Oil and Gas Investment Solicitations on the Internet

Oil & Gas Investment Solicitations on the Internet
By David D. Brown

Editor's Note: A more detailed version of Mr. Brown's article may be found at www.aapg.org/explorer.shtml

For additional information concerning the use of the Internet to solicit oil & gas investors, see the articles by Pat Sughroue in the November, 1996 and July/August, 1997 issues of this Newsletter.

The Internet provides a powerful tool for communicating information. It also gives unscrupulous promoters a means for spreading fraudulent investment offers. And the ease of Internet communication may lead honest oil and gas deal makers to violate federal securities law, if they fail to understand the nature of Internet investment solicitation.

Interstate, public investment offerings are regulated by the U.S. Securities and Exchange Commission (SEC). The agency applies the same rules to Internet solicitations as to any other type of offering, according to John R. Stark, Special Counsel for Internet Projects for the SEC's Division of Enforcement in Washington, DC.

With the rush to commerce on the Internet, a handful of entrepreneurs have publicized oil and gas deals on World Wide Web pages and posted them to public Internet newsgroups. Such investment offers might be perfectly legitimate, but even promoters with the best intentions can unwittingly violate securities law, Stark acknowledged.

"In those situations, we [at the SEC] just have to use our own prosecutorial discretion to decide whether or not to initiate any civil enforcement action. The considerations would include whether there was any fraud, whether there are any investors, and the level of cooperation from the person touting the offer," he said.

Under securities law, specific requirements apply to oil and gas investments offered to the general public. According to attorneys specializing in oil and gas matters, anyone planning to use the Internet to publicize an investment offer should be aware of the following:

1. Investment offerings on the Internet are general public offerings.

By their nature, the Internet and the World Wide Web are resources available to the general public, said Patrick R.. Sughroue, an attorney in Grand Rapids, Mich. Sughroue serves as president of Brookstone Resources, a firm specializing in capital formation for the energy industry, and also writes about oil and gas investment.

"The test [for making a private offering] has always been that you had to have a bona fide, previous business and personal relationship with the person you're in communication with. And through that relationship you had to have a reasonable basis to believe that they would be a suitable investor. There's no way you can have that on the Internet," he said.
"There's a great struggle going on right now with the whole concept of whether or not you can do a private offering on the Internet. And the answer is, until we learn more or have further regulatory announcements or court actions, you can't."

2. Public oil and gas investment offerings are securities offerings.

Oil and gas investments offered to the public are by definition securities regulated by the SEC or state agencies.

"A lot of oil people cannot quite accept that they are selling securities. With most people, in their minds, they are not selling a security -- they are selling an interest in an oil well," said Lewis G. Mosburg Jr., an attorney and nationally recognized expert on oil and gas business matters.
"The first thing a typical, legitimate, honest operator ought to do is become aware of what his responsibilities are under the securities law. Some are going to follow all of those and some are not, but they at least should not go into these things blind," he added.

3. The investing public is given special protection under securities law.

Some types of investors have the experience to understand oil and gas deals, the ability to require financial disclosure from an offeror, and the leverage to negotiate terms in an investment. For instance, industry partners are generally expected to be able to fend for themselves when evaluating oil and gas investments.

General, public investors cannot be assumed to have the experience and ability to fend completely for themselves when considering an offer. Therefore, securities law provides special protection for the investing public. There is less risk of a violation when a promoter deals with a small, well defined and familiar group of individuals who could be considered sophisticated investors.

"But that's a limited group. If you had a few people you were dealing with over and over, that's one type of situation. If you were putting together 20 or 30 'sophisticated people' you'd still probably do a private placement memorandum, because that doesn't lend itself to the idea of a negotiated deal," said Wallace W. Kunzman Jr., an attorney in Oklahoma City who specializes in oil and gas matters.

4. Securities regulators have an increased interest in policing Internet investment offerings.

Regulatory agencies plan to step up their Internet)related enforcement actions, noting the Internet's rapid growth and the number of new investment solicitations appearing on it. In July 1997, agencies in 21 states and two Canadian provinces announced a joint effort called "Project Field of Schemes" to identify and stop investment fraud. The agencies' list of target areas includes Internet-related investments and oil and gas drilling schemes.

Concerning oil and gas fraud on the Internet, the SEC's Stark predicted "if it hasn't shown up a lot yet, it will in the future."

Investigating Internet solicitations that originate outside the United States will challenge the SEC, Stark said. It can be difficult to determine if a foreign offer is fraudulent, and problematic to prosecute individuals outside the U.S. in the case of fraud.

5. It is the offeror's responsibility to obtain informed counsel before publicizing an investment offer on the Internet.

Stark advises promoters to get advice from a qualified attorney or accountant well-versed in securities law, prior to making or publicizing an investment offer on the Internet. Kunzman recommended contacting an attorney with specific knowledge about oil and gas securities, although relatively few attorneys specialize in that area, he noted.

Internet/Web marketing companies can provide help in developing communications efforts, but should not be relied upon for advice about legal aspects of oil and gas investment solicitations, warned Sughroue. "The problem is, you get into a situation of feeling that if you work with one of these firms, certainly everything they do must be in compliance," he said.

David D. Brown

918-631-2295**800-247-8678**Fax 918-599-9361

dbrown@utulsa.edu |Petroleum Abstracts, The University of Tulsa
600 S. College, 122HH Tulsa, OK 74104-3189

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