Investors in Terra Income Fund 6 (“Terra 6”) 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 Terra 6 without a reasonable basis, or misled the investor as to the nature of the investment. Terra 6 is a non-traded business development company headquartered in Kansas City, Missouri. Formed on May 15, 2013 and commencing operations on June 24, 2015, Terra 6 is a non-traded business development company (“BDC”).
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 “Mom and Pop” investor.
While non-traded BDCs may offer an attractive investment opportunity for certain investors, non-traded BDCs, such as Terra 6, are 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 often entail high up-front fees and commissions (typically 10% or more in the aggregate), which are apportioned to the broker, his or her broker-dealer, and the wholesale broker or manager. Finally, although they are frequently sold as steady income investments, non-traded BDCs do present the risk of loss of principal.