Friday’s Fraud – Third Party Service Providers: The Importance of Regulation

By Benjamin Stubbs, Spring 2014 Student Intern

referee flagA few weeks ago, I wrote about how private offerings are more risky for investors because they are not regulated in the same way as public offerings. I compared regulators and regulations to referees and noted that fewer referees often means that more mistakes and misconduct will go unnoticed. The same analogy applies to today’s topic—third party service providers.

Like last week’s post, this week’s post is geared more towards small business owners than individual investors. Listed tenth on NASAA’s list of common investment frauds of 2013 are unregulated third party service providers. Below I’ll explain a little about the dangers of using unregulated service providers and how you can protect yourself.

What are third party service providers?

In this context, third party services are people or organizations that you can use to help you offer and sell securities to buyers or just provide you with information of potential buyers. If you remember from last week, I told you a little about crowdfunding and how crowdfunding offers use, or will use, funding portals. These funding portals enable you to sell securities to investors, and they are a type of third party service provider. Another type are accredited investor aggregators, which can help you identify accredited investors who may be interested in purchasing your securities.

What are some of the risks of using unregulated third party service providers?

errorIn short, you could get scammed by a con artist or harmed by someone is out of compliance with applicable laws. The primary risk of using unregulated providers is that they expose you to greater risks because they are under less oversight than regulated organizations. Accordingly, when you deal with unregulated service providers, (to return to the referee analogy) more mistakes and foul play can go unnoticed so that more bad actors can get away with more bad acts.

The problem is that the guilty service provider will not be the only one who suffers. NASAA points out that if you use a service provider who fails to comply with all of the relevant requirements governing their business, you, the entrepreneur, could “suffer the consequences, which could include the loss of any claimed exemption.”

What are some ways you can protect yourself?

microscopeAs you do with all big decisions you make concerning your company, you’ll want to do your homework before deciding what service provider to use. As NASAA explains, “it is important to do your due diligence and to understand that use of an unregulated third party to provide [ancillary] services does not change your obligations under federal and state securities laws.” Not only should you make sure whatever organization you are considering dealing with is “a legitimate service provider,” you should also make sure the services the organization offers comply fully with state and federal requirements.

Thus, if you are going to use a funding portal, you should carefully research the service to ensure it is properly registered and compliant with all applicable regulations. If you want to contact your state’s regulators, you can find their contact information here.


In NASAA’s words: “Investors are not alone in their potential to be scammed. Using a fraudulent portal means both the business and the investor stand to lose.” To protect everyone involved, make sure you choose your service providers wisely, and make sure the service provider is in compliance with applicable laws and regulations, both state and federal. That may require a lot of work on your end, or even talking to an attorney, but doing your research on the front end is far better than getting scammed or having to pay for somebody else’s failure to play by the rules.

As always, if you think you have already been scammed or harmed by someone’s mistake, contact our Clinic.

I hope you’ve enjoyed this series on NASAA’s list of top fraud threats, and I hope you apply what you’ve learned to protect yourself. Continue to stop by our blog for helpful tips so you can invest safely and wisely and protect your future.