Investor Assistance (800) 732-0330 www.investor.gov

Investor ALERT

Private oil and Gas offerings 

The SEC’s Office of Investor Education and Advocacy is 

issuing this alert to educate individual investors about 

certain risks and possible fraudulent activity involving 

private offerings of securities for oil and gas ventures. 

the number of fraud cases related to private securities 

offerings for oil and gas ventures has increased over the 

last few years. From few in 2005 and 2006, the number 

of seC cases has averaged more than 20 per year since. 

state securities regulators have experienced a similar 

increase in cases over the past five years. All investing 

involves varying degrees of risk. Investing in private 

offerings, however, carries unique risks, and private 

oil and gas offerings have additional risks to consider.

What should I do first?

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.
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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. 

see the discussion regarding SEC v. Provident Royalties, 

LLC below. 

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 involve a high degree of risk. You should be 

aware that you could lose your entire investment. 

They 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.

In SEC v. Hartmut Theodor Rose, the seC charged 

the promoters in an oil and gas venture with 

soliciting investors’ funds to finish drilling while not

mentioning that their own geologists said not to 

go ahead. the seC alleged the promoters collected 

over $10 million from 300 investors nationwide.

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. 
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to illustrate, in SEC v. Wellco Energy, LLC, the 

seC alleged the promoters misrepresented that 

investors’ funds would be used for oil and gas 

wells when, in fact, 58% of money raised went 

to pay sales fees as well as the promoter’s personal 

mortgage and child support. In SEC v. Petroleum 

Unlimited, LLC, the seC alleged misrepresentations 

were made about the use of investor funds, since 

only $534,000 of the $2.9 million raised from 

investors was used for oil drilling. In addition to 

failing to mention that sales fees equaling 49% and 

74% of the investments would be paid, the seC 

alleged investor funds also were used to pay the 

promoter directly and through related companies, 

like the drilling company. The individuals selling 

the offerings in both these cases were not registered 

with the SEC.

In another case, SEC v. Provident Royalties, LLC, 

Provident raised $485 million through various 

offerings from at least 7,700 investors nationwide 

promising high returns and misrepresenting how 

investor funds would be used. Investors were told 

that 86% of their funds would be for oil and gas 

investments. the seC alleged that, instead and 

undisclosed to investors, a portion of the investor 

funds was used to pay dividends and returns of 

capital to earlier Provident investors. retail brokers

sold the Provident offerings to retail investors 

nationwide. A number of these brokers have since 

been sanctioned by FInrA for selling the offerings 

without having a reasonable basis for recommending

the securities.

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.

In Hartmut Theodor Rose, the seC alleged that 

the promoters told investors that oil and gas 

production was about to start when many of the 

wells were actually marginal or even dry. they 

misrepresented the “success” of prior wells to raise 

funds for new wells and touted the “low-risk” 

opportunity as “once-in-a-lifetime.” 

In Petroleum Unlimited, the seC alleged that 

investors were told without any reasonable basis 

that they could expect returns of 14% to 141% a 

year. rather, 81% of the money raised was used 

to pay for expenses other than oil drilling, including 

huge sales fees. 

In SEC v. Hilton, the seC alleged that the 

promoter raised $3.3 million from about 176 

investors nationwide in several offerings by falsely 

portraying the success or prospects of various 

wells and the expected returns for investors.
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Common red flags:

n Sales pitches referring to recent news events 

like high oil or gas prices.

n “Can’t miss” wells and “guaranteed” returns, 

including claims that major oil and gas 

companies are drilling nearby. 

n Abnormally high rates of return.

n Unsolicited materials. 

n Sales tactics that pressure you to decide, like 

“limited” or “once-in-a-lifetime” opportunity.

n Sales pitches touting new technology, especially 

if it relates to getting higher production out 

of low-producing wells (sometimes called 

“stripper” wells).

n Salesperson claims to be an investor.

n Being asked to sign documents acknowledging

that the securities laws do not apply to the 

investment.

See our Investor Alert detailing common red flags 

in oil and gas scams for more information.

What should I ask?

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: 

n Use of proceeds. What is my money going to be used for? 

Can you estimate how much of the money you raise will 

be used for each of your needs, such as drilling operations, 

administrative overhead and broker sales fees? If sales fees 

will be paid, how are those fees calculated? It is reasonable 

to expect the company raising the money to have plans 

for it, particularly if the persons involved have prior 

industry experience. Otherwise, why are they raising 

that specific offering amount? If broker sales fees are 

being paid, you should know that registered brokers are 

subject to rules and regulations including the amount 

of sales fees they can charge.

n Related parties. Are you hiring another company to drill 

or do any other work? Is there any relationship between 

these companies and the promoters and principals in the 

venture? How much is the promoter going to make even if 

we drill a dry hole? Remember that the persons involved 

in the offering can do quite well for themselves when 

the investment funds are used, for example, to pay 

themselves or to hire a company they own to do the 

drilling. They get paid even if the well is dry. Remember too that a promoter who makes his money on the 

front-end of a deal—that is, from selling the investment to you and benefiting from the proceeds—rather 

than on the fortunes of the venture—namely the actual 

production from the well—does not have the same 

interest as investors like you whose only hope to gain 

is from a successful well. You should be wary of any oil 

and gas investment where the promoter’s interests are 

not aligned with yours.
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n Prior experience. What is your track record in the 

oil and gas industry? Have you had experience with 

this particular well location? In some cases brought 

by the seC involving oil and gas offerings, the 

promoters have claimed extensive prior experience 

and success in the industry. these claims were made 

to stop investors like you from asking questions. 

Instead, you should try to independently verify any 

claims. Ask for references. 

In SEC v. Sunray Oil Co., the seC alleged 

that the promoter touted sunray’s “50 years of 

experience,” but he left out the fact that the 

company was formed much more recently and 

his previous company went bankrupt.

n Well history. Is there a prior history of drilling where 

you are drilling? If someone drilled there before, how 

much did they get out and what makes you think you 

can get any more out? If the area proved dry before or 

has not been drilled, why do you think there’s something there? A lot of new oil and gas is found in the 

united states today because of improved ways of 

drilling, such as hydraulic fracturing (i.e., fracking) 

and horizontal drilling. these improvements often 

require specialized expertise and may cost a lot. 

In Hilton, the seC alleged the promoter falsely 

told potential investors that exxon Mobil had 

previously drilled in and abandoned the oil field 

because it lacked the technology to exploit it, 

but the venture now had the necessary technology

to extract oil from it.

n Third-party report. Did you get a third-party 

engineering report for the site? Can I see the report? 

some operators may employ the expertise of 

independent third-party engineers and geologists 

to decide whether it makes sense to drill in an area. 

If the promoter says there is a report, but doesn’t 

allow you to see it, you may want to consider it 

a red flag. You should also consider whether the 

engineer or geologist is truly independent. Promoters 

sometimes use reports prepared by the same engineers 

that sold them the project or by engineers they 

employ or use repeatedly. 

n Reserves. If the offering materials discuss reserves, 

what types of reserves are being estimated? Who 

determined these reserve estimates? Were they audited 

or reviewed by an independent third party? Can you 

review the audit? the use of terms such as “reserves” 

makes it sound like a sure thing. However, reserves 

in the oil and gas industry are not so certain and 

can vary a lot. reserves can be “proved,” “probable” 

or “possible.” Proved reserves are relatively certain. 

Probable and possible reserves can mean, in short, 

a 50% to 10% chance of extracting the estimated 

amount. though not required, some oil and gas 

ventures do have their reserve estimates audited. 

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.
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Where can I go for help?

If you have a question or concern about an investment, 

or you think you have encountered fraud, please contact 

the SEC, FINRA or your state securities regulator to 

report the fraud and to get assistance.

U.S. Securities and Exchange Commission

Office of Investor Education and Advocacy

100 F Street, NE

Washington, D.C. 20549-0213

(800) 732-0330

www.sec.gov

www.investor.gov

Financial Industry Regulatory Authority (FINRA)

FINRA Complaints and Tips

9509 Key West Avenue

Rockville, Maryland 20850

(301) 590-6500

www.finra.org/Investors/

North American Securities Administrators Association 

(NASAA)

750 First Street, NE

Suite 1140

Washington, D.C. 20002

(202) 737-0900

www.nasaa.org

If you want to investigate a venture’s operations and 

wells, you can check with the oil and gas regulatory 

agency in the state where the venture undertakes its 

operations. Following is contact information for certain 

state regulatory agencies.

California Department of Conservation

Division of Oil, Gas & Geothermal Resources

801 K Street, MS 18-00

Sacramento, California 95814

(916) 445-9686

www.conservation.ca.gov/dog/Pages/Index.aspx

Kansas Corporation Commission

Oil and Gas Conservation Division

Finney State Office Building

130 S. Market, Room 2078

Wichita, Kansas 67202 

(316) 337-6200

www.kcc.state.ks.us/conservation/index.htm

Louisiana Department of Natural Resources

617 North Third Street

LaSalle Building

Baton Rouge, Louisiana 70802

(225) 342-4500

dnr.louisiana.gov

North Dakota Department of Mineral Resources

Geological Survey Division

1016 E. Calgary Avenue

Bismarck, North Dakota 58503 

(701) 328-8000

www.dmr.nd.gov/ndgs/

Oklahoma Corporation Commission

Oil and Gas Division

2101 N. Lincoln Boulevard

Oklahoma City, Oklahoma 73105

(405) 521-2302

www.occeweb.com/og/oghome.htm

Railroad Commission of Texas

1701 N. Congress

Austin, Texas 78701

(877) 228-5740

www.rrc.state.tx.us
Additional Information

For our Investor Alert detailing common red flags 

in oil and gas scams, visit www.sec.gov/investor/

pubs/oilgasscams.htm. 

For a FInrA investor alert regarding energy stock 

scams, visit www.finra.org/Investors/ProtectYourself/

InvestorAlerts/FraudsAndscams/p037236. 

For a nAsAA investor alert regarding oil and gas 

investment fraud, visit www.nasaa.org/6782/

oil-gas-investment-fraud/. 

For FInrA’s BrokerCheck resource, visit www.

finra.org/Investors/toolsCalculators/BrokerCheck/.

For our Investment Adviser Public Disclosure 

(IAPD) website, visit www.adviserinfo.sec.gov.

For our Investor Bulletin on tips on picking an 

investment professional, visit www.sec.gov/investor/

alerts/ib_top_tips.pdf. 

For the seC release regarding SEC v. Hartmut 

Theodor Rose, visit www.sec.gov/litigation/litreleases

/2009/lr21031.htm.

For the seC release regarding SEC v. Wellco Energy,

LLC, visit www.sec.gov/litigation/litreleases/2009/

lr21040.htm.

For the seC release regarding SEC v. Petroleum

Unlimited, LLC, visit www.sec.gov/litigation/

litreleases/2011/lr21808.htm.

For the seC release regarding SEC v. Provident 

Royalties, LLC, visit www.sec.gov/litigation/litreleases/ 

2009/lr21118.htm. 

For FInrA’s news releases regarding the sanctioning 

of brokers in connection with the Provident royalties 

offerings, visit www.finra.org/newsroom/ 

newsreleases/2011/P123441 and www.finra.org/

newsroom/newsreleases/2011/P125193. 

For the seC release regarding SEC v. Hilton, visit 

www.sec.gov/news/press/2012/2012-205.htm. 

For the seC release regarding SEC v. Sunray Oil Co., 

visit www.sec.gov/litigation/litreleases/2006/lr19737.

htm.

For additional investor educational information, 

see the seC’s website for individual investors, www.

investor.gov. 

The Office of Investor Education and Advocacy has provided this information as a service to investors. 

It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the 

meaning or application of a particular law or rule, please consult with an attorney who specializes in 

securities law.

SEC Pub. No. 142 (4/13)