On October 12, 2020, FS Energy and Power Fund (FSEP, or the Company) filed a Form 8-K with the SEC, disclosing that the Company had “decreased the price at which it issues shares under its distribution reinvestment plan (the ‘DRP’) from $3.35 per share to $3.30 per share.” This reduction in share price for FSEP’s DRP “was to ensure that the Company did not issue shares under the DRP at a price per share that was more than 2.5% greater” than FSEP’s net asset value (NAV) per share. For the quarter ending June 30, 2020, FSEP reported a NAV of $3.32 per share.

Investors in FSEP who acquired their shares on the recommendation of a stockbroker may have claims to recover their losses in securities arbitration, provided the recommendation to invest lacked a reasonable basis, or if the investor was otherwise misled into making the investment. Formed in September 2010 as a Delaware statutory trust, FSEP commenced its operations in July 2011. FSEP is structured as a regulated investment company (RIC) and furthermore qualifies as a business development company (BDC) under the Investment Company Act of 1940. As a publicly registered, non-traded BDC, FSEP was sold nationwide to numerous retail investors at an offering price of $10 per share.

BDCs like FSEP are in the business of providing various credit solutions, including debt and mezzanine financing options, for smaller businesses that cannot access credit in the same way as larger, more established companies. Through providing such credit solutions to smaller, more thinly capitalized companies, BDCs typically collect much higher-than-average interest income on their investment portfolios, and in turn, seek to pass along some portion of this income stream to investors in the form of dividends.

While at first blush an investment in a non-traded BDC might seem very attractive, especially for an investor seeking enhanced income, alternative investments such as BDCs like FSEP or non-traded real estate investment trusts (REITs) carry significant complexities and risks. As we have previously discussed, these risks include, but are not limited to, high up-front selling commissions—as high as 10% of total capital invested—to the soliciting financial advisor and his or her firm. In addition to high commissions and related fees and expenses, non-traded BDCs like FSEP are highly illiquid investment vehicles. In fact, FINRA issued the following cautionary guidance in 2013 concerning liquidity in alternative investments such as FSEP: “Due to the illiquid nature of non-traded BDCs, investors’ exit opportunities may be limited only to periodic share repurchases by the BDC at high discounts.”

Investors in FSEP who acquired their shares during the offering at $10 per share are now likely carrying significant unrealized losses of nearly 70% (exclusive of any distributions received to date). The attorneys at Giarrusso Law Group LLC have considerable experience with complex non-traded investments including BDCs such as FS Energy and Power Fund or non-traded REITs. Investors may pursue a claim to recover their 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.