OIL AND GAS INVESTOR TIPS & ALERTS
OIL AND GAS INVESTOR ALERT: INVESTMENT FRAUD
Federal and State securities regulators around the country warn that when asked to invest in oil wells, oil and gas investment scams are alive and well. The future for higher oil prices have created a heightened interest in investments in energy-related business ventures.
Most oil and gas investor opportunities, while involving varying degrees of risks to the investor, are legitimate in their marketing and responsible in their operations. However, as in many other investment opportunities, it is not unusual for unscrupulous promoters to attempt to take advantage of investors by engaging in fraudulent practices.
Although some of the con artists moved on to more lucrative venues since oil prices have dropped off, many continued to linger on in the oil field. Now with the constant fluctuation of oil prices, some of these people have made their way back to these kinds of scams. When there is a highly publicized economic circumstance, which creates an opportunity for money to be made legitimately, scammers follow in the shadows to take advantage of the situation.
INVESTOR CHECKLIST: HOW TO AVOID BEING SWINDLED
1. The Registration Requirements. Ask if the offering is filed with the office of the Securities Exchange Commission and the State Securities Commission in your state. If so, contact that agency for any information it may be able to provide. If the promoter claims that the offering is exempt from registration requirements in the particular state in which the offers and sales are made, find out which of the exemptions is claimed and the terms of the exemption. Therefore, it is important for you to know that today, the Securities Laws require that only qualified investors who meet the standards set by both the Federal and State Regulators can invest in direct participation oil and gas drilling offerings. These requirements are in place to protect you the investor. Fossil Oil Company, LLC to be compliant pursuant to the Exemption under Rule 506(b) of Regulation D of the Securities Exchange Commission must determine each prospective investor’s qualification. An individual to qualified to receive Fossil’s Program Information Booklet (“eBook”) must fall under one of three qualifying categories.
Accredited investor is a person who had an individual income in excess of $200,000 or joint income with my spouse in excess of $300,000 in each of the two most recent years AND/OR an individual whose individual net worth (or joint net worth with my spouse) exceeds $1,000,000 excluding the value of their primary residence.
Sophisticated investor is a person who has sufficient investing experience and knowledge to weigh risks and merits of an investment opportunity. Typically, a sophisticated investor must have either a net worth of $2.5 million or earned more than $250,000 in the past two years to qualify.
Non-accredited investor is a person who has a net worth of less than $1 million (including spouse) and who earned less than $200,000 annually ($300,000 with spouse) in the last two years.
2. The Salesperson. If it is a legitimate deal, the salesperson will not be reluctant to answer questions or provide written explanations to questions. Ask the name of the person offering you the security, where he is calling from and his background, particularly in other oil or gas ventures. Ask what compensation the salesperson will receive.
3. The Company. Ask the names of the principals of the company or the general partners offering the security, their backgrounds and experience in the oil and gas industry, and how long they have been associated with the company. Find out the history of the company. What contingent liabilities does it have from other ventures? Does it have sufficient funds to cover unexpected costs? Is the tax treatment of the investments, as claimed by the promoters, supported by the Internal Revenue Service? Find out the company’s or general partners’ history in drilling operations. In particular, ask how long it has been in the oil and gas business, the number of wells drilled, the number of wells completed as producing wells, and whether the company retained its interests in the wells it drilled. Determine if conflicts of interest involving the promoter are disclosed. All the above information should be contained in a prospectus or “offering documents” that the promoter must furnish potential investors before they commit their funds.
4. The Investment. Ask how much money is to be raised and the cost per fractional interest. Ask how much of the money will pay for advertising, salaries, and any estimated profit to the company. Ask what type of conveyance document will be provided after any investment is made.
Assuming the well is completed, ask what the completion costs will be for each investor, and whether investors may be obligated to pay in more money in the future. Ask what tax incentive might be available if a dry-hole is encountered and for intangible drilling costs. Finally, evaluate the risk involved in making the investment. Is the well to be drilled a wildcat (drilled in territory not known to be productive) or is the drilling to be done in an area of proven oil reserves?
5. The Lease. Secure a legal description of the property on which the program is to be drilled. How and when was it acquired? Is the principal selling the lease to the venture at the acquisition cost, and if not, how much profit is being made? Ask for a description of surrounding property, including local well completions and a geologist’s report on the area. You will want to know if the lease is already in default and whether there is any overriding royalty or landowner’s royalty or other leasehold burden being paid.
ADDITIONAL QUESTIONS TO ASK BEFORE INVESTING
The checklist of questions to ask and information to obtain is long and it will take time and perhaps even money invested in outside consultation before you feel comfortable risking your money in the investment. It is always advisable to seek the advice of a neutral expert before committing your funds to any investment deal. Be sure to consider the following questions:
Who will be responsible for payment of taxes? Will they be paid out of the investor’s share?
What is the location of available pipelines, or what method will be used to transport and sell any production?
What is the name and address of the operator? What is her/his experience with ventures of this nature? What are the terms of the agreement with the operator. How will the decision be made for completing the well or abandoning it? Who will make that decision?
How will the decision be made for completing the well or abandoning it? Who will make that decision? What is to become of funds received from the salvage value of equipment on the lease?
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The public portion of this site contains only general information regarding classes of products and services that are designed to meet the needs of qualified investors. This is not an offer to sell or solicitation of an offer to buy any security listed herein. Such offer may only be made by written memorandum in a jurisdiction where the offering is duly registered or exempt there from. Please see our investor protection page or download our due diligence, which outlines important information from the US securities and exchange commission (SEC) on recognizing and avoiding oil and gas investment scams. For the complete publication see www.sec.gov/investor/pubs/oilgasscams.htm. Prospective investors should be cautioned that prior performance may not be indicative of future results in any investment, and there can be no prediction as to the future production, if any, of any well to be drilled. Energy investments are speculative and involve a high degree of risk. Oil and natural gas wells are naturally depleting assets. Cash flows and returns may vary and are not guaranteed. Past performance is no indication of future performance. Nothing herein shall be construed as tax or accounting advice. Investors may lose money.