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Articles Posted in Business Development Companies (BDCs)

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Investors in FS Global Credit Opportunities Fund A (“FS Global”) may have FINRA arbitration claims if their 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 stockbroker or advisor.

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FS Global was formed as an unlisted, closed-end business development company (“BDC”) under the Investment Company Act of 1940 that invests in loans, bonds, and other instruments.

Investors who wish to sell out of their investment in FS Global are limited in their options due to the its illiquidity.  Investors who purchased shares in FS Global at the initial offering acquired shares at $10 per share, but currently has a reported estimated net asset value (“NAV”) of $7.36 per share.  Even worse, shares have reportedly been sold in the limited secondary market at prices of between $5.36 and $5.18 per share.

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Investors in Business Development Corporation of America (“BDCA”) may have FINRA arbitration claims, if their 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 stockbroker or advisor.

Money Maze
BDCA is a non-traded business development company, also known as a BDC, that provides flexible financing solutions to various middle market companies, including first and second lien secured loans and debt issued by mid-sized companies.  BDCA commenced its initial public offering in January 2011 and raised $1.9 billion after being offered at $11.15 per share. Currently, BDCA has a reported estimated net asset value (“NAV”) of $7.75 per share.  Even worse, shares on the secondary market are reportedly valued between $6.05 and $5.75 per share.

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.

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Investors in FS Energy and Power Fund (“FSEP”) an have FINRA arbitration claims, if their 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 stockbroker or advisor.

Money In Wind
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.

BDCs 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, BDCs will frequently collect much higher than average interest income and seek to pass along such income to investors in the form of dividends.

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financial charts and stockbrokerDespite 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.

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Oil Drilling RigsInvestors 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.

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Money WhirlpoolOn 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.

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Money MazeBased 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.”

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Money MazeSierra 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%.

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As we highlighted in a previous blog post, investors in FS Energy and Power Fund (“FSEP” or the “Fund”) may be able to recover losses on their investment in arbitration through arbitration before the Financial Industry Regulatory Authority (“FINRA”), if the recommendation to invest in FSEP was unsuitable, or if the broker or financial advisor who recommended the investment made a misleading sales presentation.  Headquartered in Philadelphia, PA, the Fund is structured as a non-traded business development company (“BDC”) that invests primarily in the debt of a portfolio of private U.S. energy and power companies.

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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.

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financial charts and stockbrokerInvestors 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.