There are at least three of them this month.
• The North Carolina attorney general is investigating a Nevada-based company, Child Support Services, that allegedly collects delinquent child support for parents but keeps a third of the take.
• Texas Attorney General Greg Abbott filed an enforcement action against a Nevada-based online real estate speculator who unlawfully offered to sell land in West Texas.
• In Durham, Ontario, Canada, police fraud investigators have warned the public about an alleged investment scam reportedly run by Nevada-based Gold Quest, which purported to be a foreign exchange trading company but is actually, police say, a front for a large-scale pyramid scheme currently being investigated by securities officials in both nations.
This kind of thing happens so regularly that Nevada-based sometimes seems to have become an automatically pejorative term, and it generates enormous bad publicity for the state (see box below), especially on business pages.
Yet, an awful lot of such firms are, in fact, not really Nevada based. That is, they don’t actually operate in Nevada or have offices in the state. But some of them do a lot of damage to the state’s image.
Nevada is an incorporation haven, like Delaware. Companies can incorporate here and enjoy some special privileges they would not have in other states. Companies must disclose almost nothing about themselves, they are generally not regulated, and they enjoy protection from some forms of liability. And they don’t have to actually operate inside the state. All they must have in Nevada is a registered agent (formerly known as a resident agent), and there are innumerable firms willing to serve that function for a fee. In fact, “Incorporate in Nevada” companies are a small industry in the state. They advertise across the nation and in the corridors of Nevada airport concourses. On Google, the term “Incorporate in Nevada” gets 43,300 hits.
Inevitably, these resident agent firms will make some variant on the claim, “Nevada is a business-friendly state.” The flip side to this claim is that Nevada is a consumer-hostile state. Scrutiny is so minimal that consumer victims of these firms will find very little help from Nevada officials.
When does the sheer weight of that kind of bad publicity outweigh the economic benefits to Nevada of being the “Delaware of the West”?
“I don’t know whether that ever really goes into the decision making,” said Assemblymember Bernie Anderson of Washoe County.
Anderson chairs the Assembly Judiciary Committee and sits on Assembly Commerce. He says the effect of the bad publicity has rarely been on the radar screen of legislators.
The greater concern has been making the state ultra-friendly to business, to the point where a climate is created in which consumer protection is treated as a kind of state treason and local registered agent companies have occasionally gotten out of hand.
“There was a company in Carson City for a while—for quite a few years, as a matter of fact—which had a notorious reputation of intimidating people who came in and testified against their corporation in the legislature and then would file harassment suits,” Anderson said. (That company is no longer in business.)
He said legislators have often taken their cue from Nevada secretaries of state, who perform registration of corporations. He described previous secretaries, such as Dean Heller, as gung ho on using easy incorporation as a revenue producer for the state.
In 2007, however, Nevada Secretary of State Ross Miller, a former prosecutor, sought and received authority from the legislature to obtain and disclose to law enforcement the ownership of a Nevada corporation if it becomes a subject of a criminal investigation.
“I think it strikes a balance between giving law enforcement the information that they need while at the same time not putting up a barrier to commerce,” Miller said.
Still, the problem remains—Miller’s new law has not slowed the instances of “Nevada-based” companies making the lives of consumers and law enforcement in other states difficult. It is, in fact, Nevada’s reputation for doting on business that likely attracts companies with easy ethics to register in Nevada in the first place.
In the mid-1980s Nevada had such poor regulation of securities that it became known as the capital of securities fraud, so state lawmakers enacted new consumer protection legislation and empowered two state agencies—including the secretary of state—to crack down.
But there is little inclination to do the same with “Nevada-based” companies. This is, in part, because incorporation is simply a ministerial function performed by the secretary of state for many companies doing a myriad of functions, from collecting child support to selling land. While the lawmakers take their cue from the secretary of state, it is other agencies that would probably actually regulate.
That is not certain, however, as the experience with securities fraud showed. Legislators might well put regulation of some activities under the secretary of state’s office if they decided to increase scrutiny of certain activities.
There is also a second, unrelated drawback to Nevada’s incorporation policies. In deciding what states to distribute federal benefits, federal agencies sometimes look at the incorporation rate. Nevada has one of the highest numbers of corporations per capita in the nation, making it appear to be a state with few economic problems.