It is unfortunately commonplace for many participants in the oil and gas industry, particularly in the sale of interests in oil and gas production activities, to ignore the requirements of federal and state securities laws applicable to these activities. However, the sale of an oil & gas working interest is the sale of a “security” under the securities laws, and the disclosure requirements of these laws apply just the same as the would in the sale of stock or an interest in a limited liability company.
Non-operating working interests in oil and gas leases are “securities” under the Securities Act of 1933 (the “Securities Act”), the Securities Exchange Act of 1934 (“Exchange Act”), and the Ohio Securities Act (“OSA”) because (i) working interests are “fractional undivided interest[s] in oil, gas or other mineral rights” or “interests in or under oil, gas or mining leases”  and (ii) working interests coupled with an operating agreement and a promotional scheme are “investment contracts” under thes provisions. A non-operating working interest owner in an oil and gas lease (“NWI”) is an undivided co-owner and tenant in common with the other working interest owners in an oil and gas lease. By definition, a NWI owns (i) a “fractional undivided interest in oil, gas, or other mineral rights” under the Securities Act, (ii) a “participation in . . . any oil, gas, or other mineral royalty or lease” under the Exchange Act, and (iii) an “interest[ ] in or under oil, gas or mining leases” under the OSA. Of course, a participation in an oil and gas lease in the form of a limited partnership interest or non-managing membership interest in a limited liability company is also a security.
The principal consequences of this are basically three:
- unless an exemption from registration applies, the sale of the security is subject to the registration requirements of the Securities Act and the OSA;
- even if the sale qualifies for an exemption, full and fair disclosure of all material facts relating to the investment must be made to the purchaser, and
- a person who effects the sale of the security on behalf of the issuer may have to be licensed as a broker-dealer or affiliated salesperson.
In addition to giving the purchaser a rescission claim (i.e., “give me my money back, plus interest”) against any participant in the transaction, a sale that does not comply with the requirements of the securities laws exposes participants to both civil and criminal enforcement actions.
The securities laws are complex, and any person contemplating raising funds from investors through the sale of fractional working interest participations in one or more leases or wells would be well advised to discuss the proposed offering with a securities lawyer before proceeding. In many cases, there will be exemptions from registration available, and various ways in which the required disclosures can be provided to investors, but there are fairly detailed technical requirements that must be complied with in each case, making consultation with a securities lawyer a must.