A panel of legislators on Tuesday recommended that the Legislature take up a proposal that creates an environment for entrepreneurs to test novel business ideas in a setting where rules and regulations are temporarily or permanently waived.
A joint special legislative committee studying the idea urged the Legislature to consider a bill creating what are known as regulatory “sandboxes,” where particular rules and regulations are relaxed or amended in order to foster business innovation.
The goal of regulatory sandboxes is to move innovative products and services to market faster by providing a trial period while keeping in place consumer and other safeguards.
Generally, a business idea stays within the “sandbox” for one to three years, although a bill proposed in Kansas would have allowed it to remain for up to two years.
The idea was first brought to the Kansas Legislature in the fall of 2023. Lawmakers considered a bill creating regulatory sandboxes earlier this year, but it died in a committee.
Americans for Prosperity and the libertarian think tank the Libertas Institute pitched the idea again this week to the Special Committee on Foreign Trade and Regulatory Sandboxes.
“A sandbox invites the business community to the table to highlight troublesome rules and regulations, prove they’re not working as intended,” said Rees Empey, senior director of state government Affairs at the Utah-based Libertas Institute.
“As a result, the state is better welcoming to the innovations of tomorrow. It’s a living and breathing approach to regulatory reform,” Empey told the committee.
The special committee agreed to call on the Legislature to pursue the issue, but also is asking the attorney general for an opinion about whether the idea is constitutional.
Last session, the Legislature considered a bill that would have created a “regulatory relief division” within the attorney general’s office to manage a new “general regulatory sandbox program.”
The bill also created an advisory committee to provide recommendations to the division.
The bill would have changed current law to allow regulations to be temporarily waived for the purpose of promoting business innovation, while attempting to provide certain safeguards for the protection of consumers and public interests.
The state, under the bill, was not allowed to waive a law that would prevent consumers from seeking restitution if harmed by a sandbox product.
State agencies and prosecutors would have been restricted from pursuing civil or criminal enforcement actions against regulatory sandbox participants for violating waived or suspended laws, rules and regulations identified for the demonstration period.
“Overall, sandboxes provide opportunities for creative minds to trial their new and innovative ideas while providing regulators and legislators with real examples of regulations not working neatly in today’s fast-moving, innovative world,” Empey said.
“Rather than startups or even existing companies spending thousands of dollars on lawsuits, lawyers, and lobbyists to change the law to accommodate them… this offers a more affordable and transparent avenue to trial their ideas,” he said.
Republican state Rep. Sean Tarwater, chair of the House commerce committee, said there was a lot of confusion around the bill last session. He was optimistic about the proposal going forward into the 2025 legislative session.
“I feel like we’re getting much closer to a solution here,” he said.
James Czerniawski, senior policy analyst at Americans for Prosperity, said regulatory sandboxes free businesses from outdated regulations that have not kept pace with technology.
“Current regulations often try to fit a square peg in a round hole,” Czerniawski said.
“Many regulations that are currently on the books were designed decades ago and do not necessarily account for the new and emerging industries of today.”
There are two approaches to regulatory sandboxes: The state can target certain industries, or it can pursue a universal sandbox that applies to any industry.
Kansas lawmakers seemed most interested in pursuing a universal strategy.
The sandbox idea is believed to have already been used in 15 states for various products, including insurance, agriculture, financial technology and legal services.
Empey told Kansas lawmakers that there were four states with universal sandboxes and 11 states that with industry-specific sandboxes, not counting Hawaii and Nevada.
In 2019, former Kentucky Republican Gov. Matt Bevin signed into law a sandbox bill that was intended to encourage insurance innovation and “allow for the development of creative risk management solutions.”
In 2020, Republican West Virginia Gov. Jim Justice signed a bill creating a state fintech regulatory sandbox that allows participants to temporarily test innovative financial products or services on a restricted basis without requiring a license under West Virginia law.
In 2021, Utah was believed to be the first state to establish a regulatory sandbox that allowed lawyers and other professionals to deliver nontraditional legal services under the supervision of the state supreme court.
Vermont moved forward with an insurance regulatory sandbox in 2020, allowing the state Department of Financial Regulation to waive laws that would prohibit the introduction of a more innovative or efficient product or service.
Kansas looked to Utah for guidance and Dane Ishihara, that state’s director of the Office of Regulatory Relief.
Appearing virtually before the Kansas committee, Ishihara was asked about what his state did right and where it could have done better.
Ishihara cautioned Kansas lawmakers about how they go about defining innovation in any bill that would be considered here.
He also suggested it may take five years of data before any conclusion could reached about the test product.
“It is interesting being in the innovative space within state government,” Ishihara said.
“I don’t know that we hit the nail perfectly in any area. We are continually improving. It’s a new program,” he said.
Ishihara acknowledged that the state has received some pushback from industry and business in a sector where someone applies to join the sandbox and get regulations waived for the development of their product.
“I think that’s just natural, that they’re trying to protect these new innovations from coming into the industry in the space,” he said.’
“But just through the process and meeting with the different stakeholders, we usually can calm that down pretty quickly,” he said.
“It is a temporary waiver to research and collect data before any regulatory change can be made,” he said.
Democratic state Rep. John Carmichael of Wichita asked Ishihara whether he found it objectionable that under this program some businesses are at an advantage over others since some are subject to regulations and other are not.
“Is that a fair and level playing field in your opinion for businesses?”
Ishihara said in most cases the state wants two businesses in a specific sector applying to be in the sandbox and exploring a type of technology.
He said the state would likely not approve an application that gives just one business a competitive edge.
“So, if two businesses get the advantage that’s acceptable, but the rest of the businesses are left out in the cold subject to regulation,” Carmichael said.
“And that’s a fair and level playing field in your judgment?” Carmichael asked.
Ishihara responded, “If it were the same regulation that was hindering those additional businesses, they could apply, it would be fast-tracked through the process.”
