Alumni Ventures Group is New Hampshire-based venture capital fund manager. It raised dozens of funds to pool capital and invest it in small companies. From 2016 through 2020, in marketing the funds the manager said its management fee was the “industry standard ‘2 and 20’.” The funds had a 10-year life.
Most of us realize there is no industry standard and it’s not as simple as 2 and 20.
Instead of charging 2% per year, the firm charged 20% up front, taking the 10 years’ worth of fees at the time of the initial capital contribution. The Securities and Exchange Commission found that this practice was inconsistent with what a reasonable investor would understand without additional disclosure.
In a statement the firm thinks its 20% up front fee is “far better for investors than chasing down small management fees every year for a decade and imperiling the investors’ ownership if the fees are not received.”
I think that is a stretch. A fund manager can pull the fees from the capital held by the fund. By taking the fees up front, the firm is taking payment before rendering its services.
The firm could have stated that it was taking the 20% fee up front and disclosed that payment in the fund documents and marketing materials. Would that have deterred potential investors from making the investment? The SEC certainly thinks so.
Sources:
- SEC Charges Venture Capital Fund Adviser with Misleading Investors: https://www.sec.gov/news/press-release/2022-34
- SEC Order: https://www.sec.gov/litigation/admin/2022/ia-5975.pdf