Under the direction of Ohio Division of Securities Commissioner Andrea Seidt, the NASAA has recently released an updated list of their top investor threats for 2013. Among them: “unregulated third party service providers,” a category that would include crowdfunding portals.
Seidt explained the reason for caution in the wake of the JOBS Act. “With the roll out of rules required by the JOBS Act, investors and small business owners alike must be on heightened alert for questionable investment offers and services.”
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“Whether a crowdfunding portal or an accredited investor aggregator, it is important to do your due diligence and to understand that use of an unregulated third party to provide such services does not change your obligations under federal and state securities laws,” Seidt said. “Investors are not alone in their potential to be scammed. Using a fraudulent portal means both the business and the investor stand to lose.”
The NASAA’s specific concerns align directly with the concerns of many in the crowdfunding industry in regards to compliance, and in light of these concerns various private companies have sprung up in hopes of mitigating these risks for entrepreneurs, investors and portals. CrowdCheck, for example, is poised to provide due diligence service for crowdinvesting offerings. To a similar point, Crowdbouncer provides an API for compliance services, which include the management and tracking of yearly investor maximums across crowdfunding platforms. Crowdclear is yet another third-party service provider aimed at helping investors and issuers stay on the right side of regulators.
In short, the crowdfunding industry is very much incentivized when it comes to limiting fraud in crowdinvesting. Rampant fraud would destroy any trust in this nascent industry, and without trust investors and issuers alike will not participate. The NASAA’s comments only further establish this fact.
The specific paragraph outlining the NASAA’s official take on third-party service providers is below…
Unregulated Third Party Service Providers: The implementation of the JOBS Act has created opportunities for unregulated third parties to provide ancillary services. Whether a crowdfunding portal or an accredited investor aggregator, it is important to do your due diligence and to understand that use of an unregulated third party to provide such services does not change your obligations under federal and state securities laws. Not only should a small business or other entrepreneur make sure they are dealing with a legitimate service provider, they should also make sure that the service being offered is in full compliance with all federal and state requirements. Since the passage of the JOBS Act, new firms have joined existing firms that offer to sell lists of accredited investors for use in private placement offerings. However, new rules recently adopted by the SEC include more stringent requirements replacing the old failsafe of reliance on an investor-completed questionnaire claiming accredited investor status. If not done carefully and with federal requirements in mind, an entrepreneur will suffer the consequences, which could include the loss of any claimed exemption. Use of crowdfunding portals, while subject to some regulation, also opens the door to scams. Startup businesses, especially small local businesses, should be very careful to verify the legitimacy of a portal before engaging their services. Investors are not alone in their potential to be scammed. Using a fraudulent portal means both the business and the investor stand to lose.