Investors in Franklin Square Energy and Power Fund (“FSEP”) 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.
FSEP was launched in July 2011 as a closed-end management investment company that operates as a business development company, or BDC. FSEP invests in energy and power companies, including natural gas, natural gas liquids, crude oil, coal, and other types of power. FSEP closed to new investors in November 2016.
Investors who purchased shares in FSEP through the offering acquired shares at $10.00 per share, but according to its sponsor FESP had an estimated net asset value (“NAV”) of $3.32 per share as of September 20, 2020. . Even worse, shares on the limited secondary market have reportedly traded at lower prices of between $1.10 and $1.27 per share.
Previously, in March 2020, FSEP’s board terminated the company’s quarterly tender offer and suspended the share repurchase program, citing difficult market conditions due to the coronavirus (COVID-19) pandemic and events relating to crude oil production as the reason for the changes. The company also suspended regular cash distributions to shareholders after March 31, 2020, but later resumed distributions and was scheduled to distribute $0.03 a share to shareholders on January 12, 2021 .
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 FSEP 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.
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.
BDCs characteristically offer high yields to investors, both as a function of their collecting much higher than average interest income on loans to more thinly capitalized businesses, as well as their use of internal leverage. In light of a BDC’s leveraged structure and its typical investment portfolio, however, uninformed investors may come to learn too late that their investment carries considerable risk. Moreover, non-traded BDCs such as FSEP carry additional risks, including their potential for loss of principal, lack of liquidity and high upfront fees and commissions.
Investors who wish to discuss a possible claim may contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or via email at firstname.lastname@example.org for a no-cost, confidential consultation. . Attorneys at the firm are admitted in New York, New Jersey and various federal courts around the country, and handle cases nationwide (in cooperation with attorneys located in those states if required by applicable rules).
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