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Net Asset Value Calculation: The Priority Income Fund - Oakes & Fosher Law

New secondary market pricing on the Priority Income Fund of $7.50 per share reflects that the sponsor’s NAV is roughly 40% too high. 

Recent transactions in the secondary trading market at CTTAUCTIONS for the Priority Income Fund reflect that the illiquid private investment trades at approximately $7.50 a share. Since this is a market of buyers and sellers, with active bids and offers, this price represents the fund’s current market value. The sponsor is reporting a net asset value of $12.56 a share. 

Unfortunately, investors are not able to redeem their shares reflected by the net asset value (NAV) calculation set by the sponsors, and if investors need or want to sell this investment, the only available outlet, the secondary market, values the shares at roughly 40% lower than the price reported to investors. 

What is the Priority Income Fund?

The Priority Income Fund is a non-traded closed-end fund that aims to generate current income and, secondarily, long-term capital appreciation. It achieves these goals primarily through investments in U.S.-based companies’ senior secured loans. The Fund is designed to provide an income stream with a potential for capital appreciation and diversification from traditional sources of income, such as bonds and dividend-paying stocks.

Given its risk and return characteristics, the Priority Income Fund may be best suited for sophisticated investors seeking a higher income level who understand and are willing to accept the risks associated with investing in senior secured loans, including interest rate risk and credit risk. These investors are often willing to trade daily liquidity for the potential of a higher return.

It’s Not Suitable for Everyone

While the Priority Income Fund may be an attractive investment vehicle for some, it is not a suitable choice for everyone. This fund is characterized by its illiquidity and high risk, which may not align with the investment goals or risk tolerance of conservative investors, particularly those nearing retirement or already in their retirement years who prioritize capital preservation. 

Unfortunately, there have been instances where financial advisors or stockbrokers, motivated by higher commissions or other personal gains, have recommended the Priority Income Fund to individuals for whom this investment is inappropriate. This potential conflict of interest can put uninformed or unsophisticated investors at risk of financial loss. It is crucial for investors to understand the risks associated with the Priority Income Fund and to seek independent financial advice to ensure that their investment choices align with their financial goals, risk tolerance, and investment time horizon.

The Fiduciary Duty

If your stockbroker recommended that you purchase this investment, they may have breached their duty to you. Investments such as the Priority Income Fund are high-risk, illiquid investments subject to constant conflicts of interest and high commissions and fees.

Understanding Fiduciary Duty

The fiduciary duty refers to the legal obligation of one party to act in the best interest of another. In the context of investments, financial advisors, stockbrokers, and brokerage firms have an ethical and legal obligation to put the client’s interest above their own, providing the best investment advice possible based on the client’s specified financial situation and investment objectives.

Where Fiduciary Duty Can Be Compromised

Yet, stockbrokers and firms can take advantage of fiduciary duty in certain situations. High-risk investments like the Priority Income Fund, associated with high commissions and fees, may tempt unscrupulous stockbrokers to prioritize their financial gain over the client’s interest. This is done by recommending these high-risk investments to unsophisticated or uninformed investors, who may not comprehensively understand the associated risks. In such cases, this breach of fiduciary duty could result in significant financial losses for the investor and potential legal consequences for the advisor.

The Case of Net Asset Value Calculation

The Net Asset Value (NAV) calculation on the secondary market introduces an additional layer of risk for unsuspecting investors. The NAV, calculated by the sponsor, may significantly overstate the actual market value of the fund’s shares, as evidenced by the Priority Income Fund case. Uninformed investors, relying on the reported NAV, may be led to believe their investment is worth far more than the market is willing to pay. 

This discrepancy between the reported NAV and the actual market value creates a liquidity trap, wherein investors cannot exit the investment without incurring a significant loss. Such a situation particularly places unsophisticated investors, who may lack the knowledge or resources to adequately assess the actual value of their investment, at risk. Therefore, the NAV calculation in the secondary market exacerbates the high level of risk already associated with such investments, making them even less suitable for conservative investors seeking to preserve their capital.

Oakes & Fosher is Here to Help

Oakes and Fosher represents investors who have lost money in the Priority Income Fund and other illiquid alternative investments. Oakes and Fosher handles the cases on a contingency fee basis, meaning you don’t pay any attorney fees or costs unless we can collect for you. Disputes between investors and brokerage firms/brokers are the only types of cases Oakes and Fosher brings, and we’ve won more cases for individual investors in the FINRA arbitration forum over the last 12 years than any other firm

Please contact the securities fraud attorneys of Oakes and Fosher for a free, confidential consultation.