Confirming the Registration or Exemption for an Oil and Gas Investment Offering

In Texas (and throughout the nation for that matter), oil and gas investments are generally registered, exempt from registration, or illegal.  Before purchasing an oil and gas investment from anyone in Texas, it is important for the investor to determine whether the oil and gas investment is registered, exempt from registration, or neither.

Determining whether an oil and gas investment is registered or exempt from registration can often be accomplished through a web search.  For example, the SEC’s publically available website will often reveal whether a particular company’s offerings are registered or exempt from registration.  Simply click on the following link and perform a search under the company’s name.

http://www.sec.gov/edgar/searchedgar/companysearch.html

If the SEC has records on file concerning the company’s offerings, click on the name of the offering to learn more about it.  The SEC’s records will identify whether the offering is registered or exempt and provide basic details concerning the offering.

The Texas State Securities Board provides a similar search function through its website.  Simply click on the following link and perform a search under the name of the offering or the name of the company making the offering.

http://www.ssb.state.tx.us/public/SecuritiesSearch.php

If the SEC and the Texas State Securities Board do not identify an oil and gas investment as either registered or exempt from registration, it is best to ask the issuer of the oil and gas investment what exemption it is relying upon to sell the investment.  (Some exemptions from registration do not require a notice filing with the Texas State Securities Board.)  If the issuer cannot identify a proper exemption, then this may serve as red flag that the investment might not be legitimate.

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Making Sure the Seller is Registered

In Texas, sellers of oil and gas interests usually must be registered with the Texas State Securities Board as either a “dealer” or an “agent” of a dealer.  Before purchasing an oil and gas interest from anyone in Texas, it is ordinarily advisable to determine whether the seller is appropriately registered as one or the other.

Determining whether a dealer is registered with the Texas State Securities Board is easier than ever because this information is now publicly available on the Board’s website.  Simply click on the following link to search dealers that are registered with the Board:

http://www.ssb.state.tx.us/public/

To determine if someone is registered as an agent for a dealer in Texas, click on the following link and search by the seller’s name:

http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/

If someone selling oil and gas interests from Texas is not registered as either a dealer or an agent, then it is best to determine whether the seller is exempt from such registration.  If the seller is neither registered nor exempt from registration, then the seller may not legally sell oil and gas interests.  Lack of registration or an applicable exemption should serve as a red flag that the seller might not be legitimate.

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Cease and Desist Orders: What are they?

The Texas State Securities Board routinely issues cease and desist orders against companies and individuals that have violated the Texas Securities Act. However, many people do not understand the purpose (and limitations) of a cease and desist order.

In general, the Texas State Securities Board will issue a cease and desist order to notify an offender that it is selling securities in violation of the securities laws. In addition, a cease and desist order alerts the public that the offender has violated the securities laws. A cease and desist order, however, does not compensate victims that have suffered losses due to the offender’s violation of the Texas Securities Act.

If an investor has lost money due to an offender’s violation of the Texas Securities Act, the investor should consider retaining an attorney to assert a private claim on his behalf against the offender. A private claim against an offender is generally the only legal avenue that may result in the recovery of an investor’s loss.

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Out-of-State Investors Often Assert Claims under the Texas Securities Act

Texas oil and gas promoters often raise money from investors residing outside of Texas. If an out-of-state investor is defrauded by a Texas oil and gas promoter, the investor may have a claim under the Texas Securities Act (“TSA”) against the promoter. Texas courts have repeatedly held that the TSA is “intended not only to protect Texas residents but also ‘non-Texas residents from fraudulent securities practices emanating from Texas.’” In re Enron Corp. Sec., Derivative & ERISA Litig., 235 F. Supp.2d 549, 691-92 (S.D. Tex. 2002) (quoting Baron v. Strassner, 7 F.Supp.2d 871, 875 (S.D.Tex.1998)).

Out-of-state investors often assert claims under the TSA to recover their principal because such claims usually afford more relief than the law of their home state. As explained by one court, “[m]any states, either by statue or case law, do not permit” claims like those under the TSA. Grant Thornton LLP v. Suntrust Bank, 133 S.W.3d 342, 360 (Tex. App.—Dallas 2004, pet. denied). In addition, “[m]ost of the states have shorter limitations periods than” the Texas Securities Act. Id.

Texas courts consider the following factors when deciding whether an investor from another state may assert a TSA claim:

(a) the place, or places, where the plaintiff acted in reliance upon the defendant’s representations,

(b) the place where the plaintiff received the representations,

(c) the place where the defendant made the representations,

(d) the domicil, residence, nationality, place of incorporation and place of business of the parties,

(e) the place where a tangible thing which is the subject of the transaction between the parties was situated at the time, and

(f) the place where the plaintiff is to render performance under a contract which he has been induced to enter by the false representations of the defendant.

Highland Crusader Offshore Partners, L.P. v. Motient Corp., 281 S.W.3d 237, 249-50 (Tex. App.-Dallas 2009) (quoting RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 148(2) (1971)).

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Oil and Gas Investor Checklist

There has been a renewed interest in oil and gas drilling in Texas.  A lot of this has been spurned on by new technology.  For instance, oil and gas that used to be difficult to extract has become more accessible through hydraulic fracturing technology.  With the upswing in oil and gas drilling, many companies are looking to raise money to drill in Texas.

Most companies that raise money for drilling in Texas are honest and reputable.  Unfortunately, however, there are some companies that are not so honest.  For instance, some companies misrepresent the likely profitability of the oil and gas projects that they are marketing.  Others are outright Ponzi schemes.  Many of the not so honest promoters tend to thrive in environments like this where oil and gas drilling is on the rise.

To protect yourself, you should ask a lot of questions before purchasing an interest in an oil and gas project.  The Kentucky Department of Financial Institutions has put together a good checklist to help investors determine whether an oil and gas investment is legitimate.  It is available by clicking on the following link:

http://www.kfi.ky.gov/public/Investment%20Help/Oil%20and%20Gas%20Investor%20Checklist.pdf

The Kentucky Department of Financial Institutions is the securities administrator for the Commonwealth of Kentucky.  The Texas State Securities Board is the securities administrator for the State of Texas.  When purchasing an oil and gas investment from anyone in Texas, it is advisable to check with the Texas State Securities Board to confirm that the seller is licensed with the Board.  The Board can also alert you to whether the investment itself has been registered.  The phone number for the Texas State Securities Board is (512) 305-8300.

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