Frost Management Company was what seems like a typical venture capital fund complex that had raised five private funds and invested the capital in a portfolio of start-up companies. The SEC says it found undisclosed affiliate payments and brought a suit against Frost.
Frost was an “exempt reporting adviser” with a filing from 2017. It apparently failed to file to renew the filing.
Before jumping into the charges, the first item to note is that the anti-fraud provisions of the Investment Advisers Act apply to all advisers. It doesn’t matter if you’re registered, unregistered, or exempt reporting. Those undisclosed fees will get you in troubled regardless of the firm’s registration status.
Frost caused its portfolio companies to pay incubator fees and, in some instances, monitoring fees that were not properly disclosed to investors. The SEC claims that those fees impacted the performance of the portfolio companies. That poorer performance affected the investors in the Frost venture capital funds and therefore was fraudulent, deceptive or manipulative.
The SEC seems to be hedging its argument by also claiming that the fees charged were”excessive.” In some of the five funds there appears to be some instance of disclosure. The actual process for determining the fees did not match the disclosure.
Mr. Frost apparently lost an investor arbitration case at the end of 2018 and wound down its incubator.
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