Company Name: PetroSell.com, LLC
Public Availability Date: January 20, 2000
Document Sections:LETTER OF INQUIRY
STAFF REPLY LETTER
[LETTER OF INQUIRY]
August 23, 1999 CONFIDENTIAL TREATMENT REQUESTED
VIA FEDERAL EXPRESS Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549 Re: PetroSell.com, LLC Request for No Action Letter 1933 Act, Section 2(a)(1) Ladies and Gentlemen: On behalf of our client, PetroSell.com, LLC, a limited liability company (the
"Company"), we respectfully request that the staff of the Commission advise the
undersigned whether the staff would recommend that the Commission take any
enforcement action if the Company conducts an online auction of oil and gas
properties as described herein without registration of such properties under the
Securities Act of 1933, as amended (the "1933 Act"), in reliance on our opinion
that such an auction does not involve an offer or sale of securities. In a separate letter which accompanies this letter, the Company has requested
confidential treatment pursuant to Rule 81 of the Commission's Rules of
Practice. Please acknowledge your receipt hereof by returning one file stamped copy of
this letter provided herewith in the enclosed postage paid pre-addressed
envelope. Proposed Business of the Company. The Company is preparing to conduct auctions of oil and gas properties over the
Internet. Owners of oil and gas mineral interests, royalties and leasehold
interests, whether producing or nonproducing, developed or undeveloped (the
"Properties"), may list such Properties for sale on the Company's web site by
providing the Company detailed information about the Properties in a
standardized format and entering into a listing agreement (the "Listing
Agreement") with the Company. The description of the Property to be listed will
include: 1. Legal description; 2. Production status; 3. Gas revenue, oil revenue, operating expenses and net income for last three
year period; 4. Gross and net acres; 5. Type and quantity of interest; 6. Operator; and 7. Field/reservoir. In addition the Company plans to make production data available, preferably by
means of a link to an independent oil and gas information service. From the
above information, more detailed historical data is readily available through
industry sources. The owners who list Properties for sale must offer for sale all of their
interest in a given Property. The Properties will not be fractionalized either
by the owner or by the Company for sale in smaller units to multiple buyers,
rather each Property or group of Properties will be offered for sale in its
entirety to a single purchaser who is the successful bidder. Owners will not
retain undivided fractional interests in the Properties. The Properties will be sold subject to any written agreements that are in place,
the most typical of which will be standard form operating agreements on
producing Properties. The owners listing Properties will not be permitted to
bind the Properties and/or the purchasers to agreements calling for the future
development of the Properties which would entitle the sellers to promotional
interests. Owners who sell Properties through the Company's auctions will retain
no control over the future management or development of the Properties. All
decisions as to the future management and development, if any, of the Properties
will be the responsibility of the purchaser. Owners listing Properties for sale will make representations and warranties in
the Listing Agreement that are customary in sales of oil and gas properties such
as due authority to sell the Properties and that the Properties are free and
clear of any undisclosed liens or encumbrances created by the owner. In addition
to such customary representations and warranties, owners will represent and
warrant as follows: 1. Owner is engaged in the business of exploring for or producing oil and gas as
an ongoing business; 2. Owner has not fractionalized its interest in the Properties for the purpose
of selling fractional undivided interests in the Properties; 3. Owner is listing for sale all of its interest in the Properties and will
retain no fractional undivided interest in the Properties (an owner may sever
and reserve unto itself ownership of horizontal zones that are separate from the
zones being conveyed or sever the wellbore and sell all of the owner's interest
therein, retaining the balance of the leasehold interest and may retain an
overriding royalty interest); and 4. The Properties are offered for sale free of any agreement providing for the
future development of the Properties by the owner or any affiliate of, or person
related to, the owner. Once an owner has provided the Company the required information about the
Properties, in form satisfactory to the Company, has entered into the Listing
Agreement with the Company and has paid a listing fee to the Company in the
amount of $15.00 per Property for a 30 day listing period, all of which can be
done online, the Properties will be listed for sale on the Company's web site
and the information with respect to the Properties will be accessible to
subscribers to the web site. To be eligible to bid on Properties listed on the Company's web site, a person
(either a company or an individual) must enter into a subscription agreement
("Subscription Agreement") with the Company. The Subscription Agreement will
establish the suitability of the subscriber to bid on oil and gas properties. To
that end, the subscriber must represent among other things that the subscriber:
1. Is engaged in the business of exploring for or producing oil and gas as an
ongoing business; 2. Intends to purchase Properties for the subscriber's own account, for
investment, and not with a view to reselling the Properties; and 3. Understands that the purchase and ownership of oil and gas properties
involves substantial risks and exposure to substantial liabilities, including,
but not limited to, costs and expenses of operating Properties in the case of
producing properties, economic risks, environmental risks, liability for damage
to persons and property, and lack of liquidity. The Subscription Agreement will be completed and submitted online. The Company
may reject a Subscription Agreement if it has reason to believe that the person
submitting it is not qualified to be a bidder, is domiciled in a state where the
Properties may not lawfully be offered or for other valid reasons. Any solicitations or advertising of the Company's auction site, will disclose
the presence of substantial risks and that because of such risks the auction is
a service offered only to persons engaged in the business of exploring for or
producing oil and gas as an ongoing business. The Subscription Agreement will
prominently disclose the risks of purchasing and owning oil and gas properties.
The Company will undertake to comply with state law requirements by seeking
no-action positions in certain states and relying on counsel's interpretation of
statutes and regulations in others. In any states in which the auction would
violate registration requirements, the Company will disclose on the web site
that the auction is not available in those states and no subscriptions will be
accepted from subscribers domiciled in those states. Upon the close of the auction for a subject Property, the highest qualified bid
in excess of the owner's reserve will be communicated to the owner and to the
successful bidder. The Company will maintain an escrow account with a bank's
corporate trust department which will serve as escrow agent. The escrow agent
will receive the purchase price and the conveyance documents. Upon receipt of
good funds in the proper amount, the escrow agent will disburse the closing fee
to the Company, the net sale proceeds to the owner/seller and the conveyance
documents to the successful bidder. The closing fee payable to the Company will be an amount equal to five percent
of the purchase price. No other fees or expenses will be charged by the Company
unless the owner/seller requests specific services from the Company. Following the transaction, the purchaser will have no continuing relationship
with either the Company or the owner/seller unless the owner/seller is the
operator of the Properties. The owner/seller is required to sell all of its
interest in the subject Property and, therefore, the possibility that such
owner/seller would operate the Property after the sale would be remote. Further,
the model form operating agreement (1982) provides that if the operator ceases
to own an interest in the "Contract Area" such operator will be deemed to have
resigned and if the operator fails to perform its duties, the operator is
subject to removal by owners owning a majority of the interests. Analysis of 1933 Act Definition of "Security". The 1933 Act defines the term "security," to the extent relevant to our request,
as an "investment contract...[or] fractional undivided interest in oil, gas, or
other mineral rights...."1 15 U.S.C.A. § 77b(1)(a). When evaluating whether an oil and gas interest constitutes a security, the
court's inquiry focuses on whether an investment contract or a fractional
undivided interest has been created. See SEC v. W.J. Howey Co., 328 U.S. 293,
301, 66 S. Ct. 1100, 1104 (1946) (test for investment contract is whether the
contract involves an investment of money in a common enterprise with profits to
come solely from the efforts of others); SEC v. C.M. Joiner Leasing Corp.,
320 U.S. 344, 355, 64 S. Ct. 120, 125 (1943) (holding investment contract was
created, and therefore, assignment of oil lease constituted a security); Ballard
& Cordell Corp. v. Zoller & Danneberg Exploration Ltd., 544 F.2d 1059 (10th Cir.
1976), cert. denied, 431 U.S. 965 (1977) (holding that interests were not
"fractional undivided interests" and therefore did not involve a sale of a
security). A. Investment Contracts In SEC v. C.M. Joiner Leasing Corp.,
320 U.S. 344, 355, 64 S. Ct. 120, 125
(1943), defendant, in order to finance the drilling of a well, offered to sell
to the public assignments of oil leaseholds. The sales campaign was by mail,
addressed to upwards of 1,000 prospects. The sales literature assured the
prospects that defendant was engaged in and would complete the drilling of a
test well so located as to test the oil producing possibilities of the offered
leaseholds. The Commission filed suit asking the court to restrain defendants
from violating various sections of the 1933 Act. Id. at 345. The district court
made findings of what amounted to fraud, however, it denied relief. The district
court held that the assignments could not be proved to be "securities" under the
1933 Act. Id. at 347. The Fifth Circuit affirmed. Id. In reversing the Fifth Circuit's decision, the Supreme Court stated that the
assignment of oil leases was an investment contract, and therefore, was a
"security" as defined by the 1933 Act. Id. at 349. The Court did note in dictum,
that "[h]ad the offer mailed by defendants omitted the economic inducements of
the proposed and promised exploration well it would have been a quite different
proposition." Id. at 348. Nevertheless, the Court stated that "the undertaking
to drill a well runs through the whole transaction as thread on which
everybody's beads were strung." Id. B. Fractional Undivided Interest In Ballard & Cordell Corp. v. Zoller & Danneberg Exploration Ltd., 544 F.2d 1059
(10th Cir. 1976), plaintiff offered to sell all of its fifty percent working
interest in two producing wells. Defendant agreed to purchase the interest, but
later backed out of the deal. Plaintiff filed suit asking the court to enforce
the contract. Defendant filed a counterclaim alleging various violations of the
1933 Act and the Securities Exchange Act of 1934. The district court dismissed the counterclaim and entered judgment in favor of
the plaintiff. Id. at 1063. On appeal, the Tenth Circuit affirmed the lower
courts decision. Id. The court stated that the transaction did not involve the
sale of a fractional undivided interest, and therefore, was not a security
although the interest conveyed was a fifty percent interest. The court stated
that "the fifty percent working interests in the two wells and lease units
offered for sale by B&C, while a fractional interest, were offered as a whole
and not in further fractional interests." Id. at 1063. It further stated that
the transfer involved nothing more than the transfer of the entire leasehold and
the plaintiff would have been entirely removed from the enterprise. Accordingly,
there also was no investment contract. Id. at 1065. See also Roe v. United
States, 287 F.2d 435, 437 (5th Cir. 1961) (holding that since the entire lease
was sold, the sale did not constitute the sale of a fractional undivided
interest); Darwin v. Jess Hickey Oil Corp., 153 F. Supp. 667, 671 (N.D. Tex.
1957) (plaintiff purchased all of defendants' interest, therefore, not a
security since no fractional undivided interests were conveyed). In Woodward v. Wright, 266 F.2d 108 (10th Cir. 1959), two of three defendants
sold an undivided fifteen-sixteenths interest in an oil and gas lease. The third
defendant retained his one-sixteenth interest. Plaintiffs entered into an
agreement to purchase the undivided fifteen-sixteenths interest in the
leasehold. Assignments were made, thus breaking up the undivided
fifteen-sixteenths into six additional fractional interests. When production
runs were disappointing, disputes arose and plaintiffs filed suit asserting a
claim under the 1933 Act. The trial court undertook to determine whether the interests sold constituted
"fractional undivided interests in oil and gas." In finding for the defendants,
the trial court held that they did not create a fractional interest in the oil
and gas lease for the purpose of public offering. Id. at 112. In reversing the
trial court, the Tenth Circuit stated that although the contract provided for
the sale of the entire fifteen-sixteenths interest, it clearly contemplated the
creation and conveyance of fractional interests to the respective purchasers,
and therefore, the interests were securities within the meaning of the 1933 Act.
Id. at 114-15. It is worth noting that the court stated, "[i]f the seller
transfers the whole of what he owns, there can be no creation of a fractional
undivided interest in oil and gas, and this is so even though what he sold was a
fractional interest therein." Id. at 112. In a no-action letter on the subject of whether oil and gas interests are
securities under the 1933 Act, the staff of the Commission took a no action
position in a case in which oil and gas leases on federal lands were purchased
in bulk by Southeast Oil and Gas, Inc. ("Southeast") and subdivided into 40 acre
leasehold parcels for offering to the public. The parcels were publicly
advertised for sale. Southeast retained an overriding royalty on the leasehold
interests and also reserved the right to retain unsold parcels. The overrides
retained by Southeast did not entitle it to exercise any control over the
management or development of the acreage. The staff advised Southeast that it
would not recommend any enforcement action if the interests were sold as
described without registration under the 1933 Act. See Southeast Oil and Gas,
Inc., available February 20, 1984 (1984 WL 47300 (SEC). In Robertson v. Humphries (CA 10 1978) `79-`80 CCH Dec., 97,283, the Court held
that reservation of an overriding royalty interest in connection with the sale
of oil and gas leasehold interests does not result in the creation of either an
investment contract or an undivided fractional interest. Conclusion. We believe the Company's proposed business plan as described in this letter,
under the authorities cited herein, will not involve an offer or sale of a
security and therefore will not require registration of the Properties under the
1933 Act. Owners offering Properties for sale will not be permitted to
fractionalize their interests for sale, will not retain any interest that would
be a fractional undivided interest in the Properties offered for sale and will
not retain any control over the management or development of the Properties. The
sale of Properties at auction under these circumstances will not involve, "an
investment of money in a common enterprise with profits to come solely from the
efforts of others." (SEC v. W.J. Howey Co., supra, 328 U.S. 301, 66 S.Ct. 1104.)
Any promise of future development through the efforts of the owner of the
Properties will not be permitted and would be contrary to the representations
and warranties required of the owner. There will be no "common enterprise" nor
reliance on the efforts of others. Both sellers and buyers of Properties through the auction process will have
represented that they are engaged in the business of exploring for or producing
oil and gas as an ongoing business. Thus the transactions will be industry deals
between industry members. Such persons are able to fend for themselves and do
not require the protection of registration under the 1933 Act. See Peter K.
Reilly, When Should Interests in Oil and Gas be Considered Securities?: A Case
for the Industry Deal, supra. Permitting the owners to retain an interest in a separate horizontal zone which
is distinguishable from any of the zones being conveyed, or sever and sell only
the wellbore, is analogous to the retention by Southeast of separate 40 acre
parcels in the above referenced no action letter. Such retained ownership is not
an undivided fractional interest. It is not a form of individual or concurrent
ownership in the whole (note 1, supra). Further, allowing owners to retain
overriding royalties also does not create either an investment contract or an
undivided fractional interest (Robertson v. Humphries, supra). On the basis of the foregoing we respectfully request that the staff, based on
our opinion that the auction of Properties in the manner described herein does
not involve an offer or sale of a security, advise us that the staff will not
recommend any enforcement action to the Commission if Properties are sold in the
manner described herein without registration under the 1933 Act. If it would be helpful to the staff to have any additional information or to
clarify any of the comments made herein, please contact the undersigned. We will
be happy to discuss these matters by telephone and will respond promptly to any
requests for additional information. Very truly yours, ANDREWS DAVIS LEGG BIXLER MILSTEN & PRICE D. Joe Rockett -----FOOTNOTES----- 1 The phrase "fractional undivided interest in oil, gas, or other mineral
rights," applies to concurrent ownership of oil, gas, or other minerals.
"Concurrent ownership" is a form of divided ownership where two or more persons
own fractional interests in the whole. For example, tenancy in common, joint
tenancy, and tenancy by the entireties. See Peter K. Reilly, When Should
Interests in Oil and Gas be Considered Securities?: A Case for the Industry
Deal, 34 S. Tex. L. Rev. 37, 45 (1993). [STAFF REPLY LETTER]
September 22, 1999 RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE Re: PetroSell.com, LLC Incoming letter dated August 23, 1999 Based on the facts presented, the Division will not recommend enforcement action
to the Commission if PetroSell.com, LLC, in reliance on your opinion of counsel
that the described auctions will not involve the sale of securities within the
meaning of section 2(a)(1) of the Securities Act of 1933, conducts such auctions
without registration under the Act. We have noted in particular that persons
engaged in oil and gas exploration or production as an ongoing business will be
the only eligible sellers and purchasers in the auctions. Only whole interests
in the properties will be offered for sale. Fractionalized interests will not be
permitted, including fractional undivided interests retained by sellers. We have
also assumed that neither PetroSell.com nor the sellers will directly or
indirectly offer incidental services for the management or exploitation of the
properties. This position is based on the representations made to the Division in your
letter. Different facts or conditions may require another result. This expresses
the Division's position on enforcement action only. It does not express a legal
conclusion on the question presented. Your request for confidential treatment under rule 81 has been granted until 120
days from the date of theis letter. Sincerely, Michael Hyatte Special Counsel
|
