Business Development Corp. Of America
Business Development Corp. of America is an alternative type of investment known as a non-traded business development company, or BDC. It was formed in Maryland in 2010. The company’s objective was to provide private mortgages to middle market companies. BDCA believed that this was a relatively untapped market and would provide them the opportunity to negotiate the investment terms in their favor. This was because the types of business that BDCA sought to provide mortgages to had very poor credit. Business such as these are often denied mortgages from mainstream sources and are thus forced to rely on predatory non-traded BDCs such as BDCA.
Business Development Corp. of America began its Initial Public Offering in January 2011 at a price of $10 per share. The necessary funds to begin actual operations were raised by August of that year. The IPO officially ended in April 2015 at which point the company had raised a total of $1.9 billion. By the end of 2017, the company’s assets totaled nearly $2.5 billion. Non-traded BDCs operate differently to securities that are sold on public securities exchanges. While those investments have share prices determined by actual market value, the share prices for non-traded BDCs can often be inflated in an attempt to raise the necessary capital without as many investors.
How Liquid Was This Investment?
The truth about business development companies that don’t trade publicly is that they are incredibly speculative and illiquid investments. Investor’s in non-traded BDCs lack the guaranteed redemption that accompanies securities sold on public exchanges. Most non-traded business development companies offer quarterly buy out periods; however, they only buy out a certain percentage of the fund’s shares every quarter. This means that not every investor who wishes to liquidate their shares at that time will be able to. While Business Development Corp. of America originally offered redemptions of 2.5 percent of its shares every quarter, this changed when the value of the fund dropped. In 2016, BDCA changed its policy to only allow withdrawals twice a year as opposed to four times a year. Because of this, investors looking to liquidate assets were forced to wait even longer to do so.
Since these products are not traded on any public securities exchanges, the amount that an investor receives when liquidating their shares of a business development company usually does not equate to what they are told the security is actually worth. This is meant as a deterrent to prevent investors from pulling out of non-traded BDCs earlier than the business would like. For instance, in early 2017, MacKenzie Capital Management offered to purchase shares from BDCA share holders for $6 per share up until May of that year. This was despite the fact that the shares were currently valued at $8.58 per share. This company knew that it could get away with this offer because of BDCA’s limited buy outs. Essentially, investors had to choose between waiting six months to be bought out, and possibly not even being able to, or liquidate their shares for an amount substantially less than what they purchased the shares for originally.
Who Is Liable For Damages?
Many proponents of these types of investments like to claim that this is common knowledge and the liability rests solely on the investor. “It couldn’t be more clear in the documents that this was a risk. That’s the nature of this investment. It’s illiquid,” said Steven Boehm, an attorney for Business Development Corp. of America. While the company’s leaders claim that an investment like this should never be recommended to investors with more conservative investment objectives, they definitely benefit greatly when securities brokers solicit these individuals to invest.
Non-traded BDCs are also accompanied by incredibly high fees when the transaction is executed. Fees for these products can be as high as 17 percent of the investor’s principal investment just for the opportunity to invest in these incredibly flawed products. A large portion of this money goes right to the broker as their commission for brokering the trade. This serves to be the main motivation for securities brokers who recommended these types of products to unsuited investors. It’s a motivation that creates a significant conflict of interest as it can cause brokers to place their own financial interests ahead of their customers. In the end, this substantial commission makes it almost impossible for the investor to actually see any investment returns under anything besides a booming market.
Non-traded BDCs are not suitable for most investors. They are self-serving to recommending brokers, incredibly risky, and highly illiquid and Business Development Corp. of America is no different. Because of this, financially unsuited investors who were placed in this product may be entitled to damages. If you believe this might be you, please contact Oakes & Fosher for a free and private consultation. We work on a contingency basis, which means there are no fees charged unless we collect for you.
