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All investing involves varying degrees of risk. Investing in private offerings or private placements, however, carries unique risks, and private oil and gas offerings have additional risks to consider.
If you are asked to invest in a private oil and gas offering, you should first consider and investigate who exactly is asking you to invest and think carefully about whether the investment is appropriate for you.Is the Person Recommending the Investment Registered?
Most people offering you securities must be registered as a broker with the SEC and must be a member of the Financial Industry Regulatory Authority, or FINRA. You can find out if someone is registered and obtain information about a registered broker by visiting FINRA’s BrokerCheck website or calling FINRA’s BrokerCheck hotline at (800) 289-9999. If you are working with a registered investment adviser, you may be able to obtain information about the adviser by visiting the SEC’s Investment Adviser Public Disclosure (IAPD) website. You can also check with your state securities regulator regarding the person soliciting your investment.What if I’m not Working With a Registered Broker or Investment Adviser?
If someone who is not registered solicits your investment, that person may be violating the law. One exception from broker registration is available to employees of the company offering the securities and who engage in strictly limited sales activities. If you aren’t consulting a registered broker or adviser, you should consider doing so. A registered broker or adviser that is familiar with the oil and gas industry and not connected to the offering can help you analyze the investment. Most importantly, working with a registered broker or investment adviser affords you certain legal protections.
Even if you are working with a registered broker or adviser, it is not a seal of approval. Oil and gas offerings present many investment risks, and working with a registered individual is not a guarantee that the offering is a sound investment. Ask about any prior history of selling oil and gas offerings and if those offerings failed, the vetting or due diligence process for such offerings, and the risks of the particular investment you are considering.
Be particularly cautious if the broker or adviser has a relationship with the promoter of the venture, or otherwise has a personal stake in the transaction. A promoter is the person promoting the offering and is usually the founder of the venture. Ask about any current or prior relationship with the promoter, the extent of their business together, and any personal incentive in the offering. These or similar questions should help alert you to any potential conflicts and biases that may exist in recommending the particular offering to you.
Ask for the “due diligence report.” A registered broker that recommends a private oil and gas offering must independently review the investment. The broker may not just rely on the oil and gas promoter for information. Instead, the broker must check the statements and claims about the investment. To know what due diligence your broker performed, ask for a copy of his “due diligence report.” This report should outline how the broker evaluated the venture’s prospects and claims. However, the broker’s investigation is not infallible.
Consider whether the investment is appropriate for you. Private securities offerings are generally limited by law to certain institutional and high net worth investors. This limitation exists because of the greater risks involved in private offerings as compared to, for example, investing in publicly traded stock. Private offerings-including private oil and gas offerings-may and usually do involve a high degree of risk. You should be aware that you could lose your entire investment. Many private placement offering memorandums actually contain such a statement. It is made for a reason. These types of investment also typically have less liquidity, which means you might have to hold your investment indefinitely.What Could Possibly Go Wrong?
The oil and gas industry is often in the news. Because of this, some people have used the appeal of “striking it rich” with a gushing well as a basis for fraudulent schemes. The SEC and the states have brought a number of cases involving “great opportunities” that turned out to be scams. Investors lost some or all of their investments. Many scams shared the same themes.
Investing to support drilling and completion operations. The SEC has investigated many oil and gas offerings that claimed they were about to strike oil or gas and they just needed some investment to pay for drilling and completion. The promoter often doesn’t tell you, however, that he owns the drilling company or plans to hire a driller at far less than what he’s told you the drilling costs will be while pocketing the difference. The promoter makes money from you even if the well comes up dry.
Undisclosed use of proceeds. In several cases, the SEC alleged misrepresentations about what the invested funds were going to be used for. Misrepresentations and omissions about uses of investors’ monies included (i) paying big sales fees to brokers, (ii) the nature and size of compensation to the promoter and employees of the venture, (iii) operating and other expenses for unrelated businesses and (iv) using the money to pay for personal items.
Overinflated or misrepresented prospects and claims. One common thread among all fraudulent schemes, including those related to oil and gas, are claims that they are about to strike it rich, or that it is likely or even guaranteed that the returns will be too good to pass up. When you hear this sales pitch, you should be very skeptical about high returns with little risk that are just around the corner. Higher returns typically mean higher risks of loss.
Common red flags:
Analyzing an oil and gas investment may involve highly technical matters, such as geological findings and new drilling technologies, making it difficult for many individual investors to fully understand. Also, the only information that you have may be coming from the promoter. You may receive a private placement memorandum detailing the venture’s management, its drilling prospects and plans, the terms of the venture and investment, and basic financial statements for the usually new venture. As a start, if you aren’t given anything in writing, then you should be very skeptical.
You should ask questions until you are satisfied with the answers. Don’t just accept promises of low risk for high returns. Remember, it is your money and you shouldn’t let anyone pressure you into purchasing an investment that you don’t understand. Here are some things to ask about and consider if you’re thinking about investing in an oil and gas venture:
Keep in mind that if the investment opportunity is an outright fraud, the written materials may look legitimate and every question you have about the opportunity may be answered to your satisfaction, but that doesn’t make any of it true. It is important to conduct your own independent research. One good way to do that may be to engage an investment professional specializing in oil and gas.
If you have lost money as a result of an investment in and oil and gas private offering and you feel that the loss was caused by fraud, misrepresentation or mismanagement, please feel free to contact us for your initial free consultation.Contact Us
With extensive courtroom, arbitration and mediation experience and an in-depth understanding of elder abuse, exploitation and securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.