Michael Collins undoubtedly had an appealing idea when he founded his investment firm in 2016: make professional venture capital accessible to millions of people who otherwise are shut out of potentially lucrative early-stage investment opportunities.

He would do it by recruiting “individual accredited investors,” rather than sophisticated institutional financiers, offer lower investment minimums, and target alumni of top, mostly Ivy League, universities who would network with fellow graduates and pool their money to build portfolios of competitive VC deals. 

It seemed to work. His firm, Alumni Ventures Group, headquartered in New Hampshire, raised nearly $1 billion in five years, and grew to more than 175 employees, and 1,000 portfolio companies that raised more than $25 billion from investors in 2021. The firm’s investments include startups like telemedicine-based birth control provider Nurx, media brand Mic, direct-to-consumer mattress seller Casper, and lending platform Better.com.

Rapid growth by recruiting less-experienced investors

By some accounts Alumni Ventures was the most active and fastest growing venture investor in the U.S., associating its funds with major colleges (Blue Ivy Fund for Yale alumni, The Yard Fund for Harvard grads, Purple Arch for Northwestern, Nassau Street Ventures for Princeton etc.) - despite there being no legal or financial connection to the institutions. 

Its website presents itself as much as a learning tool as an investment opportunity, promising “club members” engagement, content, and “educational opportunities.” In that sense, the pitch somewhat resembles that of stock trading app Robinhood, which has also sought to “democratize” markets and make them accessible to less experienced (or well-capitalized) investors.

Amid Alumni Ventures’ rapid growth, however, Collins may have taken advantage of the financial neophytes he persuaded to join his club. This month, the SEC and two states lowered the boom on Collins and Alumni Ventures, saying for years it had misled investors and gouged excess management fees while maintaining it was all standard operating practice for VC firms. 

Breaking new ground but misstating fees? 

Alumni Ventures and Collins, which took the “we didn’t do anything wrong but vow not to do it again” approach, agreed to repay $4.7 million to affected funds and pay a $700,000 penalty to the SEC. Collins, personally, was fined $100,000. State regulators in New Hampshire and Massachusetts assessed similar penalties. The company and Collins reached a settlement under which they did not admit or deny the regulators’ findings.

In a letter to investors Collins said he was “pleased” with the regulatory agreement and framed it as a learning experience.

“As an innovator breaking new ground in bringing historically exclusive venture capital asset class to large numbers of individual accredited investors, our company has always viewed regulatory oversight as expected - and seen it as an important opportunity to cooperate, learn, and strengthen our practices,” Collins wrote.

The U.S. Securities and Exchange Commission and state regulators saw things a bit differently. In an administrative proceeding, the SEC said Collins told investors his firm adhered to an industry standard “2 and 20” fee structure, generally understood to mean 2% annual management fee for the 10-year fund duration and separately a 20% performance fee.  

But that’s not what Alumni Ventures did, according to the regulator. The company would typically take 10 years worth of management fees off the top, along with the 20 percent performance fee, the SEC said. So, if an investor contributed $100,000 to an Alumni Ventures-managed fund, the company would immediately take $20,000 (2% for 10 years) in management fees. Alumni Ventures typically drew and spent most or all of this $20,000 to pay expenses during the first year of the fund’s operations.

“Collins, AVG’s founder and Chief Executive Officer, approved of AVG employees using the misleading ‘industry standard 2 and 20’ language, and personally used it with fund investors and prospective investors,” the SEC said. The regulator also dunned the firm for making inter-fund loans and cash transfers between funds in violation of operating agreements.

Changes already made to marketing materials

The firm has generally blamed sloppiness in its marketing materials for the problems. A representative for Alumni Ventures also told The Business of Business that the issues were corrected to comply with regulatory requirements and make its fee practices more obvious in 2019 and 2020. Thousands of investors have continued to join the firm since the changes were made “because they love the access we bring them to great venture deals and the simplicity of how we do it,” the representative told us.

“AV’s low investment minimum and single, simple, all-inclusive capital call for each investment has many advantages over the more complex traditional VC model, which has often included high investment minimums, multiple capital calls, and hidden fees,” the company wrote in an addendum to its investor letter. 

“AV believes the company’s simplified approach to fees is far better for its investors than chasing down small management fees every year for a decade and imperiling the investors’ ownership of the venture portfolios if the fees are not received. AV also does not pass on “soft costs” to investors, which is common in the industry (such as expenses for travel, fund formation, and administration fees, etc.). AV remains confident that its capital call approach and fee structure are an advantage for its investors and business model.”

No further repercussions so far

Why it took regulators so long to bring down the hammer is unclear. The New Hampshire consent order said regulators were told about the company’s fee policies as far back as 2018. Nor did the company say whether it expected any repercussions from its investment partners, which include larger and more notable VC firms such as Sequoia Capital, Andreessen Horowitz and many others. The company says it makes 200-to-300 investments each year and has compiled an enviable history of early stage SaaS and fintech capitalization.

Asked if the government’s enforcement of Alumni Ventures signaled a new aggressive posture for the SEC, which had been criticized for looking the other way during the Trump Administration, agency officials declined to comment.

“Venture capital fund advisers, like all advisers to funds, must accurately describe their fees and abide by the funds’ agreements,” said Adam S. Aderton, co-chief of the SEC enforcement division’s asset management unit. “When appropriate, enforcement actions like this one hold firms accountable when they fail to meet these obligations.”