As we highlighted in a previous blog post, investors in FS Energy and Power Fund (“FSEP” or the “Fund”) may be able to recover losses on their investment in arbitration through arbitration before the Financial Industry Regulatory Authority (“FINRA”), if the recommendation to invest in FSEP was unsuitable, or if the broker or financial advisor who recommended the investment made a misleading sales presentation. Headquartered in Philadelphia, PA, the Fund is structured as a non-traded business development company (“BDC”) that invests primarily in the debt of a portfolio of private U.S. energy and power companies.
BDCs first emerged in the early 1980’s when the U.S. Congress enacted legislation that amended the federal securities laws. These legislative changes allowed BDCs — which are a type of closed-end fund — to make investments in developing companies and firms. BDCs are in the business of providing various debt and mezzanine financing solutions for small and medium-sized businesses that otherwise could not access credit in the same way as more established companies.
By providing credit solutions to less established companies, BDCs frequently collect much higher than average interest income and seek to pass along such income to investors in the form of dividends. While an investment in a BDC may seem like an attractive option for an investor seeking enhanced income, our office has frequently encountered situations in which financial advisors recommended unsuitable nonconventional investment products to their clients, including non-traded BDCs, such as FSEP.