Nontraded Business Development Companies (BDCs)

Securities Fraud, Misrepresentation and Unsuitable Investment FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.

Non-Traded Business Development Companies or BDCs

In economic environments where investors are searching for yield, one of the investments that may be proposed to an investor as an appropriate investment vehicle is non-traded business development companies. The purpose of this post is to provide general educational information concerning these investments, which is not designed to be complete in all material respects. Thus, this information should not be relied upon as legal or investment advice. If the reader has any questions concerning BDCs, he or she should contact a qualified professional.

Business development companies are technically closed-end funds regulated under the Investment Company Act of 1940. They were created by Congress years ago.

BDCs primarily invest in the equity and debt of small to middle sized companies, with the debt instruments ranging from the senior debt level to below investment grade, or “junk,” an asset class usually unsuitable for the average investor.

A BDC must invest at least 70 percent of its assets in eligible companies, which means that they serve private or very thinly traded public U.S. companies.

The sales commission in non-traded BDCs typically is 7 percent, and the product is supposed to be sold only to those investors with a net worth of $250,000 or more, or a net income of at least $70,000 combined with a net worth of at least $70,000.

These suitability requirements are minimum suitability standards and, as an investor, the more that you consider investing in this type of investment, the larger these numbers should be for the average life of these types of investments can be up to six years. With limited liquidity, you may not be able to access your funds when you need them.

As with all investments of this type, read all disclosure materials. If you don’t understand what you are reading or there are written risk factors, with which you don’t agree, you should probably not invest, regardless of what is told to you verbally.