'Dealing with Securities Regulators'

Dear readers, and oil & gas investors...there is a perplexing, and historically difficult problem I've been dealing with for 25 years....it is about how to deal with the matter of working successfully with state securities regulators, and in particular figuring-out how to do everything possible to avoid what is commonly call their cease & desist, or cease & refrain orders. These orders are issued by state regulators for technical violations, or other mistakes which can be made by smaller companies and their attorneys when offering private placements to private investors to raise capital for oil & gas drilling, real estate, and other private equity programs.

Cease & desist orders can effectively stop smaller companies 'dead in their tracks' from raising further capital after they are issued, or until they are explained to the satisfaction of a state regulator, or dropped, dismissed, or expunged. C & D's are not judicial actions, and no due process, or court case legal procedure has been followed. No court whether civil, state, or federal has heard the complaint, nor made a decision or judgement, and no jury has heard an argument in a court prior to a C & D order that is issued by a regulator. C & D decisions are really unilateral actions or decisions made by department of securities regulators, at the state government level. Decisions can vary greatly from state to state, and don't have to be based on fraud, or the complaint of fraud. You are considered guilty until proved innocent when the orders are issued, and the states coordinate, and cooperate with one another when any state issues such as order. A company or person can be issued a C & D for a variety of reasons the state regulator writes in his findings, or when he believes a technical mistake, a violation of a rule, or omission of something is made by an individual or company that he makes a decision is material...the C & D's usually having nothing to do with a deal, but are issued to the company or the owners of the company.

To put it bluntly, if someone accuses you of something, a state regulator can shut you down if in his opinion, he thinks this accusation or for example a competitors complaint may have merit, or is a part of a 'pattern' of violating the rules the regulator interprets. It's sort of like the story told by Fred Thompson in the movie 'Days of Thunder', when Tom Cruise, and Rowdy Gates were running into each other on the race track with their stock cars, and were told, "If you so much as touch paint one more time I'm going to pull your licenses, and stop you from racing." Then he tells the two racers about the lettuce story. If you leave lettuce on the docks and wait for the perishable lettuce to spoil before you inspect it, you know what happens. The analogy in this case is, the racer's short careers could quickly be over. This is exactly what can happen to a small, and fledgling company trying to fund itself and grow when issued an embarrassing, and heart stopping Cease & Desist to it's principals.

If you stop a business from doing business, especially a small business with one principal source of funding, you can quickly kill the business, and greatly injure the private, and typically 'accredited' investors who fund it. In the zeal of some regulators, or enthusiasm to enforce the rules, or maybe to make a career, by simply issuing a cease & desist order, and then sitting on possibly an action without merit...they can absolutely, and subsequently be the prime reason you can kill a business. In a 'real' deal, or one making money, or will make money for investors, the real losers are the private investors. In my opinion, what regulators should do first is simply call the small company securities attorneys who write the private placement memorandums and give them the opportunity to make corrections, changes, or fix any mistakes, errors of omission, or unintended errors, BEFORE they issue a cease & desist, which takes a lot of money to get dropped, dismissed, or ever expunged.

C & D orders are issued to private companies who operate or raise funds with a federal exemption through the private placement offering mechanism or Reg D. Private, or smaller companies are not exempt entities such as banks, insurance companies, or licensed professionals who supposedly conduct themselves in such a manner they don't need to be as carefully supervised, and controlled as tightly as the smaller companies without the business or financial acumen to control or regulate themselves.

The state regulators have very broad powers to supervise and enforce the rules for smaller investment companies. The stated or written reason for this power is to keep smaller companies honest, and to make sure full disclosures are made to potential investors about the risks, and other issues they regulators want to make clear or be sure investors see in any offering memorandum made with a PPM. The problem is one of determining whether you are getting fair treatment, and can get quick resolutions when you are honest, and simply made a mistake, or your attorney has made a mistake in writing the private placement memorandum you use to raise funds.

The direct participation private placement exemption or Regs 502-506-D are allowed or permitted by the FEDERAL government to enable the smaller companies who have few other choices to raise investment capital, and the private investor may be their only real recourse to start businesses, or fund small oil & gas companies prior to being able to qualify, or pay the relatively expensive costs associated with taking a company public, or doing an IPO for example.

Most smaller companies involved with drilling programs for example cannot meet the bank requirements for getting loans. Banks are not in the habit of taking risk they can't control, and want collateral they understand such as homes & cars. Increasingly, in my opinion, the smaller private, and independent companies started by entrepreneurs are being squeezed out of the marketplace by large corporations with government help and support. This can take the form of punitive actions taken by such regulator actions as the issuance of cease & desist orders without giving a company notice first, or an opportunity to correct the mistake, or discussing a complaint with the company counsel first.