SEC slaps VC firm for misleading investors on fees

Alumni Ventures Group is the latest private investment firm to get in trouble for saying one thing and doing another, when it comes to the fees it charges to limited partners.

Driving the news: The SEC found that AVG told LPs in marketing materials that they would be charged the “industry standard” of 2% management fees and 20% carried interest. But, rather than charging the management fees on an annual basis, as is industry standard, AVG charged 20% upfront (i.e., 2% times 10 years).

• Regulators also found that AVG comingled funds without informing LPs.
• AVG agreed to repay $4.7 million to affected funds and to pay a $700,000 penalty. Also, AVG CEO Mike Collins agreed to pay a $100,000 penalty.

Why it matters: Charging 10 years of management fees upfront is essentially an interest-free loan.

• Details of the arrangement were included in fund subscription documents — as opposed to in the marketing materials — but AVG is mostly backed by thousands of individual investors who may not have noticed or understood the discrepancy. Remember, “accredited” doesn’t necessarily equal “sophisticated.”
• AVG also created the possibility that it was charging the equivalent of 10 years worth of fees, even if a fund didn’t last 10 years.
• It offers no fee clawbacks in such situations, per new marketing docs distributed after the SEC investigations began, except in the case of single company syndicates (and, even there, the clawback was non-pro rated).

By the numbers: AVG managed around $425 million as of March 31, 2021.

• It’s primarily an umbrella for a series of funds that operate under brands tied to specific universities like Harvard (The Yard Ventures) and Yale (Blue Ivy Ventures). The idea is to back startups somehow tied to those schools, such as via alumni co-founders, but AVG doesn’t have any formal affiliation with any of the schools.

What it’s saying: AVG tells Axios that its upfront capital call and fee structure is in the best interest of LPs because it’s simple, helps enable low investment minimums and eliminates the possibility of hidden fees.

• And, to further its point, AVG is continuing to maintain this structure for new funds, albeit with compliant marketing materials.
• AVG declined to explain why it used the “industry standard” language, or why anyone should pay 10 years of management fees for (potentially) fewer years of management.

The bottom line: Always read the fine print.