Many oil and gas drilling programs involve selling undivided fractional interests to “investors”. Who would imagine that every time they draw up an assignment of an undivided fractional interest they should think about securities law? Well, they should. A lawyer who prepares participation agreements, operating agreements, or working interest assignments for such programs is working with securities. Incredibly, many, and possibly most, oil and gas lawyers do not realize (or maybe just do not acknowledge) their practice involves securities law.
Whether the drilling program is set up for investors to receive working interest assignments, limited partnership certificates, LLC membership certificates, or some other evidence of participation, it falls within the purview of federal and state securities laws. Usually, it will be state securities commissioners taking enforcement action, often in the form of a “cease and desist” order, for starters. Most oil and gas drilling programs offered by small independent producers are eligible for exemptions from registration under securities laws. In practice, most offerors don’t bother to attend to qualifying for such exemptions. Most of the time, this causes no problem. This is called “being lucky”.
We’re now seeing drilling programs offered via the internet. For an introduction to the risks and pitfalls, see “Oil & Gas Investment Solicitations on the Internet” at Lewis Mosburg’s excellent Internet Oil & Gas Newsletter.