When raising capital for outpatient surgery projects, most physicians and management companies assume they can rest easy if the transaction complies with fraud-and-abuse and anti-referral statutes. But the penalties for violating securities laws could include large fines, hefty legal defense costs and jail time - and you'd have to rescind the transaction and refund investors' money, with interest. Here, I'll explain Securities and Exchange Commission (SEC) rules for buying and selling outpatient center securities and steps to take to avoid penalties.

Understanding Regulation D
Unless an exception is available, you must register each security with the SEC and state securities authorities. Registration is time-consuming and expensive; you typically want to exempt your outpatient surgery center project from registration. One popular exemption permits non-public sales of securities. But the SEC has not clearly defin-ed "public offering," and some participants inadvertently violate general solicitation rules.

Instead, structure the venture so it falls within Regulat-ion D, an SEC safe harbor that ensures a private placement has been conducted. The SEC focuses on three factors to determine whether an advertisement, article, meeting or other communication offering securities falls in the safe harbor:

• Relationship. You should have a pre-existing relationship with a potential investor. If an existing surgery center recruited physicians with privileges at the same hospital as the center's owners, such pre-existing relationships would help prove the recruitment was not a general solicitation. But if a management company sought to expand its geographic area, it should carefully consider its contacts.
• Content. Securities laws do not specifically prohibit circulating advertising or other activities that market a project; the issue is analyzed case-by-case. To be safe, use materials that generically describe the project and your business, and don't refer to any investment.
• Timing. Wait a reasonable period of time (at least 45 days) after initial contact with a potential investor if there is no pre-existing relationship before sending securities-related materials.

What you can do
Consult a lawyer who practices securities law to obtain advice on structuring an offering. If you don't have pre-existing relationships with potential investors, here are some guidelines for your securities offering.

• Begin communication. Your initial letter should generically describe the project's business but not refer to any particular investment or offering. It should invite persons to contact you for more information. The surgery center should mail the letter only to sophisticated investors - persons experienced enough to understand the investment's risks and have the resources to withstand a possible loss.
• Meet informally. Generally describe the surgery center's business, not specific information.
• Schedule an introductory meeting. If the physician is interested in continuing discussions, proceed with a meeting featuring general information about the surgery center's business. Ask the person to complete an investor-qualification questionnaire detailing his level of wealth and sophistication.
• Review. If the person is a sophisticated investor, you may begin discussing the investment. Discussion should occur well after initial contact with the person. Give potential investors an offering circular and ask them to review it.
• Follow up. Answer questions about the offering.
• Finalize. Schedule payment of money and execution of closing documents.

Some protection
Follow these guidelines and you should not find yourself conducting an impermissible general solicitation that renders the protections of Regulation D unavailable. Keep in mind that even if you get exempted from registering, you must still fully disclose financial and regulatory information to federal and state securities authorities.