The Truth About Selling Your Ambulatory Surgery Center

The following white paper was written by Blayne Rush, president of Ambulatory Alliances. These are the opinions of the author and not of Becker's ASC Review.

Caveat emptor! No, caveat venditor!


Buyer beware! No, seller beware!


In 2008, Dwight Shane Baldwin of Utah, who ran several venture capital funds called the SilverLeaf Companies, sold equity in one of his companies for $200,000 to two buyers. He told them that the company would use their money to invest in a California company called GarageCo, Inc., which makes a plastic toy called "Yo Baby."


The lawyer who advised Mr. Baldwin on the sale assured him that because the company was selling equity investments ­­­— not securities like stock — that he was exempt from registering as a "broker-dealer" at either the state or federal level. That assurance did not stop the Utah Division of Securities from charging Baldwin with securities fraud and offering and selling securities as an unlicensed broker.[i] He escaped jail time by repaying the investors in full and negotiating a "guilty plea in abeyance."[ii]


Any owner or partner in a business, like an ASC, could unwittingly face this same scenario. Securities laws and regulations are complex and can be confusing even to the well educated. They concern what constitutes a security, who is legally permitted to sell them and the licenses required to do so. Failure to adhere to the law can have grave consequences, both financially and personally.


No doctor who has sold units of an ASC wants to receive a phone call from his lawyer informing him that the investor is now saying, "You violated securities laws and therefore I want my money back.


"And oh, by the way, here's your center back, the one that we ran into the ground. Thanks for the no-cost trial run."


To understand the potential perils and pitfalls, it is important to know a few basics under the law, such as what qualifies as a security, the definition of a broker-dealer and who is required to register with the government.

What is a security?

When most surgeons and radiation oncologists hear the word securities, they conjure up images of Wall Street and traders bustling on the floor of the New York Stock Exchange. They understand that stocks and bonds of companies like Microsoft, Coca-Cola and Ford are securities and that they are governed by special laws and regulations. What many do not realize is just how broad the definition of a security is, and how many different financial instruments it encompasses.


For example, take a breath and consider the Congressional definition: "any note, stock, treasury stock, security future, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a 'security'; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or bankers' acceptance that has a maturity at the time of issuance that does not exceed nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited."[iii]


Just in case you thought Congress left anything out, section 3(a)(10) of the Securities Exchange Act of 1934 includes "investment contract" in its definition of a security (15 U.S.C. §§ 77b(a)(1) and 78c(a)(10)). Generally, an investment contract is created when a person invests something of value in a common enterprise with the expectation of a return (e.g., dividends, profits or increased capital) to come through the managerial efforts of someone other than the investor.[iv]


Not to be outdone by the federal government, the Texas State Securities Board states the term "security" or "securities" shall include any interest in a limited partnership, share, stock, treasury stock, stock certificate under a voting trust agreement, collateral trust certificate, equipment trust certificate, preorganization certificate or receipt, subscription or reorganization certificate, note, bond, debenture, mortgage certificate or other evidence of indebtedness, any form of commercial paper, certificate in or under a profit sharing or participation agreement, certificate or any instrument representing any interest in or under an oil, gas or mining lease, fee or title, or any certificate or instrument representing or secured by an interest in any or all of the capital, property, assets, profits or earnings of any company, investment contract, or any other instrument commonly known as a security, whether similar to those herein referred to or not. The term applies regardless of whether the "security" or "securities" are evidenced by a written instrument.[v]


For a time, some courts adopted the so-called sale of business doctrine, which said the sale of 100 percent of a corporation's stock was not a securities transaction but merely the method by which ownership was transferred and therefore not subject to either the Securities Act of 1933 or the Securities Exchange Act of 1934. The Supreme Court settled the issue in Landreth Timber Co. v. Landreth, 471 U. S. 681 (1985). In that case, a family in Washington offered their stock in a lumber business for sale. Before a deal was reached, the company's sawmill was damaged by fire. Potential purchasers were advised of the damage but were told that the mill would be rebuilt. The business was eventually sold but did not live up to the buyer's expectations. The buyer eventually sold at a loss and sued the family, contending that the transaction violated the nation's securities laws, in part because the stock was unregistered. Lower courts concluded that the transaction was a commercial venture rather than a typical investment, but the justices rejected that argument, and the sale of business doctrine died.


Consequently, the Securities and Exchange Commission and most states treat the sale of an ASC business as a securities transaction if it involves the purchase, sale, issuance or exchange of stock, LLC membership or limited partnership interests, options, warrants or other securities.[vi]


If a promissory note is issued for payment of a portion of the purchase price over time or a future point in time, regardless of whether or not the sale is of stock or assets, that portion of the transaction involves a security.[vii]


The conclusion is that the sale of any ASC most likely involves a security. The success of a center depends in large part on its ability to bring in the right mix of physicians through an initial syndication of the LLC or LP. An offering of units in the vast majority of cases falls under the jurisdiction of federal and state securities laws.


What is a broker?

To protect investors and assure the stability and integrity of the nation's public and private market system, the government closely scrutinizes those involved in the sale of securities, requiring them to register and pass corresponding qualification exams.


Under Section 15(a) of the Securities Exchange Act of 1934, any person acting as a "broker" must register with the SEC. According to the act, a "broker" is "any person engaged in the business of effecting transactions in securities for the account of others" or, if a natural person, to be associated with a registered broker-dealer.


"Effecting a transaction" is interpreted as participating "at key points" in the "chain of distribution" of securities. In the case of a surgery center, a business broker typically participates in the "chain of distribution" when he or she identifies potential buyers, advises the parties on the merits of a sale, negotiates the transaction, executes it or performs any combination of these.


If a financial intermediary takes part in any of these activities and receives compensation based on the success or size of the transaction, then the intermediary is almost certainly required to register with the SEC as a broker-dealer, is subject to extensive compliance regulations and is required to be a member of the SEC's self-regulating arm, the Financial Industry Regulatory Authority (FINRA), formerly known as the National Association of Securities Dealers.


The first step to ensuring that any ASC transaction complies with the law is knowing who needs to register as a broker. Helpfully, the Securities and Exchange Commission Guide to Broker-Dealer Registration[viii] lists the following as those who may be required to register as a broker, depending on several factors:


- "Finders," "business brokers" and other individuals or entities that engage in the following activities:

  • Finding investors or customers for, making referrals to, or splitting commissions with, registered broker-dealers, investment companies (or mutual funds, including hedge funds) or other securities intermediaries.
  • Finding investment banking clients for registered broker-dealers.
  • Finding investors for "issuers" (entities issuing securities), even in a "consultant" capacity.
  • Engaging in, or finding investors for, venture capital or "angel" financings, including private placements.
  • Finding buyers and sellers of businesses (i.e., activities relating to mergers and acquisitions where securities are involved).


- Investment advisers and financial consultants.


- Foreign broker-dealers engaging in activities in U.S. markets.


- Persons who operate or control electronic or other platforms for trading    securities.


- Persons who market real estate investment interests, such as tenancy-in-common interests, that are securities.


- Persons who act as "placement agents" for private placements of securities.


- Persons who effect securities transactions for the account of others for a fee, even when those other people are friends or family members.


- Persons who provide support services to registered broker-dealers.


- Persons who act as "independent contractors" but are not "associated persons" of a broker-dealer.


The SEC guide offers the following questions:

  • Do you participate in important parts of a securities transaction, including   solicitation, negotiation or execution of the transaction?
  • Does your compensation for participation in the transaction depend upon, or is it   related to, the outcome or size of the transaction or deal?
  • Are you otherwise engaged in the business of effecting or facilitating securities transactions?
  • Do you handle the securities or funds of others in connection with securities transactions?

According to the guide, a "yes" answer to any of these questions indicates that a person may need to register as a broker. Notably, the guide does not suggest that a person listed above is exempt from registering if he or she does not receive transaction-based compensation.


One of the murkiest areas in the sale of ASCs concerns unregistered financial intermediaries. These can include certified public accountants, business development consultants, healthcare advisers and resource connectors, mergers and acquisition specialists, business brokers, real estate agents, individuals familiar or connected with the center and radiation oncology marketplace and lawyers. The law does not clearly set out what activities can be undertaken by unregistered broker-dealers. Most of the time, they are not registered with the SEC, even when the law suggests they should be.


According to a report from the American Bar Association's Task Force on Private Placement Broker-Dealers: "There exists a major disconnect between the various laws and regulations applicable to securities brokerage activities and the methods and practices actually in daily use by which the vast majority of capital is raised to fund early stage businesses in the United States." The perception exists that "this vast and pervasive 'gray market' of brokerage activity creates continuing problems for the unlicensed brokers, the businesses which rely upon them for funding, attorneys and other professionals advising both the brokers and businesses, and, last but not least, the federal and state regulators who are charged with the obligation to enforce laws and regulations that are out of step with current business practices."[ix]


Unregistered financial intermediaries who have provided services to surgeon owners who want to sell their centers have pretty much "flown below the regulatory radar." In some cases, it is conceivable that some intermediaries knowingly violated securities laws hoping they would be lucky enough to avoid the potential legal ramifications for themselves and their clients. Some crossed their fingers and said a prayer that everything would go fine or that the statute of limitations would expire before any issues were raised. Others were simply not aware that what they were doing violated the law. In effect, the prevailing attitude has been "no harm, no foul."


The potential for harm is a real risk, though. Unregistered financial intermediaries can create a multitude of problems for physician-owners seeking to sell or syndicate their centers. If an unregistered intermediary is determined to be "engaged in the business of selling securities for compensation," that person may be subject to criminal or civil actions or both. The SEC and state securities authorities may bring an enforcement action not only against the registered intermediary, but also against the seller – for aiding and abetting a violation of the registration provisions. Sanctions may include civil penalties, forfeit of profits, with interest, or other court-ordered sanctions. Owners may also face risks from private litigants. The buyer of your ASC or radiation oncology center may have the right to rescind or unwind the deal altogether under Section 29(b) of the Exchange Act.


"Almost all states prohibit paying compensation to non-exempt unregistered broker-dealers as a requirement for private offering exemptions. Thus, paying transaction-based compensation to unregistered persons may lead to a claim that the issuer sold unregistered securities with no exemption, and the investor can seek to rescind the investment."[x] The buyer also may be entitled to damages.


On May 17, 2010, the staff of the SEC refused to assure a law firm, Brumberg, Mackey & Wall, P.L.C.(BMW), that it would not recommend enforcement action if it provided services to a company called Electronic Magnetic Power Solutions (EMPS).[xi] The firm planned to help EMPS raise money to finance its operations and development by introducing to EMPS individuals and entities who might be interested in investing in equity or debt instruments. In return, the firm would receive a percentage of the gross amount EMPS raised as a result of the introductions. The SEC said that if compensation is based on the successful funding from an investor introduced by BMW then the law firm is required to register as a broker-dealer. The staff also stated that "the receipt of compensation directly tied to successful investments in EMPS's securities by investors introduced to EMPS by BMW (i.e., contingent/success-based compensation) would give BMW a 'salesman's stake' in the proposed transactions and would create a heightened incentive for BMW to engage in sales efforts." The SEC staff also said: "A person's receipt of transaction-based compensation in connection with these activities is a hallmark of broker-dealer activities."


So what happens when an unregistered business broker identifies a prospective purchaser for your radiation oncology center, advises the parties on valuation, assists with the collection of the various agreement, generally facilitates what all parties believe will be an asset sale — and then the transaction is executed with a securities component? Well, you have suddenly run afoul of the securities regulations. You say you didn't mean to? See you in court, the SEC will say. The problem is that many deals that start out as asset-based transactions are ultimately completed — for one reason or another — as securities-based transactions. Even when the parties plan for an asset sale and devise the transaction structure — ­­­­how, when and by what means you are paid — tax and regulatory considerations may arise that favor executing the deal as a securities transaction.


Fraud and misconduct are not required for legal trouble. For example, from 2001 through early 2005, Michael E. Fein and Stephen E. Saltzstein, who controlled a firm called Ram Capital Resources, engaged in the business of identifying investors for offerings known as PIPEs, or private investments in public equities. They solicited investors — a majority of which were hedge funds — to invest in these offerings. The investors then compensated Ram by paying a percentage of the gross amount invested and, in most instances, allocated to Ram a percentage of any warrants they received as part of their investment. Ram also helped structure these offerings and negotiated terms with investors and issuers. The only problem was that the two men failed to register with the SEC.


The SEC found Mr. Fein and Mr. Saltzstein in willful violation of the broker-dealer registration provisions of the Securities and Exchange Act. [xii] The SEC shut down their business, suspended Mr. Fein and Mr. Salzstein from associating with any broker or dealer for up to 12 months and required each to forfeit $364,721, plus interest of $83,657. Mr. Fein and Mr. Saltzstein also had to pay civil penalties of $90,000 and $60,000, respectively. [xiii]


If a seller is represented in a securities transaction by an unregistered financial intermediary, the seller is under no legal obligation to pay any transaction-based commission on the securities portion of the transaction, regardless of the terms of the seller's contract with the intermediary, because that contract will be deemed null and void


For instance, in a Massachusetts case, Novelos Therapeutics, Inc. v. Kenmore Capital Partners, Ltd., a pharmaceutical company, Novelos, sought money for clinical trials on a drug it had developed. Novelos entered into a contract with Kenmore, whereby Kenmore would serve as an "adviser" to assist Novelos in raising capital. Although Kenmore was not able to assist in the sale of the expected amount of private equity, it regularly filed invoices for advisory services (this contract for advisory service fees was voided). Novelos filed a lawsuit against Kenmore and Kenmore responded with a breach of contract suit contending that Novelos owed Kenmore fees. The court ruled that Novelos was not required to compensate Kenmore because Kenmore was acting as an unlawful broker-dealer under Massachusetts law. The court reasoned that because the contract calling for "advisory" services to be performed by Kenmore was in essence calling for the performance of unlawful broker-dealer services, the contact was void in its entirety. Kenmore could not enforce payment for its services, and the court ruled that Kenmore might still be subject to other civil and criminal penalties under state law.

Enforcement crackdown

The activities of unregistered broker-dealers are attracting more regulatory scrutiny, both at federal and state levels. Unregistered consultants argue they are not "effecting transactions" in securities and therefore are not acting as broker-dealers when they facilitate the transfer of ownership. The SEC and the state securities agencies disagree with them.


For instance, the Hallmark Capital Corp. sought an opinion from the SEC in June 2007 on whether it needed to register as a broker-dealer. The firm stated in a letter to the agency that it assists small businesses with mergers and acquisitions and provides strategic business consulting services. If a client wants to sell his business, the firm prepares a confidential information summary, identifies companies that might be interested in the purchase, qualifies prospective buyers and arranges meetings. The firm made it clear that "at no point does HallCap handle the securities or funds of others." The SEC still concluded that "it appears that Hallmark Capital Corp. would be required to register with the Commission as a broker-dealer."


The SEC has also addressed the unregistered broker-dealer issue in its revisions to the rules on accountants' independence under Section 201 of the Sarbanes Oxley Act of 2002. Rule 10A-2 under the Exchange Act now states generally that a certified public accounting firm is prohibited from acting as a promoter or underwriter, or making investment decisions on behalf of an audit client, among other things. The amendment expanded the scope of the prohibition to address situations where an accounting firm acts as an unregistered broker-dealer. In the commentary, the SEC notes that selling – directly or indirectly – an audit client's securities presents a threat to independence, regardless of whether the broker-dealer affiliated with the firm was registered or not. Perhaps more important is the pronouncement, in footnote 82 of Release 33-8183, that states: "Accountants and the companies that retain them should recognize that the key determination required here is a functional one (i.e., is the accounting firm or its employee acting as a broker-dealer?). The failure to register as a broker-dealer does not necessarily mean that the accounting firm is not a broker-dealer."


As indicated earlier, the statutory definition of "broker" covers persons "engaged in the business of effecting transactions in securities for the account of others." A person may "effect transactions" in any number of ways, including assisting in the structure of prospective securities transactions, helping a seller identify potential buyers of securities, or by marketing transactions that contain securities components. A person may be "engaged in the business," among other ways, by receiving transaction-related compensation or by holding itself out as a broker-dealer. Please note that for the purpose of selling an ASC, the issuer is the same as a seller and the investor is the same as a buyer.


Furthermore, in footnote 84, the commission notes that broker-dealers "provide an array of services that may include certain analyst activities," suggesting that when providing analytical services to an issuer or investor, the question of broker-dealer registration is raised even beyond the concerns in expressed in footnote 82.[xiv]


States are cracking down on the unlicensed individuals who locate and solicit buyers. "Finders" are normally instrumental in raising capital for private placements and are normally compensated based on the amount of money they raise. Often, finders will actually sell a security on behalf of an issuer.


In California, such conduct carries harsh civil penalties.[xv] Following the passage of California Assembly Bill 2167, Cal. Corp. Code §& 25501.5 was added and reads:


(a)(1) A person who purchases a security from or sells a security to a broker-dealer that is required to be licensed and has not, at the time of the sale or the purchase, applied for or secured from the commissioner a certificate under Part 3 (commencing with Section 25200), that is in effect at the time of the sale or purchase authorizing the broker-dealer to act in that capacity, may bring an action for rescission of the sale or purchase or, if the plaintiff or the defendant no longer owns the security, for damages.


(2) Upon rescission and tender of the security, a purchaser may recover the consideration paid for the security plus interest at the legal rate, less the amount of income received on the security.


(4) Damages recoverable under this section by a purchaser shall be an amount equal to the difference between the following: (A) the price at which the security was bought plus interest at the legal rate from the date of purchase; (B) the value of the security at the time it was disposed of by the plaintiff plus the amount of any income received on the security by the plaintiff.


(b) The court, in its discretion, may award reasonable attorney's fees and costs to a prevailing plaintiff under this section.


In Pennsylvania, in another example, the state securities commission has decreed that "Pennsylvania does not allow the payment of finder's fees for sales of securities to Pennsylvania residents." Indeed, persons who attempt to obtain finder's fees are deemed to be broker dealers under Pennsylvania law and must register as such with the Pennsylvania Securities Commission. The failure to have registered before earning a finder's fee is a violation of Section 301(a) of the 1972 Act, 70 P.S. § 1-301(a).[xvi]


On Feb. 17, 2009, FINRA proposed to the SEC a rule change to adopt Rule 1032(i), which requires a person to register as an investment banker with FINRA and pass a corresponding qualification examination if his 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 or other corporate reorganizations or business combination transactions. The SEC issued an order approving the rule change and it took effect on Nov. 2, 2009.


Three parts of the rule are worth noting. First, the phrase "advising on or facilitating" is so all encompassing that is difficult to imagine what kind of value an individual might lend to the sale of an ambulatory surgery center that could not be incorporated within that phrase. Second, the term "asset sales" is included but was not part of the definition of a security in the Security Act of 1933, thus broadening the definition of a security. Third, the rule states "whether through a public offering or private placement." Many industry experts incorrectly associate "securities" only with publicly traded stocks, which I have shown to be a misconception.



Physician-owners of ASC who are contemplating a transaction should be certain their advisers are properly registered. Owners who pay transaction-based compensation to non-exempt unregistered broker-dealers incur several risks. Sellers may be liable if they knowingly assist or abet the violation of the broker-dealer registration requirement. Sellers may also face risks from private litigants. Paying transaction-based compensation to unregistered persons may lead to a claim that the issuer sold unregistered securities with no exemption, and the investor can seek to rescind the investment.


Take care to engage legal representatives familiar with securities laws and how they might affect your specific circumstances. They will assist you in the risk-assessment process and preparation of the proper documentation to comply with the law. If anything, recent decisions by courts and regulators indicate that anyone involved in finding buyers for transactions that contain securities in return for compensation should be registered as brokers, with dire consequences for both the finder and the issuer of the securities involved if they are not.


Blayne Rush is the president of Ambulatory Alliances ( and is a SEC Registered and FINRA Licensed Investment Banker. He specializes in acquisitions, alliances and access to capital markets for surgery and radiation oncology centers. He can be reach though the Ambulatory Alliances web site or by calling (469) 385-7792.




[iii] Section 3a item 10 of the Securities Act of 1934

[iv] See SEC v. W.J. Howey Co. and SEC v. Glenn W. Turner Enterprises, Inc.


[vi] Expressly included in the "securities" definition in some states, other states apply "investment contract," "profit-sharing agreement," "risk capital analysis," or "characteristics of stock" tests Limited Liability Company Interests As Securities,73 Denver University Law Review 425 (1996)

[vii] "seller's note" "note" is in the statutory definition of a "security" A "note" is presumed to be a "security" unless it bears strong "family resemblance" to instruments held not to be securities Reves vs. Ernst & Young, U.S. Supreme Court (1990) See Promissory Notes as Securities, 39 ALR Fed 357 (2004) E.g., In the Matter of Gebhart, 2006 SEC LEXIS 93 (1/18/06) See SEC Release No. 33-4412 (1961) State securities regulators often call a "note" a security


[ix] The Report and Recommendations of the Task Force on Private Placement Broker-Dealers, by the Task Force on Private Placement Broker-Dealers, ABA Section of Business Law, Business Lawyer, May 2005





[xiv] The Report and Recommendations of the Task Force on Private Placement Broker-Dealers, by the Task Force on Private Placement Broker-Dealers, ABA Section of Business Law, Business Lawyer, May 2005

[xv] at 3



This paper 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 paper. This paper was not written by an attorney licensed in your state. Those seeking legal advice or assistance should contact an attorney.


Securities offered through Bedminster Financial Group, LTD. member FINRA, SIPC, 4920 York Rd., Ste 2DD1. P.O.Box 295, Holicong, PA 18928. Ph (215) 794. 9016




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