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The Uber fight and regulatory perils

Uber is the handy little mobile app that lets users looking for a ride order a car service to pick them up. The app connects the user with luxury car-for-hire services and handles the payment based on negotiated rates. It even lets users track where their cars are so they know when to be at the pick-up spot.

For those of us who have stood on a curb on a cold, rainy night trying to flag down a cab, the appeal of Uber is obvious. Why stand outside waving helplessly as cabs drive by when one can use a mobile app to snag a nice black sedan? The cost is a little higher than a regular taxi, but given the uncertainty of catching a cab during peak times (and the uncertainty of the quality of some cabs), the higher cost isn't prohibitive.

The appeal is so obvious that Uber has raised more than $44 million in venture capital and has expanded from its home city of San Francisco to offer services in about a dozen big cities including New York, Chicago, Boston and Washingon D.C.

But Uber's not beloved by all. City cab drivers, not surprisingly, don't like Uber. Regulators don't either. Drive-for-hire is a highly regulated industry in most cities with regulations and licenses that apply to everything from who can drive to where they can drive to how much they can charge.

Washington D.C. is no different. Regulators and cabbies (who make up a formidable political lobby) wanted to make sure Uber isn't avoiding any regulations or fees. This past week, the District's city council voted to enact an amendment to a bill covering the drive-for-hire industry in the city. One amendment to the bill would have required Uber to charge a minimum fee of five times the rate charged by taxi cabs, effectively putting Uber out of business in D.C.

But it turns out it's possible to fight city hall. To draw attention to the proposed fee increase, Uber mobilized its online supporters via social media. Travis Kalanick, the cofounder and CEO of Uber, posted a request on the company's blog for users to reach out to council members and ask them to kill the amendment. The response was enormous (more than 50,000 emails were sent to the city council) and the effort worked; the city council shelved the minimum fare requirement.

For startups, especially in hyper-regulated markets (like mobile payments), the Uber case is both a lesson and a warning: Regulations at every level — from city to state to federal — are potential headaches, but companies have a responsibility to make sure they're not running afoul of any of them. That may be a particular problem for tech startups where innovations happen quickly and a common belief is that it's easier to ask forgiveness than permission.

"For companies coming out of tech, this may come as a shock and surprise," said Erin Fonte, an Austin, Texas-based attorney who specializes in payments and mobile technology. "You ignore regulatory issues at your peril," she said.

Fonte warned that it behooves companies to understand the regulatory issues they're up against from the very beginning, and not after they look to scale their business. "The biggest concern when building out a product is knowing what you're required to do on the front end," she said.

Fonte brought up mobile payment provider FaceCash as an object lesson on the extent to which regulations can effectively kill a company

FaceCash's mobile payment app links a user's picture to a prefunded account to pay for purchases at the point of sale. Launched in 2010 by Aaron Greenspan (the guy Mark Zuckerberg supposedly stole Facebook from), the Silicon Valley startup garnered considerable attention when it launched, receiving glowing coverage in both the tech and mainstream press.

Unfortunately for FaceCash, the state of California, in an effort to protect consumers, recently added financial stability requirements for money transfer services seeking a license. FaceCash fell under the regulation and was required to post a sizable bond and show a minimum net worth. The bond and net worth requirements were beyond what FaceCash could muster.

Citing its inability to obtain licensing, the company suspended operations in California and refunded money to customers in the state. Though the company is still fighting with the state of California, it is effectively out of business at the moment.

Which brings us back Uber.

For now, Uber is safe in Washington D.C. It's operating within the law. But the city council said it will revisit the minium fare amendment again later this year. What's more, Uber also faces challenges from regulators in other cities as well, including its own home city of San Francisco. So even though the company has won this one regulatory battle, the future is as uncertain as trying to catch a cab on a cold, rainy night.

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