What Are Non-Traded Business Development Companies?
There is a type of investment plaguing the market right now known as a non-traded business development company, or BDC. Non-traded BDCs are a type of alternative investment that, like most private investments, are highly unsuitable for investors.
Non-traded business development companies provide financing to small and medium start-up businesses that are unable to obtain financing through traditional means. The reason that non-traded BDCs are usually these businesses’ last stop is because they charge much higher interest rates than the more traditional lenders.
Reasons Non-Traded BDCs Are Risky Investments
- Non-traded BDCs have very high initial and ongoing fees
Non-traded business development companies are speculative and illiquid investments with very high initial and ongoing fees that make it virtually impossible to make money from the investment.
To start with, the selling broker can receive up to ten percent of the investor’s principal investment as their commission at the time of the transaction—as well as an additional two percent given to the dealer manager. Afterwards, many non-traded BDCs charge their investors fees in “two and twenty” structure. Essentially, the BDC charges the investor a yearly fee of two percent of their entire investment and a 20 percent fee of any profits earned. Essentially, non-traded BDCs often charge investors extremely high fees for the opportunity to invest with them.
Securities brokers who pitch these products to unsuspecting investors like to claim that these fees are inconsequential compared to the distributions they will receive. However, these distributions are dependent upon the company’s success.
- Non-traded BDCs are not able to guarantee distributions to its investors.
Non-traded BDCs are inherently risky due to the nature of what they do. These companies invest in smaller businesses that traditional lenders reject. This is done with no real guarantees that the business they lend to will be successful enough to repay the loan.
Non-traded BDCs are not able to guarantee distributions to its investors. Thus, any guarantees they make qualifies as misrepresentation. When a non-traded BDC experiences financial hardship, the investors not only have to watch the value of the investment drop, but they are still required to pay management fees to the BDC.
- Non-traded BDCs are illiquid
In addition to the risk and the associated fees, non-traded BDCs are also highly unsuitable due to their illiquidity. These products do not trade on any public securities exchanges, therefore, it is much more difficult for investors to liquidate their shares of a non-traded BDC should the need to do so arise.
Those who control these business development companies want to deter investors from exiting the investment pool too early. Because of this, most non-traded BDCs only offer investors quarterly buyout periods. However, they usually only offer a finite amount of buyouts each quarter. If the amount of investors looking to exit this investment exceeds the amount of buyouts the non-traded BDC offers each quarter, then a lot of investors will be stuck invested in a product they don’t want to be invested in anymore.
On top of all this, investors are often offered buyout prices significantly less than what they are told their shares are actually valued at.
Brokers Take Advantage of Investors By Recommending Unsuitable Non-Traded BDCs
Non-traded business development companies are illiquid and deceptive investments that are highly unsuitable for investors. This is especially true for investors who might need to liquidate assets at any point over the life of their investment, or for those who expressed more conservative investment objectives to their securities brokers.
Despite this, they continue to be recommended to unsuited investors because the selling brokers receive incredibly high commissions. These commissions create significant conflicts of interest on the part of these brokers and serve as proof that these products are recommended to financially unsuited investors.
If You Suffered Losses Due to a Non-Traded BDC – Contact Oakes & Fosher
Oakes & Fosher dedicates its entire legal practice to helping investors across the nation. If you believe that your securities broker placed you in a highly unsuitable Non-Traded BDC, you may be entitled to damages. Contact Oakes & Fosher for a free and private consultation.