In early May, the SEC’s Office of Investor Education and Advocacy released an Investor Alert entitled Private Oil and Gas Offerings (PDF). This follows the release in late March 2013 by the North American Securities Administrators Association, an association of state securities regulators, of a paper entitled Oil & Gas Investment Fraud. Each of these papers includes warnings to potential investors in oil-and-gas investment opportunities and advice regarding questions that potential investors should pose, and information that potential investors should obtain and review, when presented with oil-and-gas investment opportunities.
Although the papers vary somewhat in approach, both of them generally focus on:
- The registration or exempt status of the offering and the person or persons selling or recommending the investment opportunity.
- The business and legal or regulatory backgrounds and the oil-and-gas experience of the principals of the issuer.
- The historical business and the business plan of the issuer, including the nature of the issuer’s business, the issuer’s financial and operational history (if any) and proposed operations, the issuer’s proposed use of offering proceeds, the issuer’s properties or rights and (as material) the history of them, the issuer’s current and proposed liabilities, the issuer’s material contracts and commitments, and third-party analyses or reports (e.g., from a geologist or petroleum engineer) that are material to the issuer’s business or operations.
- The identification of those who can profit or benefit from the offering and the issuer’s operations and the extent to which the interests of those persons are consistent or aligned with the investors’ interests.
- The kinds of claims made in, or the characteristics of, an offering or offering process that should be “red flags” or warnings that the investment opportunity may not be suitable or as promoted.
The papers stress the importance of a prospective investor’s inquiry regarding whether a person selling securities for an issuer is registered as a broker. They acknowledge that broker registration is not always required and is not an assurance of a non-fraudulent offering, but they note that the disregard of such registration (if required) may well indicate other issues or deficiencies with the offering.
Although the papers are addressed to, and oriented toward the protection of, potential investors, persons in the oil-and-gas business should be aware that the papers have two additional uses:
- Plaintiffs’ counsel can, and have begun to, use the papers to indicate that private oil-and-gas offerings are at least quite susceptible to fraud or misleading activities, thereby prompting existing or past investors in such offerings to consider whether they may have some legal claim against an issuer, a promoter, or a broker; and
- Persons conducting or proposing to conduct private oil-and-gas offerings, whether as issuer or as securities brokers (or exempt intermediaries), can use them as guidelines for the offerings, indicating the kinds of issues that should be addressed and information that should be provided to potential investors.
If used for planning, the papers provide valuable guidance regarding various aspects of a private oil-and-gas offering. They emphasize the concern that a legitimate issuer and its principals and promoters should have for an offering or offering process that:
- Discloses all material information to potential investors in writing and in an organized manner, without any “high-pressure” tactics or persons inclined to use any such tactics;
- Is conducted in accordance with an exemption or exemptions from registration for the issuer;
- Is conducted by persons who are exempt from registration as securities brokers or by persons who are so registered; and
- Addresses in the offering materials the main questions that a potential investor would reasonably pose to understand the investment opportunity, including the investment terms, the issuer and its business, the issuer’s principals, and the significant risks associated with the investment and the issuer’s business and principals.
OUR TAKE: The two papers are worthwhile reading not only for potential investors in private oil-and-gas offerings, but also for persons conducting or proposing to conduct such offerings.