Tag: Glenn Truitt

Highs & No’s: The Do’s & Don’ts of Cannabis Investing

-By Caleb M. Zobrist, Esq., Glenn H. Truitt, Esq. & David J. Housey

Read Our Digital Issues

Investors – especially those unfamiliar with the cannabis market – have traditionally been hesitant to invest in an industry the federal government views as illegal. While this still holds true for most institutional investors, smaller firms and groups of wealthy individuals are becoming increasingly interested in cannabis.1 However, the majority of information surrounding these investments still lies somewhere between rumor and nuance, and the dizzying array of so-called cannabis “experts” can lead one to the conclusion that there is no such thing (there is, but they’re hard to spot).

The Cannabis industry has a lot in common with business in general. The industry includes agricultural, commercial processing, retail and laboratory businesses – each of which has a broad market of comparable enterprises for comparison. The maturity of these sectors also means that traditional accounting and financial reporting is more than adequate for business analysis purposes.

So, you’re looking to invest in marijuana. You’re not alone. Billions of dollars of private equity are flowing into the cannabis business – with billions more flowing into the rapidly growing public market for marijuana securities. However, if you have even a remote connection to this sector – you’ve likely been solicited (or know someone who has) with a private equity opportunity. Despite the federal illegality of the cannabis industry, in general (owing to the classification of marijuana as a Schedule I drug, as governed by the federal Controlled Substances Act), federal securities laws still apply to investment in marijuana businesses. Here’s a quick guide to what to do next.

Securities

The Supreme Court has adopted a flexible and liberal approach in determining what constitutes a security. In its famous decision of SEC v. W.J. Howey Co., 328 U.S. 293, 90 L.Ed. 1244, 66 S.Ct. 1100 (1946), the Court held that land sales contracts for citrus groves in Florida, coupled with warranty deeds for the land, and a contract to service the land, were “investment contracts” and thus securities. The Court stated that

[a]n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party. 66 S.Ct. at 1103.

In general, all securities offered in the U.S. must be registered with the SEC or must qualify for an exemption from the registration requirements. Registering securities (as publicly traded companies do) is an exceptionally expensive undertaking, and requires the full-time support of an experienced securities law firm. It is critical for the success of the issuance of private securities that they avoid registration by qualifying for a Regulation D exemption and properly documenting that exemption.

No matter what you are told by a cannabis company seeking investment, if you give them money, with an expectation of return on your investment without any material effort on your part: you are being issued a security. As a result, you should be provided with a private placement memorandum (“PPM”; a prospectus and required legal disclosure statement) and a Subscription Agreement (providing the terms of your investment – and your qualification as an accredited and/or sophisticated investor). The PPM must include information regarding its qualification for a Regulation D exemption.

Valuation

One of the greatest challenges facing investors in new markets is proper valuation of marijuana enterprises. Speculation and short supply can drive equity valuations into inflated multiples based on rapid growth expectations. Conversely, perceived risk can be overestimated and drive equity valuations into substandard positions. No matter what, the one valuation you should be skeptical of is the one provided by the issuing company. The offer, itself, represents a valuation (e.g. if you get offered 10% of a company for $100,000 investment – that’s a $1,000,000 valuation), but may also include detailed analysis to highlight the valuation discount or premium.

Nevertheless, you should have the pro forma financials reviewed by an independent financial professional – including an independent valuation, for perspective. The resulting quantitative analysis will provide important information on the nature of the offer you’ve been provided.

Compliance

For the amateur investor, legal compliance is likely your biggest concern. For professional money, the regulatory environment is just another variable in the valuation. While compliance risk has always been a material element of cannabis investing (and will be until marijuana is legalized at the federal level), it has become particularly sensitive in light of Attorney General Jeff Sessions rescinding the 2013 Cole Memo, which had directed US attorneys not to pursue properly-licensed marijuana businesses in marijuana-legal states.

If this repeal had gone unmentioned or unopposed, the increased risk would materially depress valuations and chill investment. However, opposition to the repeal was swift and widespread, including (at the federal level) U.S. Congressmen Polis of Colorado, Rohrabacher of California, and Blumenauer of Oregon sponsoring an amendment to the House’s next budget bill prohibiting the Justice department from spending money on the prosecution of legally-compliant cannabis businesses.

Additionally, Cannabis-legal states have indicated they will aggressively fight back any federal action taken to shut down state-legal Cannabis businesses. Many industry analysts cite the expected tax revenues that have already been budgeted, and the increase in local economies via job creation and the deep political unpopularity involved in eliminating or even reducing those revenues.

The bottom line is that cannabis investment remains at record levels with stable valuations and public sentiment strongly in favor of legalization (across both parties). Eventual legalization is all but inevitable.

Conclusion

It’s a great time to invest in cannabis, despite what you may have heard in the news. When it comes to investment, follow the money – and with little or no money exiting cannabis companies, it remains a bull market. However, once you’re ready to invest:

Make sure private securities offers are properly documented; and
Secure your own independent valuation.

Because a good investment can still be a bad (or illegal) deal.


Glenn H. Truitt, Esq. is a managing partner at Ideal Business Partners (www.idealbusinesspartners.com), a multidisciplinary professional services firm serving healthcare professionals with state-of-the-art legal, financial compliance and strategic advice, working together to lift up their practices. IBP consults with ComplyPro (www.mycomplypro.com), a HIPAA compliance services company, serving Nevada and southern California, and employing both traditional and digital compliance tools to develop comprehensive, customized compliance solutions for any size practice.

Malvika Rawal, Ph.D., J.D., is a law clerk at Ideal Business Partners. She received her Master of Science at the University of Delhi in Biomedical Sciences and her doctorate degree in Free Radical and Radiation Biology at the University of Iowa. She then received her Juris Doctor at the University of Iowa College of Law in May 2016. Rawal is deeply involved with ComplyPro, a HIPAA compliances services company.

1 Marijuana Business Daily. Marijuana Business Factbook 2017. p.6. https://mjbizdaily.com/wp-content/uploads/2017/05/Factbook2017ExecutiveSummary.pdf

The MD-DC

MD

The Surprising Challenge Of Doctors & Chiropractors Working Together & How To (Legally) Do It

Allopathic physicians with a Medical Doctorate (M.D.) or a Doctorate in Osteopathic Medicine (D.O.) often find it valuable to partner with a chiropractic physician (D.C.). This relationship is especially valuable if the allopathic physician is a primary care provider. The relationship can also be quite profitable for a D.C. as well. However, the two types of providers cannot form a direct partnership in most states due to the Corporate Practice of Medicine (CPOM) laws. In addition, anti-referral laws such as the Anti-Kickback Statute (AKS) prohibit the individual providers from receiving financial benefits of any kind for referring patients, especially from other providers. This creates a paradoxical situation where all parties (the M.D./D.O., the D.C., and the patients) benefit from this specific partnership but significant legal roadblocks stand in its way. This article discusses how M.D./D.O.s may work with a D.C. to provide better care for their patients without running afoul of the various regulations governing medical practice.

The M.D.-D.C. partnership (commonly referred to as the “MD-DC”) creates substantial advantages for both types of providers and their patients. The first major advantage of the relationship is higher reimbursements. If an M.D. examines the patient, and sets and supervises the treatment plan for the D.C. to follow, the practice is allowed to bill for the chiropractor’s services as physical therapy under the M.D.’s billing code. For the same procedure, insurance providers, both government and private, reimburse up to three (3) times as much when billed under the M.D. compared to when billed under the D.C. In addition, if the D.C. is working under the supervision of an M.D., s/he can provide physical therapy services to the patients, apart from and in addition to chiropractic care.

The patients also derive significant advantages from MD-DC relationship. An M.D. is capable of treating a larger number of maladies than a D.C.; who must limit his/her practice to treating musculoskeletal issues. Chiropractic medicine only offers minimal prescriptive authority and most D.C.s are not even authorized to write prescriptions, for pain medication or otherwise. Therefore, if both types of providers are collocated and partners, patients only need to go to a single clinic to receive treatment for health issues other than musculoskeletal injuries, including primary care. Also, M.D.s are authorized to issue pharmaceutical prescriptions. Therefore, if the patient’s pain is not adequately addressed through chiropractic manipulations, they may be referred to the M.D. to receive pain management treatment, including pharmaceutical prescriptions. If needed, the M.D. may also be able to refer the patients directly to receive surgical care, cutting out an additional referral step and office visit.

The MD-DC provides patients with access to conservative care, allowing providers to treat patients’ issues with minimal pharmaceutical assistance and expense. In fact, many musculoskeletal injuries may be treatable with only chiropractic manipulation. Easy access to and optimal utilization of chiropractic manipulation allows the M.D. to prescribe a lower dose of analgesic (pain relieving) medication for musculoskeletal injuries. Analgesic medications, including opioids, have significant side effects, most notably, substance addiction. This MD-DC therefore aligns well with national public policy to combat the over-prescription of medications like opioids.

Unfortunately, despite the equitable advantages of these partnerships, they are legally difficult. CPOM laws in most states, including Nevada, prohibit medical practices from being owned by persons not licensed to practice medicine. See NRS 89.070.1. These laws also prohibit a non-M.D./D.O. from having any voting control (through equity) in a professional medical entity. Id. Therefore, an M.D. and a D.C. cannot form a professional medical entity together to provide medical services under Nevada law. However, these providers may still be able to work together under different types of arrangements.

The M.D. can own and operate a medical practice where s/he employs the D.C. to provide their services (the “Employment Model”). This employment arrangement can either be a flat, salary-based compensation, or it may provide the D.C. with an opportunity to earn a bonus based upon case volume and overall practice performance. However, for these bonuses, the M.D. employer and D.C. employee must negotiate the bonus compensation in advance and this bonus arrangement must be memorialized as a part of the D.C.’s employment agreement which must have a term of at least one (1) year to avail the practice of the employment safe harbors created in the anti-kickback laws.

The second method of the MD-DC is the management services organization (“MSO”) model. The two providers form an MSO which does not provide medical services. However, this entity may provide all of the necessary non-medical services to the M.D.’s (and the D.C.’s) practices/clinics, including but not limited to, leasing/buying space and equipment, paying non-clinical staff, billing and collecting, etc. The profit that the MSO makes for providing these non-medical services may be shared legally between the M.D. and the D.C. Each partner in the MSO may choose whether to contribute capital or services, or a combination thereof, and receive distributions of profit accordingly. Further details of the MSO structure can be found in our article entitled ‘The ABCs of the MSO’ published in the summer 2017 edition of Vegas Legal Magazine.1 This article explains the MSO corporate structure, the regulations governing it, and the common pitfalls providers face when participating in such entities.

The State of California is a notable exception in this regard since its CPOM law, the Moscone-Knox Professional Corporations Act, allows other licensed personnel such as chiropractors, psychologists, optometrists, clinical social workers, etc. to receive equity in a professional medical corporation, so long as the sum of the equity held by such other licensed personnel does not exceed forty-nine (49%) percent. Conversely, in a professional chiropractic corporation, the licensed allopathic physician(s) may hold equity so long as the total equity held by a non-chiropractor does not exceed forty-nine (49%) percent.

M.D.s and D.C.s may use either of the aforementioned arrangements (or combinations/versions thereof) to structure their relationship. However, both federal and state regulations addressing anti-referral and CPOM laws are extremely broad and complex. The arrangement, as set up, must be exactingly complaint with all the relevant criteria to survive regulatory scrutiny. Providers must be cognizant of not just the letter of the law, but also its spirit. In addition, the providers must put a robust dispute resolution structure in place at the outset so the interests of all parties, including the patients, are protected in the event of a disagreement between the providers down the line.

The providers are strongly encouraged seek the assistance of experienced healthcare counsel and financial advisors to set up an MD-DC. Counsel will ensure the established arrangement is not only compliant with law and public policy, and will also help implement robust measures to protect not just the interests of the individual parties, but also the confidentiality, integrity, and accessibility of the patient records in the event of a dispute. Finally, utilizing the services of a certified public accountant (CPA) with healthcare experience will help ensure that both providers receive equitable compensation for their hard work and capital, irrespective of the type of arrangement they decide on.

A partnership between an M.D./D.O. and a D.C. creates immense value in the healthcare marketplace. However, given the breadth and depth of the regulations governing such a relationship and the volume of increasingly lucrative violations thereof, it is easy for providers to be lured into relationships that may land them into trouble. Aspiring MD-DC participants should understand that the power of partnership can be as risky as it is profitable. Collaboration is just as important clinically as it is professionally, and the right professional team can make the MD-DC everything it promises to be, and more.


Glenn H. Truitt, Esq. is a managing partner at Ideal Business Partners (www.idealbusinesspartners.com), a multidisciplinary professional services firm serving healthcare professionals with state-of-the-art legal, financial compliance and strategic advice, working together to lift up their practices. IBP consults with ComplyPro (www.mycomplypro.com), a HIPAA compliance services company, serving Nevada and southern California, and employing both traditional and digital compliance tools to develop comprehensive, customized compliance solutions for any size practice.

Malvika Rawal, Ph.D., J.D., is a law clerk at Ideal Business Partners. She received her Master of Science at the University of Delhi in Biomedical Sciences and her doctorate degree in Free Radical and Radiation Biology at the University of Iowa. She then received her Juris Doctor at the University of Iowa College of Law in May 2016. Rawal is deeply involved with ComplyPro, a HIPAA compliances services company.

Read Our Digital Issues

Like Us On Facebook