Nontraded Business Development Companies To Be Scrutinized By Regulators

Reno, NV Attorney serving Nevada & California


A) Introduction

Nontraded business development companies are a fast-growing investment option in today’s market. Financial securities regulators such as the North American Securities Administrators Association (NASAA) and the Financial Industry Regulatory Authority (FINRA) have been looking into reviewing policies and standards that govern this type of investment.

B) What are nontraded business development companies, also known as ‘BDC’s?

These are investments made through the equity and debt of small to middle sized companies. The debt instruments range from the senior-secured level to the below-investment grade, otherwise known as “junk,” which is usually inapt for the average investor. BDC’s offer individuals the opportunity to invest in privately owned American companies. They can be sold only to 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. The illiquidity, or lack of cash assets, of this investment as well as the 7% commission made by brokers on this product are what should be made known to investors.

C) What is going to be scrutinized by regulators?

Since nontraded BDC’s are growing investments and almost $1.5 billion was gained last year according to Robert A. Stanger & Co., it makes sense that regulators would want to accompany these investments with more defined guidelines. These guidelines would help advise investors to take “due diligence” and to “consider whether [the BDC] is suitable for a particular investor,” as one spokesperson for FINRA stated. As for NASAA, it is planning to “draft a statement to include review policies and standards governing the drafting of an offering document for a new fund.” This increased concern among regulators regarding BDC’s stems from previous issues with nontraded REIT’s.

These investor alerts could prove to be similar to those concerning nontraded REIT’s, including “know your customer” guidelines and an emphasis on the lack of liquidity in nontraded investments. REIT guidelines have been loosely used for nontraded BDC’s in the past, and new guidelines pertaining to this specific sector will be a main concern for securities regulators in the near future.

D) Conclusion

In a short while, investors and firms should be on the lookout for new and better-defined guidelines regarding nontraded business development companies. As the popularity of these investments increases, the interest that regulators have in establishing these guidelines will also rise. Each of these factors will help to provide the investors, firms, and the regulators with the tools needed for all parties involved to be successful and to maintain that success in coming years.

E) Investors Remedies

As with all investments, knowing exactly how your money is being handled can be filled with frustration and confusion. If your brokerage firm and/or financial advisor has disregarded their due diligence to clients or has made unsuitable determinations which have put their own interests above yours, then you may be the subject of this type of investment fraud. Securities and Stock Fraud Attorney Thomas C. Bradley can guide you in taking the proper legal action necessary to regain your financial losses. Call today for your free consultation.