Investigating Potential Claims involving Prospect Flexible Income Fund Inc.
The White Law Group is investigating potential securities claims involving broker dealers who may have improperly recommended Prospect Flexible Income Fund Inc. BDC to investors. If you are concerned about this investment, the securities attorneys of The White Law Group may be able to help you.
Prospect Flexible Income Fund, Inc. (FLEX) is a publicly registered, non-traded business development company. FLEX invests primarily in senior and secured credit of privately owned U.S. middle market companies. FLEX’s objective is to generate current income and, as a secondary objective, capital appreciation, by targeting investment opportunities with favorable risk-adjusted returns. For the trailing twelve months ended June 30, 2021, FLEX’s distributions were composed of approximately 0% from cash flows from its investments and operations, 100% was a return of capital, and 0% from borrowings.
Risk Factors for Prospect Flexible Income Inc.
Distributions in the fund may exceed earnings, and therefore, portions of the distributions may be a return of the money that investors originally invested and represent a return of capital to investors for tax purposes, according to the prospectus. This return of capital is not immediately taxable, but reduces investor tax basis in the shares, which may result in higher taxes for investors even if shares are sold at a price below original investment.
Distributions are not guaranteed and may be modified at the company’s discretion. Since a portion of its distributions may include or represent a return of capital, the fund may have less money to invest, which could lower its overall return.
Risks of investing in Business Development Companies (BDCs)
BDCs were created by the U.S. Congress to stimulate investments in privately owned American companies that may have limited access to debt and equity capital. Non-traded BDCs offer retail investors access to private debt, an asset class that typically has only been available to high-net-worth and institutional investors. By investing in a non-traded BDC, individuals are able to pool their capital to invest in private American companies. For more information on BDCs, please see: BDCs – the good, the bad, and the UGLY
Business Development Companies operate much in the same was as REITs (Real Estate Investment Trusts) with non-traded BDCs having many of the same problems for investors as non-traded REITs – like high-risk, high commissions, and lack of liquidity.
BDC Sales & Performance took a Dive in 2020
Unfortunately for investors, sales of nontraded BDCs hit new lows in 2020 and also had poor performance due to COVID-19’s negative effect on returns, according to a report by Robert a Stanger & Co.
Broker-dealers reportedly sold just $362.3 million in nontraded BDCs last year, the least since 2010, which was the year after the first product was launched, according to Robert A. Stanger & Co. Inc. Broker-dealers have sold more than $22.6 billion of nontraded BDCs since 2009. The brokers or advisors usually charge a 7% commission and the firm 1%, which translates into a total of $1.8 billion in commissions over that time, according to Investment News.
Many of these non-traded BDCs were promised to provide steady growth, and invulnerability from volatile markets, which has not happened. According to the Wall Street Journal, FINRA’s Vice President for Corporate Financing has said these products are an “ongoing concern” for the regulator and that “firms must ensure they are suitable for an investor’s risk profile and investment strategy.”
Brokerage firms are required to perform adequate due diligence on any investment they recommend and to ensure that all recommendations are suitable for the investor in light of that particular investor’s age, investment experience, net worth, risk tolerance, investment objectives, and income. Firms that fail to perform adequate due diligence or that make unsuitable recommendations can be held responsible for investment losses in a FINRA arbitration claim.
Potential Lawsuits to Recover Financial Losses
If you are concerned about an investment in Prospect Flexible Income Fund Inc. and would like to discuss your litigation options, please call the securities attorneys of The White Law Group at 888-637-5510 for a consultation.
The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois. The firm represents investors in FINRA arbitration claims throughout the country. For more information on the firm, visit https://www.whitesecuritieslaw.com.