Selling Your Ambulatory Surgery Center or Radiation Oncology Center? Don’t Take Chances.

By: Blayne Rush, MHP, MBA

June 25, 2010


It’s the first day of your long-awaited, much-anticipated Scottish links tour. You inhale deeply, contentedly – enjoying the light scent of sea salt, peat, and heather as you stroll off the 18th green. “Now that I’m retired, I’m playing pretty well,” you think to yourself, and you head toward the tradition-steeped clubhouse for a round with your buddies. But, wait, what’s this? Hmm … it seems your wife has been trying to reach you all afternoon. “I’m afraid I have some bad news, dear.” Apparently, the buyer of your ambulatory surgery center has learned that the consultant you used to broker the sale was not registered as required under federal securities laws. Now, after running your old business into the ground for the past six months, the buyer says he’s weighing his options: unwind the sale or sue you for damages. Not how you envisioned the start of your retirement, is it? And the one thing that will really keep you up at night? Knowing you could have prevented it — if you’d only done your homework.

The time to educate yourself is before you begin the sales process. So let’s take a look now at the possible consequences of using an unregistered financial intermediary to help with the sale of your ambulatory surgery center or radiation oncology center.

* * *

Securities law requirements

Under federal law, registration as a securities broker is required when an intermediary (1) effects a transaction in securities for someone else’s account; and (2) does so as part of the intermediary’s business. “Effecting a transaction” is interpreted as participating “at key points” in the “chain of distribution” of securities. A business broker typically participates in the chain of distribution when he or she identifies potential investors or purchasers for a business, advises the parties on the merits of a sale, and negotiates and/or executes the transaction. If a financial intermediary engages in any of these activities and receives compensation based on the success or size of the transaction, then the intermediary almost certainly: (1) is required to register with the Securities and Exchange Commission (SEC) as a broker dealer under Section 15 of the Securities Exchange Act of 1934 (the Exchange Act), (2) subject to extensive compliance regulations; and (3) is required to be a member of the SEC’s self-regulating arm, the Financial Industry Regulatory Authority (FINRA), formerly NASD. While a broker’s participation in just one sales transaction does not require registration, the phrase “engaged in the business” is interpreted sufficiently broadly that participating in two such transactions probably requires registration.

Moreover, FINRA recently established regulations for a new category of securities professionals: limited representative – investment banking. Under rule 1032(i), which took effect on November 2, 2009, certain qualified professionals will be required to take and pass a new Series 79 examination, either in addition to or instead of the Series 7 test (depending on the functions the professional performs). The Series 7 exam covers a broad range of activities that investment bankers rarely handle, such as trading and sales to retail customers, so the SEC adopted Rule 1032(i) to apply to a narrower class of professionals. Specifically, Rule 1032(i) will require a person to register as an investment banker with FINRA as a limited investment banking representative and pass a corresponding qualification examination if such persons’ activities involve advising on or otherwise facilitate securities offerings – whether through a public offering or private placement – as well as professionals who advise on or facilitate mergers and acquisitions, asset sales, divestitures, and other corporate reorganizations or business combination transactions. These so-called “limited license” investment professionals are required to take and pass the Series 79 examination instead of the broader Series 7 test.

Consequences of using an unregistered business broker

“Come on,” you might be thinking. “What’s the worst that can happen if I use Cousin Joe for this deal? I know he’s not registered, but – hey, he’s family. We played stickball together every summer. He’s always gone to bat for me, and I know he’ll try his darnedest to get me a great deal.”

Unsurprisingly, Cousin Joe’s failure to register under the federal securities laws could be costly for him. Not registering exposes Joe to significant civil penalties and possibly even criminal sanctions if the failure is deemed fraudulent. Moreover, all related contracts are void and unenforceable. This means you as a seller are under no legal obligation to pay Cousin Joe a transaction-based commission on the securities transaction. It does not matter what the contract between you and your unregistered broker says because that contract will be deemed null and void. (For this reason, don’t bother trying to waive the securities law requirements in your contract with an unregistered consultant. It won’t work.)

It’s not just Joe who will suffer. Using an unregistered financial intermediary to help you sell your ambulatory surgery center or radiation oncology center also exposes you – as the seller — to serious adverse consequences. First, the SEC and state securities authorities may bring an enforcement action not only against Joe, but also against you for aiding and abetting a violation of the Exchange Act registration provisions. Sanctions may include civil penalties, injunctive relief, and disgorgement (with interest). Second, use of an unregistered broker will also call into question the validity of the federal and state securities registration exemptions that are often used in private placements. Finally, and perhaps most devastating, the buyer of your ambulatory surgery center or radiation oncology center may have the right to rescind or unwind the deal altogether under section 29(b) of the Exchange Act. The buyer also may be entitled to damages. Even if – after months of legal wrangling – no damages are found, do you really want to be tied up in litigation during what you’d envisioned as your relaxed retirement years?

What Cousin Joe won’t tell you

Cousin Joe may assure you that you can use him or another unregistered financial intermediary without running afoul of securities laws – or at least without getting caught. While it is possible to structure a transaction and a consultant agreement in a way that reduces the risk to both you and Joe, the only way to completely eliminate that risk is to use a registered investment banker or business broker.

Cousin Joe might suggest one of three alternatives that he says will avoid problems with SEC staff: (1) serving in a very circumscribed role as a “finder” in the sale of your ambulatory surgery center or radiation oncology center, (2) structuring your sell-side transaction as strictly an asset sale, not as a stock sale, and/or (3) structuring the deal to comport with the guidelines for unregistered brokers that were set forth in a recent SEC no-action letter. However, none of these three approaches is foolproof, and the adoption of new SEC Rule 2032(i) raises serious questions about the continued viability of alternatives (2) and (3).

Let’s take a closer look at the pitfalls associated with each of Cousin Joe’s three suggestions. First, many unregistered and unregulated business brokers purport to avoid application of the federal securities laws by styling themselves as “finders” or “consultants,” implicitly suggesting that registration under the securities laws is required only for financial intermediaries who actually call themselves “brokers.” Not so. Whether your intermediary calls him- or herself a “finder,” “consultant,” or “broker” is wholly irrelevant to the SEC and FINRA.

While industry professionals have long advocated a less burdensome “Broker Dealer Lite” registration requirement for unregistered brokers who simply facilitate mergers and acquisitions or raise funds for small businesses, to date the SEC and state securities regulators have not adopted such a proposal. Thus, if your consultant does anything more than simply locate a purchaser or investor for your ambulatory surgery center or radiation oncology center – and/or receives compensation in the form of a success fee or an amount tied to the size of the transaction – then he or she is in fact a business broker subject to securities laws requirements.

Second, let’s consider Cousin Joe’s suggestion that the deal be structured as an asset sale. As you might expect, the securities laws apply to “securities.” The Securities Act of 1933 does not include assets in its definition of a “security.” Thus, for years and years, a financial intermediary who was involved in the sale of an asset was deemed not subject to federal securities registration requirements.[1] All that changed, however, when Rule 1032(i) took effect on November 2, 2009. As discussed above, Rule 1032(i) requires investment professionals that are affiliated with securities firms and who advise on or facilitate asset sales, among other activities, to take and pass the Series 79 examination.

Even before the passage of Rule 1032(i), it would have been risky to use an unregistered broker to structure the sale of your ambulatory surgery center or radiation oncology center as an asset sale. The problem is that many deals that start out as asset-based transactions are ultimately consummated – for one reason or another – as securities-based transactions. Even when the parties anticipate and plan for an asset sale, the transaction structure (how you are paid, when you are paid and by what instruments you are paid) tax and regulatory considerations may arise that weigh in favor of executing the deal as a securities transaction. This is particularly true in the heavily regulated health care arena.

So what happens when your unregistered business broker identifies a prospective purchaser, advises the parties on valuation, assists with the collection of the various agreements, and generally facilitates what all parties believe will be an asset sale – and then the transaction is executed as a securities deal? Oops, you’ve suddenly run afoul of the securities regulations.

You say you didn’t mean to? Tell it to the SEC.

The third alternative that Cousin Joe or one of his unregistered brethren might suggest has also been affected by the adoption of Rule 1032(i). Previously, an unregistered consultant might have advised you to align the sale of your ambulatory surgery center or radiation oncology center with the guidelines set forth in a November 8, 2006 SEC “no-action” letter issued to Country Business, Inc. (CBI).[2] CBI, an unregistered business broker for small businesses, received a no-action letter stating that SEC staff would not recommend enforcement of the securities laws where:

(1) The unregistered broker represented the seller side only.
(2) The unregistered broker’s role in negotiations was strictly limited to valuing the assets, providing administrative support, and helping to prepare financial statements.
(3) The business being sold was a going concern, not a “shell” organization
(4) The unregistered broker advertised or offered for sale only the assets associated with the company, not its stock.
(5) The business for sale was a “small business” eligible to receive grants and loans under Small Business Association (SBA) regulations.
(6) The unregistered broker did not advise the seller or any other parties regarding whether or not to issue securities.
(7) The unregistered broker did not assess the value of any securities actually sold, other than by valuing the assets of the business as a going concern.
(8) The unregistered broker’s compensation was fixed or hourly (not based on the size or success of the transaction), and was determined before any decision was made on how to effect the sale of the business.
(9) If applicable, all of the business’s equity securities went to a single purchaser or to a group of purchasers formed without the unregistered broker’s help.
(10) The unregistered business broker did not help the buyer obtain financing, other than by providing uncompensated introductions to third-party lenders or helping with loan application paperwork.

That all changed when Rule 1032(i) took effect. Even prior to the rule change, structuring your sell-side transaction in keeping with CBI was far from a foolproof way to avoid the adverse consequences of using an unregistered consultant to facilitate the sale. First, as is clear from the long list of requirements, structuring the sale of your ambulatory surgery center or radiation oncology center in a manner that meets the terms of the CBI no-action letter requires significant advance planning. Even if you can set up your sell-side transaction to adhere to the CBI guidelines, remember that no-action letters merely represent the SEC staff’s current views. They are not binding on either the SEC or the courts. Also, SEC no-action letters are notoriously fact-specific; it is impossible to protect yourself completely by relying on the provisions of a no-action letter that was not issued in your particular case. Adherence to the terms of another company’s letter is merely evidence in your favor. While sticking to the CBI guidelines may give you some ammunition when the SEC comes calling, why put yourself in the position of fielding a call from the SEC in the first place?

In addition, Rule 1032(i) clearly states that all individuals who are associated with securities firms and are involved in advising or facilitating mergers and acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations or business combination transactions – or are involved in advising on or facilitating debt or equity securities offerings – must take and pass Series 79. If your unregistered broker has not done so, he or she is in violation of federal securities laws. Period.

It is far more prudent – and ultimately less time- and money-consuming — to hire a registered broker or investment banker to facilitate the sale of your ambulatory surgery center or radiation oncology center. Sure, fees and expenses for unregistered financial consultants may be lower than those for registered investment bankers. What seems to be a bargain may well turn out to be anything but. The fact that you have a personal relationship with Cousin Joe and that you trust him to take an interest in obtaining the best deal for you is all well and good – until it isn’t. The risk you assume in using an unregistered financial intermediary to facilitate the sale of your ambulatory surgery center or radiation oncology center is simply too great.

In sum, the surest way to guard against that phone call on the 18th green at St. Andrews is to hire a registered business broker or investment banker from the get-go. After all the work you’ve put into building up your business over the years, isn’t that the least you can do for yourself and your family now?



[1] An asset sale is a transaction conducted for cash consideration only, with no stock sold, exchanged, or issued by either party.
[2] A “no-action” letter from the SEC means that SEC staff would not recommend enforcement under the circumstances specified in the letter.


Disclaimer: This article is not intended or offered as legal advice. These materials have been prepared for educational and information purposes only. This paper is not legal advice or legal opinions on any specific matters. No person should act or fail to act on any legal matter based on the contents of this white paper. This white paper was not written by an attorney licensed in your state. Legal advice depends on the specific facts and circumstances of each individual’s situation. Those seeking specific legal advice or assistance should contact an attorney.




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