Investors in Sierra Income Corporation May Have Recourse to Recover Their Investment Losses
Investors in Sierra Income Corporation (Sierra, or the Company) may have claims to recover their losses through FINRA arbitration, provided the recommendation to invest lacked a reasonable basis, or if the investment was solicited through a misleading sales presentation. Sierra is a non-traded business development company (BDC) which primarily invests in first lien secured debt, second lien secured debt, and certain subordinated debt of middle market companies with annual revenues of approximately $50 million to $1 billion. Sierra is externally managed by SIC Advisors LLC, which in turn is affiliated with Medley Management (NYSE: MDLY).
Effective as of May 1, 2020, in the wake of initial Covid-19 lockdowns, Sierra and Medley Management announced that their anticipated merger was being terminated. Consequently, the limited secondary market for Sierra shares reflected a downwardly trending price, suggesting investors who sold their shares may have suffered significant losses. As a publicly registered, non-traded BDC, Sierra was sold nationwide to numerous retail investors by various third-party broker-dealers and their affiliated stockbrokers. As of year-end 2016, the Company reported that it had raised in excess of $900 million in investor equity. Through its public offering, investors acquired shares of Sierra at $10 per share.
Unfortunately, in some instances, investors who acquired their Sierra shares at the offering price of $10 per share may not have been adequately informed of the investment’s many risks. Investors may have been solicited to invest without being adequately informed that an investment in a non-traded BDC like Sierra typically entails hefty up-front fees (as high as 10% in some cases) to the soliciting stockbroker and his or her firm, as well as significant liquidity issues. As set forth in Sierra’s prospectus, investors who participated in the offering were subject to considerable up-front fees and commissions of nearly 10%, including a 7% selling commission, as well as a 2.75% dealer-manager fee.
Aside from their characteristic high-fee structure, non-traded investment products carry additional risks. In fact, in early 2017, FINRA issued the following cautionary guidance with respect to non-traded REITs and BDCs:
“While these products can be appropriate for some customers, certain non-traded REITs and unlisted BDCs, for example, may have high commissions and fees, be illiquid, have distributions that may include return of principal, have limited operating history, or present material credit risk arising from unrated or below investment grade products. Given these concerns, firms should make sure that they perform and supervise customer-specific suitability determinations.”
Unfortunately for Sierra investors seeking near-term liquidity, their options are limited and disadvantageous. For instance, recent secondary market pricing as of October 2020 has reflected Sierra shares priced at a significant discount of around $1.50 per share. Therefore, Sierra investors who recently sold their shares on a thinly traded secondary market likely incurred substantial losses in excess of 80%, exclusive of any distributions received to date.
The attorneys at Giarrusso Law Group LLC have considerable experience with non-traded investments, including non-traded BDCs such as Sierra Income Corporation as well as 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.