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Dissecting the SEC’s case against Alumni Ventures

The SEC said Alumni ran afoul of the advertising rule by promising that its management fees were the 'industry standard 2-and-20.'

A recent case brought by the Securities and Exchange Commission against Alumni Ventures demonstrates that SEC Chairman Gary Gensler doesn’t need new rules to make VC managers’ lives difficult.

The SEC accused Alumni with “making misleading statements about its management fees and engaging in inter-fund transactions in breach of fund operating agreements.” It also charged the firm’s chief executive, Michael Collins, “with causing AV’s violations.” To settle the charges, Alumni repaid $4.7 million to LPs of affected funds and agreed to pay a penalty of $700,000, while Collins agreed to pay a $100,000 penalty.

Regulators say they gave credit to Alumni and Collins for getting ahead of their problems. Alumni has already returned the fees to investors. It also hired a new compliance officer – Parker Infrastructure Partners veteran Michael Phillips – in late 2020. Phillips “promptly” rewrote Alumni’s policies and procedures and now reviews any “written communication” by any Alumni employee about the firm’s fees before it goes anywhere, the SEC said.

Under current SEC rules, charging accelerated fees is permitted as long as LPs are informed of the practice ahead of time. In a statement to investors, Alumni said charging 20 percent up-front is “far better for its investors than chasing down small management fees every year for a decade and imperiling the investors’ ownership if the fees are not received.”

Alumni also said it “disclosed this fee structure in the fund offering documents signed by every investor and in the investor portal. Regulators viewed certain AV early marketing materials – such as web pages and informational presentations – as not clearly explaining the fee structure.”

The SEC said Alumni ran afoul of the advertising rule by promising that its management fees were the “industry standard ‘2-and-20’” – that Alumni would collect 2 percent per year for the 10-year life of its funds, and then a 20 percent performance fee. In fact, regulators claim, Alumni took 20 percent right off the top.

Alumni also made inter-fund loans, direct loans to some of its funds and moved cash between funds it advised, regulators claim. All that movement violated Alumni’s operating agreements and created a conflict of interest “because AVG was solely responsible for determining the terms for each side of the transaction, including when or if to repay the loan,” the SEC said. Moreover, the firm didn’t disclose the transfers to its investors, the commission claimed in its March 4 settlement order.

In the 14-page settlement order, the SEC said Collins was responsible for Alumni’s advertising violations. “In his own direct communications with investors and prospective investors, Collins used the phrase ‘industry standard 2 and 20’ and ‘industry-standard rates’ himself to describe AVG’s management fee arrangement,” the SEC said. “Collins approved the use of this ‘industry standard’ language even though he was unaware of any other adviser in the industry that collected the entirety of multiple years’ worth of management fees at the time of the fund investor’s initial investment.”

The Commission’s case rests on the anti-fraud rules under the Investment Advisers Act of 1940, Sections 206(2) and 206(4) and Rule 206(4)-8. That means regulators did not have to prove intent in any of the violations they were claiming. Mere negligence is enough.

Bill Myers covers private fund policy from Washington, DC. He can be reached at