by Brian Mahany
The amount of new financial products coming out of Wall Street never ceases to amaze. The industry is developing products faster than state regulators and FINRA (the Financial Industry Regulatory Authority) can issue new regulations. The newest hot product on Wall Street is a Nontraded Business Development Company or “BDC.”
According to an article in InvestmentNews, BDCs are really closed end funds already subject to some regulation. That article says that last year, BDC’s raissed $1.5 billion in capital, up from less than $100 million in 2009.
Like Real Estate Investment Trusts (REITs) they are often illiquid meaning they can be difficult to sell if an investor suddenly needs to raise capital. The term “nontraded” should be a red flag to any investors that may need access to their money in the short term.
Stockbrokers and investment advisers are required to tell investors of the liquidity issues surrounding these investments. We have seen from many complaints in the REIT industry, however, that brokers often don’t do a good job of explaining those risks.
Our admonishment has always been to only invest in things that you completely understand. If someone asks you for money and you don’t fully understand the product – or worse, they can’t explain that product – don’t invest. The lure of high yields in this economy makes nontraded BDCs appear attractive. They are also attractive to brokers because they carry a high commission.
The drawback in BDCs is that once you invest, you may find yourself stuck with that investment for a long time. Unlike traditional investments like stocks and bonds which can be readily sold, many REITS and BDCs have no ready secondary market. That means they are probably not suitable for older investors who are nearing retirement and who need access to their money for retirement.
No doubt FINRA and some states will issue guidance to the industry as to how these products should be marketed. Investors, however, should always maintain their own vigilance and thoroughly understand the risks of their decisions.
The investment fraud lawyers at Mahany & Ertl have helped many people recover their money from dishonest or “fast talking” stockbrokers. We are a full service law firm concentrating in fraud. If you believe you have been the victim of securities fraud, a Ponzi scheme or financial malpractice, give us a call. All inquiries are kept in strict confidence. In many instances cases can be handled on a contingent fee basis meaning you owe nothing for legal fees unless we recover money for you.
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