Mid-Atlantic Health Law TOPICS
A Securities Law Primer
Doctors are increasingly finding themselves owners of interests in various health care companies. For example, some doctors are trading their practices for stock in practice management companies. Other doctors are investing in ambulatory surgery centers, or joining specialty networks. In these scenarios, the doctors' ownership interests in these companies are likely "securities," and, therefore, the issuers of these securities must comply with federal and state securities laws. Accordingly, like it or not, a basic understanding of the securities laws has become a necessary evil for many physicians.
A. Federal Securities Laws
Under the Securities Act of 1933, offers and sales of securities by a health care company to residents of its home state are exempt from federal registration if the health care company is considered "doing business" in its home state.
Accordingly, if a health care company that only operates in Maryland offers ownership interests only to physicians or medical practices residing in Maryland, no federal securities registration or filing is required. (Whether or not the offering is "registered," federal law still prohibits any fraud or misleading statements in connection with the sale of the interests.)
If more than a single state is involved, the health care company must register the offering with the federal Securities and Exchange Commission (SEC) or qualify for an exemption from registration.
The most common exemption available (and often used to raise venture capital for businesses) is the "private placement" exemption under the SEC's Regulation D. In a health care offering pursuant to Regulation D, there generally can be no more than 35 physicians or medical practices which purchase interests, but purchasers who meet certain financial tests ("accredited investors") are excluded from the 35 purchaser limitation.
An accredited investor includes an individual with a net worth (or net worth jointly with his or her spouse) of over $1,000,000, or an individual who has had income in excess of $200,000 (or joint income with his or her spouse in excess of $300,000) in each of the two most recent years, and expects the same income level for the current year. If a purchaser is a medical practice formed as a corporation (P.A.), partnership or limited liability company, it will meet the financial test if it either has assets in excess of $5,000,000 or is owned by individuals each of whom meets the income or net worth test.
Regulation D contains certain additional requirements pertaining to the information provided to investors, the manner in which the offering is made, and the filing of a notice with the SEC.
Certain offerings may qualify for other exemptions or simplified registration procedures, depending on the aggregate value of the securities being sold and the jurisdictions in which offers and sales will be made.
If a health care company plans a public offering of stock, a full registration process will, most likely, be necessary. A public offering is a long and expensive process. Usually, however, it is not necessary to incur those expenses if an exemption is available for the initial stages of the health care company's life.
B. State Securities Laws
If federal (SEC) registration is required, Maryland and most other states coordinate their requirements, in some fashion, with the federal registration. If SEC registration is not required, state registration or an exemption from state registration is still necessary.
The private offering exemption in Maryland (and many other states) is also limited to 35 purchasing physicians or medical practices, other than those which meet the accredited investor financial tests, and requires compliance with additional terms (similar to Regulation D).
Accordingly, if the offering is within these limits, a descriptive offering memorandum would be distributed to potential investors, a filing would be made with the state securities administrator (in Maryland it is the Office of Attorney General, Division of Securities), and the offering and sales would be exempt from state registration.
If, on the other hand, more than 35 physicians (other than those who meet the financial tests) invest, a private exemption (or "no action letter") may be needed to avoid state (and federal) registration. There is precedent in several states (including Maryland) for granting a private exemption for medical affiliations. State law also prohibits any fraud or misleading statements in connection with the sale of the interests.
C. Offering Materials
The offering materials that a health care company prepares to solicit investor interest serve two purposes. These materials are a marketing tool, and, as such, will be designed and written to shed favorable light on the health care company. The materials must also disclose material information about the health care company that an investor should consider prior to an investment.
As such, the offering materials must be forthright in disclosing risks and even negative information. Accordingly, great care must be used in drafting these documents.
When a business is formed, raises capital or acquires assets, through the issuance of ownership interests, federal and state securities laws are triggered. The business of medicine is no exception to this rule.
September 21, 1998