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5 Bull. Sec. Corp. Banking & Bus. L. 1 (1966-1967)

handle is hein.journals/txjbus5 and id is 1 raw text is: BULLETIN OF THE SECTION ON CORPORATION, BANKING & BUSINESS LAW VOLUME 5 NOVEMBER, 1966 NO. 1 OIL AND GAS INTERESTS AS SECURITIES UNDER THE FEDERAL AND TEXAS SECURITIES ACTS By William T. Fleming, Jr., and William E. Joor III of Houston In the complex world of oil and gas finance, the application of Federal and State securities laws to everyday oil and gas transactions is often overlooked. The existence of a recision remedy under both the Federal and Texas Securities Laws' makes compliance by sellers of oil and gas interests critically important. For instance, a failure to abide by such statutes will create in the seller of an interest in a dry well a liability for recision to his disappointed investor, making the seller, in effect, an insurer of the purchaser's investment. Thus, the questions of what oil and gas interests constitute securities and the scope of the principal exemption to these laws bear examination. The definition of security in the Securities Act of 1933 includes any certificate of interest or parti- cipation in a profit sharing agreement, . . . investment contract, (or) . . . fractional undivided interest in oil, gas, or other mineral rights.2 An examination of the application of this definition indicates that practically every basic instrument used in oil and gas financing or operations falls within its scope. The courts have included within the definition assignments of fractional interests in oil and gas leases,3 the oil field equipment sold with such interests,4 warranty deeds purporting to convey oil land coupled with an agreement to drill an oil well,5 overriding royalty interests,6 investment contracts coupled with collateral assignments of leases and promises that wells would be drilled on the property covered by the assignments,7 and contracts for the sale and delivery of a specified number of barrels of crude oil authorizing the seller to dispose of the oil and remit the proceeds to the purchaser unless delivery was demanded.8 Moreover, it is irrelevant for the purposes of the Federal Act whether such interests are transferred by deed or contract or whether under the law of the particular state in which the tract is located such interests are regarded as real estate or personal property. Finally, in theory, the entering into of a noncompulsory unitization or pooling agreement in conjunction with an operating contract would appear to constitute a sale of securities, since the agreement effects an exchange of undivided fractional interests.0 The transfer of the whole royalty interest in any tract of land, however, is not considered the transfer of a security under the Act, even though under the terms of the lease the holder may be entitled to only a portion of the production. 1 Securities Act of 1933, § 12(1), 48 Stat. 84 (1933), 15 U.S.C. § 771 1 (1958) (hereinafter, Securities Act of 1933); Texas Securities Act of 1957, § 33(A) (1), V.A.T.S. Article 581, § 33(A) (1) (hereinafter, Texas Securities Act of 1957). 2 Securities Act of 1933, § 2(1). 8 Creswell-Keith, Inc. V. Willingham, 264 F. 2d 76 (5th Cir. 1959); Repass v. Rees, 174 F. Supp. 898 (Colo. 1959); Dupler V. Simmons, 163 F. Supp. 535 (Wyo. 1958); Cf. Holmberg V. Williamson, 135 F. Supp. 493 (S.D.N.Y. 1955). 4 Whittaker V. Wall, 226 F. 2d 868 (8th Cir. 1955); Ouachita Industries, Inc. v. Willingham, 179 F. Supp. 493 (W.D. Ark. 1959). Quere the courts' holdings in these cases had there not also been a primary sale of fractional undivided interests in oil and gas leases. 5 Mansfield v. U. S., 155 F. 2d 952 (5th Cir. 1946). 6 In Re Engineers Oil Properties Corp., 72 F. Supp. 989 (S.D.N.Y. 1947). 7 Price V. U. S., 200 F. 2d 652 (5th Cir. 1953) 8 SEC V. Crude Oil Corp. of America, 93 F. 2d 844 (7th Cir. 1937), aff'g. 17 F. Supp. 164. The contracts involved purported to be of a twenty-five year duration. The court found that the speculative feature of the transaction was the possible rise in the price of oil during that period. 9 Sec. Act Rel. 185 (1934); In the Matter of Stowitts, 6 SEC 97 (1939); Cf. SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344 (1943). 10 In such an arrangement, holders of such undivided interests enter an operating agreement and thereby invest their interests in a common enterprise with the expectation of profit through the efforts of a third party. Thus, the investment contract language of § 2(1) is relevant as well as that of fractional undivided interests. 11 Sec. Act Rel. 185 (1934); Woodward v. Wright, 266 F. 2d 108 (10th Cir. 1959); See Loss, Securities Regulations, 2d ed. p. 471. However, while the court in Woodward held that a sale by the owners of a 15/16 interest conveyed the entire oil and gas lease, such interest was yet encompassed by the definition for it contemplated creation of fractional interests therein and conveyance of the same to the respective purchasers-contractors. 266 F. 2d at 114.

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