If you have invested in HMS Income Fund (“HMS”) upon the recommendation of your financial advisor, you may be able to recover your losses through arbitration before the Financial Industry Regulatory Authority (“FINRA”). A Maryland corporation formed in 2011, HMS is sponsored by Hines Interests Limited Partnership (“Hines”). HMS is structured as a closed-end management investment company, and pursuant to the Investment Company Act of 1940 operates as a public, non-traded business development company (“BDC”). HMS’s business focuses on providing mezzanine debt and equity financing to various private middle market companies. As of June 30, 2017, HMS has provided debt financing to 119 companies across a spectrum of industries.
As an investment vehicle, BDCs have been available since the early 1980’s (when Congress enacted legislation making certain amendments to federal securities laws allowing for BDC’s to make investments in developing companies and firms). Frequently, financial advisors have recommended BDCs, allowing for Mom and Pop retail investors to participate in private-equity-type investing. Many income-oriented investors are attracted to BDCs because of their characteristic enhanced dividend yield.
Traded BDCs that are listed (and thus sold and resold) on national securities exchanges may offer an attractive investment opportunity (although with enhanced dividend yield comes additional risk). However, non-traded BDCs are altogether different, and should be regarded as risky, complex and illiquid investment products. As their name implies, non-traded BDCs do not trade on a national securities exchange, and are therefore illiquid products that are difficult to sell. Typically, investors can only sell their shares through redemption with the issuer, or through a fragmented and inefficient secondary market. Moreover, non-traded BDCs such as HMS usually have high up-front fees (typically as high as 10%), which are paid to the financial advisor selling the product, his or her broker-dealer, and the wholesale broker or manager.
The publicly available HMS prospectus filed with the Securities and Exchange Commission (“SEC”) indicates that shares of HMS were offered to investors at $10 per share “[l]ess the 10% sales load….” Additionally, the prospectus references offering expenses to investors of 1.50%. Therefore, investors who bought into HMS at the offering price of $10 per share were immediately charged 11.5% of their initial capital outlay in expenses. Such high up-front expenses create significant risk, particularly for the uninformed investor.
As of November 1, 2017, HMS’ board of directors has disclosed that the net asset value (“NAV”) of HMS shares is $8.22 per share. For investors who purchased shares of HMS through the offering, it appears they have sustained losses approaching 20% (excluding fees). Furthermore, because HMS is a non-traded investment product, HMS investors will encounter difficulty in exiting their investment position, and will only be able to do so through direct redemption with the sponsor (and likely at a discount, or alternatively, through selling their shares on a limited and fragmented secondary market (likely at a discount to NAV).
Before recommending a nonconventional investment product such as HMS to a customer, financial advisors and their employers are first required to perform adequate due diligence on that investment. In addition, brokers, and by extension their employer, are required to perform a suitability analysis, in order to determine if the investment product is suitable for that investor based on factors including the investor’s age, risk tolerance and stated objectives, net worth and income, and prior investment experience.
If you have invested in HMS, or another non-traded BDC or similar ‘alternative investment product’ and you have suffered losses in connection with your investment (or are currently unable to exit your illiquid investment position without incurring losses), you may have legal claims to be pursued through FINRA arbitration. To find out more about your rights and options, 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.