In the same month that the Securities and Exchange Commission approved Regulation Crowdfunding, permitting startups and small businesses to raise capital by offering and selling securities through crowdfunding, the agency also filed its first complaint for crowdfunding fraud. The case highlights the emerging risk posed by online fundraising for the investor community.

The SEC on Oct. 13 filed a civil action against defendants Ascenergy and its chief executive officer, Joseph Gabaldon, for offering fraudulent oil and gas investments. At the SEC’s request, the U.S. District Court for the District of Nevada entered a temporary restraining order halting the offering, as well as an order freezing the defendants’ assets and the assets of relief defendants Alanah Energy and Pyckl, a company that has no apparent connection to the oil and gas business.

According to the SEC’s complaint, defendants have engaged in a deceptive scheme on crowdfunding websites and the company’s website to solicit investors to purchase overriding royalty interests in undeveloped oil and gas wells since at least last year. Ascenergy has raised approximately $5 million from approximately 90 investors, according to the complaint.

“Ascenergy has already spent at least $1.2 million of the offering proceeds, but only a few thousand dollars appear to have been used for oil and gas-related expenses,” the SEC said. “Instead, the complaint alleges that a significant part of the $1.2 million has been spent on payments to Mr. Gabaldon or companies he controls, or for expenses unrelated to the oil and gas business.” Furthermore, immediately after the SEC subpoenaed Gabaldon, Ascenergy allegedly transferred $3.8 million—virtually all of the remaining offering proceeds—to Pyckl, the SEC said.

The SEC contends that Ascenergy has also made multiple, material misrepresentations about the company and the nature of the offering. Ascenergy allegedly falsely holds itself out as a credible energy company, and it presents the investment as a novel and extremely low-risk opportunity that will essentially guarantee investors out-sized returns. The SEC’s complaint alleges that, in reality, Ascenergy is, at best, offering a high-risk investment in undeveloped and unproven conventional oil and gas wells.

The complaint alleges that defendants violated Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5. The SEC seeks preliminary and permanent injunctions, disgorgement of ill-gotten gains, prejudgment interest, civil penalties, and other ancillary relief against both defendants. The SEC said it further seeks the return of investor funds from the relief defendants.

Topics