SEC Charges Venture Capital Fund Adviser with Misleading Investors

The Securities and Exchange Commission today charged venture capital fund adviser Alumni Ventures Group, LLC (AVG) with making misleading statements about its management fees and engaging in inter-fund transactions in breach of fund operating agreements. The SEC also charged AVG’s CEO, Michael Collins, with causing AVG’s violations. To settle the charges, AVG repaid $4.7 million to affected funds and agreed to pay a $700,000 penalty, whereas Collins agreed to pay a $100,000 penalty.

According to the SEC’s order, AVG’s website and other marketing communications represented that its management fee for the venture capital funds that it managed was the “industry standard ‘2 and 20.’” The order found that these representations were misleading because they led some investors to believe that AVG would collect a two-percent management fee during each year of its funds’ 10-year term, and separately collect a 20-percent performance fee. According to the order, AVG’s typical practice was instead to assess management fees totaling 20 percent of an investor’s fund investment (representing ten years’ of two-percent annual management fees) upon the investor’s initial fund investment.

The order found that Collins approved of AVG employees using the “industry standard ‘2 and 20’” language and personally used it with fund investors and prospective investors. The order also included findings that AVG made inter-fund loans and cash transfers between funds and made loans to certain funds in violation of the funds’ respective operating agreements.

“Venture capital fund advisers, like all advisers to funds, must accurately describe their fees and abide by the funds’ agreements,” said Adam S. Aderton, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “When appropriate, enforcement actions like this one hold firms accountable when they fail to meet these obligations.”

AVG and Collins consented to the entry of the SEC’s order finding that AVG violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8, and that Collins caused AVG’s violations. Without admitting or denying the SEC’s findings, AVG and Collins agreed to a cease-and-desist order, AVG agreed to a censure and to pay a $700,000 penalty, and Collins agreed to pay a $100,000 penalty.

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.  The SEC appreciates the assistance of the New Hampshire Bureau of Securities Regulation and the Massachusetts Securities Division.