Business Development Companies (“BDCs), Non-traded Real Estate Investment Trusts (“REITs), and most other alternative or direct investments are illiquid investments, not listed on public exchanges and with little to no secondary market trading.
Hospitality Investors Trust REIT is also a publicly registered non-traded real estate investment trust or REIT, formerly known as American Realty Capital Hospitality Trust. The Trust was another “blind pool” offering, and shares were originally sold to investors, including Claimant, at $25 a share. The Trust purports that invests in a diversified portfolio of lodging properties in the midscale limited service, extended stay, select-service, upscale select-service and upper-upscale full-service segments within the hospitality sector.
As the US Securities & Exchange Commission, in its approval of the consolidated FINRA Suitability Rule observed:
Reasonable-basis suitability requires a broker to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.
In general, what constitutes reasonable diligence will vary depending on, among other things, the complexity of and risks associated with the security or investment strategy and the firm’s or associated person’s familiarity with the security or investment strategy.
A firm’s or associated person’s reasonable diligence must provide the firm or associated person with an understanding of the potential risks and rewards associated with the recommended security or strategy.
See Securities Exchange Act Release No. 63325 (November 17, 2010).
However, it was disclosed at the time of sale that the Trust has a limited operating history, and that its “use of proceeds” from the offering was not for the purpose of making new investments, but instead to reduce the Trust’s loans or “borrowings, including borrowings made in connection with the acquisition of a portfolio of 116 hotel assets.”
Here, again, according to SEC materials, selling broker-dealers, were paid fees and commissions of 14%, in connection with the offer and sale of these investments, leaving less than 86% of proceeds to be used for actual investing. The Trust discloses that since inception, “all distributions” to investors were not profits, but “were paid from offering proceeds.”
On May 20, 2021, Hospitality Investors Trust REIT filed for bankruptcy. Based upon a estimated current value of less than $1.00 per share, these shares may be substantially worthless.
Investors in Hospitality Investors Trust should consult with qualified counsel to determine their legal rights.
Guiliano Law Group
Our practice is limited to the representation of investors. We accept representation on a contingent fee basis, meaning there is no cost to you unless we make a recovery for you. There is never any charge for a consultation or an evaluation of your claim. For more information, contact us at (877) SEC-ATTY.