Unusual VC Structure and Excessive Fees Result in Industry Bar

The principal of a venture capital firm, registered as an exempt reporting adviser, was barred from the industry for taking fees that exceeded the amounts permitted by the operating agreements.  The VC firm imposed a front-loaded fee structure whereby investors paid fees on committed capital in early years to approximate the amount they would pay over the possible 10-year life of the funds.  The first fund charged an upfront management fee of 17.75% of invested capital, although later structures deferred some of the fees.  The SEC asserts that the defendants collected more than $7 Million in unauthorized fees while commingling funds and entering into conflicted transactions.

Imposing an unusual fee structure raises a red flag for regulators.  Skeptical examiners will spend significant time and resources to understand the fees and ensure they are properly calculated and collected.