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Crudefunders Review

Summary

Crudefunders offers two categories of oil and natural gas investments, an earlier-stage (and riskier) category open only to accredited investors via SEC Reg D, and a later-stage category open to all investors via Reg CF. Selection is limited and energy investments can be quite complex, but also offer potentially significant tax benefits.

Investor OverviewCompany Information

Pros

  • Offers some investments open to all investors
  • Multiple substantial potential tax benefits
  • Low correlation with stocks and other asset classes
  • Long-term cash flow
  • Nice glossary of relevant industry terms

Cons

  • Low selection (none open as of the time of this writing)
  • Relatively complex from tax and legal perspective
  • Minimal public information on website about Reg D investments
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Crudefunders Overview

Crudefunders began by offering investment only to Texas residents via an intrastate crowdfunding exemption, but has since expanded to open up investments nationwide (and to foreign investors). Investments like this are common in Texas and other areas of the South, but traditionally have required direct connections with well operators and relatively high investment amounts. Crudefunders is following the lead of EnergyFundersin reducing minimums for oil and natural gas as an alternative asset class and opening up the investor pool much more widely.

Types of investments Crudefunders offers

Crudefunders offers investment in oil and natural gas drilling projects. Some of the investments are in early-stage projects and are open only to accredited investors, while others are in a later-stage of those projects when the well has actually been drilled, and those are open to all investors via Reg CF.

Investments in oil and gas projects involve detailed and specific legal, technical, scientific and tax considerations that set them apart from most of the alternative assets covered on this site.

What do you get when investing with Crudefunders?

Details on the Reg D investment offerings were difficult to find on the Crudefunders website, but based on reviewing the offering circular for one of the Reg CF investments, investors in the early stage projects likely receive interests in a General Partnership (which offers unique tax benefits but also carries the theoretical risk of unlimited liability). Investors in the Reg CF investments (the later stage of the projects) receive membership interests in an LLC. Based on review of the offering circular for one of the Reg CF investments, it appears that the General Partnership from the earlier phase is then merged in to the LLC formed for the second phase (thereby converting General Partnership interests into LLC membership interests for the earlier investors). From the Crudefunders FAQ:

Investors typically receive shares in a limited liability company issued and managed by the project trustee, which represent a working interest in one or more oil or gas wells. Revenue from the sale of oil or gas is paid to the company on a monthly and/or quarterly basis.

As noted above, these are among the more complex investment structures found on the platforms listed on this site, and prospective investors should definitely consult a tax professional for advice.

Crudefunders fee structure

There are no direct fees to investors, though various entities involved throughout the project stages (including the project sponsor) receive different forms of compensation, including in the form of carried interest or direct ownership interest in the drilling rights. Prospective investors should be sure to review the investment materials carefully For example, in the case of one of the Reg CF investments, here's how Crudefunders is compensated:

Crudefunders, LLC, which is a representative of the Intermediary, will offer certain services to the Company, including funding portal management & marketing services and ongoing investor relations and administrative support services. Crudefunders will perform these services, independent of the Intermediary, on behalf of the Issuer and will receive a carried working interest of 6.0% before payout and 9.0% after payout, and an annual investor services and administration fee equal to $25 per investor with a minimum annual fee of $2,500.

Potential returns and cashflow

Specifics vary by investments, but investors are generally entitled to a share of the revenue produced by the well (and there are multiple categories of revenue), with distributions paid monthly and/or quarterly. There may also substantial potential tax benefits associated with these investments that can have a major impact on the overall return.

As an example, an investment in an oil well might pay back the investment amount in 36 months at current oil prices, and then be expected to continue producing oil (and therefore revenue) for another 10-15 years. The specific payback period and overall return are dependent primarily on the market price of the gas or oil, as well as the timing and amount of any additional capital required.

Prospective investors should know that delays are common with oil and natural gas wells, especially in the earlier stages of a project. It is not unusual for up to 6 months to elapse between an investment closing and the well to actually begin producing (and therefore earning revenue).

Breadth of offerings on Crudefunders

As of this writing, there were no open investments on the Crudefunders site, though one was listed as "Coming Soon".

Regulatory framework and due diligence expectations

The regulatory framework applied varies by the investment type (Reg D or Reg CF). All investments offered via Crudefunders are sold by their broker-dealer partner, North Capital Securities, and Broker-Dealers are subject to specific requirements related to due diligence and confirming investor suitability.

Crudefunders also performs their own due diligence on submitted projects, including reviewing detailed drilling plans, financial projections, and a range of financial and legal documents, as well as interviews with key personnel and/or customers.

A platform's review process, however thorough, is never a substitute for your own due diligence, and prospective investors should understand that oil and gas well project investments are very complex relative to other alternative investment types.

Final Thoughts

Crudefunders is probably not for the casual investor (especially the higher-risk earlier-stage investments), though patient investors with an appetite for learning the nuances of energy projects and the related IRS tax rules will find much to dig into. There are substantial potential tax benefits to this kind of investment (even more so than real estate), though taking advantage of them will almost certainly require assistance from a tax professional.

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  • Editor Rating
  • Rated 3.5 stars
  • 60%

  • Crudefunders
  • Reviewed by:
  • Published on:
  • Last modified: October 9, 2017

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