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Karen Tyler

Commissioner
ND Securities Department
600 East Boulevard Avenue
State Capitol, 5th Floor
Bismarck, ND 58505-0510
Phone: (701)-328-2910
Toll Free: (800)-297-5124
Fax: (701)-328-2946
Grafton Office
701 W 6th Street, #312
Grafton, ND 58237
Phone: 701-352-4592

Investor Checklist: How to Avoid Being Swindled

checklist and checkmark

The North Dakota Securities Department advises potential investors to ask questions and gather detailed information when solicited for real estate development or oil and gas investment opportunities. You can minimize the risk of being swindled if you resist pressures to make hurried, uninformed investment decisions. There are several steps you should take before parting with your money. The following checklist covers five key areas to examine before investing.

  1. The Registration Requirements. Ask if the offering is filed with the securities regulator in your state or the state in which the promoters are located. If so, contact that agency for any information it may be able to provide. If the promoter claims that the offering is exempt from registration requirements in the particular state in which the offers and sales are made, find out which of the exemptions is claimed and the terms of the exemption.  Contact your state securities regulator to confirm that the offering is indeed exempt. If the promoter claims a security is not involved at all, find out why and contact your state securities regulator and confirm whether it really is a security being offered.
  2. The Salesperson. If it is a legitimate deal, the salesperson will not be reluctant to answer questions or provide written explanations to questions. Ask the name of the person offering you the security, where he/she is calling from and their background, particularly in other real estate or oil or gas ventures. Ask what commission and/or other compensation the salesperson will receive.  Contact your state securities regulator to find out if the promoter or salesperson has been sanctioned for previous violations of securities laws.
  3. The Company. Ask the names of the principals of the company or the general partners offering the security, their backgrounds and experience in the real estate development or oil and gas industry, and how long they have been associated with the company. Find out the history of the company, its capitalization, assets and retained earnings. What contingent liabilities does it have from other ventures? Does it have sufficient funds to cover unexpected costs? Is the tax treatment of the investments, as claimed by the promoters, supported by the Internal Revenue Service?  For Oil and Gas Offerings, find out the company’s or general partners’ history in drilling operations. In particular, ask how long it has been in the oil and gas business, the number of wells drilled, the number of wells completed as producing wells, and whether the company retained its interests in the wells it drilled. Determine if conflicts of interest involving the promoter are disclosed. All the above information should be contained in a prospectus or “offering documents” that the promoter must furnish potential investors before they commit their funds.
  4. The Investment. Make sure funds raised are kept in a separate escrow account until used and that they won’t be commingled with other funds. Also, be certain the funds will not be used for purposes other than those specified. Ask how much money is to be raised and the cost per fractional interest. Ask how much of the money will pay for advertising, salaries, sales commissions and any estimated profit to the company. Ask what type of conveyance document will be provided after any investment is made.  For Oil and Gas Offerings, assuming the well is completed, ask what the completion costs will be for each investor, including additional commissions to be paid (the purpose and amount), and whether investors may be obligated to pay in more money in the future. Ask what tax incentive might be available if a dry-hole is encountered and for intangible drilling costs. Finally, evaluate the risk involved in making the investment. Is the well to be drilled a wildcat (drilled in territory not known to be productive) or is the drilling to be done in an area of proven oil reserves?
  5. The Lease. For Oil and Gas Offerings, secure a legal description of the property on which the program is to be drilled. How and when was it acquired? Is the principal selling the lease to the venture at the acquisition cost, and if not, how much profit is being made? Ask for a description of surrounding property, including local well completions and a geologist’s report on the area. You will want to know if the lease is already in default and whether there is any overriding royalty or landowner’s royalty or other leasehold burden being paid.  Ask for a disclosure of the person(s) selling the lease, the cost of the lease and any relationship between the lessor and the operator. Secure a statement of the depth of the well to be drilled and an indication of when drilling is to begin. Insist on seeing a copy of the operator’s contract with the promoter.

Additional Questions to Ask Before Investing

The checklist of questions to ask and information to obtain is long and it will take time and perhaps even money invested in outside consultation before you feel comfortable risking your money in the investment. It is always advisable to seek the advice of a neutral expert before committing your funds to any investment deal. Be sure to consider the following questions:

  • Who will be responsible for payment of taxes? Will they be paid out of the investor’s share?
  • What is the location of available pipelines, or what method will be used to transport and sell any production?
  • What is the name and address of the operator? What is her/his experience with ventures of this nature? What are the terms of the agreement with the operator, including the compensation terms?
  • How will the decision be made for completing the well or abandoning it? Who will make that decision? What is to become of funds received from the salvage value of equipment on the lease?