SEC charges venture capital fund firm with excess management fees

On Behalf of | Sep 14, 2022 | Securities and Compliance

A venture capital fund adviser has been penalized for charging excess management fees on two of its funds, the Securities and Exchange Commission announced.

The SEC detailed its charges against California-based Energy Innovation Capital Management, LLC (EIC), an exempt reporting adviser. The firm was found to have made miscalculations in its favor on two venture capital funds, in violation of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.

According to the SEC’s order, EIC has returned $678,681 plus interest to the funds and their limited partners, and agreed to settle the charges by paying a $175,000 penalty. The commission said EIC’s limited partnership agreements for the two funds allow it to charge management fees during certain times based on the funds’ invested capital in individual portfolio company securities. EIC is required to reduce the basis for these fees if certain events occur, such as write-downs of such securities.

The SEC determined that the firm made a number of errors between January 16, 2020 and March 31, 2022 that resulted in overcharges of management fees. These included failing to make management fee adjustments for individual portfolio company securities subject to write-downs, and failing to calculate its fees based on invested capital at the portfolio company level instead of the individual portfolio company level.

EIC was also found to have incorrectly included accrued but unpaid interest in the management fee calculation, and failed to appropriately reduce its fees during the post-commitment period as required.

“Venture capital fund advisers, even if exempt from registering with the SEC, are not exempt from the anti-fraud provisions of the Investment Advisers Act. They must accurately calculate their management fees consistent with fund documents,” said C. Dabney O’Riordan, Chief of the SEC Enforcement Division’s Asset Management Unit. O’Riordan added that the SEC’s action ensures that the funds and investors will be repaid.

EIC did not admit or deny the SEC’s findings, but agreed to cease and desist from committing or causing any future violations of the provisions of the Investment Advisers Act of 1940 and also consented to a censure.

The attorneys at Lewitas Hyman include former senior attorneys at the SEC whose legal experience and industry knowledge make them uniquely qualified to provide counsel on securities regulatory, compliance and enforcement matters. Our attorneys fully understand the regulatory scrutiny financial professionals and their firms face from the various regulators that oversee the financial services industry. If your firm is facing an investigation from a regulatory agency, please contact Lewitas Hyman at (844) 651-2643 or through our online contact form.

Share This