Texas Securities Commissioner John Morgan entered an Emergency Cease and Desist Order March 10 against a Texas oil and gas exploration company that claims it is the first company in the industry to accept Bitcoin from investors.
Balanced Energy LLC of Southlake, a Dallas-Fort Worth suburb, and its president, Kirk Johnson, solicited investment at the Texas Bitcoin Conference, held in Austin March 5-6. The company has advertised working interests in wells in West Texas, both at the conference and through social media and a web page, according to the emergency order.
Balanced Energy and Johnson are accepting payment through Bitcoin, a digital currency that incorporates cryptography and is designed to enable users to send money over the Internet without using a credit card or bank account. The Securities Commissioner issued an Investor Alert on Feb. 25 warning of the risks associated with investments tied to digital currencies.
Balanced Energy will convert some or all of the payments it receives through Bitcoin to traditional currency and use the money to pay for its business operations, the order says.
Balanced Energy has failed to disclose to investors the risks in using Bitcoin to purchase working interests in wells, according to the order. The price of digital currency is subject to extreme swings, which could affect the amount of money available for business operations.
The order requires Balanced Energy and Johnson to stop selling unregistered securities and making an offer to investors that contains a statement that is materially misleading and could deceive the public. The company and Johnson have 30 days to notify the Securities Commissioner of their request for a state administrative law hearing.
According to the order, Balanced Energy and Johnson are telling investors they can purchase a 6.25% working interest in either of two exploration projects in Runnels County, which is between San Angelo and Abilene, for about $31,000. That working interest may generate a first-year return of between 76% and 118%, depending on the price of oil, according to Balanced Energy’s investment offering documents.
The working interests are not registered with the State Securities Board and no permit has been granted for their sale in Texas. Rule 506 of Regulation D under the federal Securities Act of 1933 does allow an issuer to solicit and sell certain securities without first complying with state registration requires, but only to accredited investors. The Securities and Exchange Commission defines individual accredited investors as persons whose net worth is at least $1 million – excluding their primary residence – or who make at least $200,000 a year.
The issuer of a such an offering must also take reasonable steps to verify an investor’s accredited status.
Far from verifying that purchasers of the company’s investments are accredited, Johnson, according to the order, said “we don’t do any verification” and “we’re not the paperwork police.”