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.