Prospect BDC Investors May Have FINRA Arbitration Claims to Recover Losses
Investors in Prospect Floating Rate and Alternative Income Fund Inc. (Prospect BDC or, the Company) may have claims to recover investment losses through securities arbitration before the Financial Industry Regulatory Authority (FINRA), if the investment was recommended by a financial advisor and the recommendation to invest lacked a reasonable basis or was sold via a misleading sales presentation. Prospect BDC, a non-traded business development company (BDC) formerly known as Prospect Sustainable Income Fund Inc., and previous to that, as Prospect Flexible Income Fund Inc., recently advised securities regulators that its ability to continue as a going concern is in doubt.
Prospect BDC, incorporated in Maryland in 2011, is an externally managed closed-end investment company with an objective, according to the Company’s recently filed Quarterly Report, of “primarily lending to and investing in the debt of privately-owned U.S. middle market companies.” Prospect BDC, while currently continuing its operations, nevertheless warns in its Quarterly Report that “there is substantial doubt” that the Company will be able to continue as a going concern for at least another year following the Company’s most recent Quarterly Report, as filed February 13, 2023.
According to the Quarterly Report, because “many of the costs of operating the Company are not proportional to the size of the Company’s investment portfolio,” Prospect BDC “must raise sufficient capital in order to build a portfolio that generates sufficient revenue to cover the Company’s expenses.” Prospect BDC further warns that as of December 31, 2022, it has not been able to raise such funds. Although Prospect BDC has indicated that it is trying to improve its financial position, without a further extension of an existing credit facility “the Company may fail to comply with a covenant which may result in an event of default.”
Investments in non-traded BDCs, as with other complex and illiquid financial products, carry significant risk factors that should be explained to investors by their financial advisors. To begin, non-traded BDCs lack liquidity, meaning that the shares cannot be easily sold on a national exchange as would be the case with a publicly traded stock or mutual fund. Because of this, some investors in non-traded BDCs are surprised when they come to learn that their investment capital may well be tied up for an extended time frame, sometimes up to 7-10 years. In some cases, investors must wait for a liquidity event to transpire, such as shares being listed on a national exchange, in order to achieve liquidity on the underlying investment.
Prospect BDC’s financial challenges underscore the inherently risky nature of the Company’s business model and, consequently, the risky and unsuitable nature of non-traded BDCs for many retail investors. Brokerage firms have a duty to perform adequate due diligence on any investment recommended to customers. Furthermore, financial advisors have a duty to disclose the risks associated with investment products, and to analyze whether the investment meets a customer’s stated investment objectives and risk profile.
If you have invested in Prospect BDC, or any other non-traded investment product, and have suffered losses or are unable to exit your illiquid investment position, you may be able to recover your losses in securities arbitration before FINRA. The attorneys at Giarrusso Law Group LLC have considerable experience working closely with investors in complex and illiquid non-conventional investments, including non-traded BDCs and non-traded REITs, to recover investment losses. Investors who wish to discuss a possible claim are invited to contact us at 201-771-1115 or info@gialawgroup.com for a free and confidential consultation.