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How to Protect Yourself from Oil and Gas Scams

Oil and gas investment scammers continue to prey on the general public, using high-pressure sales tactics to try to get investors to part with their money before they have the chance to think carefully.

You can minimize your risk of being swindled by asking challenging questions to anyone trying to sell you on an oil and gas investment opportunity. The North American Securities Administrators Association (NASAA) recommends that you protect yourself from scams by taking five key steps before investing.

First, ask about the registration requirements of the offering. Specifically, ask the salesperson if the offering is filed with the Texas State Securities Board or a comparable agency in another state. If so, contact the agency and request information. If the salesperson says the offering is exempt from registration, ask which specific exemption is being used, then contact the agency to verify.

Second, ask personal questions about the salesperson. If the offering is legitimate, the salesperson shouldn’t be hesitant to provide his or her full name, where they are calling from or what their oil and gas investing experience is. Also ask what type of commission or other compensation the salesperson will receive. After gathering the information, contact the state regulatory agency and ask whether the salesperson has a history of fraud or misconduct.

Third, find out about the company. Ask for the names of the owners and partners and their backgrounds in oil and gas. Get specific by asking about how many wells the company has drilled and how long they have been in operation. Look into the company’s history, its current financial position and its growth strategies. Don’t forget to ask about the company’s liabilities, ability to cover unexpected costs and proposed tax treatment of the investment. This information may be available in a prospectus or other documents the salesperson can provide.

Fourth, ask about the investment itself. Is there an escrow account for the funds being raised? How much money needs to be raised and what is the cost per fractional interest? How much of the funds will go toward paying for marketing and salaries/commissions? Is the well being drilled in a proven area or new, unproven area? Will investors be required to pay any more money in the future?

Finally, inquire about leases, which are often the linchpins of oil and gas ventures. You need to make sure the leases accurately describe the property to be drilled on, whether the lease is already in default and whether there are royalties being paid to a landowner. You also should ask about the relationship between the lessor and the operator, since there could be a conflict of interest.

Protect yourself from oil and gas fraud by disregarding any investment promoter who won’t answer questions like these. If you would like to speak with a Dallas attorney about an investment you’ve been presented, call The Law Office of Paul R. Clevenger at 469-212-9764 or contact us online.

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