Investors in FS Energy and Power Fund May Have Recourse to Recover Investment Losses

Investors in FS Energy and Power Fund (FSEP) may have claims to recover their losses through FINRA arbitration, provided the investment recommendation lacked a reasonable basis, or if the investor was otherwise misled into purchasing shares. Formed as a Delaware statutory trust in September 2010, FSEP is a publicly registered, non-traded business development company (BDC). As such, FSEP was sold nationwide to numerous retail investors.

The investment objective of FSEP, sponsored by FS Investments (formerly Franklin Square), “is to generate current income and long-term capital appreciation by investing primarily in privately-held U.S. companies in the energy and power industry.” In fact, FSEP’s policy is to invest “at least 80% of its total assets” in securities of energy companies. Therefore, in addition to those risks as a non-traded BDC—including characteristic high fees and illiquidity—FSEP also presents significant commodity volatility risk associated with investing in the energy sector.

Unfortunately, in some instances, investors who acquired their FSEP shares at the offering price of $10 per share may not have been adequately informed of the investment’s many risks. Investors should understand that an investment in a non-traded BDC like FSEP usually entails hefty up-front fees (as high as 10% in some cases) to the soliciting stockbroker and the brokerage firm, as well significant liquidity issues. In fact, FINRA has issued the following cautionary guidance: “Due to the illiquid nature of non-traded BDCs, investors’ exit opportunities may be limited to only periodic share repurchase by the BDC at high discounts.”

For the quarter ending June 30, 2020, FSEP has reported a net asset value of $3.32 per share. Regardless of that pricing, investors seeking immediate liquidity have only limited options, including attempting to sell their shares at a significant discount through a secondary market. As of April 2020, one secondary market had FSEP shares selling for approximately $1.50 per share.

And it gets worse. As disclosed by FSEP’s board of trustees in its quarterly report of June 30, 2020, recent events including the COVID-19 pandemic and an oil price war “are likely to continue to negatively impact” the fund’s operations and the business operations of some of its portfolio companies. In light of current events, investors requiring immediate liquidity on their FSEP investment will likely suffer significant near-term losses (exclusive of any distributions received to date).

The attorneys at Giarrusso Law Group LLC have considerable experience with complex non-traded investments, including REITs and BDCs. Investors may pursue claims to recover losses through FINRA arbitration, or in some instances, litigation. Investors who wish to discuss a possible claim are invited to contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, confidential consultation.