Alumni Ventures (AV) and its chief executive Michael Collins misled fund investors by charging 10 years’ worth of management fees up front, an unusual practice that was not spelled out in the funds’ marketing materials, according to a Securities and Exchange Commission claim against the firm.
The case is an example of the SEC cracking down on misleading terms in investor communications. The SEC has been hyper-focused on making sure GPs live by the word of their limited partnership agreements, and any deviation from the contracts can lead to penalties.
In this case, the SEC has accused AV and Collins with the violations. Collins and the firm agreed to the settlement but did not admit or deny wrongdoing. AV repaid LPs $4.7 million and agreed to pay a $700,000 penalty, while Collins agreed to pay $100,000, according to the SEC.
AV is a venture capital firm formed in 2014 that targets investments in fintech, artificial intelligence, cybersecurity, healthtech and food and agriculture. As of March 30, 2021, AV managed about $425 million, according to the firm’s Form ADV. Collins, of New Hampshire, began his career at TA Associates. He started the incubator Big Idea Group in 2000 before founding AV.
AV has raised more than 100 funds, according to its ADV. Its fundraising differs from other firms in that it raises a number of small pools from smaller investors. A TechCrunch article in 2018 said the firm takes $50,000 commitments from individual alums of universities, then pools the capital and creates university-specific venture funds for grads of places like Stanford, Harvard and MIT.
AV also charged management fees different from more traditional VC firms, accelerating full payment of 10 years of management fees in one payment at the beginning of the fund, the SEC complaint alleged. Generally, the 2 percent fee on commitments is collected over the course of the fund life, rather than in one lump payment up front.
“For example, if an investor contributed $100,000 to a fund managed by AV, AV would immediately assess 20 percent, or $20,000, as its management fee for the expected life of the fund. AV typically drew and spent most or all of this $20,000 to pay expenses during the first year of the fund’s operations,” the SEC’s complaint said.
The problem, according to the SEC, is that AV did not spell out to investors that it would collect fees this way. The firm disclosed in its fund marketing materials and communications with LPs that it had charged the “industry standard 2 and 20” – a 2 percent management fee and 20 percent performance fee, or carried interest.
AV continued using its misleading language even after investors complained when they learned of how the firm was charging fees, the SEC said. The commission described the accelerated fees as an interest-free loan to the firm from the funds.
Alumni Ventures said, in a statement to investors and given to Venture Capital Journal, that the allegations pertained to activities more than two years ago, and it has made changes to its wording of fee structures.
“AV disclosed this fee structure in the fund offering documents signed by every investor and in the investor portal,” the statement read. “Regulators viewed certain AV early marketing materials – such as web pages and informational presentations – as not clearly explaining the fee structure.”
The firm said that the SEC believed it should not use the term “industry standard.” AV said it updated its marketing materials in 2019 and early 2020 to further clarify its fee structure. It maintains its approach 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.”
AV said it chose to voluntarily return a small portion of the capital it raised “in order to recognize any potential confusion in some descriptive materials regarding management fees.”
AV also allegedly commingled fund assets through loans and transfers among the funds, despite contract language stating it would not commingle assets, the SEC said. For example, on December 22, 2016, Green D Ventures Fund 3 LLC loaned $200,000 to LASF – Bloom Energy LLC, and on December 28, 2017, Strawberry Creek Ventures Fund 1 LLC funded a portfolio investment on behalf of several other funds, the SEC said.
These activities “breached AV’s fiduciary duties, and rendered the statements in the operating agreements regarding commingling materially misleading,” according to the SEC’s complaint.
AV said in its statement that “occasionally approving and recording short-term loans to the venture funds managed by AV… allowed those funds to be able to get into competitive, fast-moving and time sensitive venture deals.”
“Venture capital fund advisers, like all advisers to funds, must accurately describe their fees and abide by the funds’ agreements,” Adam Aderton, co-chief of the SEC Enforcement Division’s Asset Management Unit, said in a statement.
The SEC has been vocal about fee transparency and proposed new rules to enhance transparency around fees and expenses. The rules, if they receive final approval after a public comment period, could also bar certain activities that have been staples of the private markets, like carving out exceptions for certain fund investors through the use of side letters.
Alumni Ventures is based out of Manchester, New Hampshire, and has offices in Boston, New York, Chicago, Austin and San Francisco.
Correction: The original version of this story incorrectly stated that AV was ordered by the SEC to repay $4.7 million in fees to LPs. AV voluntarily repaid the fees to LPs.