Written by The White Law Group• January 7, 2022• 7:46 pm• Blog, Current Investigations

Oil and Gas Private Placements – Securities Fraud Lawsuits Investigation

The White Law Goup is investigating claims involving Oil and Gas Private Placements

Private placement investments are securities offerings exempt from registration with the SEC. Under the federal securities laws, a company may not offer or sell securities unless the offering has been registered with the SEC or an exemption from registration is available.

Private placements are typically not subject to some of the laws and regulations that are designed to protect investors, such as the comprehensive disclosure requirements that apply to registered offerings. Private and public companies engage in private placements to raise funds from investors.

Oil and gas private placements use a portion of investors’ money to drill and operate oil and gas wells. These oil and gas drilling programs (also known as Direct Participation Programs (DPPs)) are sponsored and managed either by investment companies or oil and gas exploration companies. The structure of these investments typically includes very high fees and commissions.

What is Regulation D?

When reviewing private placement documents, you may see a reference to Regulation D. Regulation D includes three SEC rules—Rules 504, 505 and 506— to sell securities in unregistered offerings. The entity selling the securities is commonly referred to as the issuer or sponsor. Each rule has specific requirements that the issuer must meet.

If you have reason to believe that an unregistered offering claiming to rely on one of these rules does not satisfy the applicable requirements, consider this a red flag about the investment.

Rule 504

Generally, securities issued under Rule 504 will be restricted securities unless the offering meets certain additional requirements, This rule permits certain issuers to offer and sell up to $1 million of securities in any 12-month period. These securities may be sold to any number and type of investor, and the issuer is not subject to specific disclosure requirements. As a prospective investor, you should confirm with the issuer or sponsor whether the securities being offered under this rule will be restricted.

Rule 505

Rule 505 allows issuers to offer and sell up to $5 million of their securities in any 12-month period but there are limits on the types of investors who may purchase them. The issuer may sell to an unlimited number of accredited investors, but to no more than 35 non-accredited investors. If the issuer sells its securities to non-accredited investors, the issuer must disclose certain information about itself, including its financial statements. If sales are made only to accredited investors, the issuer has discretion as to what to disclose to investors. Any information provided to accredited investors must be provided to non-accredited investors.

Rule 506

An unlimited amount of money may be raised under Rule 506. An issuer relying on Rule 506(b) may sell to an unlimited number of accredited investors, but to no more than 35 non-accredited investors and the non-accredited investors in the offering must be financially sophisticated or, in other words, have sufficient knowledge and experience in financial and business matters to evaluate the investment. To satisfy the sophistication requirement the investor may have a purchaser representative. An investor engaging a purchaser representative should pay particular attention to any conflicts of interest the representative may have.

As with a Rule 505 offering, if non-accredited investors are involved, the issuer must disclose certain information about itself, including its financial statements. If selling only to accredited investors, the issuer has discretion as to what to disclose to investors. Again, any information provided to accredited investors must be provided to non-accredited investors.

Before you Invest in an Oil and Gas Private Placement

Keep in mind that private placements can be very risky and may be difficult, if not virtually impossible to sell.

Oil and gas private placements may be pitched as a unique opportunity that is only being offered to a handful of investors, but don’t be fooled by this high-pressure sales tactic. Even if the deal is “unique,” it may not be a good investment.

Oil and gas private placements tend to be illiquid and they often are associated with high fees and sales commissions. They are typically sold as unregistered securities which lack the same regulatory oversight as more traditional investment products like stocks or bonds. An additional risk inherent to oil and gas private placements is the general risk that comes with the energy market. The energy market has seen enormous ups and downs over the past few years due to the Covid-19 global pandemic. These investments may seem wise at first, until the dramatic drop in distributions.

It is important for you to obtain all the information that you need to make an informed investment decision.

Issuers and sponsors relying on Rule 505 and 506(b) exemptions from registration must provide non-accredited investors an opportunity to ask questions and receive answers regarding the investment.

Investigating Potential Oil and Gas Securities Claims

The White Law Group has represented numerous investors in claims against their brokerage firms for improperly recommending oil and gas programs.

In those claims, the firm has alleged, among other things, that the investments were (1) high-risk and unsuitable for our clients given their financial situation, needs and investment objectives, (2) that the risks of the investment were not fully disclosed to them, and (3) that the brokerage firms that sold the investments failed to conduct the proper due diligence with respect to the investments (as the firms are required to do by FINRA Rules).

The firm continues to investigate potential securities claims involving the following oil and gas drilling program sponsors, among others:

Resource Royalty
Waveland Drilling
Atlas Energy Group
MDS Energy
Mewbourne Oil Co.
US Energy Development Corp.
Montego Minerals
Catalyst Energy
APX Energy

Broker dealers that sell oil and gas private placements are required to perform adequate due diligence on all investment recommendations. They must ensure that each investment recommendation they make is suitable for the investor in light of the investor’s age, risk tolerance, net worth, financial needs, and investment experience.

If the firm fails to due diligence on the investment and the client suffers losses, the firm may be held liable through a FINRA arbitration claim.

The White Law Group, LLC is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Seattle, Washington.