In 2021, the Securities and Exchange Commission (“SEC”) announced settled charges against investment adviser VII Peaks Capital, LLC (“VII Peaks Manager”) and its co-owner and managing member, Gurprit Chandhoke (“Chandhoke”), for breaching their fiduciary duty by engaging in transactions that benefitted themselves to the detriment of VII Peaks BDC, a business development company (BDC) managed by VII Peaks Manager.

According to the SEC’s order, from late 2015 through 2017, VII Peaks Manager and Chandhoke breached their fiduciary duty to VII Peaks BDC by engaging in transactions that were not disclosed to or approved by the Board of Directors of the BDC. The SEC charged that VII Peaks Manager collected over $722,500 in due diligence fees for loans made by the BDC to various portfolio companies, even though the loan documentation said that the fees belonged to the BDC. The SEC also charged that VII Peaks and Chandhoke caused VII Peaks BDC to make loans to portfolio companies in order to generate the fees for themselves.

Without admitting or denying the SEC’s findings, VII Peaks Manager agreed to a cease-and-desist order and to pay disgorgement of $722,500, prejudgment interest of $123,199, and a civil penalty of $185,000, while Chandhoke agreed to an associational suspension, investment company prohibition, and penny stock suspension, all for a period of twelve-months.

VII Peaks Manager, an investment management firm based in Orinda, California, reportedly invests primarily in discounted corporate fixed income securities and employs a “co-optivist” TM (co-operative activism) approach where they act as cooperative, activist investors who work with senior management teams of target companies to proactively restructure their outstanding corporate debt.

VII Peaks BDC is now reportedly in the process of liquidating its assets, after which liquidation the BDC will provide an uncertain sum of cash proceeds to shareholders. SEC filings indicate that the public offering price of VII Peaks BDC started at $10.15 per share but the offering price was later reduced to as low as $8.75 per share in May 2016 due to the net asset value of the fund’s common stock being reduced. As of year-end December 2017, the net asset value per share was reportedly $5.31, suggesting that investors in VII Peaks BDC have lost substantial principal.

Non-traded BDCs, as their name implies, do not trade on a national securities exchange, and are therefore illiquid products that are hard to sell (investors can typically only sell their shares through redemption with the issuer, or through a fragmented and illiquid secondary market). In addition, non-traded BDCs have high up-front fees (typically as high as 10%), which are apportioned to the broker, his or her broker-dealer, and the wholesale broker or manager.

BDCs have been around since the early 1980’s, when Congress first enacted legislation amending federal securities laws allowing for BDCs — which are simply types of closed-end funds — to make investments in developing companies and firms that would otherwise have difficulty accessing financing. In light of a BDC’s leveraged structure and its typical investment portfolio, however, uninformed investors may come to learn too late that their investment carries considerable risk. Moreover, non-traded BDCs such as VII Peaks BDC carry additional risks, including their lack of liquidity and high upfront fees and commissions.

Investors who wish to discuss a possible claim may contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or via email at newcases@investorlawyers.net for a no-cost, confidential consultation. Attorneys at the firm are admitted in New York, Wisconsin and various federal courts around the country, and handle cases nationwide (in cooperation with attorneys located in those states if required by applicable rules).

THIS ARTICLE IS INTENDED AS ATTORNEY ADVERTISING AND IS NOT AN OFFICIAL ANNOUNCEMENT

Despite FS Investment Corporation II’s (“FSIC II”, or the “Company”) providing an estimated value of $8.31 a share, recent publicly-available information concerning pricing suggests a lower value, with secondary market transactions reportedly at prices of between $7.20 and $7.31 a share and a third-party tender offer being completed at $5.15 a share.

FSIC II is a publicly registered, non-traded business development company (“BDC”) that may have been marketed to some public investors as a relatively safe investment offering a steady yield of income. However, as a non-traded BDC, the Company carries with it considerable risks. Accordingly, in those instances where retail investors were solicited by a financial advisor to invest in FSIC II without first being fully informed of the risks associated with the investment, including the potential for principal losses, high upfront fees and commissions, and the illiquid market in the Company’s shares, investors seeking to recoup their losses may have legal claims against stockbrokers or investment advisory firms who sold them the shares.

Organized under Maryland law in July 2011, FSIC II commenced its operations on June 18, 2012 and is structured as a publicly registered, non-traded BDC under the Investment Company Act of 1940 (’40 Act). Publicly-available information suggests numerous retail investors participated in FSIC II’s initial offering, priced at approximately $10 per share. FSIC II is managed by FS Investments (formerly known as Franklin Square), a Philadelphia-based alternative asset management firm sponsoring a number of non-traded BDCs. As of June 30, 2018, FSIC II reported assets under management of approximately $4.77 billion.

As a BDC, FSIC II specializes in providing financing solutions to middle market private companies. Specifically, as set forth in certain SEC filings, the Company’s business model is aimed at making “debt investments in a broad array of private U.S. companies” with annual revenues of “$50 million to $2.5 billion at the time of investment.” By investing in smaller, private companies, BDCs like FSIC II can theoretically offer investors superior returns. However, such private-equity style investing is not without risk. These risks include reduced access to capital markets by the portfolio companies in which the BDC holds investments, as well as less transparency and information in these portfolio companies than is typically provided by publicly traded companies.

Furthermore, as a non-traded investment vehicle, FSIC II is illiquid and shares cannot be readily sold on a national securities exchange. Thus, investors seeking liquidity are restricted in their options. One option available to investors is to sell their shares back to the Company, although FSIC II’s Share Repurchase Program is only available on a quarterly basis, and further, redemptions are limited as to the number of shares the Company will redeem at a given time (based on an internal formula).

Because there is not an established, liquid public market in FSIC II’s shares, investors seeking immediate liquidity may elect to participate in a tender offer by an institutional, third-party investor. Alternatively, investors may seek to sell their shares on a limited and fragmented secondary market. Unfortunately, in either scenario, investors may learn the share pricing through a tender offer or by selling on a secondary platform is often disadvantageous, with shares selling at a substantial discount to FSIC II’s stated net asset value (NAV).

Through an SEC filing on August 20, 2018, MacKenzie Capital Management (“MacKenzie”) disclosed its purchase of a total of 47,474 shares pursuant to a tender offer, priced at $5.15 per share. Based on FSIC II’s approximate $10 offering price, investors who participated in this tender offer appear to have sustained significant principal losses approaching 50% (excluding distributions). Additionally, recent secondary market pricing suggests FSIC II investors seeking near-term liquidity may have sold at prices ranging from $7.20-$7.31 per share – substantially below FSIC II’s most recent stated NAV of $8.31 per share.

The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience representing investors in connection with complex non-conventional investments, including non-traded BDCs and REITs. Investors may contact us via the contact form on this website, by telephone at (866) 966-9598, or by e-mail at newcases@investorlawyers.net for a no-cost, confidential consultation. Attorneys at the firm are admitted in New York and Wisconsin and various federal courts around the country, and handle cases nationwide (in cooperation with attorneys located in those states if required by applicable rules).

Investors in FS Energy and Power Fund (“FSEP” or the “Company”) will likely encounter difficulty in selling out of all or a substantial portion of their FSEP position, in the event they seek to redeem their shares directly with FSEP’s sponsor, Franklin Square. Headquartered in Philadelphia, PA, FSEP was formed as a Delaware Statutory Trust in September 2010, and subsequently commenced its investment operations on July 18, 2011. Structured as a regulated investment company, or RIC, for federal tax purposes, FSEP qualifies as a business development company (“BDC”) under the Investment Company Act of 1940.

Upon information and belief, as a publicly registered, non-traded BDC, FSEP was marketed and recommended to numerous retail investors nationwide. As set forth in its most recent quarterly 10-Q as filed with the SEC, “The Company’s investment objective is to generate current income and long-term capital appreciation by investing primarily in privately-held U.S. companies in the energy and power industry.”

As we have highlighted in recent blog posts, BDCs have been around since the early 1980’s, when Congress first enacted legislation amending federal securities laws allowing for BDCs — which are simply types of closed-end funds — to make investments in developing companies and firms that would otherwise have difficulty accessing financing. Because they provide financing solutions for smaller, private companies, BDCs have been likened to private equity investment vehicles for retail investors in various marketing pitches by BDC sponsors and the financial advisors who recommend these financial products.

BDCs characteristically offer high yields to investors, both as a function of their collecting much higher than average interest income on loans to more thinly capitalized businesses, as well as their use of internal leverage. In light of a BDC’s leveraged structure and its typical investment portfolio, however, uninformed investors may come to learn too late that their investment carries considerable risk. Moreover, non-traded BDCs such as FSEP carry additional risks, including their lack of liquidity and high upfront fees and commissions.

Investors who wish to sell their FSEP shares through the Company’s Share Repurchase Program are limited as to timing, and may only do so quarterly pursuant to FSEP’s redemption program. Further, the Company limits the amount of shares which it allows for repurchase each quarter. For example, on July 2, 2018, FSEP “repurchased 4,554,498 common shares (representing 20% of common shares tendered for repurchase…) at $6.60 per share….” Thus, a FSEP investor seeking to sell out of their entire for the quarter ending July 2, 2018, would have been limited to only selling 20% of their FSEP investment.

For investors seeking immediate liquidity on their non-traded FSEP shares, there does exist a limited and fragmented secondary market. Unfortunately, however, recent pricing suggests that FSEP investors wishing to sell on a thinly traded secondary market may only do so at disadvantageous pricing of approximately $5.25 – $5.61 per share. This recent secondary market pricing suggests that FSEP investors who recently sold their shares on the secondary market likely incurred substantial losses of approximately 45% on their initial investment, excluding distributions paid to date.

The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience representing investors in connection with complex non-conventional investments, including non-traded BDCs and REITs. Investors may contact us via the contact form on this website, by telephone at (866) 966-9598, or by e-mail at newcases@investorlawyers.net for a no-cost, confidential consultation. Attorneys at the firm are admitted in New York and Wisconsin and various federal courts around the country, and handle cases nationwide (in cooperation with attorneys located in those states if required by applicable rules).

On November 6, 2018, Sierra Income Corporation (“Sierra”) filed a Registration Statement (on Form N-14) with the SEC, notifying Sierra investors and the public at large of a proposed merger transaction. Specifically, Sierra’s board of directors is seeking shareholder approval on a series of related transactions designed to effectuate a merger between and among Sierra, a publicly registered non-traded business development company (BDC), as well as Medley Capital Corporation (“MCC”), a publicly traded BDC, and Medley Management Inc. (“MDLY”), a publicly traded asset management firm.

MDLY is the parent company of both MCC’s and Sierra’s investment adviser, and the same portfolio management team and officers are responsible for both MCC’s and Sierra’s operations. While a date for a special shareholder meeting has yet to be set, Sierra’s board of directors is seeking shareholder approval on the contemplated merger, a transaction which will reportedly create the second largest internally managed and seventh largest publicly traded BDC.

Sierra is currently externally managed by SIC Advisors LLC, which in turn, is affiliated with MDLY. MDLY operates a national direct origination franchise through which it seeks to market its financial products, including Sierra. As of December 31, 2016, Sierra reported that it had raised in excess of $900 million in connection with its equity capital raise. As of July 31, 2018, Sierra had closed its public offering. Most recently, shares of Sierra have been assigned a NAV of $7.27 per share by management, and has reported approximately $1.1 billion in total assets.

Under the terms of the contemplated merger, MCC shareholders will receive 0.8050 shares of Sierra stock for each existing share they currently hold. Further, MDLY shareholders will receive 0.386 shares of Sierra stock for each Medley Class A share, in addition to $3.44 of additional cash compensation and a special cash dividend of $0.65 per MDLY share. Current Sierra shareholders will continue to hold their shares of Sierra stock, but in a publicly traded BDC. The contemplated merger is cross conditioned on approval by Sierra, MCC, and MDLY shareholders, regulatory review, and other customary closing conditions. It is anticipated that the transaction will close in early 2019.

Investors who participated in Sierra’s offering acquired shares at $10 per share. Moreover, as set forth in Sierra’s initial prospectus, investors who participated in the offering were subject to considerable up-front fees and commissions of nearly 10%, including a “selling commission” of 7.00%, in addition to a “dealer-manager fee” of 2.75%. While the contemplated merger has yet to garner shareholder approval, Sierra investors are cautioned to monitor the situation as it develops. In particular, MCC’s share price has dramatically underperformed broad market indices over the past 3-5 years (e.g., from a high of approx. $16 per share in March 2013, MCC currently trades at less than $4 per share), including its market cap decreasing from more than $800 million to less than $200 million as of today.

Persons who have sustained losses in Sierra (or another non-traded investment) may be able to recover damages in FINRA arbitration. Investors may contact Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or via email at newcases@investorlawyers.net for a no-cost, confidential consultation. Attorneys at the firm are admitted in New York and Wisconsin and various federal courts around the country, and handle cases nationwide (in cooperation with attorneys located in those states if required by applicable rules).

Based upon recent secondary market pricing, investors in certain publicly registered, non-traded business development companies (“BDCs”), may have suffered losses on their illiquid investments. In the wake of the 2008 financial crisis, many retail investors have been steered into so-called non-conventional investments (“NCIs”), including non-traded REITs and BDCs, often premised upon a sales pitch or marketing presentation from a financial advisor touting the investment’s lack of correlation to stock market volatility and enhanced income via hefty distributions. Unfortunately, in some instances, investors were solicited to invest in such NCIs without first being fully informed of the risk components embedded in these products.

In January 2017, FINRA issued the following guidance with respect to investments in non-traded NCIs:

“While these products can be appropriate for some customers, certain non-traded REITs and unlisted BDCs, for example, may have high commissions and fees, be illiquid, have distributions that may include return of principal, have limited operating history, or present material credit risk arising from unrated or below investment grade products. Given these concerns, firms should make sure that they perform and supervise customer specific suitability determinations. More generally, firms should carefully evaluate their supervisory programs in light of the products they offer, the specific features of those products and the investors they serve.”

Because of the illiquid nature of non-traded NCIs, investors seeking to exit their investment position are constrained by limited options, including redemption of some or all of their shares directly with the sponsor (often at a disadvantageous price and only in an amount approved by the sponsor), as well as selling their investment in a fragmented and inefficient secondary market, typically at a disadvantageous price.

According to recent secondary market pricing, shares of FS Energy & Power Fund (FSEP), a non-traded BDC sponsored by Franklin Square, were recently listed for sale at $5.70 per share. This recent pricing in FSEP suggests that investors in this non-traded BDC may well have suffered considerable investment losses of approximately 40% on their initial investment (which does not include distributions paid to date). With respect to another non-traded BDC, Business Development Corporation of America (“BDCA”), recent secondary market pricing indicates BDCA shares were recently sold at $6.50 per share. BDCA’s shares were offered through its IPO at $11.15 per share; thus, it appears investors seeking liquidity through recent secondary market transactions have sustained losses on their BDCA investment of approximately 40% (excluding distributions and commissions paid to date).

Investors in FSEP or BDCA (or other non-traded BDCs) may be able to recover investment losses in FINRA arbitration if their investment was the subject of an unsuitable recommendation by a stockbroker or investment advisor. Investors may contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or via email at newcases@investorlawyers.net for a no-cost, confidential consultation.

Sierra Income Corporation (“SIC”) recently extended a tender offer to its shareholders, which terminated on December 22, 2017, offering to purchase shares for $7.89 a share. SIC is a publicly registered, non-traded business-development company (“BDC”). This non-traded BDC invests primarily in first lien senior secured debt, second lien secured debt, and certain subordinated debt of middle market companies with annual revenue between $50 million and $1 billion. Investors who participated in the tender offer likely sustained losses on their initial capital investment at $10 per share (exclusive of fees, commissions and any distribution income received). According to publicly available information, a total of 4,923,026 shares were validly tendered.

According to publicly available information, SIC is externally managed by SIC Advisors LLC, which in turn, is affiliated with Medley Management (NYSE: MDLY, “Medley”). Medley operates a national direct origination franchise through which it seeks to market its financial products, including SIC. As of December 31, 2016, Sierra reported that it had raised in excess of $900 million in connection with its equity capital raise.

Investors who purchased shares in SIC’s offering acquired shares at $10 per share. Further, as outlined in SIC’s prospectus, investors who participated in the offering were subject to hefty up-front fees and commissions of nearly 10%, including a “selling commission” of 7.00%, in addition to a “dealer-manager fee” of 2.75%.

In January 2017, FINRA — as part of its ongoing efforts to ensure the integrity of financial markets and offer protection to investors — issued the following guidance with respect to certain illiquid non-traded financial products, including non-traded BDC’s:

While these products can be appropriate for some customers, certain non-traded REITs and unlisted BDCs, for example, may have high commissions and fees, be illiquid, have distributions that may include return of principal, have limited operating history, or present material credit risk arising from unrated or below investment grade products. Given these concerns, firms should make sure that they perform and supervise customer specific suitability determinations. More generally, firms should carefully evaluate their supervisory programs in light of the products they offer, the specific features of those products and the investors they serve.

Investors in non-traded BDCs and other illiquid investments such as non-traded REITs and private placement offerings may be able to recover their investment losses through FINRA arbitration, if the investment was recommended by a financial advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment was misrepresented by the financial advisor. Investors may contact a securities arbitration attorney at Law Office of Christopher J. Gray, P.C. (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.

BDCs first emerged in the early 1980’s when the U.S. Congress enacted legislation that amended the federal securities laws. These legislative changes allowed BDCs — which are a type of closed-end fund — to make investments in developing companies and firms. BDCs are in the business of providing various debt and mezzanine financing solutions for small and medium-sized businesses that otherwise could not access credit in the same way as more established companies.

By providing credit solutions to less established companies, BDCs frequently collect much higher than average interest income and seek to pass along such income to investors in the form of dividends. While an investment in a BDC may seem like an attractive option for an investor seeking enhanced income, our office has frequently encountered situations in which financial advisors recommended unsuitable nonconventional investment products to their clients, including non-traded BDCs, such as FSEP.

An investment in a BDC carries the same risks associated with other non-traded investment vehicles. These risks include, but are not limited to: excessive front-end fees (as high as 10%) to the soliciting broker and his or her firm, in addition to the illiquid nature of such non-traded investments. In fact, FINRA has offered the following cautionary guidance regarding such liquidity concerns: “Due to the illiquid nature of non-traded BDCs, investors’ exit opportunities may be limited only to periodic share repurchases by the BDC at high discounts.”

FSEP is managed by Franklin Square, a firm specializing in alternative investment funds. As of September 2015, Franklin Square managed approximately $17 billion in total assets, including $15.7 billion in BDC assets, thus making Franklin Square the largest manager of BDCs. A review of recent SEC filings indicates that FSEP closed its public offering in November 2016.

Investors who wish to exit their FSEP investment position are limited in their options due to the Fund’s illiquidity. For example, investors seeking to redeem their shares directly through Franklin Square need to wait until the Fund makes a quarterly tender offer, or wait until a future liquidity event transpires that may not occur for a number of years. According to SEC filings, on December 29, 2017, the Fund announced a decrease in the price of shares issued under the dividend reinvestment plan (‘DRIP’) to $6.70 from $7.15 a share.

Moreover, while a secondary market to sell FSEP does exist, it is fragmented and relatively inefficient. For example, Central Trade and Transfer recently listed shares of FSEP with a bid-ask spread of $6.60 – $6.85 per share. The recent pricing in the Fund — both through SEC filings by FSEP and through the secondary market — suggests that investors in this non-traded BDC may well have suffered considerable investment losses of approximately 35% on their initial investment (which does not include distributions paid to date). With respect to distributions, FSEP recently announced a reduction in the amount of their dividend: a decrease of nearly 30%. Particularly for income-oriented investors, this is not a favorable sign.

If you have invested in FSEP, or another non-traded alternative investment product, and you have suffered losses (or are currently unable to exit your illiquid investment position without incurring losses), you may be able to recover your losses in FINRA arbitration. Investors may contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or via email at newcases@investorlawyers.net for a no-cost, confidential consultation.

Investors in Business Development Corporation of America (“BDCA”) may be able to recover losses on their investment through initiating an arbitration proceeding with FINRA Dispute Resolution, if a broker or financial advisor made the recommendation to invest in BDCA without a reasonable basis, or misled the investor as to the nature of the investment. BDCA is a non-traded business development company headquartered in New York, New York. As a business development company (“BDC”), BDCA focuses on providing flexible financing solutions to various middle market companies, including first and second lien secured loans and debt issued by mid-sized companies.

As an investment vehicle, BDCs first emerged in the early 1980’s following legislation passed by Congress making certain amendments to federal securities laws. These legislative changes allowed for BDC’s — types of closed end funds — to make investments in developing companies and firms. Many brokers and financial advisors have recommended BDCs as investment vehicles to their clientele, touting the opportunity for retail investors to earn enhanced dividend income while participating in private-equity-type investing previously unavailable to the average retail investor.

While BDCs may arguably offer an attractive investment opportunity, non-traded BDCs, such as BDCA, are very complex and risky investment products. Non-traded BDCs, as their name implies, do not trade on a national securities exchange, and are therefore illiquid products that are hard to sell (investors can typically only sell their shares through redemption with the issuer, or through a fragmented and illiquid secondary market). Further, non-traded BDCs such as BDCA have high up-front commissions and fees (typically as high as 10%), which are apportioned to the broker, his or her broker-dealer, and the wholesale broker or manager.

As of September 30, 2016, BDCA reported a net asset value (“NAV”) of $8.58 per share, which is $0.39 lower than the NAV as of December 31, 2015. Moreover, the share repurchase program for BDCA is oversubscribed and repurchases of shares are only made semi-annually (or twice per year). Therefore, it is unlikely that an investor in BDCA will be able to redeem their entire investment through BDCA’s repurchase program. For example, as of December 2016, 17 million shares were submitted for tender. However, BDCA purchased only 6.7 million of these shares.

With respect to secondary market liquidity, one secondary trading platform recently listed shares of BDCA for only $6.49 per share. For investors who wish to sell out of BDCA through the secondary market, it appears they will sustain considerable losses on their initial capital investment in order to exit their illiquid investment position.

Before recommending a nonconventional investment product to a customer, such as a non-traded BDC, broker dealers are first required to perform adequate due diligence on that investment. In addition, brokers and broker dealers are required to perform a suitability analysis, in order to determine if the investment product is suitable for that investor based on his or her age, risk tolerance, net worth and income, investment experience, etc.

If you have invested in BDCA, or another similar illiquid ‘alternative investment product’ and you have suffered losses in connection with your investment (or are currently unable to exit your investment position without incurring losses), you may be able to recover your losses in FINRA arbitration. Investors may contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or via email at newcases@investorlawyers.net for a no-cost, confidential consultation.

On November 15, 2017, H.R. Bill 4267 (the “Bill”), entitled the Small Business Credit Availability Act (the “Act”), passed the House Financial Services Committee by an overwhelming 58-2 vote. This Bill seeks to amend the Investment Company Act of 1940 (’40 Act), specifically the regulations currently governing business development companies (“BDCs”). In recent years, financial advisors have increasingly recommended BDCs, allowing for Mom and Pop retail investors to participate in private-equity-type investing. Many income-oriented investors are attracted to BDCs because of their characteristic enhanced dividend yield.

As an investment vehicle, BDCs were first made available pursuant to the Small Business Investment Incentive Act of 1980, as a result of a perceived crisis in the capital markets. At that time, small businesses were encountering severe difficulties in accessing credit through traditional means. BDCs are a special type of closed-end fund designed to provide small, growing companies with access to capital.

BDCs are structured as hybrid between an operating company and an investment company under the ’40 Act. Regulated as an investment company, BDCs are required to file periodic reports under the Securities Exchange Act, and further, are subject to a number of regulatory requirements. Three of the most notable regulations currently governing BDCs are as follows:

• Character of Investments – a BDC must generally invest at least 70% of its assets in “qualifying assets” pursuant to Section 55(a) of the ’40 Act;
  • The qualifying assets requirement means that BDCs must typically invest in “eligible portfolio companies,” which are private U.S. companies with a market cap of no greater than $250 million;
• Adviser Compensation – Investment Advisers to BDCs are able to receive capital gains incentive fees in an amount not to exceed 20% of realized capital gains;
  • Investment advisers to other investment companies are generally prohibited from receiving capital gains incentive fees;
• Leverage – a BDC must maintain at least a 200% asset coverage ratio. This means that for every dollar invested in the BDC, only one dollar can be borrowed for additional investment purposes (1:1 ratio).

If the proposed Bill passes the House and Senate, then the current 1:1 leverage requirement imposed on BDCs will no longer apply. If enacted, the Bill will allow BDCs to leverage 2:1 against their investment dollars. Proponents of the bill argued that asset coverage rules for BDCs are far more restrictive than for other lending vehicles, including traditional banks, as well as Collateralized Loan Obligation (“CLO”) funds. Further, proponents of the Bill have reasoned that with increased leverage, BDCs will be better positioned to focus on investing in senior debt that is less inherently risky than junior, or even junk, debt.

If the Bill passes, investors in BDCs — particularly non-traded BDCs — should be aware of the significant risk associated with allowing their investment vehicle, and its manager(s), to further leverage their investment dollars. As our office has discussed in previous blog posts, non-traded BDCs should rightly be regarded as risky, complex and illiquid investment products. As their name implies, non-traded BDCs do not trade on a national securities exchange, and are therefore difficult to exit. Typically, investors can only sell their shares through redemption with the issuer, or through a fragmented and inefficient secondary market.

In addition, non-traded BDCs have high up-front fees (typically as high as 10%), which are paid to the financial advisor selling the product, his or her broker-dealer, and the wholesale broker or manager. These high fees may create an incentive for some financial advisors to recommend a non-traded BDC, without first conducting the necessary due diligence on the investment, or performing a meaningful suitability analysis to determine if the investment meets the customer’s stated objectives and risk profile.

If the Bill passes, investors in non-traded BDCs will not only face the risks associated with illiquidity and high fees, but they will also be encountering the risk associated with additional leverage, particularly on an investment vehicle that also permits its managers to earn considerable performance fees of up to 20% of capital gains. Thus, the risk becomes whether some BDC managers will consciously (or subconsciously) make riskier investments (with leveraged capital) on the hopes of netting outsized returns and performance fees. Under the ’40 Act, other traditional lending vehicles do not permit such outsized performance fees.

If you have invested in any of the following non-traded BDCs, and you have suffered losses in connection with your investment (or are currently unable to exit your illiquid investment position without incurring losses), you may have legal claims to be pursued through FINRA arbitration:

• FS Investment Corporation II (FSIC II);
• FS Investment Corporation III (FSIC III);
• FS Investment Corporation IV (FSIC IV);
• FS Energy and Power Fund (FSEP);
• FS Global Credit Opportunities;
• CNL Corporate Capital Trust II;
• CION Investment Corporation (offered by ICON Investments);
• Business Development Corporation of America (BDCA);
• Business Development Corporation of America II (BDCA II).

To find out more about your rights and options, contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or via email at newcases@investorlawyers.net for a no-cost, confidential consultation.

Investors faced the prospect of losses as Corporate Capital Trust, a former non-traded business development company listed its shares on the New York Stock Exchange this week under the ticker symbol CCT. In early trading on November 14 and 15, 2017, the price of CCT shares fluctuated between $16.56 and $18.63 a share. Accounting for the October 31, 2017 2.25-to-1 reverse split in CCT’s shares, this trading range means that a pre-split share of CCT is now worth between $7.36 and $8.28 a share- down from offering prices of between $10.00 and $11.30 a share at which investors purchased shares before the company was publicly traded

CCT is now reportedly the largest publicly-traded business development company, and the company raised billions of dollars in its public offerings of stock. Corporate Capital Trust also commenced a tender offer to purchase up to $185 million in shares of its common stock at $20.01 per share, the company’s most recent net asset value per share, as of September 30, 2017. The tender offer expires at 5:00 p.m. (EST) on December 12, 2017. The tender offer price is a significant premium to the market price.

Corporate Capital Trust’s initial public offering was declared effective by the SEC in April 2011 and raised a total of $3.3 billion before closing its follow-on offering in October 2016. The managing dealer, CNL Securities Corp., sold approximately 141 million shares in CCT’s initial public offering and sold an additional 168 million shares in a follow-on public offering, which closed on November 1, 2016. CNL Securities Corp. was generally entitled to receive selling commissions of up to 7% of the gross proceeds of shares sold in the offerings and a marketing support fee of up to 3% of the gross offering proceeds of shares sold in the offerings, some of which may have been shared with other broker-dealers who sold shares to customers.

Business development companies like CCP (BDCs) were created by Congress with the intent to stimulate investments in privately-owned companies. BDCs are closed-end funds that invest in a company’s debt (loans) or equity with the goal of generating income, capital growth or both. BDCs are registered with the U.S. Securities and Exchange Commission (SEC) and regulated under the Investment Company Act of 1940, and may be either non-traded or publicly traded. In the case of CCT, the company was non-traded for several years before listing its shares on the New York Stock Exchange this week.

As members and associated persons of FINRA, brokerage firms and their financial advisors must ensure that adequate due diligence is performed on any investment that is recommended to investors. Further, firms and their brokers must ensure that investors are informed of the risks associated with an investment, and must conduct a suitability analysis to determine if an investment meets an investor’s stated investment objectives and risk profile. Either an unsuitable recommendation to purchase an investment or a misrepresentation concerning the nature and characteristics of the investment may give rise to a claim against a stockbroker or financial advisor.

The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience in representing investors who have incurred losses in connection with non-traded investments and non-conventional investments, including recovering losses through FINRA arbitration. Investors may contact our office at (866) 966-9598 or via email at newcases@investorlawyers.net for a no-cost, confidential consultation.

If you have invested in HMS Income Fund (“HMS”) upon the recommendation of your financial advisor, you may be able to recover your losses through arbitration before the Financial Industry Regulatory Authority (“FINRA”). A Maryland corporation formed in 2011, HMS is sponsored by Hines Interests Limited Partnership (“Hines”). HMS is structured as a closed-end management investment company, and pursuant to the Investment Company Act of 1940 operates as a public, non-traded business development company (“BDC”). HMS’s business focuses on providing mezzanine debt and equity financing to various private middle market companies. As of June 30, 2017, HMS has provided debt financing to 119 companies across a spectrum of industries. As an investment vehicle, BDCs have been available since the early 1980’s (when Congress enacted legislation making certain amendments to federal securities laws allowing for BDC’s to make investments in developing companies and firms). Frequently, financial advisors have recommended BDCs, allowing for Mom and Pop retail investors to participate in private-equity-type investing. Many income-oriented investors are attracted to BDCs because of their characteristic enhanced dividend yield. Traded BDCs that are listed (and thus sold and resold) on national securities exchanges may offer an attractive investment opportunity (although with enhanced dividend yield comes additional risk). However, non-traded BDCs are altogether different, and should be regarded as risky, complex and illiquid investment products. As their name implies, non-traded BDCs do not trade on a national securities exchange, and are therefore illiquid products that are difficult to sell. Typically, investors can only sell their shares through redemption with the issuer, or through a fragmented and inefficient secondary market. Moreover, non-traded BDCs such as HMS usually have high up-front fees (typically as high as 10%), which are paid to the financial advisor selling the product, his or her broker-dealer, and the wholesale broker or manager. The publicly available HMS prospectus filed with the Securities and Exchange Commission (“SEC”) indicates that shares of HMS were offered to investors at $10 per share “[l]ess the 10% sales load….” Additionally, the prospectus references offering expenses to investors of 1.50%. Therefore, investors who bought into HMS at the offering price of $10 per share were immediately charged 11.5% of their initial capital outlay in expenses. Such high up-front expenses create significant risk, particularly for the uninformed investor. As of November 1, 2017, HMS’ board of directors has disclosed that the net asset value (“NAV”) of HMS shares is $8.22 per share. For investors who purchased shares of HMS through the offering, it appears they have sustained losses approaching 20% (excluding fees). Furthermore, because HMS is a non-traded investment product, HMS investors will encounter difficulty in exiting their investment position, and will only be able to do so through direct redemption with the sponsor (and likely at a discount, or alternatively, through selling their shares on a limited and fragmented secondary market (likely at a discount to NAV). Before recommending a nonconventional investment product such as HMS to a customer, financial advisors and their employers are first required to perform adequate due diligence on that investment. In addition, brokers, and by extension their employer, are required to perform a suitability analysis, in order to determine if the investment product is suitable for that investor based on factors including the investor’s age, risk tolerance and stated objectives, net worth and income, and prior investment experience. If you have invested in HMS, or another non-traded BDC or similar ‘alternative investment product’ and you have suffered losses in connection with your investment (or are currently unable to exit your illiquid investment position without incurring losses), you may have legal claims to be pursued through FINRA arbitration. To find out more about your rights and options, contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or via email at newcases@investorlawyers.net for a no-cost, confidential consultation.

BDCs are not a new investment product, having been around since the early 1980’s (in 1980, the U.S. Congress enacted legislation making certain amendments to federal securities laws allowing for BDC’s — types of closed end funds — to make investments in developing companies and firms). Many brokers and financial advisors have recommended BDCs as investment vehicles to their clientele, touting the opportunity for retail investors to participate in private-equity-type investing through BDCs, as well as their typically outsized dividend yield.

Non-traded BDCs, as their name implies, do not trade on a national securities exchange, and are therefore illiquid products that are hard to sell (investors can typically only sell their shares through redemption with the issuer, or through a fragmented and illiquid secondary market). In addition, non-traded BDCs such as BDCA have high up-front fees (typically as high as 10%), which are apportioned to the broker, his or her broker-dealer, and the wholesale broker or manager.

In the first-half of 2017, MacKenzie Capital Management, L.P. extended a tender offer to BDCA shareholders to purchase their shares for $6.00 per share up until May 5, 2017. In connection with this recent tender offer, Mackenzie Capital has further indicated that BDCA is not required to complete a liquidity event by a specified date. As of September 30, 2016, BDCA estimated its net asset value (“NAV”) at $8.58 per share, or $0.39 per share lower than the valuation of December 31, 2015. For investors who participated in the MacKenzie tender offer, it appears they would have sustained significant losses in order to exit their investment position.

With respect to BDCA’s own redemption program (for shareholders seeking to sell their shares back to the issuer), this share repurchase program is oversubscribed. Specifically, as of December 2016, 17 million shares were submitted for tender. However, BDCA purchased only 6.7 million of these shares. Such repurchases or redemptions by BDCA are made on a semi-annual basis (only twice a year), so investors seeking to sell out of their BDCA position are likely stuck holding their illiquid investment for the foreseeable future.

Before recommending a nontraditional investment product to a customer, such as BDCA or another non-traded BDC, broker dealers are first required to perform adequate due diligence on that investment. In addition, brokers and broker dealers are required to perform a suitability analysis, in order to determine if the investment product is suitable for that investor based on his or her age, risk tolerance, net worth and income, investment experience, etc.

If you have invested in BDCA, or another non-traded BDC or similar alternative investment product such as a non-traded REIT, and you have suffered losses in connection with your investment (or are currently unable to exit your illiquid investment position without incurring considerable losses), you may be able to recover your losses in FINRA arbitration. To find out more about your legal rights and options, contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or via email at newcases@investorlawyers.net for a no-cost, confidential consultation.