Non-Traded Business Development Companies Hit Securities Regulators’ Radar Screen


The Financial Industry Regulatory Authority (FINRA) is taking a closer look at a fast-growing alternative investment known as a non-traded business development company (BDC). According to InvestmentNews, FINRA spokeswoman Nancy Condon states, “we are looking at a number new products being sold to investors and BDC’s are one of them.” BDC’s are typically closed-end funds regulated under the Investment Company Act of 1940. BDC’s were created in 1980 by Congress in order to provide small companies with funding.

As with many alternative investments there are many pitfalls that the investor needs to be aware of before investing. The sales commissions on non-traded BDC’s are high, typically around 7%. Additionally, the investments are illiquid and may contain debt instruments such as junk bonds. BDC’s are also limited to investors whose net worth is $250,000 or who net have a net income of at least $70,000 combined with a net worth of at least $70,000.

According to attorney Pratt H. Davis at Page Perry, a securities arbitration and litigation firm, “investors, especially seniors on limited incomes, need to be very skeptical of investments that promise to increase the return with no corresponding increase in the risk and are locked up for long periods of time.” According to Mr. Davis, “one of the big concerns regarding BDC’s is that the income requirements are much lower than the ‘accredited investor’ standard that applies to the majority of alternative private placement investments.” What you might end up seeing according to Mr. Davis, “is a whole lot of middle class folks who can’t afford to lose any money being locked up in illiquid investments that are likely to contain some very risky assets.”

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.