ll read about unregistered brokers getting a $540K wake-up call and Genesis Global’s balance sheet gymnastics that landed them in hot water. While the SEC is in a state of flux, it continues its mission of market oversight. Don’t expect enforcement actions to stop just because the Commission’s chair is still empty and 20% of the staff has suddenly retired or left the agency.

And for those raising funds in the SaaS FinTech space, we’ve got you covered with 10 proven fundraising strategies, from bootstrapping and angel rounds to ICOs and revenue-based financing. If you’re thinking of raising money, you’ll want to read this before your next investor meeting (or at least before you Google “safe note template”). And before you ask, yes, you can raise money if you’re not an AI company, it’s just going to be harder.

Finally, we round things out with thought leadership, case studies, and practical takeaways— because whether you’re navigating compliance, building your cap table, or just trying to make sense of digital assets in a regulatory gray zone, knowledge is your best defense (and offense).

So go ahead, refill your coffee, minimize that tab of market volatility graphs, and settle in. We promise to bring the brains—and just enough sass to make reading legal news feel like a power move.

(Part One)

Legal Essentials Every FinTech Startup Must Know Before Raising Capital

FinTech startups have the potential to become enormous earners and can help to revolutionize the financial services sector. However, with great opportunities come great regulatory responsibilities.

Unlike traditional startups, FinTech startups have to navigate complex legal frameworks, abide by strict compliance requirements, and ensure high- level business practices are in place before they can legally start operations.

FinTech . . . computer programs and other technology used to support or enable banking and financial services. It is often associated with innovative applications such as a website app, mobile app, and/or android app.

If your aim is to start and then raise capital for your FinTech startup, being legally prepared can save time and keep your new FinTech startup bulletproof against costly mistakes. Furthermore, a FinTech startup that is set up with the best practices in mind builds trust with investors.

Here’s a list of legal essentials every startup founder should know before raising capital:

1. Choosing the Right Business Structure for a Fintech Startup

Selecting the best legal structure for your tech startup is crucial, as it affects liability, taxation, and the ability to raise capital. Within the United States, the following business structures are available:

Limited Liability Company (LLC)

Founders or owners of a Limited Liability Company (LLC) are called “members.” They are partners in the business and enjoy the usual protection reserved for corporations. They are also taxed like partnerships or disregarded entities, making this structure easy for new founders.

LLCs are great for pre-seed or seed-stage companies that don’t plan to raise venture capital money in the short term. An LLC can handle pre-seed and seed rounds, even if angel investors or small funds are involved or multiple classes of equity (e.g., common and preferred) are needed. Large companies, including behemoths such as Amazon, Anheuser-Busch InBev, Google, Exxon Mobile Corp., and PepsiCo Inc., use LLCs as subsidiaries.

Advantages: Provides liability protection for founders, offers tax flexibility, and has fewer regulatory requirements. Ownership is not restricted, meaning that individuals, corporations, foreigners, other LLCs, and foreign entities can be members of an LLC. They can even be taxed as an S-Corp (see below).

Disadvantages: Limited ability to raise venture capital, as investors often prefer corporations due to the availability of stock options. Often, an LLC can be dissolved upon the death or bankruptcy of a member, although this varies from state to state. In recent years, states have updated their statutes to allow LLCs to continue operating despite the death of a member. However, an LLC operating agreement has to be set up for it.

C Corporation (C-Corp)

The owners or shareholders are taxed separately from the entity. C corporations are subject to corporate income tax, and the profits that are generated from the C corporation are taxed at a personal as well as a corporate level. This often leads to a double taxation situation.

Examples of C corporations are Apple, Walmart, Microsoft, and McDonalds.

Advantages: It’s easier to attract venture capital with a C corporation. You can issue different classes of stock, and a C-corp generally enjoys more credibility within the financial sector and among FinTech investors.

Disadvantages: Double taxation (corporate and individual) and higher regulatory and reporting requirements.

S Corporation (S-Corp)

In this type of business structure, corporate income, credits, deductions, and losses “pass through” to the shareholders for federal tax purposes. Most often, only small businesses choose this structure since S-corps can have only up to 100 shareholders.

Examples of S corporations are small businesses, dealerships, and retail stores.

Advantages: Since a pass-through taxation method applies within an S corporation, it helps against double taxation. S corporations have limited liability protection.

Disadvantages: S corporations can have only up to 100 shareholders, all of whom must be U.S. citizens or residents, and only one class of stock is allowed.

Whether you are creating a website app or developing a revolutionary mobile application, choosing the right business entity depends on your startup fundraising goals, growth strategy, and long-term vision.

2. FinTech Startup Regulatory Compliance

FinTech startups operate in a highly regulated space. Therefore, ensuring compliance with local, national, and international laws is critical.

Know Your Customer (KYC) & Anti-Money Laundering (AML) Regulations

Most FinTech startups that handle financial transactions have to comply with KYC and AML laws. These laws are in place to combat financial terrorism and money laundering practices. These are especially applicable to money service or transmitter businesses.

Consumer Protection Laws

During 2024, the United States Securities and Exchange Commission (SEC) obtained a record $8.2 billion in financial remedies in total.

Examples of 2024 SEC cases were those against companies such as Ken Leech, Macquarie Investment Management Business Trust, Rari Capital, and Inspire Investing for failing to be forthcoming and honest with their client base.

All Fintech startups should take note of regulations such as the Truth in Lending Act (TILA), which protects customers against unfair or inaccurate credit billing and credit card practices, as well as the Fair Credit Reporting Act (FCRA), which protects customer information that is collected by consumer reporting agencies.

Data Privacy Laws

Depending on the location of your startup, and how you handle sensitive financial data, your startup might be subject to the General Data Protection Regulation (GDPR) (Europe) and/or the. Both of these regulations govern how the data that businesses collect about their customers are used, stored, and shared.

Since FinTech startups often work with sensitive financial information, you might be subject to certain data privacy laws as mandated by the country in which your company will operate. Many startups believe Terms of Service and Privacy Policies are just boilerplate documents that any law firm can provide on the cheap.

In reality, these documents need to reflect rigorous data mapping that illustrates what type of information the startup collects and where it originates or is stored.

If your FinTech startup involves investments, crowdfunding, or cryptocurrency, compliance with the SEC and other financial regulatory bodies is necessary.

3. FinTech Startup Contracts and Agreements

The success of a FinTech company often lies in the strengths and weaknesses of its agreements and contracts. Companies are often dissolved because of disputes, the untimely death of a founder, or financial problems. A good contract can protect you from a bad lawsuit.

It’s exceptionally important to have agreements and contracts in place to protect you and your FinTech company. Whether it’s the founders’ agreement, fundraising documents, or vendor contracts, these documents are critical for protecting a company’s operations, intellectual property, and values.

The following is a list of agreements and contracts every business should consider. It’s also important to set up contracts that are legally binding. Therefore, seeking FinTech legal counsel is important during this stage.

Founders’ Agreement

A FinTech Founders’ Agreement helps establish who the owners of the company are, their share percentages, voting rights, the roles
and responsibilities of each owner (member/director), and the applicable laws and regulations that apply to the company, as well as equity vesting schedules, dispute resolution methodologies, and leadership roles.

Investor Agreements

There are various types of investor agreements, but in general, a FinTech Investor Agreement is a legally binding contract made between your entity and an investor. To prevent conflicts, it outlines the terms of the investment,
the conditions of the investment, mutual commitments, the investor’s rights, and exit strategies.

Non-Disclosure Agreements (NDAs)

Non-disclosure Agreements are legally enforceable contracts that ensure confidential information between you and another person or business entity is protected as per the agreements made within the NDA.

Service Level Agreements (SLAs)

A Service Level Agreement is a contract between • a service provider and a customer. It controls the quality, expectations, performance, and
scope of the services that will be provided. If performance levels are not met, it also determines the consequences of such.

Employee Agreements

United States Law dictates the minimum requirements for employment but can vary from state to state. Therefore, if you are employing US citizens, your startup will be subject to complying with both federal and applicable state employment laws.

A FinTech Employee Agreement establishes the relationship between your company and your employee and sets in writing the employee’s duties, compensation, benefits, conduct, etc.

Contractor Agreements

Startups often utilize the cost-effective services of freelance contractors. Developers from Asian and Latin American countries are especially sought after. You might require an official Contractor Agreement to establish the terms and conditions of the work the freelancer has to perform, compensation, benefits, and the like.

Partnership Agreements

When two or more partners start a company together, an official, legally binding contract is often forgotten about. However, history has proven that when it comes to doing business together, it’s always best to have a partnership contract in place.

Supplier / Vendor Agreements

If your startup relies on raw materials, and/ or products or services from vendors, set up an agreement between your business and the mentioned parties to protect your business from supply shortages, outages, and the like.

Data Sharing Agreement (DSA)

A Data Sharing Agreement outlines the terms of how your company will collect, store, save, process, use, and share data. The agreement is usually publicly published via your website’s Privacy Policy, for example. If you’re doing business in Europe, you will need to comply with all General Data Protection Regulation (GDPR) laws.

Software License Agreements (SLAs)

Whether it’s a website app or mobile application, your FinTech software needs to be protected under a Software License Agreement. This agreement establishes the rights, obligations, duration, scope, fees, terms and conditions, and limitations when a consumer uses the Fintech software.

Others

Every startup is different; therefore, it’s always best to consult a FinTech Lawyer to establish the types of contracts or agreements your startup might need.

In PART 1 of this article, we outlined three of the most important legal considerations every FinTech startup should consider before raising capital, namely:

1. Choosing the right business structure
2. FinTech Startup Regulatory Compliance
3. FinTech Startup Contracts and Agreements

In PART 2 of our Legal Essentials Series for Startups we will take a look at:

1. Protecting Intellectual Property
2. Fintech Startup Fundraising Documentation Requirements
3. Understanding Investor Expectations

Subscribe to our Newsletter here to be notified when PART 2 becomes available.

Intensified Crackdown on Misconduct

Record-Setting SEC Enforcement Activity in Q1

When we take a look at the number of SEC enforcement actions during the first quarter of this year, it is clear the SEC is intensifying its crackdown on misconduct with unprecedented intensity.

200 Enforcement Actions in Q1

On 17 January 2025, the Securities and Exchange Commission (SEC) announced preliminary results indicating it had initiated a total of 200 enforcement actions. These enforcements cover the period from October through December 2024. Among these were 118 standalone enforcement actions.

During the month of October 2024, the SEC brought 75 enforcement actions, the highest number since at least 2000.

Diverse Violations Targeted

The first-quarter enforcement actions targeted a diverse range of violations, ranging from misleading disclosure, financial misstatements, and failures
by advisory firms to disclose conflict of interest, to fraud among retail investors, alleged bribery, and misleading statements involving artificial intelligence (AI).

Statements from SEC Leadership

SEC Chair Gary Gensler noted that he was proud of the work the SEC Division of Enforcement was doing in their efforts to protect public investors. Of course, he’s gone now and enforcement activity is expected to recede under the Trump administration, but that doesn’t mean it will stop. The SEC pays for itself through fines and even returns money to the Treasury each year.

Acting Director for the Division of Enforcement, Sanjay Wadhwa, said that the impressive figures indicated the Division’s focus on maintaining momentum and protecting investors.

Continued Emphasis on Cooperation and Remediation

The SEC gave credit to companies who took it upon themselves to self-report, self-police, and initiate remedies when failures did occur. He also emphasized the continued benefits of cooperation and remediation.

*NOTE: Figures above reflect preliminary data, which will be finalized at the conclusion of the fiscal year-end.

Startup LEGAL SERVICES

Our startup law team ensures your business meets all legal and regulatory requirements.

From raising capital to trademarking your logo. We handle the details, so you can focus on growing your business.

SERVICE LIST

• Business formation
• Business plan review
• Emerging business and technology transactions
• Outsourced general counsel services
• Raising capital
• Guidance on intellectual property protection
• Employment matters
• Regulatory compliance
• Cybersecurity
• Business consulting
• Counsel on mergers and acquisitions
• Contract disputes and pre-litigation matters
• Litigation support in securities and commercial cases

Top 10 Strategies for Fundraising in the SaaS FinTech Sector

Raising funds for your SaaS (Software as a Service) FinTech business is no easy task. Most SaaS founders say it is one of the most challenging aspects of running a business.

It doesn’t have to be, though. When you commit to gaining the required knowledge, you equip yourself with a powerful set of skills that will serve you for life. As the age-old saying goes, “Knowledge is power.”

To help you gain fundraising knowledge, we will take a look at the top 10 strategies you can use to raise funds for your SaaS Fintech company:

10. Crowdfunding

Leveraging Public Support for Your SaaS Solutions

Platforms such as IndieGoGo and Kickstarter are favorites among consumers. Furthermore, these platforms have an exciting, loyal fan base that loves supporting new products.

Leveraging the power of crowdfunding can help your SaaS products reach customers they otherwise wouldn’t, and it often creates a loyal following. Additionally, it’s free to create a campaign and, therefore, a cost-saving alternative for money-strapped startups.

These platforms work best for companies producing consumer products and services.

IMPORTANT TO NOTE: Due to the large number of campaigns created daily on crowdfunding platforms, success on crowdfunding platforms often goes hand in hand with advertising, marketing, and social media campaigns.

9. Venture Capital

Partnering for Rapid Growth

Fintech investors often search for companies that offer innovative products with a profitable return on investment (ROI). If your SaaS product can ensure a high ROI, consider venture capital.

VC is, in essence, a form of private equity financing, usually during the startup, early development, or up-and-coming stages.

Forming relationships with well-established VCs who understand the tech and financial industries can lead to both capital and valuable strategic guidance (Forbes, 2023). A successful VC raise can skyrocket a company’s growth strategy, but VCs usually want a certain level of corporate control and oversight.

8. Angel Investors

Help and Knowledge When You Need It

If you are in need of early-stage funding as well
as mentorship, industry insights, business know- how, and networking, consider angel investors. Many angel investors are corporate executives and successful founders who want to give back to their local community (while making some money).

Angel investors are an excellent resource for companies that are too early in development for venture capital but still need a significant amount of funding to scale (Crunchbase, 2023).

Important to know is that angel investors usually take up ownership positions in the company in the form of equity or convertible debt. And like VC money, they’ll want some control of the corporate governance process (i.e., board seats).

7. Private Equity

Larger Investments for Operating Companies to Scale Up Faster

If you’re an operating company looking to scale rapidly, private equity might hold the answer, although private equity is usually reserved for more mature SaaS Fintech companies with existing products.

Private equity investors can add credibility to a company, in addition to providing their knowledge and expertise.

Companies that have achieved product-market fit but are looking to expand operations or enter new markets can greatly benefit from private equity investments (VentureBeat, 2023). These investments often require large amounts of debt, which makes cash flow very important, and the investors will want a return in 5-7 years, so be prepared for a medium-term exit.

6. Bank Loans and Government Grants

Traditional Funding Routes

While less common in the SaaS Fintech sector, bank loans and government grants are still viable funding options for some businesses. SaaS Fintech startups that have demonstrated financial stability or have access to government-backed programs can secure lower-interest loans or grants that help fuel growth (Forbes, 2023). Small working capital loans can be helpful to startups with a positive cash flow, but larger loans are often expensive. The one benefit is no equity dilution.

5. Strategic Partnerships

Collaborative Fundraising for SaaS Success

Strategic partnerships as a way of funding continue to rise in popularity. By partnering with larger firms or well-established companies in the Fintech space, SaaS startups can gain access to funding as well as new clients and markets.

Such partnerships can also provide credibility and trust, which is crucial when dealing with investors and customers in the highly competitive SaaS Fintech market (Crunchbase, 2023).

4. Initial Coin Offerings (ICOs)

Leveraging Blockchain Technology

For SaaS Fintech companies operating in the blockchain space, initial coin offerings (ICOs) offer an innovative method of raising funds, especially in the Web3 space.

By issuing digital tokens or coins to the public, companies can raise capital while also engaging with a new customer base interested in the project. Be careful though: just because they’re coins doesn’t mean they’re not securities (TechCrunch, 2023).

Consult with a fintech law firm like FTL to make sure your ICO doesn’t create regulatory or legal risk.

3. Bootstrapping

Self-Funding to Retain Control

Some SaaS Fintech companies opt for bootstrapping, which is where founders use their personal savings or reinvest profits to fund their businesses.

This is a risky strategy since if your company fails, you lose all the money you invested in it. The benefit of self-funding, though, is that it can provide one of the best motivations to succeed. Often, when funders use other people’s money, they are not as careful. But if it’s their own hard- earned cash at risk, most individuals work hard to succeed.

The other major benefit of self-funding is the ability to maintain full control and equity of the company, without having to give away any equity.

2. Revenue-Based Financing

Unlocking Capital from Future Revenue

Revenue-based financing is an increasingly popular method for SaaS Fintech companies to secure funding.

Rather than giving up equity, companies agree to repay investors through a percentage of future monthly revenue.

This is particularly beneficial for businesses with predictable cash flows, such as SaaS companies with subscription models (Forbes, 2023).

1. Seed Funding

Laying the Foundation for Long-Term Growth

Seed funding is arguably the most important fundraising strategy for early-stage SaaS Fintech companies. This initial funding round helps businesses establish their product and validate their business model. A pre-seed round is often called the friends and family round, while the seed round is the first “institutional” round.

Securing seed funding often involves pitching to angel investors or venture capital firms that specialize in early-stage startups. These firms will conduct some due diligence on the investments, so have good business plans, financial projects, and legal documentation ready.

A well-prepared pitch that demonstrates the scalability of your business and its market potential can lead to significant backing (Crunchbase, 2023).

In Conclusion

Fundraising in the SaaS Fintech sector is an evolving challenge that requires a tailored approach depending on the stage of the company and the type of product.

From crowdfunding to venture capital, revenue- based financing, and strategic partnerships, there are a variety of methods to secure the funds necessary for growth.

SaaS startups need to remain adaptable, leveraging both traditional and innovative funding routes to ensure their long-term success in an increasingly competitive market.

SEC v Digital Currency Group and Soichiro “Michael” Moro (Former CEO of Genesis Global Capital)

(Release No. 11357 & 11358 / January 17, 2025)

Background

Industry Context

Financial institutions and investment firms base their means of operation on a system of trust. Providing inaccurate or misleading information is considered a serious offense and the penalty for doing so is quite severe.

Company Details

Founded in 2015 and incorporated in Delaware, the Digital Currency Group (DCG) has its principal place of business in Stanford, Connecticut. The company is not registered with the Commission and has not registered any securities with the Commission either. (DCG had a subsidiary called Genesis Global Capital, LLC (GGC).)

Whilst working and residing in New York, Soichiro “Michael” Moro served as CEO from June 2022 to July 2022, finally leaving in August 2022. He is not registered with the Commission. From 2004 until 2022, Soichiro “Michael” Moro was associated with a registered broker-dealer.

Key Events Leading to the Case

GGC operated as a crypto-lending service for retail investors. Crypto assets and US dollars were lent to crypto-focused hedge funds. Operating capital was derived from crypto assets tendered in return for interest payments.

During June 2022, Three Arrows Capital (TAC), one of the largest crypto asset hedge funds, defaulted on their payment, leaving GGC with only the collateral. With economic fluctuations, the “mark to market deficit” on the loan was $1 billion. All this left GGC with unsecured exposure.

Executive management made it clear to everyone that they needed to project strength.

On June 15, 2022, a tweet was circulated indicating that the balance sheet was strong.

On June 30, 2022, a $1.1 billion promissory note was issued to GGC to shore up its balance sheet, giving the company positive equity, but the terms of the note were not disclosed. While the note created positive equity, no assets were delivered to GGC, and its financial stability was not improved by it.

On July 6, 2022, another tweet was circulated stating that DCG had assumed certain liabilities relating to TAC and that GGC had adequate long- term capital. This was false and misleading.

Legal Issues

Allegations/Claims/Violations

After comprehensive investigation, the SEC brought the following claims against DCG and Moro:

Soichiro “Michael” Moro

• Violation of Section 17(a)(3) of the Securities Act of 1933:
  • “...to engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit upon the purchaser”;
• Maintaining the depiction of the strong financial position of Genesis after the TAC default;
• Falsely and misleadingly issuing a promissory note as a solution to the default problem;
• Negligently engaging in the creation of misleading or false impressions regarding Genesis’s financial position.

Digital Currency Group (DCG)

• Violation of Section 17(a)(3) of the Securities Act of 1933:
  • “...to engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit upon the purchaser”;
  • Based on Section 14(e) of the Securities Exchange Act of 1934, only a showing of negligence and not a showing of scienter is required.1
• Maintaining the depiction of the strong financial position of GGC after the TAC default;
• Not ensuring that the promissory note was accurately described;
• Negligently engaging in materially false messaging regarding the financial condition of GGC.

Case Outcome

The Settlement

Without admitting or denying any fault, settlements in the case were issued as follows: In the matter against Soichiro “Michael” Moro:

• A cease and desist order was issued.
• A financial penalty to the value of $500 000.

In the matter against Digital Currency Group Inc.:

• A cease and desist order was issued.
• A civil penalty in the amount of $38 000 000.00.

Broader Implications

For the Fintech Industry

The judgment in this matter has shed light on the severity of the offense of misleading conduct within the FinTech industry. It stands as a stark warning to other FinTech companies to guard against the same business practices that could lead to punishment by the SEC.

Regulatory Trends

On the regulatory side, the value of strong corporate governance has been established. If these measures had been in place, independent verification would have been able to identify issues and establish measures to remedy the situation, without its having escalated.

Key Takeaways

Lessons Learned

1. Integrity and trust are the foundations upon which any financial institution should base its business model.
2. Conformity to regulatory bodies helps guide the conduct of any and all financial institutions and employees.
3. Companies and individuals need to bear the consequences of any misconduct, whether it be a criminal conviction or just a financial penalty.

References & Resources

SEC Press Release: SEC.gov | SEC Charges Digital Currency Group and Soichiro “Michael” Moro, Former CEO of Genesis Global Capital, for Misleading Investors about Genesis’s Financial Condition

Direct Case:

Link 1 | Link 2

SEC targets DCG and Genesis executives for fraud over 3AC fallout

3 Investment Adviser Representatives Acting as Unregistered Brokers Settle SEC Charges