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FINRA Focuses On Non-Traded Business Development Companies – Have You Lost Money In a Non-Traded BDC Such As Sierra Income Corporation?

Investors in Sierra Income Corporation (“Sierra”), or a similar non-traded investment product may be able to recover losses on their investments through FINRA arbitration.  The attorneys at Law Office of Christopher J. Gray, P.C. have considerable experience in representing aggrieved investors who have lost money due to unsuitable recommendations to purchase securities, including illiquid non-traded investment products.

According to publicly-available SEC filings (from May 2016), Sierra made a tender offer to purchase up to 1,005,447 shares of its issued and outstanding common stock.  In connection with this tender offer, 855,215 shares were validly tendered at a price equal to $8.04 per share.  Unfortunately, for many investors in Sierra, it would appear that the tender offer price represents a significant loss on the initial capital investment.

In January 2017, the Financial Industry Regulatory Authority (“FINRA”), as part of its ongoing efforts to ensure the integrity of financial markets and offer protection to investors, issued certain guidance through its ‘2017 Regulatory and Examination Priorities Letter.’  Among those concerns highlighted by FINRA were issues related to so-called ‘alternative’ investments such as non-traded real estate investment trusts (“REITs”) and non-traded business development companies (“BDCs”):

“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.”

BDCs were created by Congress in 1980 as a means to stimulate investment in small, privately owned American companies that had limited access to the credit solutions and financing available to larger, more established companies.  Non-traded BDCs, such as Sierra, offer the average investor access to investing in the debt of private companies, a so-called ‘nontraditional’ asset class historically only available to institutional and/or sophisticated high-net-worth investors.

While non-traded BDCs may seem at first blush like an attractive investment option, as noted by FINRA the investment vehicles carry considerable risk.  Some of these risks include very high up-front commissions and fees to the recommending broker and his or her brokerage firm, as well as liquidity concerns.  Before recommending an investment in an alternative product such as a non-traded BDC, a brokerage firm is required to first perform adequate due diligence on the investment itself.  Further, the broker and brokerage firm are responsible for ensuring that any such investment is suitable in light of the investor’s risk profile, including their age and investment time horizon, income level and net worth, prior experience and sophistication with investing, and investment objectives and risk tolerance.

Sierra is a non-traded BDC that invests primarily in first lien senior secured debt, second lien secured debt, and certain subordinated debt of middle market companies across a broad range of industries with annual revenue between $50 million and $1 billion.  Sierra is externally managed by SIC Advisors LLC, an investment advisor registered under the Investment Advisers Act of 1940.  SIC Advisors LLC is affiliated with Medley Management (NYSE: MDLY, “Medley”).  Medley operates a national direct origination franchise through which it seeks to market investment in 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.

Investors in Sierra Income Corporation or other non-traded BDCs who wish to discuss a possible legal claim may contact our office at (866) 966-9598 or  for a no-cost, confidential consultation.

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