How the SEC’s New Crowdfunding Rules Are Creating Options for Oil and Gas Financing
Texas is a unique case study for sustained economic growth. Part of the reason that the state keeps growing is that job growth has not just been sequestered to the oil and gas sector: Texas has added a significant number of jobs across all sectors.  Houston, the headquarters of the energy industry, has actually become more like the nation at large in terms of industry diversification. This means that contractions in the oil and gas industry can be offset by economic growth elsewhere. For example, the Federal Reserve Bank of Dallas predicts that a 30% decline in exploration and production capital expenditures yields a 1% drop in Houston nonfarm employment (about 30K jobs) by year-end, one-quarter of the disastrous 3.9% employment loss that would have occurred in the pre-1990 bust. 
However insulated some parts of Texas may be from industry contraction, low oil and gas prices have still tightened budgets for firms in the energy industry. Capital expenditure in upstream projects declined 12% in the fourth quarter of 2014 versus the year prior. In the last six months of 2014, the market shaved $1.6 trillion from the sector’s market capitalization. Energy sector bonds tumbled in 2015, closing the bond market for much of the sector. Independents that use reserve-based lending (borrowing against asset valuations linked to market prices) are in for a significant capital crunch.
Although first quarter secondary equity offerings actually increased from last year, there is reason to believe that capital markets may be retreating. U.S. explorers that announced at least $1 billion in stock offerings every month in the first half of 2015 raised just $300 million in secondary offerings in July. As equity markets dry up, firms have responded by selling assets on top of cutting capex. Chinese companies looking to dodge competition from state-owned energy firms and government regulation back home have been especially receptive—a Chinese investment firm recently inked a $1.3 billion deal to buy oil fields in the Permian Basin. 
In an industry known for its inventiveness, companies may turn to a new source of capital outside traditional debt or equity markets or even large asset sales. The crowdfunding phenomenon has given entrepreneurs passed over by institutional investors access to much needed capital. The 2012 Jobs Act made equity crowdfunding, which gives investors a piece of the company they fund, easier for accredited investors.  However, the SEC did not open up equity crowdfunding to individuals (or couples) below $1 million in net worth. In late October of 2015, the SEC released rules enabling non-accredited investors to partake in equity crowdfunding under certain constraints. The rules take effect January 2016.
Although companies of all stripes will soon have a new pool of capital to draw from, it remains to be seen whether crowdfunding will take off in the oil and gas industry. Some critics of equity crowdfunding point out that the industry is too capital intensive to benefit from investors seeking to invest as little as $1,000, limiting the practical use of crowdfunding for oil and gas projects. They have a point. For example, assuming a one month time-frame for drilling and completion, drilling a well in the Eagle Ford costs anywhere from $5.5 to $9.5 million. Couple that with the $1 million yearly cap the SEC places on companies for crowdfunding offerings, and the pockets of individual non-accredited investors are nothing to write home about.
Still, the practical needs of oil and gas companies have not deterred a number of equity crowdfunding firms focused on the industry from launching successful businesses. Houston-based EnergyFunders.com has raised $1.8 million for five projects this year, and CEO Philip Racusin is ready to extend an invite to non-accredited investors (by some estimates, potentially 80 million new investors). Racusin argues that there are many lucrative oil and gas projects that require capital investments below $1 million, such as cleaning out neglected wells to boost production. If smaller companies have trouble accessing capital from banks, traditional markets, or refuse to sell assets, additional sources of much needed cash seems like a win-win for everyone involved. To inspire confidence in the individual investor stepping in the boots of a West Texas wildcatter, some energy-focused crowdfunding portals supply a team of experts ranging from operators, attorneys, geophysicists and traders to identify the best projects.
However, companies seeking crowdfunding capital must weigh the prospect of reaching more investors with the probability of increased lawsuits. Few industries are riskier than the oil and gas business, and when investors lose money, investors sue. Investor advocates and other critics warn that opening up equity crowdfunding to non-accredited investors could be a breeding ground for fraud.  No sooner than the SEC released rules covering non-accredited investors, the agency filed a 10(b)-5 action against Las Vegas-based Ascenergy for running a fraudulent oil and gas crowdfunding scheme. Even crowdfunding middle men may not be safe. Although crowdfunding portals like Kickstarter disclaim all liability for fraud, their exposure to litigation risk is likely to be tested in the near future. Add in the high costs for marketing crowdfunding investments to compliance and legal costs, and the SEC rules are unworkable for many smaller companies. 
On the other hand, even the critics see some unique applications for crowdfunding in the oil and gas space. For example, crowdfunding could be used to develop prototypes of machinery that can be marketed at trade shows. Additionally, crowdfunding can add an interesting social impact element to oil and gas investing. Recently, French oil and gas group Total SA and leading European crowdfunding specialist Babyloan announced a partnership to develop the first crowdfunding platform dedicated to access to energy projects in isolated communities. Motivated to take part in the growth of green microfinance, the partnership will seek to fund energy projects in Asia and Africa.
Given that oil and gas companies are in need of new sources of capital, crowdfunding is sure to be an option that many companies explore. If companies and crowdfunding portals can adequately manage the litigation risk, the possibility of opening investment opportunities to the “little guy” will be a welcome prospect for all parties involved. Crowdfunding in the energy space is certain to open new doors, whether it means letting an accountant or teacher play prospector, or providing avenues for social impact investing. At the very least, securities lawyers will have more work to do.
 Michael D. Plante, Fed. Reserve Bank of Dall., Lower Oil Prices Weaken Prospects for Job, Economic Growth in Texas (2015), available at https://www.dallasfed.org/assets/documents/research/swe/2015/swe1501d.pdf.
 Jeff Barron & Laura Singer, Upstream Capital Expenditure Declined 12% Year-Over-Year in Fourth Quarter 2015, U.S. Energy Info. Admin. (2015), http://www.eia.gov/todayinenergy/detail.cfm?id=20512.
 John England, Gregory Bean, & Anshu Mittal, Following the Capital Trail in Oil and Gas, Deloitte Univ. Press (2015), http://www2.deloitte.com/content/dam/Deloitte/es/Documents/energia/Deloitte_ES_Energia-Following-The-Capital-Trail-in-Oil-Gas-Navigating-The-New-Environment.pdf.
 US E&Ps Access to Debt Capital Shrinks, Oil and Gas Investor (July 24, 2015), http://www.oilandgasinvestor.com/us-eps-access-debt-capital-shrinks-811416#p=full.
 Russell Gold, Easy Access to Money Keeps U.S. Oil Pumping, Wall St. J. (May 31, 2015, 4:20 PM), http://www.wsj.com/articles/easy-access-to-money-keeps-u-s-oil-pumping-1433103619.
 Mathew Monks, Explores in Need of Cash are Selling Oil Fields as Last Resort, Bloomberg (Aug. 6, 2015, 12:59 AM), http://www.bloomberg.com/news/articles/2015-08-06/explorers-in-need-of-cash-are-selling-oil-fields-as-last-resort.
 Joe Carroll, Oil Explorers Prepare for Another Year of Depressed Prices, Bloomberg (Oct. 28, 2015, 6:03 AM), http://www.bloomberg.com/news/articles/2015-10-28/occidental-posts-loss-as-lower-oil-prices-add-to-output-declines.
 Sophia Yan, Chinese Company to Buy Texas Oil Fields in $1.3 Billion Year, CNN Money (Oct. 26, 2015, 3:20 AM) http://money.cnn.com/2015/10/26/news/companies/china-texas-oilfields/.
 Anya Litvak, Crowdfunding Oil and Gas, Pittsburgh-Post Gazette, http://powersource.post-gazette.com/powersource/companies/2015/10/27/Oil-and-gas-to-the-masses-crowdfunding-drilling/stories/201510270014.
 17 C.F.R. § 230.501 (2015).
 SEC Adopts Rules to Permit Crowdfunding (Oct. 30, 2015), available at http://www.sec.gov/news/pressrelease/2015-249.html.
 Karen Boman, Could Crowdfunding Become New Way to Finance Oil, Gas Activity, Rigzone (June 17, 2015), http://www.rigzone.com/news/oil_gas/a/139183/Could_Crowdfunding_Become_New_Way_to_Finance_Oil_Gas_Activity/?all=HG2http://www.rigzone.com/news/oil_gas/a/139183/Could_Crowdfunding_Become_New_Way_to_Finance_Oil_Gas_Activity/?all=HG2.
 Trey Cowan, Costs for Drilling the Eagle Ford, Rigzone (June 20, 2011), http://www.rigzone.com/news/oil_gas/a/108179/Costs_for_Drilling_The_Eagle_Ford.
 Supra note 16.
 Supra note 11.
 SEC Oks Crowdfunding Rules Allowing Companies to Sell Stock Online, CBS News (Oct. 30, 2015), http://www.nbcnews.com/business/markets/sec-oks-crowdfunding-rules-allowing-companies-sell-stock-online-n454631.
 SEC Calls Fraud on Ascenergy Oil & Gas Crowdfunding Scheme, Crowdfund Insider (Nov. 2, 2015) http://www.crowdfundinsider.com/2015/11/76712-sec-calls-fraud-on-ascenergy-oil-gas-crowdfunding-scheme/.
 The Pitfalls of Crowdfunding, Law 360 (Nov. 26, 2014), http://www.law360.com/articles/599953/the-pitfalls-of-crowdfunding.
 Q&A with Kendall Almerico on Title III Equity Crowdfunding Rules, Bankless Times (Nov. 2, 2015) http://www.banklesstimes.com/2015/11/02/qa-with-kendall-almerico-on-title-iii-equity-crowdfunding-rules/.
 Supra note 7.
 Mariyana Yaneva, France’s Total, Babyloan to Set up Crowdfunding Platform for Energy, See News (Nov. 2, 2015), http://renewables.seenews.com/news/frances-total-babyloan-to-set-up-crowdfunding-platform-for-energy-499842.