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How should a startup assess the regulatory regime applicable to its activities?

How should a startup assess the regulatory regime applicable to its activities?

// February 28, 2019

At the outset, each new startup certainly pays all its attention to the development and implementation of a business idea, whereas regulatory aspects of the business often remain behind. Unfortunately, it may cost a lot for a young business in the future. Depending on the character of performed activities and requirements for it, legal acts provide for rather severe sanctions for failure to comply with regulatory requirements: from fines to suspension/ban of operations or even criminal liability. Besides, the practice consistently shows that startups, which do not meet requirements for their activities, are less attractive for investors.

In this text, we describe 3 steps, which, if taken, would enable to avoid problems with authorities supervising compliance with regulatory requirements.

First step: one needs to know well what activities one plans to perform

Before starting a business, first of all, one should identify all activities that the startup is going to perform and the importance of those activities. This exercise is easiest to perform by simply drawing a map of operations in the business of the startup and separating the main activities, without which the conceived new business idea could not be implemented, from activities, which are important, but without which a business idea would still remain feasible. This action allows identifying the most important operational aspects to be focused on in the analysis of the regulatory regime. Also, it helps to ensure that no aspect of the planned activity is forgotten.

Second step: one needs to assess which regulatory requirements apply to planned activities

Regulatory requirements can be very various, depending on the character of performed activities. In order to perform regulated activities, it may be necessary to notify the responsible authorities, to register activities in various registers, or even obtain permits/licenses. Basically, there are two methods to assess regulatory requirements applicable to a specific activity:

  • Independently. If this method is chosen, one should dedicate a lot of time for analysis of legal acts. The analysis should start with Google. After determining which legal acts regulate the planned activity and which authorities control implementation of those legal acts, one could address those authorities for relevant consultations.

Advantages of the method: lower financial costs.

Disadvantages of the method: big-time costs; the risk than an independently performed analysis will be inadequate; state authorities tend to have a rather conservative attitude towards innovations, therefore, their consultations frequently fail to reflect all possibilities for a business ensuing from legal regulation.

  • By use of consultants

Advantages of the method: high-quality business-oriented consultations allow to save time and resources; pointing out every possibility in the regulatory legal acts, which gives competitive advantage and enables to save costs.

Disadvantages of the method: additional financial costs; not all consultants can effectively provide top quality legal consultations, therefore, only law firms with the best reputation in the market are worth choosing.

Third step: deciding which planned activities need to be forgone

Implementation of each regulatory requirement means additional costs: whether it be a requirement to register with a public register (payment of a state levy for registration) or obtaining a license (huge investments into infrastructure, etc.). Thus, upon assessment of activities, which are the most important for the implementation of the business idea, and activities, which are less important, and upon performance of the analysis what regulatory requirements apply to each of them, one should carefully weigh whether, in the initial stage of the startup existence, a specific activity is worth the cost of compliance with the regulatory requirements applicable to it. This would ensure the effective use of startup resources. Again, the most accurate information, which would allow deciding best whether a specific planned activity is worth the costs of compliance with the relevant requirements, can be obtained only from professional legal consultants.

Thus, basically this is to say two things:

  • regulatory requirements cannot be overlooked;
  • the most efficient and safest method to ensure your business compliance is to involve professional legal consultants.

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