What are some of the regulatory risks associated with physician recruitment and syndications?

Note that we aren’t lawyers, thus you need to work with your lawyer on this. This is from the perspective of an SEC registered and FINRA Licensed Investment Banker as well as a Securities Principle responsible for the supervision of Investment Bankers and their activities.

You need to be aware that syndication involves the sale of securities-whether you are selling shares, or LLC Units or limited partnership units. Federal and state securities laws determine the manner in which the offering and sale of ownership interest must be conducted. Additionally securities laws control who can affect the sale of securities and how. There is a white paper and a few articles around this very important but not well understood law that are posted on the Ambulatory Alliances website.

To ensure compliance with the securities laws, syndication almost always involve some form of disclosure documents, whether an offering memorandum, purchase agreement or similar instrument. The primary purpose of such a document is to fulfill the disclosure requirements of the Securities Act, while serving as a shield against any future charges of violating the antifraud provision of the securities laws. The documents will serve as an outline of the transaction and a tool for marketing the offering. The gist of the documents is to ensure you have an educated buyer, educated in the sense that they know what they are getting into.

With secondary offerings, even though one physician is selling some of their shares to another physician you need to make sure that the second physician is fully informed by giving them copies of all of the original documents and updated documents such as current ownership percentages, updated financials including any debt instruments, updated disclosure documents etc.

Additionally, we have seen some doctors trade these securities often. The securities laws as well as all of the transaction documents mimic the laws and state something along the lines of- you acknowledge that the purchase of the securities is for the investment intent and not for resale. The securities must come to rest in the hands of the investor. Different states have different interpretations or safe harbors so to speak as to how long a physician must own the security before they can resell it. That is why when we do a resyndication, before executing an exit strategy we make sure the securities have come to rest and we are very careful.

In some cases around the above we have advised clients in certain situations that warrant it that they can write the state securities administrators and ask for a “no action letter”, which is a letter to the state securities administrator or SEC for that matter explaining the action asking if the staff would not recommend that the Commissioner or Administrator take enforcement action against the requester based on the facts and representations described in the individual’s or entity’s original letter. ASCs have been granted these in the past.

A common question is what kind of pre-offering communication can be had with physicians.  The Securities Act most of the time prohibits issuers from engaging in any form of general advertising or general solicitation in connection with the offer or sales of securities in an exempt private offering. Similarly, almost all states mimic this. It is not entirely clear what constitutes general solicitation or advertisement in a private offering but an effective tool for conducting syndication without running afoul of the prohibitions against general advertising or general solicitation is to be able to document the existence of a substantial and pre-existing relationship between the entity and the prospective physician investor. In addition, measures such as tracking offerees, pre-qualification questionnaires and other qualification techniques should be employed.

But what about recruiting physicians that you do not have a pre-existing relationship with? Well you are not supposed to send them a letter or brochure, etc. that outlines or advertises the investment without running afoul of the rules. What we have done is to direct mail that outlines the facts of the center and why a physician might be attracted to a center around the physician recruitment part of the process. We do not offer, we do not refer to nor do we discuss any investment until after we have established a pre-existing relationship with them. We do not even have the investment documents prepared if it is a primary offering because we are merely gathering indications of interest, which are general in nature.

We also recommend that a physician try the center out before they are offered an investment opportunity in the center assuming the center is operational. The entire process would take about 6 months or longer thus you should be able to document the relationship that we have been discussing by the time you approach them about an investment.

Because the interest represents ownership under the federal anti-kickback statute, the ownership percentage being sold cannot be tied to the past or anticipated volume of a physician’s procedures. Additionally, the purchase price must be consistent with fair market value.

Make sure that investments are offered on equal terms to all physicians buying at any given time.

Neither the ASC nor its owners nor any affiliate may loan monies to a physician for the purpose of acquiring an equity interest in the ASC.

Investor must fully disclose his or her or its investment interest to patients treated at the facility

All of the transactions that I have dealt with have required that the investor be an accredited investor and for this situation defined as:

  • a director, executive officer, or general partner of the company selling the securities;
  • a business in which all the equity owners are accredited investors; (think if the physicians sets up a LLC to invest in the ASC, the physicians must be an accredited investor)
  • a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase excluding the value of the primary residence of such person; – a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year;

There are some options here, if you have a physician where their income or net worth does not qualify them as an accredited investor you can make them a director (board of directors) or executive of the surgery center (e.g. medical director) and they qualify.  You can also request a no action letter.

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