March 11, 2014 Contact: Robert Elder, Communications, 512 305 8386, or relder@ssb.state.tx.us
AUSTIN, Texas -- 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 investments are accredited, Johnson, according to the order, said "we don't do any verification" and "we're not the paperwork police."
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