As we have noted previously, the sale to investors of interests in an oil and gas venture typically involves the sale of a security under federal and state securities laws, regardless of whether the investment vehicle is stock, a limited partnership or limited liability company interest, or even a fractional undivided interest in a lease (such as a working interest) if the investor is relying on someone else to manage operations. A corollary of this principle is that persons involved in marketing and selling the investment, if they receive compensation based on the transaction, must be licensed as a broker under state and federal securities laws. The lore that an unregistered “finder” can perform such services is mostly just that — lore. For the issuer, the consequence may well be loss of an exemption from registration and rescission claims from investors. For the “finder” it may mean that his contract is not enforceable.
In Legacy Resources, Inc. v. Liberty Pioneer Energy Source, Inc. (No. 20120142, Dec. 20, 2013), the Utah Supreme Court held that a finder of investors for a prospective oil and gas project could not enforce an agent agreement with the issuer because the finder acted as an unregistered broker in violation of the Utah’s state securities laws. The court noted that the record contained undisputed evidence that the finder:
- accepted transaction-based compensation;
- provided opinions regarding the merits of the project;
- actively recruited investors;
- participated in refining marketing materials;
- answered investor questions about the project;
- offered to accompany investors to the issuer’s offices to look at seismic data;
- occasionally accepted payment and other documents from investors; and
- remained the primary contact for the project for some investors, even after they had invested.
The finder was, thus, involved in the securities transactions at issue at key points in the chain of distribution, sought to influence investors’ decisions, and functioned as the go-between for the issuer and potential investors. As the finder’s efforts were geared toward effecting an investment, and not just initiating a business contact, the finder acted as an unlicensed broker in violation of Utah law, and was, therefore, barred from enforcing the contract.
The same result would be reached under the securities laws of most states, and under federal securities laws. So, be careful of persons who represent that they can find investors for your deal and want to be paid a commission or similar transaction-based compensation, but do not hold the necessary licenses.