American Realty Capital Argues Investment Illiquidity Isn’t So Bad

Posted on November 10th, 2014 at 1:18 PM

From the Desk of Jim Eccleston at Eccleston Law Offices:

It is no surprise that American Realty Capital, the largest sponsor of illiquid non-traded REITs, is fighting what it says is a mistaken perception by state regulators that difficult-to-trade products are dangerous for investors.

As background, several states impose restrictions on the amount of exposure investors can have to illiquid investments, such as non-traded REITs, given the obvious concerns with any investments that are illiquid.  That cap frequently is 10% of the investor's net worth.

However, American Realty Capital argues that’s the wrong approach.  Instead, the serial peddler of illiquid non-traded REITs contends that illiquidity should be viewed as a good thing.  Why?  It’s a kind of handcuffs and blindfold theory. 

Here is the theory.  Illiquidity (and artificially stable pricing) allows investors to not have to worry about market volatility, and it discourages or prevents investors from selling the products should their price drop.  That could prevent a sale that causes a realized loss for the investor.  Illiquidity – thank goodness -- requires investors to hold the product over the long run, and everyone knows that over time, an investment may gain in value.  Thank you, American Realty Capital!!

Of course, the firm also argues that non-traded REITs are attractive to brokers not because of their high commissions and fees but because of their value for investors. The firm smugly claims that no one has shared evidence with it that brokers “overinvest” clients in the illiquid products.

The attorneys of Eccleston Law Offices represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 50 years in delivering the highest quality legal services.

Related Attorneys: James J. Eccleston

Tags: American Realty Capital, Illiquidity, REITs

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