Articles Posted in Business Development Companies (BDCs)

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Building Demolished On October 24, 2017, the New Jersey Bureau of Securities (the “Bureau”) entered into a Consent Order (“Order”) with Boston-based brokerage firm LPL Financial, LLC (CRD# 6413) (“LPL”), in connection with LPL’s sales of certain non-traded investment products to residents of New Jersey.  Specifically, the Order encapsulated findings of fact that LPL agents sold to New Jersey clients various non-traded financial products, including non-traded real estate investment trusts (“REITs”), as well as non-traded business development companies (“BDCs”) and other non-traded investments such as closed-end and interval funds, hedge funds, and managed futures.

In particular, the Bureau focused on LPL’s sales of non-traded REITs (some 7,823 transactions) and non-traded BDCs (some 2,120 transactions).   Non-traded REITs and BDCs carry considerable risks, chief among them their illiquid nature (often, investors are not fully aware at the time of purchase that exiting the investment could be problematic).  As stated in the Bureau’s Order: “Non-traded REITs and non-traded BDCs are generally illiquid as they have no public trading market and a liquidity event typically occurs within five to seven years of an offering’s inception.”

Aside from liquidity concerns, there are numerous additional risks associated with non-traded financial products, including but not limited to characteristically high up-front fees charged investors (commissions to brokers and their firm run as high as 10%, as well as certain due diligence and administrative fees that can range up to 3%), as well as the fact that many non-traded REITs and BDCs pay distributions from investor capital (return of capital).  This return of capital may confuse some investors who believe that the investment’s yield is based on positive earnings and cash flows.

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Business Development Corporation of America (“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 (e.g., BDCA extended a second lien term loan in August 2016 to the well-known “fast casual” restaurant chain, Boston Market).

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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.