The Securities and Exchange Commission (SEC) Thursday issued an alert to persons who are considering private securities offerings for oil and gas ventures as an investment opportunity, saying that such investments carry significant risks.

The number of fraud cases involving private securities offerings for oil and gas ventures has increased over the last few years, the agency said. “From [a] few in 2005 and 2006, the number of SEC cases has averaged more than 20 per year since [then]. State securities regulators have experienced a similar increase over the past five years.” The states have brought a number of cases that were promoted as a “great opportunity” and turned out to be scams.

“All investing involves varying degrees of risks. Investing in private offerings, however, carries unique risks, and private oil and gas offerings have additional risks to consider,” the SEC said.

“One common thread among all fraudulent schemes, including those related to oil and gas, are claims that they are about to strike it rich, or that it is likely or even guaranteed that the returns will be too good to pass up. When you hear this sales pitch, you should be very skeptical about high returns with little risk that are just around the corner. Higher returns typically mean higher risks of loss,” the agency said.

Most people offering securities must be registered as a broker with the SEC and must be a member of the Financial Industry Regulatory Authority. However, even if the investor is working with a registered broker or adviser, it is not a seal of approval. “Oil and gas offerings present many investment risks, and working with a registered individual is not a guarantee that the offering is a sound investment,” the SEC said.

The agency warned investors to be particularly cautious if the broker or adviser has a relationship with the promoter of the venture. A promoter is the person promoting the offering and is usually the founder of the venture.

The SEC also recommends that an investor request a copy of the broker’s due diligence report. “This report should outline how the broker evaluated the venture’s prospects and claims. However, the broker’s investigation is not infallible.”

Moreover, the agency advised investors to know exactly where their funds are going. It cited one case in which the promoter misrepresented to the investor that his/her funds were going to be used for oil and gas wells when, in fact, 58% of the money raised went to pay sales fees as well as the promoter’s personal mortgage and child support.

Investors should ask questions until they are satisfied with the answers, the SEC said. “What is my money going to be used for?…Are you hiring another company to drill or do any other work? Is there any relationship between these companies and the promoters and principals in the venture? How much is the promoter going to make even if we drill a dry hole?…What is your track record in the oil and gas industry? Have you had experience with this particular well location? Is there a prior history of drilling where you are drilling? If someone drilled there before, how much did they get out and what makes you think you can get any more out?

“Did you get a third-party engineering report for the site? Can I see the report?…If the offering materials discuss reserves, what types of reserves are being estimated? Who determined these reserve estimates? Were they audited or reviewed by an independent third party? Can you review the audit?” the agency said.

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