SEC penalizes venture capital fund manager for charging excess fees

The Securities and Exchange Commission last week charged Energy Innovation Capital Management, LLC (EIC), a California-based exempt reporting adviser, with charging excess management fees from two venture capital funds. EIC has returned $678,681 plus interest to the funds and their limited partners, and has agreed to settle the SEC’s charges by paying a $175,000 penalty.

According to the SEC’s order, EIC’s limited partnership agreements for the two venture capital funds allow it to charge management fees during certain times based on the funds’ invested capital in individual portfolio company securities, and require EIC to reduce the basis for these fees if certain events occur, such as write-downs of such securities. The order finds that, from January 16, 2020, through March 31, 2022, EIC overcharged management fees by making a number of errors in its favor. As the order states, the errors include:

• Failing to make adjustments to its management fee calculations for individual portfolio company securities subject to write-downs;
• Inaccurately calculating management fees based on aggregated invested capital at the portfolio company level instead of at the individual portfolio company security level;
• Incorrectly including accrued but unpaid interest as part of the basis of the calculation of management fees for certain investments; and
• Failing to begin the post-commitment management fee period at the correct date.

“Venture capital fund advisers, even if exempt from registering with the SEC, are not exempt from the anti-fraud provisions of the Investment Advisers Act. They must accurately calculate their management fees consistent with fund documents,” said C. Dabney O’Riordan, Chief of the SEC Enforcement Division’s Asset Management Unit. “This resolution ensures that the funds and investors are repaid and affirms the SEC’s commitment to focus on misconduct by all investment advisers.”

The SEC’s investigation was conducted by Ellen Bortz, David P. Bloom of the Asset Management Unit, and Daniel Faigus of the Division of Examinations’ Private Funds Unit. It was supervised by David A. Becker of the Asset Management Unit.

(Source: Securities and Exchange Commission)