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).

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.

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.

FS Energy and Power Fund (“FSEP” or the “Fund”) is a non-traded business development company that invests primarily in the debt of a portfolio of private U.S. energy and power companies. BDC’s have been around since 1980 when the U.S. Congress enacted legislation which ushered in certain amendments to federal securities laws allowing for BDC’s — which are simply types of closed-end funds — to make investments in developing companies and firms.

BDC’s are in the business of providing various debt and mezzanine financing solutions for typically small and medium-sized businesses that cannot access credit in the same way as larger, more established companies. By providing credit solutions to less established companies, BDC’s will 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 all too frequently encountered situations in which money managers or brokers improperly recommended unsuitable “alternative” investment products to their clients, including such alternatives as non-traded REITs, as well as non-traded BDC’s such as FSEP.

Investors should understand that an investment in a non-traded BDC like FSEP carries many of 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 liquidity issues. In fact, the Financial Industry Regulatory Authority (“FINRA”) has offered the following cautionary guidance in an effort to educate and inform investors of the liquidity concerns associated with investing in such an alternative investment product: “Due to the illiquid nature of non-traded BDC’s, 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 which specializes 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 BDC’s. A review of recent SEC filings indicates that FSEP closed its public offering in November 2016. According to FSEP’s most recently reported data, the Fund manages $4.4 billion in assets.

Investors who wish to sell out of their investment in FSEP 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. While a secondary market to sell FSEP does exist, it is fragmented and relatively inefficient. 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 FSEP through Central Trade and Transfer suggests that investors in this non-traded BDC may well have suffered considerable investment losses of approximately 35% on their initial investment in FSEP at $10.00 per share.

If you have invested in FSEP, or another non-traded BDC or similar alternative product (such as a non-traded REIT) at the recommendation of a stockbroker or investment advisor, 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.