The SEC 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 Wednesday 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.

Financial planners who work with households with $1 million in investable assets say the rule makes sense, and should go further.

“I have no problems with the SEC putting on restrictions to investing in unregistered securities,” John Eckel, founder and president of Pinnacle Investment Management, based in Simsbury, Conn., said in a telephone interview. “I do not think they are appropriate in most cases, and they should be putting limits on the percentage of a household’s net worth that can be invested in unregistered securities.” The $1 million minimum for the “accredited investor” standard should be raised, Eckel said.

Pinnacle Investment Management is a fee-only financial planning firm whose average household has between $1 million and $5 million in investable assets. That is not a lot of money to put into such opaque investments.

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.

“I think it was the right thing to do,” Cathy Simmons, CFP, chief compliance officer of Legacy Wealth Management in Memphis, Tenn., said. Indeed, the SEC said in its final release that it received 43 comment letters to the proposed amendment. That is a low number, Simmons said, an indication that the industry generally supported the SEC’s move.

One financial advisor in Florida, however, sees drawbacks to the SEC’s decision.

The amendment limits potential access to capital for investment, according to an email statement from William E. Hamm, Jr., CFP, CEO of Tampa, Fla.-based Independent Financial Partners. Hamm also expressed a bit more faith in investors with $1 million in investable assets.

“Investors that have a net worth in excess of $1 million, regardless of the source of that value, should be sophisticated enough to gauge the merits and risks of different ventures,” Hamm said.

Donna Mitchell writes for Financial Planning.