Investor Lawsuits to Recover Business Development Company Losses

Non-traded Business Development companies, or BDCs, are a popular investment, but they carry significant risks for investors. Structured somewhat like a closed-end investment fund, BDCs are nonetheless publicly traded companies in themselves and are traded on public stock exchanges, such as Nasdaq.  FS Energy & Power Fund[1] is an example of a popular nontraded business development company that resulted in significant investor losses.

Non-Traded BDCs Pay Financial Advisors Large Commissions

Did you know how much your financial advisor was paid when you were recommended your non-traded BDC? If you think the answer is $0, you were likely misled.  Financial advisors like to sell products like non-traded BDCs because of the commissions that are paid by the investment sponsor.  These commissions can range as high as 10% and, when combined with other fees can severely impair the value of the investor’s investment. Your financial advisor is also obligated to provide you with full and transparent information regarding any investments they recommend, provided that the advisor is registered with FINRA.

Eligibility for BDC Lawsuit

If you lost money investing in a business development company you may be able to file a lawsuit against the salesperson who sold you the investment. You may be eligible if any of the following apply to you:

• You have a conservative or moderate risk tolerance;
• You did not understand all the risks of the investment, including total loss of principal;
• You invested in other illiquid products, including non-traded REITs [2]and annuities[3];
• You were told that the investment would conclude with an IPO or some other liquidation event;
• Your investment is no longer paying the promised distributions to you.

Process for Suing Your Financial Advisor for BDCs

Nontraded BDCs Do Not Trade Like the Stock Market  

A closed-end fund is a fund that offers a fixed number of shares through an Initial Public Offering (IPO) but then issues no further shares after that. The fund will not create new shares, and it will not buy back shares from shareholders. But shareholders are able to sell shares to other investors on the secondary market – assuming there is a buyer. Often it is very difficult, if not impossible to find someone willing to purchase a non-performing nontraded business development company.

Understanding the Real Value of a Non-Traded BDC is Difficult

Firstly, open-end funds can trade above (at a premium) or below (at a discount) the Net Asset Value (NAV) of the fund. This is in contrast to mutual funds whose price is determined by the previous day’s NAV. The prices of closed-end funds—and, therefore, BDCs—are market-driven. When investor interest is high in a particular sector, prices can go higher.

This opens the door to both potentially higher gains, but also to sudden losses if investor faith dwindles and the price sinks lower than the NAV.

In open-end funds, investors can sell shares back to the company that issued them. This is not the case with closed-end funds, which don’t repurchase shares once they have been issued. That means that closed-end funds have more flexibility with the cash they have on hand because they don’t need to maintain reserves.

BDCs Often Target “Distressed” Assets

Business development companies generally invest in distressed assets. Distressed companies have a bad track record and injecting funds into them will not guarantee that they turn around without commensurate improvement in their management structure or basic business model. Emerging companies have no track record at all, making them likewise a risky investment. With U.S. startup failure rates hitting[4] 90% in 2019, this is a factor that cannot be ignored.

A BDC would ideally maintain a diversified portfolio of the companies it invests in so that no single collapse would bring down the entire fund, but it’s important to note that many of the companies would have similar profiles. The macroeconomic factors affecting one company’s inability to repay a loan might be the same factors that cause the others to do the same. Investments could collapse overnight.

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