The Securities and Exchange Commission has closed a loophole that previously allowed individuals to artificially inflate net worth before investing in unregistered securities offerings. Advisors are generally supportive of the change.
The regulator on Dec. 21 said the value of a person's primary residence must be excluded from net worth calculations used to determine qualifications to invest in unregistered securities offerings. These offerings range from hedge funds to derivatives and private debt, which often are viewed as less transparent and risky than publicly registered offerings.
The SEC made the changes to ensure that its definition of an accredited investor conforms to the requirements stipulated under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The legislation also says the value of an investor's primary residence be excluded from the net-worth calculation used to determine the person's status.
Under the new rules that determine a client's "accredited investor" status, any debt secured by the investor's primary residence within 60 days of buying the unregistered securities must be treated as a liability. In the past, clients could artificially inflate the net worth on paper by borrowing against the value of their homes shortly before participating in an exempt securities offering.