Have you suffered losses with FS Investment Corp. III (FSIC)? FSIC is sponsored by FS Investments, which was also known as Franklin Square Capital Partners. The FSIC III investment is a non-traded business development company (BDC).
Mackenzie Capital Management LP previously made a tender offer at $5.00/share. The BDC stated the current value of $7.42/share, is significantly higher than the prior tender offer price. Notwithstanding those estimates by the BDC, the most recent trading range reported by a secondary market source was in the $5.65/share to $5.75/share range. For buyers who paid at or near the original $10.00/share price level, this could reflect a significant loss.
What are non-traded BDCs?
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Non-traded business development companies (BDCs) like FSIC III are investment companies that are not traded on the exchanges. They are similar to non-traded real estate trusts (REITs), but typically invest in small-mid sized companies. They are considered to be high risk but offer attractive dividend yields.
The high risks are three ways.
- The first risk is the pure nature of the investments in BDCs. They are investing in companies that are often distressed.
- The second risk is that market liquidity. There are not large public exchanges for investors to sell their investments.
- The last risk is transparency and a high front load of commissions. The front-load commissions are as high as 20%, and the investment company determines the values.
Sales Problems of BDCs to Investors
These investments are generally offered by financial advisors working at independent broker-dealer firms. They represent one type of Direct Participation Programs (DPPs). Non-Traded REITs and BDCs are typically risky illiquid alternative investments that the United States Securities and Exchange Commission (SEC) define as a “Reg D” offerings also known as “private placement.” The reference to Regulation D provides exemptions from the typical registration requirements of Section 5 of the Securities Act of 1933.
A brokerage firm selling a private placement still has a duty to conduct a reasonable investigation of any securities it recommends. The types of problems that FINRA found in the past with regard to some private placements were significant and include outright fraud and sales practice abuse in Regulation D offerings. With private placements, the firm recommending the investment to a customer must also conduct a reasonable investigation into the issuer and its management, the business prospects of the issuer, the assets held by or to be acquired by the issuer, the claims being made by the issuer, and the intended use of the offering. Failure of a firm to adequately investigate a given private placement can result in a violation of antifraud provisions of federal securities law, as well as FINRA Rule 2010 (adherence to just and equitable principles of trade) and Rule 2020 (prohibiting manipulative and fraudulent devices). In addition to various cases and enforcement actions cited in Regulatory Notice 10-22 (and its endnotes), another sweep by FINRA resulted in more crackdowns on firms (and individuals) that did not conduct a reasonable investigation before selling private placements to customers.
Also, with respect to private placement investments, broker-dealer firms still must supervise their brokers in the investigation and recommendation being made to the customer. In addition to the typical supervision duties that a broker-dealer firm has over its registered representatives, as required by FINRA Rule 3010, private placements necessitate additional supervisory procedures. As reminded by FINRA Regulatory Notice 10-22, those additional supervisory procedures must be reasonably designed to ensure that a broker-dealer firm’s registered representatives: (1) engage in an inquiry that is sufficiently rigorous to comply with their legal and regulatory requirements; (2) perform the analysis required by FINRA Rule 2111 (formerly, NASD Rule 2310); (3) qualify their customers as eligible to purchase securities offered pursuant to Regulation D; and (4) do not violate the antifraud provisions of the federal securities laws or FINRA rules in connection with their preparation or distribution of offering documents or sales literature. Importantly, each Reg. D offering must be properly supervised “before it is marketed to other firms or sold directly to customers.”
FSIC III Investors Seeking to Recover Losses
Haselkorn and Thibaut, a national investment fraud law firm, has started an investigation into FS Investment Corp. III and non-traded BDCs. We assist investors that want to recover their investment losses. One way we help some investors, a private FINRA arbitration customer dispute enables them to bring a claim and potentially recoup their investment losses. These customer disputes typically involve only paper discovery and no depositions, and they are a faster and more efficient alternative to traditional court litigation, as they provide a private forum to resolve disputes more quickly and efficiently.
About Haselkorn & Thibaut, P.A.
Haselkorn and Thibaut, P.A. is a nationwide law firm specializing in handling investment fraud and securities arbitration cases. The law firm has offices in Palm Beach, Florida, on Park Avenue in New York, as well as Phoenix, Arizona and Cary, North Carolina. The two founding partners have nearly 45 years of legal experience.
InvestmentFraudLawyers.com has filed numerous (private arbitration) customer disputes with the Financial Industry Regulatory Association (FINRA) for customers who suffered investment losses relating to issues similar to those matters mentioned above. There are typically no depositions involved, and those cases are typically handled on contingency with no recovery, no fee terms.
Experienced attorneys at Haselkorn & Thibaut, P.A. are available for a free consultation as a public service. Call today for more information at 1-800-856-3352.
