Illiquid alternative investments have been a cause of particular concern for securities regulators and watchdogs in recent years. Among the products that have garnered the most notoriety are non-traded Real Estate Investment Trusts (“REITs”), non-traded Business Development Corporations (“BDCs”), and oil and gas private placements.

Non-Traded REITs

A REIT is an investment vehicle that uses pooled investor funds to acquire income-producing real estate or mortgages. In order to maintain REIT status, and the tax benefits that come with it, the trust must return at least 90% of its taxable income to investors on an annual basis.

REITs that do not trade on public exchanges are considered illiquid because opportunities for early redemptions are very limited and because secondary market trading is characterized by low volume, a lack of price continuity, and wide bid-ask spreads.

FINRA has described non-traded REITs as “speculative investments that contain a high degree of risk.” [1] In addition to significant default and liquidity risks, id., the risks of investing in non-traded REITs include high fees (upfront and management); distributions from principal (i.e., return of capital); lack of share value transparency; and, conflicts of interest. [2]

Non-Traded BDCs

BDCs are organized and structured similarly to REITs; however, rather than investing in real estate, BDCs generally invest through subprime loans to “small and developing businesses and financially troubled businesses.” [3]

As with all “non-traded” securities, exit opportunities with respect to non-traded BDCs “may be limited only to periodic share repurchases” by the isser “at high discounts.”[4]

Like non-traded REITs, non-traded BDCs carry a high default risk. Id. They are often compared to venture capital or seed capital investments (but without the accredited investor protections). [5] The Wall Street Journal has described them as “High-Fee, Unlisted, Junk-Based Funds.” [6]

Private Placement Oil and Gas Investments

Private oil and gas investments are generally limited by law to certain institutional and high net worth investors. “This limitation exists because of the greater risks involved in private offerings as compared to, for example, investing in publicly traded stock.” [7] In addition to default and liquidity risks, private oil and gas investments pose a significant risk of fraud. [8]

REITs

• American Finance Trust
• American Realty Capital (ARC)
• Behringer Harvard
• Carey Watermark
• CNL Financial Group
• Cole Capital
• Corporate Property Associates (CPA)
• Dividend Capital
• Griffin Capital Corp
• Healthcare Trust
• Highlands REIT Inc
• Hines Real Estate
• Inland Real Estate Group
• InvenTrust Properties Corp
• KBS Capital Markets
• Lightstone Group
• MacKenzie Realty Capital
• NetREIT
• NorthStar Asset Management
• Phillips Edison & Co
• Resource Real Estate
• Sentio Healthcare Properties
• Strategic Realty Trust
• Strategic Storage REIT
• Summit Healthcare
• Whitestone REIT

BDCs and LPs

• AEI Capital Corp
• ATEL Capital Group
• Business Development Corp of America
• Corporate Capital Trust
• Cypress Leasing Corp
• Divall Properties
• Franklin Square Capital Partners
• ICON Investments
• LEAF Commercial Capital
• Redwood Mortgage Investors
• Reef Oil & Gas
• Secured Income
• Sedona Tree Farm
• Uniprop
• United Development Funding

[1] FINRA Disciplinary Proceeding No. 2013-038283001
[2]https://www.sec.gov/oiea/investor-alerts-bulletins/ib_nontradedreits.html)
[3]https://www.sec.gov/investment/fastanswers/divisionsinvestmentinvcoreg121504htm.html
[4]http://www.finra.org/industry/2013-exam-priorities-letter
[5] SEC Investigation Report, Case No. OIG 496
[6]https://www.wsj.com/articles/these-high-fee-unlisted-junk-based-funds-arent-working-out-1458379803
[7]https://www.sec.gov/files/ia_oilgas.pdf
[8]http://www.nasaa.org/22282/nasaa-issues-investor-advisory-on-private-placement-offerings/