1. (a) Cost and Revenue Sharing. The sponsor may elect a compensation arrangement where he shares in revenue on a basis related to certain costs paid by him.

   1. (1) Where the sponsor agrees to pay all tangible costs of the program but in any case at least 10% of the total program's capital contribution, even if the tangible costs otherwise payable are less than such 10%, his share of revenue will be determined by the following formula:

      1. (A) If the agreement is to pay all tangible costs, but in any case a sum of not less than 10% of the capital contributions of the program, the sponsor is entitled to receive 35% of program revenues;
      2. (B) If the agreement is to pay all tangible costs, but in any case a sum of not less than 15% of the capital contributions of the program, the sponsor is entitled to receive 40% of program revenues; and
      3. (C) The sponsor's revenue sharing may be increased in additional increments of 5%, for each additional 5% increase in the percentage of capital contribution agreed to be paid by him, up to a maximum of 50% of revenues, subject to the sponsor's agreement to pay in any case all tangible costs.
   2. (2) As an alternative to Subdivision (1), the sponsor may elect to receive 15% of revenues and an additional percentage of revenues determined by computing the sponsor's tangible costs as compared to total costs associated with obtaining production, on a prospect basis, until such time as the sponsor shall have received from such additional percentage of revenues an amount equal to his tangible costs; after which, revenues shall be distributed as follows: 15% of revenues to the sponsor and 85% of revenues to the participants until the participants shall have received on a program basis a return of their capital contributions and then, 15% plus the additional percentage of revenues shall be paid to the sponsor and the remainder to the participants.
   3. (3) The agreement to pay tangible costs should include tangible costs for development during the life of the program. If the sponsor should enter into farm-out or other arrangements through which he is relieved of his obligation to pay for tangible costs, then the sponsor's share of revenue authorized by Subdivision (1) or (2) of this Section shall be proportionately reduced, the amount to be determined on an individual basis. Any such variation from the basic format described in either of said Subdivisions shall be fully disclosed in the application for qualification and must be approved in advance of the effectiveness of the qualification.

   4. (4) In order to elect either of the sharing arrangements authorized by Subdivisions (1) or (2) hereof, the following conditions must be met:

      1. (A) the sponsor has a net worth of $300,000 or 10% of the total contributions to the program by the participants, whichever is greater, and
      2. (B) the sponsor is under a contractual obligation to pay his share of expenses as such expenses are paid by the program and to complete his minimum financial commitment to the program, by the end of the second fiscal year succeeding the fiscal year in which the program commenced operations.
   5. (5) For the purposes of this Subsection (a) if a well is not abandoned within 90 days of completion, then it shall be deemed to be a commercial well insofar as the program is concerned and the sponsor may not recapture its tangible costs from the program, which otherwise would be treated as intangible costs upon abandonment.

2. (b) Other Compensation Arrangements.

   1. (1) A promotional interest in the form of a subordinated percentage of the working interest which does not exceed 33 1/3% of the working interest. A subordinated interest shall provide for the return from production to the investors of 100% of their capital contribution, determined on a prospect or total program basis, before the holder of any subordinated working interest may receive a share of revenues, and should provide that, when such promotional interest is entitled to receive distribution, it will bear costs in the same ratio as it participates in revenues; or,
   2. (2) An overriding royalty of not more than ¹/₃₂ of the program's share of production, convertible to not more than a 20% working interest after the return from production to the investors of 100% of their capital contribution on a prospect or total program basis.

   In lieu of the compensation arrangements authorized by Subsection (a) hereof, the sponsor may take one of the following:

3. (c) If substantiated by the sponsor, any interest or combination of interests substantially equivalent to the compensation arrangements set forth in Subsections (a) and (b) above may be approved.
4. (d) The sharing arrangements set forth in this Section 260.140.125 shall not be considered presumptively reasonable (1) for a sponsor who does not actively participate in obtaining a significant portion of the program's prospects and who does not assume management responsibility for drilling, completing, equipping and operating a significant portion of a program's wells, unless such sponsor shall satisfactorily demonstrate that his compensation together with the costs of procuring such services for the program from third parties does not exceed the permissible compensation to the sponsor set forth in this Section, (2) where any overriding royalty is taken in a program in which lease acquisition costs are anticipated to exceed 25% of capital contributions to a program, (3) in the case of sharing arrangements where the sponsor does not pay his share or category of the costs on a current basis or where properties or revenues of the participants are pledged to obtain loans for the sponsor, (4) in the case of sharing arrangements in which the sponsor pays all development costs and exploratory wells are drilled on prospects which cannot reasonably be expected to require developmental drilling if the exploratory drilling is successful, or (5) in the case of sharing arrangements where the sponsor cannot demonstrate a financial ability to pay for his share of costs.

5. (e) Compensation for Regulation B Sponsors.

   As an alternative to the sharing arrangements authorized by this Section 260.140.125.1, the sponsor of a Regulation B offering may elect to retain a working interest in the well or tract involved equal to a percentage of the aggregate drilling and completion costs of such well or tract paid by him, plus an additional percentage of 15%. To the extent that the sponsor intends to render drilling and related services under a “turn key” contract, the amount of profits in excess of 10% of the cost of providing such services will be considered in determining the reasonableness of the sponsor's aggregate promotional compensation.

   Each sponsor of a Regulation B offering shall file with the Commissioner one copy of each of Forms 3-G and 1-G within 30 days after filing with the Securities and Exchange Commission.

6. (f) Compensation for Production Purchase Programs.

   1. (1) Where a major portion of the sponsor's management and operating responsibilities are performed by third parties, the cost of which is paid by the program, the sponsor may take a 3% working interest convertible to not more than a 5% working interest after the return from production to the investors of 100% of their capital contribution, computed on a total program basis.

   2. (2) Where the sponsor maintains the operating capabilities and technical staff so as to be in a position to, and in fact does provide the program with a major part of the management and operating responsibilities of the program, the sponsor may take a 10% working interest convertible to not more than a 15% working interest after the return from production to the investors of 100% of their capital contribution, computed on a total program basis.

      The sponsor's interest in a program or in properties owned by a program shall bear a pro rata share of all costs, expenses and obligations of the program including but not limited to costs of operations, general and administrative expenses, debt service and any other items of expense chargeable to the operations of the program.

   Compensation to sponsors of production purchase programs shall be limited as follows:

Any form of compensation arrangement that conforms to the following standards shall be considered presumptively reasonable for a sponsor who actively participates in obtaining a significant portion of a program's prospects and who assumes management responsibility for drilling, completing, equipping and operating a significant portion of the program's wells.

Note: Authority cited: Section 25610, Corporations Code. Reference: Section 25140, Corporations Code.

History

1. Editorial correction adding Note filed 11-8-82 (Register 82, No. 46).