Alex Carter lost his life savings. In 2017, he created Otmo.com, a company that offers cost-sharing for car repairs. Alex is an automotive technician and saw first-hand how warranty companies can sometimes avoid paying claims to customers. After joining a cost-sharing company for healthcare, Alex thought it would be a great idea to bring that concept to the auto industry.
After launching Otmo.com, Alex had no problems for more than a year. His customers were happy and business was thriving. But one day the Utah Department of Insurance got word of Alex’s new business. The Department told Alex he was not conforming to current insurance regulations and had to shut down. Alex was devastated. He and his wife put their life savings into this business and didn’t have any money left to fight this directive from the Department. Alex had to close his business, cut his losses, and move on.
Although stories like Alex’s don’t usually make the front-page news, his plight is a common one. Across the country, outdated and onerous regulations threaten to destroy innovative businesses before they even get off the ground. Connor Boyack, president of the Libertas Institute added:
“It’s an interesting thought experiment to ponder how many innovative products and services we have been deprived of because of government regulation. Of course, that’s an unknown. But it’s not unreasonable to suggest that the number is more than zero. How many businesses never got off the ground because an entrepreneur sitting at their kitchen table comes to realize that their idea is not legal?”
Government regulations were put in place to protect the consumer. Although well-intentioned, these regulations sometimes do more harm than good. New business models or services do not always fit neatly into previous regulatory models. In short, government regulatory agencies frequently don’t understand how to regulate a new product or service. And entrepreneurs and innovators don’t know what regulations they have to follow.
When government regulation stands in the way of an entrepreneur starting a new business, it doesn’t just hurt that hard-working American. It also hurts the economy, which doesn’t get to reap the financial benefits of new companies. It hurts consumers, who never receive the benefits of a new product or service. And it hurts workers, who are never able to benefit from the job opportunities that come with new businesses.
How can we ensure consumers are protected while allowing new, innovative businesses and ideas to thrive? One solution is called a regulatory sandbox.
A regulatory sandbox is a space where participating businesses won’t be subject to onerous regulations—usually for a specified amount of time. The point is to allow these businesses to “play” in the sandbox without regulations. It’s not a free-for-all though. Participating businesses still have to follow regulations that affect public health, safety, and consumer protection. All other regulations are suspended. After “playing” for one year without regulations, lawmakers will evaluate what’s working and what isn’t—namely, what regulations the business needs to follow once it transitions out of the “sandbox,” or regulation-free space.
The point of a regulatory sandbox is to find the appropriate, and perhaps reduced, amount of regulations needed for a specific product, service, or business model.
This innovative idea caught the eye of the Libertas Institute, a nonprofit educational organization in Lehi, Utah. Although Utah is known for its business-friendly environment, many of its neighbors—including Wyoming, Idaho, Nevada, and Montana—have more favorable business climates. What’s more, Utah’s regulatory code has more than 88,000 restrictions. As Libertas noted in an op-ed for The Salt Lake Tribune, Utah should be “open for business,” not “open for some business.”
Libertas believed a regulatory sandbox could attract new businesses and jobs, grow the state’s economy, and help hard working Utah residents. It could also position Utah as a state that welcomes and encourages innovation.
In the fall of 2019, Libertas brought their idea to State Policy Network’s LaunchPad—an event where transformative thinkers, like-minded innovators, and successful entrepreneurs incubate policy solutions that improve people’s lives. LaunchPad helps state think tanks turn their innovative ideas into actionable plans. At the event, Libertas refined their strategy and outlined a three-year plan to make Utah the first state in the country to adopt an all-inclusive regulatory sandbox. “We got so much feedback on the first day that we actually pivoted our entire approach,” said Boyack. “We came away with radical specificity and clarity.”
Libertas’ three-year plan called for the passage of industry-specific sandboxes first. This approach would allow the Legislature to see how regulatory sandboxes work for specific industries before moving to an all-inclusive sandbox. In 2019, Libertas worked with the Legislature to pass regulatory sandboxes for the financial technology, insurance, and legal services industries. Libertas’ campaign was running smoothly, and right on time. Then, in March 2020, the coronavirus hit.
In response to the pandemic, many states ordered all nonessential businesses to close. What started as “two weeks to slow the spread” turned into months of continued lockdowns. Millions of Americans lost their jobs, and some businesses—with expensive overhead and minimal profits—had to close their doors for good. According to a Yelp report, 60 percent of American businesses that closed during the pandemic won’t reopen.
In Utah, legislative leadership was looking for ideas that would spur the state’s economic recovery. Libertas explained how the state could benefit from an all-inclusive regulatory sandbox. Adopting such a program in the Beehive State could boost economic recovery, help Utah residents get back to work, and position the state as an innovative leader that looks outside the box for policy solutions. The governor’s Office of Economic Development was also interested in the policy, and Libertas worked directly with that office to determine how to bring the idea to life.
Libertas laid the groundwork before the legislative session even began in January 2021. In addition to legislative leaders and the governor’s office, they circulated their idea to a wide number of stakeholders—including the state’s regulatory agencies—for their input.
When Utah lawmakers introduced the legislation that adopts an all-inclusive regulatory sandbox, Libertas had already answered potential questions and concerns from lawmakers. Lawmakers were excited about the bill and how it could help Utah residents.
On March 9, 2021, the Utah Legislature unanimously passed the legislation. The governor signed the bill on March 22, 2021.
Imagine you’re an entrepreneur in Utah and you have an idea for a business. You apply to be a participant in the state’s all-inclusive regulatory sandbox. Your application goes to the governor’s Office of Economic Development, and that office decides which regulatory agency has oversight over the product or service in question. As Libertas points out, each agency performs a health and safety analysis to determine if participation in the sandbox would jeopardize public health, safety, or financial well-being. The agency approves or denies the product or service at hand. But there’s also a form of internal checks and balances throughout the process. The governor’s Office of Economic Development can override the regulatory agency’s decision to approve or deny the product or service.
Boyack added: “What’s critical is all of these activities—the overrides, the vetoes, the approvals, the rejections—that is all being regularly reported to a legislative committee. All the transactions are transparent and published.” Because everything is transparent, legislators and the general public will be able to see what policymakers are approving and denying and hold them accountable when necessary.
When reflecting on losing his business, Alex Carter said: “I do feel like there needs to be a way for state regulators to work with innovative companies—instead of shutting them down, give them the ability to flourish and grow.” Thanks to the Libertas Institute, onerous regulations will no longer stand in the way of entrepreneurs like Alex. Hard working Utah residents will now be able to more easily set up a business and create opportunities and jobs for the people in their communities.
Libertas is using their expertise and experience to help other states pass regulatory sandboxes so even more Americans can thrive and benefit from this innovative policy. As part of SPN’s Economic Recovery Working Group, Libertas is leading a monthly call with other state think tanks on how to advance regulatory sandboxes across the country.
Other state policy organizations in the Network, including the Beacon Center in Tennessee, Mackinac Center in Michigan, The Buckeye Institute in Ohio, and The James Madison Institute in Florida are encouraging policymakers to adopt regulatory sandboxes in their states.
This policy is gaining traction across the country. Arizona (the first state to adopt an industry-specific sandbox in 2018), Florida, Nevada, West Virginia, and Wyoming passed a “fintech sandbox” for the financial technology sector. Kentucky, South Dakota, and Vermont passed regulatory sandboxes for the insurance industry. And the Tennessee Legislature is considering a fairly broad regulatory sandbox similar to the one passed in Utah. In fact, there are currently 28 bills being considered for industry-specific sandboxes in state legislatures across the country.
Create Regulatory Sandboxes
State Policy Network Toolkit
How Utah Aims to Help Businesses Flourish After Pandemic
Libertas op-ed in US News & World Report
All-Inclusive Regulatory Sandbox
Libertas Institute landing page
Utah Innovates: Regulatory Frameworks for the Future
Libertas policy brief
Let’s lay the groundwork for Utah’s future economy
Libertas op-ed in The Salt Lake Tribune