SCOOP: SEC fines sketchy ‘Ivy League’ venture capital firm. What took so long?

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Friday, the United States The Securities and Exchange Commission (SEC) has issued an order vs Alumni Ventures Group (AVG), a venture capital firm that made its mark trying to partner with Ivy League universities (and other prestigious universities) and their alumni. The SEC has for years accused AVG of misrepresenting its operations to investors and illegally moving millions of dollars between its funds. AVG was also charged this week by the states of Massachusetts (where the company is registered) and New Hampshire (where its CEO Michael Collins Lives).

There was always something fishy about AVG funds.

AVG isn’t huge; it reported about $425 million in assets under management (AUM) last year (but employs far more people than that size would suggest). AVG funds are sickeningly named after prominent characteristics of different universities. For example, the “exclusively for Harvard alumni” fund is The Yard Ventures:

Yes, there were translucent hard-to-read characters on that slide stating that the fund is not affiliated or sanctioned by Harvard, but all of AVG’s university funds (Yale’s is Blue Ivy Ventures, Princeton’s is Nassau Street Ventures, etc.) such as trademark lawsuits waiting to be dropped; perhaps with the SEC’s crackdown on AVG, some of these universities will see the need for more distance.

AVG funds have invested in many fintech companies that have risen to prominence, including BlockFi, Carta, Circle, Ellevest and OpenInvest (which sold last year to JPMorgan). In total, AVG has invested in almost 1,000 companies (in fintech and other sectors) since 2016, but this volume makes AVG say that, say, a Brown graduate would invest in companies founded by Brown graduates. , particularly strange. If you simply visit the various fund sites, you see that they mostly boast of investing in the same companies, regardless of where their founders went to school.

A sketchy university affiliation is of course not what the SEC sought. AVG on its website and in pitch decks said it charges investors “a standard 2% management fee and 20% carried interest.” Most knowledgeable people would take this to mean that for ten years the venture capital firm would take 2% of the investment in management fees, plus 20% of the profits earned. However, this is not what AVG has actually done. According to the SEC order (emphasis added):

AVG’s typical practice was to assess management fees totaling 20% ​​of an investor’s fund investment (representing ten years of 2% annual management fees). at the time of the initial investment of the fund by the investor.

Let’s be clear: if you invest $100,000 in an AVG fund, AVG would take $20,000 upfront. It’s a big booty; yes, it could even be the same as taking 2% for ten years, but who can say that the fund will be there in ten years?

Several things about this are hard to believe. First, why do AVG investors, who had to be accreditedand contribute a minimum of $50,000 per fund—do you condone this unusual practice?

According to the State of Massachusetts, which this week fined AVG $750,000, “several investors in AVG’s funds complained to AVG when they later learned of AVG’s actual fee practice. “, but AVG has maintained its unusual fee structure for years.

AVG’s explanation, in a post-SEC order letter provided to its investorsis that charging investors 20% upfront is a feature, not a bug:

AV’s low minimum investment and single, simple, all-inclusive capital call for each investment have many advantages over the more complex traditional venture capital model, which has often included high investment minimums, multiple capital calls and hidden charges.

Second, how did AVG get away with such brazen behavior for almost four years? Signing AVG was to co-invest with larger, more established venture capital firms, including Andreessen Horowitz, Benchmark, Sequoia, Y Combinator and dozens more. In four years, AVG has easily reached tens of thousands of people: co-investors; holding companies; potential portfolio companies; at least 3,000 investors; more potential investors. Did anyone who worked with AVG notice that it was stealing and/or cheating its investors?

In reality, some within the investment community have noticed. According to legal documents obtained by the Monitor, there were two “TCR” Submissions made through the SEC’s whistleblower channel in 2019. The New Hampshire Consent Order says the state received a complaint as early as 2018. What took regulators so long? There’s almost nothing in Friday’s SEC order that hasn’t been on the commission’s plate for at least two-and-a-half years (except material about moving money between funds, but even that was strongly suggested in whistleblower complaints). It’s hard to avoid the conclusion that under the Trump administration a case like this was destined to fade away, whereas under Gary Gensler the SEC sees the need to act. (The SEC did not respond to a request for comment.)

The SEC fines were modest: $700,000 for AVG and $100,000 for AVG founder and CEO Collins (Massachusetts and New Hampshire imposed fines of roughly the same size). About $4.8 million was also paid for interest that should have been charged on internal loans. AVG told the Observer that was the end of the story: “Regulators have reviewed all of this material in great detail over the past two years, and AV is pleased with the final resolution represented in the deal this week. last. The company is excited to continue its successful work in expanding access to the entrepreneurial ecosystem.

Still, some AVG investors are bound to have questions, and the SEC order specifically mentions private lawsuits as a possibility. AVG’s statement to investors acknowledges a small step back on this point:

AV decided earlier this year to return a small portion of the capital raised to a number of the different funds it manages, in order to acknowledge any potential confusion in some descriptive material regarding management fees and any potential implicit benefits for AV… . In cases where funds have already closed or are no longer making further investments, this small amount of capital is returned to investors, who are notified individually.

It wouldn’t be a big surprise to see private lawsuits against AVG.

SCOOP: SEC Fines Venture Capital Firm

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