The U.S. Securities and Exchange Commission (SEC) has outlined charges against a California-headquartered exempt reporting adviser, maintaining the firm charged excess management fees from two venture capital funds.
According to the SEC’s order, Energy Innovation Capital Management, LLC’s (EIC) limited partnership agreements for the two venture capital funds allowed the firm to charge management fees during certain times based on the funds’ invested capital in individual portfolio company securities and required EIC to reduce the basis for the fees if certain events occur, such as write-downs of such securities.
According to the SEC order, from Jan. 16, 2020, through March 31, 2022, EIC overcharged management fees by making several errors in its favor, including failing to make adjustments to its management fee calculations for individual portfolio company securities subject to write-downs and inaccurately calculating management fees based on aggregated invested capital at the portfolio company level instead of at the individual portfolio company security level.
EIC has returned $678,681, plus interest to the funds and their limited partners, while agreeing to settle the SEC’s charges by paying a $175,000 penalty.
Without admitting or denying the SEC’s findings, EIC agreed to cease and desist from committing or causing any future violations of the provisions and to a censure in addition to the penalty.
“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,” SEC Enforcement Division Asset Management Unit Chief Dabney O’Riordan said. “They must accurately calculate their management fees consistent with fund documents. This resolution ensures that the funds and investors are repaid and affirms the SEC’s commitment to focus on misconduct by all investment advisers.”