If a sales pitch for a private investment in an oil or gas venture project sounds too good to be true, it probably is, the Securities and Exchange Commission warned today.
In a seven-page
Investor Alert, the agency cautioned that private placements in the energy sector can be rife with fraud, and outlined several warning signs.
For instance, investors should be wary if an offering tries to capitalize on a spike in oil or gas prices, describes itself as “can't miss” or a “limited” opportunity, promises spectacular rates of return or promotes new technology.
The SEC has averaged more than 20 cases annually since 2007 involving rip-offs in oil and gas private securities. The alert comes amid heightened focus on the promise and dangers of tapping vast domestic natural gas reserves through a process called fracking.
The agency warned investors not to get hoodwinked by a firm that says it needs investment to finance drilling and completion of an operation.
“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 SEC alert states. “The promoter makes money from you even if the well comes up dry.”
Before sinking money into a private oil or gas offering, investors should determine how the funds will be used, how many companies will be involved in the project and the experience of the promoter in the energy field, the SEC said. They also should look into the prior drilling history at the site and obtain third-party engineering reports.
“It is important to conduct your own independent research,” the alert states. “One good way to do that may be to engage an investment professional specializing in oil and gas.”
The bottom line is to use common sense when considering risky investments labeled as a way to “strike it rich.”
“When you hear this sales pitch, you should be very skeptical about high returns with little risk that are just around the corner,” the alert states. “Higher returns typically mean higher risks of loss.”
