The U.S. Securities and Exchange Commission charged Alumni Ventures Group LLC, a venture capitalist fund adviser, with making misleading statements about its management fees and engaging in interfund transactions that violate fund operating agreements.
The SEC charged the entity’s CEO, Michael Collins, with causing AVG’s violations in its March 4 announcement.
AVG and Collins consented to the entry of an SEC order finding that AVG had violated sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8, and that Collins had caused these violations. The two defendants neither admitted nor denied the findings. But they agreed to a cease-and-desist order, a censure of AVG, a penalty of $700,000 for the entity, and a penalty of $100,000 for Collins.
“Venture capital fund advisers, like all advisers to funds, must accurately describe their fees and abide by their funds’ agreements,” said Adam Aderton, co-chief of the asset management unit of the SEC’s enforcement division.
Both of the practices that the SEC seeks to discourage here occurred between June 2016 and February 2020. The SEC’s investigation was conducted by Luke Pazicky and Michael Moran, and was supervised by David Becker, all within the Enforcement Division’s Asset Management Unit.
With regard to the misleading statements about management fees, the firm in its marketing documentation described its practice as “the industry standard ‘2 and 20’”. But what that phrase is generally and reasonably taken to mean is not what AVG was doing.
The phrase “the industry standard ‘2 and 20’” is generally understood to refer to a two-percent annual management fee on the one hand and carried interest often amounting to 20% of a fund’s profit on the other. But AVG was marketing funds with a 10-year life span, and assessing the whole 10 years’ worth of management up front at 2% per annum at the time of the investors’ initial capital contribution. This was the 20% (misleadingly) referenced when AVG used the phrase quoted above.
Indeed, the upfront collection of 10-years-worth of management fees may be considered an interest free loan from the funds to the management company.
Some investors complained as early as 2017 about the discrepancy between the firm’s practice and the actual industry standard. Yet AVG under Colins’ direction continued using the phrase “the industry standard ‘2 and 20’” until the end of the relevant period.
As an example of the inappropriate commingling of fund assets: AVG on December 22, 2016, Green D Ventures Fund 3, LLC loaned $200,000 to LASF – Bloom Energy, LLC. This and analogous inter-fund loans and transfers were not documented in a written debt instrument, had no predetermined maturity date, and were times/repaid purely at AVG’s discretion. The amounts were ultimately repaid without interest.
As the complaint says, “Collins was aware of and approved the loans from AVG to the Funds, and he knew or reasonably should have known that these loans were contrary to the representations in the operating agreements about not commingling, thus rendering such representations materially misleading.”