Sellers of Interests in Oil, Gas and Mineral Rights Are Subject to Securities Laws

Most sophisticated business people know that, for a corporation to sell shares of its stock on a public exchange like NASDAQ or the New York Stock Exchange, the corporation must first register those shares of stock with the federal Securities and Exchange Commission. This is a requirement of federal law, enacted in response to the stock market crash of 1929. The federal government realized that in order for investors to make educated decisions about the shares of stock they were buying, certain kinds of information about the companies that issued those shares needed to be available to those investors. The government required companies to file that information with the SEC as a condition of registration, and in that way investors were assured that they would be able to make informed investment decisions when buying “registered” stock. The individual states soon followed suit. Ultimately, the federal government and all 50 states also enacted legislation that required most people who sell stock to have passed certain examinations, and provided for remedies for investors who bought unregistered stock or who were defrauded in connection with their purchases of stock.

Many people do not know, however, that these laws apply not only to sales of stock, but to sales of all kinds of “securities.” The U.S. Supreme Court has defined this term very broadly, to include virtually any arrangement in which a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party. For this reason, many partnership interests are securities, and the federal Securities Act of 1933 specifically defines fractional undivided interests in oil, gas and other mineral rights as securities.

Of course, it is possible to sell securities without federal and state registration, but sellers (both the original issuers of the securities and subsequent sellers) will need to ensure that they are able to obtain an exemption from the registration requirements. Doing this requires an analysis of several factors, including the sophistication and financial well-being of the investors, the kind and amount of information to be provided to the people to whom the security is offered, and the way in which the offering is to be conducted, including the number of people to whom the security is offered and the extent to which the seller has a prior relationship with those people. Filings with state and federal authorities are often required in order to obtain an exemption. Sellers should also consider whether they want to provide potential investors with a disclosure document to establish a record of the information about the investment that the sellers gave to the investors. This can help protect the seller in the event an investor later complains that the seller lied to the investor in connection with the investment.

For more information on this topic, please contact Jeff Dickerson, the firm’s senior corporate lawyer.