Business Development Corporation of America (BDCA)

Business Development Corporation of America (BDCA) Lawsuit “FINRA”

The Business Development Corporation of America (BDCA) is a non-traded business development company (a BDC) that focuses on senior secured loans with middle-market companies. A non-traded BDC does not trade like a stock or a bond on a national exchange. It is generally considered a risky, complex, illiquid, private placement alternative investment.

Notwithstanding the recent sponsor stated valuations appearing on investor account statements, there is a thin secondary market available through several sources, one of which has reflected current pricing well below the range stated by the sponsor, and indicating that actual willing buyers in the market place have been willing to pay only approximately $4.00/share, which is well below the original investment price of $10.00/share and may represent a substantial loss for some investors.

Non-traded BDC sales are often motivated by high-commissions and fees paid up-front to the advisor or firm that was selling the product. These are often not the only concern with investments similar to BDCA.

Problems With Business Development Corporation of America (BDCA) and Non-Traded BDCs

Non-traded BDCs like Business Development Corporation of America (BDCA) raise many of the same concerns as non-traded real estate investment trust (REIT) investments. Both non-traded BDCs and non-traded REITs are examples of Direct Participation Programs (DPPs). For investors, these types of investments typically have high costs, liquidity concerns, and transparency issues.

BDCA High Commissions

As noted above, the high expenses often provide for the incentive at the individual financial advisor or brokerage firm level that serves as a potential motivation for the recommendation to promote or sell these products to clients. If investors were aware that the only reason the firm and their financial advisor were pushing the product was the fact that they were going to be receiving a substantial commission incentive. That barely $8.50 of every $10.00 initially invested was getting invested in the underlying business, many investor clients would not be interested in such transactions. Were these details thoroughly disclosed such that the investor could make an informed decision?

BDCA Liquidity Issues

The liquidity issues are similar to non-traded BDC and non-traded REIT investments. First, is the fact that these investments do not trade on an exchange.

Redemption programs are often represented at the point of sale as a means of providing liquidity. In reality, these programs are often little more than window-dressing for investors as the window for taking advantage of these programs is often extremely limited, the terms are quite strict, and if there are financial downturns, cash flow or other issues, they may change, be suspended, or be terminated. Even if available, they rarely (if ever) provide for a liquid robust secondary market, and options to sell at auctions or other secondary markets are generally quite limited (if they even exist). Furthermore, the underlying business of the BDC or REIT often holds illiquid investments and assets. The combination of the nature of those holdings, as well as the prospect of a BDC suspending (what have already limited redemption options), can leave investors holding these illiquid investments for many years, often much longer than expected or represented by the financial advisors selling these investments.

The income stream or distribution rates are often represented as being attractive or comparatively favorable with other investment options. This is not always an “apples to apples” comparison, and it is commonly used to “sell” the non-traded BDC or non-traded REIT. To the typical investor unfamiliar with these types of products that are trusting their financial advisor, the distribution rates initially sound more attractive than stock dividends, bond interest rates, or CD interest, but these are very different investment products.

Some distribution rates often include a partial return of principal (and many investors mistakenly believe these distributions are a return on their investment principal).

Also, many non-traded REITs and non-traded BDCs reduce or even suspend distribution streams, especially after new investment funds are no longer being raised or when the underlying business begins to see cash flow other issues arise. The suspension (or reduction) in distributions leaves many investors without the one primary reason they purchased the investment. When combined with the illiquid nature of the investment product now generating much less (or possibly little or no income stream at all), some investors suddenly realize that they were never really adequately advised of the material risks associated with these products.

FINRA Complaints With BDCA

Likely not part of the sales pitch on these investment products is the fact that securities regulators have investigated some severe issues related to these types of investment products. Those issues are not limited to any one particular broker-dealer firm.

In 2016, the financial regulatory authority (FINRA) issued a targeted examination letter seeking information from firms regarding their sales of BDCs and their due diligence practices related to the same. See FINRA, Targeted Examination Letter on Non-Traded Business Development Companies (August 2016).

FINRA requested documents and information for the period from January 2015 through June 2016 that included a list of each BDC offered by the firm, lists of all participating broker-dealers that have selling agreements with the firm per each registration statement, a list of all broker-dealers that sold the aforementioned identified BDCs to its customers in initial or follow-on offerings that include for each BDC, and copies of the firm’s due diligence procedures that the firm conducts of the BDC initially and on an ongoing basis. FINRA has not released the results of these reviews or exams.

BDCA Lawsuit “FINRA”

FINRA has fined several firms for their BDC sales practices.

Examples include a $775,000 fine against Berthel Fisher in part due to an alleged failure to have adequate procedures to ensure the firm complied with concentration levels for BDCs. See FINRA Letter of Acceptance, Waiver, and Consent (AWC) No. 2012032541401. There was also a $950,000 fine leveled against LPL Financial LLC in part for failing to have adequate procedures to ensure the firm complied with both internal concentration limits as well as limits set by the BDCs or the states. See FINRA Letter of Acceptance, Waiver, and Consent (AWC) No. 2011027170901. At least one state securities regulator has also fined LPL Financial LLC because it inconsistently classified non-traded BDCs and non-traded REITs as equities rather than alternative investments. See: In the Matter of LPL Financial LLC, Case No. S-16-0069, Arkansas Securities Commissioner (January 2019).

Take a look at your investment account statements. Whether you did business with LPL Financial or any other firm, are your non-traded REIT or non-traded BDC investments listed as “Alternative Investments” on your account statements, or are they listed under a different asset description?

What Should Business Development Corporation of America (BDCA) Investors Do?

If you are an investor in BDCA or any similar non-traded BDC or non-traded REIT investment, and it was not a suitable or appropriate investment for you. You are facing a substantial loss, whether it has been realized (sold) or unrealized (remains unsold). You should review your account statements and investigate description issues, pricing issues, and compare secondary market valuations that might be available. If this seems overwhelming, contact an experienced investment fraud lawyer as they will often help provide this review and information free of charge.

If you do determine that you have significant investment losses, you have some choices.

First, you ou can “wait and see” but keep in mind that there is a statute of limitations and other potential laws, rules, or regulations that a couple may impact not only your ability to bring a potential claim or lawsuit at a later date.

For many investors, they are surprised to find out the broker-dealer firm making the investment product available to its financial advisors had duties and responsibilities that typically included conducting thorough research and due diligence effort before making the investment product available for sale. In failed (again) by failing to properly and adequately supervise the recommendations and sale of the investments to the clients.

Senior debt notes are risky, illiquid, alternative investments for elderly and retired investors. Many FINRA recent cases suggest that recommendations of risky, illiquid, private placement alternative investments similar in nature and complexity to non-traded REITs and non-traded BDCs are not always appropriate for investors who may need liquidity.

Broker-dealer firms recommending this investment had a duty to know and understand the investment as well as a duty to know their client before making any recommendation to investors. Some broker-dealer firms fail their customers by not properly and adequately supervise the recommendations and sale of investments such as BDCA to investors.

For some BDCA investors with significant losses who received unsuitable investment recommendations, one good option includes filing a FINRA customer dispute. This is an alternative form of dispute resolution that is private, and quicker and more efficient than traditional court litigation. Besides, there are typically no depositions, as it is almost entirely paper-based discovery.

You should contact experienced investment fraud lawyers who can review the status of these and similar investments in your accounts, properly advise you regarding your rights and options, and help you by taking steps to help you recover your investment losses.

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 and Phoenix, Arizona, Houston, Texas, and Cary, North Carolina. The two founding partners have 45 years of legal experience.

Haselkorn & Thibaut, P.A. has filed numerous (private arbitration) customer disputes with FINRA for customers who suffered investment losses relating to issues similar to those matters mentioned above. Typically, there are no depositions involved, and those cases are usually 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 or visit our website and email us from there at www.investmentfraudlawyers.com.

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