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.