The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to provide investors with information about business development companies, or BDCs, whose shares are not traded on national securities exchanges. It is important to understand them before investing. Learn more about BDCs whose shares are traded on national securities exchanges at Publicly Traded Business Development Companies (BDCs): Investor Bulletin.
What are BDCs?
BDCs are a type of closed-end investment fund. They are a way for retail investors to invest money in small and medium-sized private companies and, to a lesser extent, other investments, including public companies. BDCs typically invest in companies that are in the early stages of development or are financially distressed. BDCs are sometimes compared to venture capital funds or private equity funds, which provide exposure to private, often illiquid, investments and may provide assistance to the companies they invest in. Some BDCs are focused on investing in private credit loans, which generally means they lend money directly to businesses or purchase syndicated loans. Syndicated loans are loans to businesses generally originated by a bank and sold in several pieces to other investors.
BDCs are complex and have certain unique risks. BDCs also may be structured in different ways. One way that BDCs can differ is in whether their shares are traded on national securities exchanges. This Investor Bulletin focuses on BDCs whose shares are not traded on national securities exchanges, or “non-publicly traded” BDCs. Because these BDCs’ shares are not traded on a national securities exchange, an investor cannot sell their shares on an exchange and has fewer options to liquidate their investment in the BDC.
What are non-publicly traded BDCs?
Shares of non-publicly traded BDCs are not bought and sold on national securities exchanges. Instead, investors purchase shares through SEC-registered or private placement offerings. In addition, investors are limited in when they can sell their shares.
Non-publicly traded BDCs fall into two main categories:
- Retail-offered BDCs, and
- Privately-offered BDCs.
Retail-offered and privately-offered BDCs have significant differences from each other, and from publicly traded BDCs. It is important to understand these differences and which type of BDC you are being offered. Retail-offered BDCs are commonly called “non-traded” BDCs. Privately-offered BDCs are commonly called “private” BDCs.
How do non-publicly traded BDCs compare to publicly traded BDCs?
All BDCs are similar in that they are regulated by the SEC and invest in the same types of companies. However, there are substantial differences among the types of BDCs. Below is a chart highlighting some key differences.
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Publicly traded BDCs |
Non-publicly traded BDCs |
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Retail-offered or “non-traded” BDCs |
Privately-offered or “private” BDCs |
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Who can invest? |
Anyone. |
Only investors who meet state-level suitability requirements, which generally means income and/or net worth minimums. |
Generally sold to accredited investors, which means investors who meet income or net worth minimums higher than those of state-level suitability requirements, or who hold certain financial professional licenses. |
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How can I buy shares? |
Any investor can buy shares of the BDC on a national securities exchange at the market price. |
Investors purchase shares from the BDC through a continuous offering. |
Investors invest in the BDC through private placement transactions with the BDC. |
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When can I sell shares? |
Any investor can sell shares of the BDC on a national securities exchange at the market price at any time. |
Investors can generally only sell their shares when the BDC offers to repurchase them. Typically, a retail-offered BDC will offer to repurchase investors’ shares quarterly or monthly. |
Absent a share repurchase program, investors generally cannot sell their shares until the BDC chooses to go public, sells its portfolio, winds down, or pursues another event or transaction in which investors have an opportunity to sell their shares for cash. Such an event or transaction may be several years (e.g., 5-7) after initial investment. |
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Does the BDC file a registration statement with the SEC? |
Yes. The BDC publicly files a Form N-2 registration statement, which includes comprehensive strategy and risk information about the BDC. |
Yes. The BDC publicly files a Form 10 registration statement, which is not as detailed as a Form N-2. |
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Will the BDC provide a prospectus? |
Yes. |
No, but you may receive a private placement memorandum. |
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Does the BDC file periodic reports about itself? |
Yes. The BDC must publicly file periodic reports, including Forms 10-K, 10-Q, and 8-K. These forms contain information about the BDC’s business and financial condition, financial statements, and information about certain material corporate events. |
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What additional risks do non-publicly traded BDCs have?
All BDCs share certain risks, such as risks of the underlying investments, exposure to leverage or debt, and potentially higher fees than other types of funds. Read more about these generally applicable risks at Publicly Traded Business Development Companies (BDCs): Investor Bulletin. Many of the risks discussed in that Bulletin apply to both publicly traded and non-publicly traded BDCs. As with any investment, you could lose money investing in a BDC.
Non-publicly traded BDCs, which include retail-offered and privately-offered BDCs, present some additional risks to consider before investing.
- Lack of liquidity. Investments in retail-offered and privately-offered BDCs are illiquid, which means they cannot be sold readily in the market. Instead, investors can only sell their shares at certain times determined by the BDC. Investors may only have the opportunity to sell their shares sporadically or several years after initial purchase. As a result, investors in a retail-offered or privately-offered BDC may not be able to sell their shares when they want or need to.
- Limited public information about privately-offered BDCs. While all BDCs must publicly file the same periodic reports, there are significant differences in other important disclosures made by BDCs.
Retail-offered and publicly traded BDCs are required to provide extensive information to investors about the investment and the issuer through a publicly filed Form N-2 registration statement. They must also provide a prospectus as part of their registration statement, and periodically update that prospectus.
Privately-offered BDCs are not required to publicly file as much information about themselves as other types of BDCs. Privately-offered BDCs use the Form 10 registration statement, which is not as detailed as Form N-2. In addition, privately-offered BDCs are not required to provide a prospectus.
Most privately-offered BDCs choose to provide investors with a document called a private placement memorandum introducing the investment and providing information about the offering and the company. However, such memoranda are not required and typically are not reviewed by the SEC or any other regulator. Private placement memoranda are not subject to standardized formatting, content requirements, or regulatory review, all of which help promote accuracy and completeness.
If you receive little or no information about a privately-offered BDC, that may be a red flag.
Because non-publicly traded BDCs may come with additional risk, it is important to understand what type of BDC you are investing in and to be sure it matches your investment time horizon.
Before you invest in a BDC
- Carefully read all of the BDC’s available information, including its registration statement, prospectus or private placement memorandum, as applicable, and any recent 10-Ks, 10-Qs, and 8-Ks. You can get this information by looking at the BDC’s filings in the SEC’s EDGAR database, from your investment professional, or directly from the BDC.
- Understand the fees and expenses you will pay for the BDC, including up-front fees to purchase shares of the BDC along with longer term management fees and performance fees, and compare them to other investment options. A fund with high costs must perform better than a lower cost fund to generate the same returns for you.
- Be sure that the BDC’s investment strategy is consistent with your goals.
- Ask questions:
- What kind of companies does the BDC invest in?
- What kind of loans does the BDC make? Are they higher quality loans or lower-rated loans?
- What are the most significant risks of an investment in the BDC?
- How much debt has the BDC taken on to make its investments?
- Has the BDC consistently paid distributions to its investors?
- What ongoing fees and expenses are my investment dollars subject to? Do the fees change depending on the investment performance of the BDC?
- Will my initial investment be reduced by an up-front fee to invest in the BDC?
Additional Information
Publicly Traded Business Development Companies (BDCs): Investor Bulletin
Investor Bulletin: Publicly Traded Closed-End Funds
Information Available to Investment Company Shareholders
Investor Bulletin: How to Read a Mutual Fund Prospectus (Part 1 of 3: Investment Objective, Strategies, and Risks); (Part 2 of 3: Fee Table and Performance); (Part 3 of 3: Management, Shareholder Information, and Statement of Additional Information)
Updated Investor Bulletin: How to Read a Mutual Fund or ETF Shareholder Report
How Fees and Expenses Affect Your Investment Portfolio: Investor Bulletin
