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Square Gets Cease and Desist Order in Illinois

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By Deanne Katz, Esq. on March 04, 2013 11:44 AM

Square has become ubiquitous in many cities as an easy and inexpensive way for businesses to process credit card payments. But in Illinois, the company has received a cease and desist order that could endanger their success in that state.

The notice alleges that Square is violating the Illinois' Transmitters of Money Act. The law requires businesses that buy or sell "payment instruments" or transmit money to get a state license.

If Square's plan is to argue the law doesn't apply, their previous actions could make that hard to justify.

Square tried to argue that it was exempt from a similar licensing requirement in California, reports Business Insider. But they eventually agreed to pay for the license.

That could potentially make it harder to argue that the company is not really a "money transmitter" under Illinois' law, since Square apparently agreed to be licensed as one in another state.

It also doesn't help that Square just began selling gift cards, which can be considered "payment instruments."

Square's lawyers may be able to argue that they aren't holding money in relation to transmitting it, as TechCrunch notes. But it's harder to argue they aren't selling payment instruments with their new gift cards.

Licensing is nothing new for businesses, given the numerous regulations and requirements that go into running a company. Each state sets its own rules about transactions, which may require a company to get a license in every state.

Square isn't the first startup to have problems with trying to avoid traditional licensing requirements. Paypal faced similar issues, as did car service companies like Sidecar and Lyft.

But what about all the merchants that use Square? Happily for them, this technically isn't their problem -- although they may want to keep an eye on the outcome.

It's only Square that got a cease and desist order for allegedly violating state law. That jeopardizes Square's business, but companies that use Square aren't violating anything.

If Square loses this legal fight and doesn't get a license, then the company may be forced to stop doing business in Illinois, which could leave their customers in a tough position. But again, legally speaking, it seems those businesses using Square won't be on the hook.

Square could face fines of $1,000 per day for noncompliance. Luckily for them, that fine will likely disappear if they reach a settlement with the state.

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