Alumni Ventures SEC Agreement Summary

Overview of Agreement

Alumni Ventures (“AV”) cooperated fully with regulators and has reached a mutually agreeable settlement with the U.S. Securities and Exchange Commission (“SEC”), as well as state regulators in the two states where our company and our funds are headquartered (the New Hampshire Bureau of Securities Regulation and the Secretary of the Commonwealth of Massachusetts — Securities Division). Upon receiving initial inquiries several years ago, AV has been transparent and shared news of these inquiries with all employees at the time; with potential business partners via the company’s official annual Due Diligence Questionnaire; with its independent auditor; and with company equity holders and prospective equity holders in investment subscription documents when raising capital for the company. As a disruptive company with an innovative approach, AV received a thorough review.

The agreements focus on two areas of past business practice that occurred more than two years ago: occasional short-term loans to the funds AV manages; and language describing fees in certain marketing materials (as well as some past-due state filings). The agreements contain no admission of liability, wrongdoing, or responsibility by Alumni Ventures, the Board, or the Executive Team and were subject to the approval of an SEC Administrative Law Judge and administrative processes in New Hampshire and Massachusetts. The agreements do not raise any assertions that Alumni Ventures or any individuals were engaged in any intentional wrongdoing.

AV has a longstanding demonstrated commitment to always putting the best interest of its investors first. Occasionally approving and recording short-term loans to the venture funds managed by AV — such as loans from our management company to those funds — allowed those funds to be able to get into competitive, fast-moving, and time-sensitive venture deals. As a co-investor, AV is subject to limited time frames in order to participate. All such loans were repaid in full, and the funds were not charged interest. Alumni Ventures has since adopted more formal loan and cash management policies and more robust disclosures to enhance its compliance program and internal controls. AV’s current operational practices allow it to continue to move quickly to secure access to highly competitive venture investments for the funds it manages for investors.

On the second issue, 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. 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.

AV disclosed this fee structure in the fund offering documents signed by every investor and in the investor portal. Regulators viewed certain AV’s early marketing materials — such as web pages and informational presentations — as not clearly enough explaining the fee structure. Specifically, that collecting a single capital call at the time of investment means AV’s fee structure should not have been described as an “industry standard” structure in light of how the fee is collected. For context: Alumni Ventures charges an amount equivalent to a 2% annual management fee for the 10-year life of a fund on all funds it manages. All marketing and web materials were updated in 2019 and early 2020 and are now even clearer on this topic.

AV agreed to notify all impacted investors of the agreements within 30 days. The monetary terms of the settlement include a payment by Alumni Ventures of $700,000 and by AV’s Founder & CEO of $100,000 to the SEC, as well as some additional penalties to the two state regulators where AV and the funds it manages are headquartered and payments for some past-due state filing fees.

Also, AV decided earlier this year to return a small portion of the capital raised to a number of the various funds it manages, in order to recognize any potential confusion in some descriptive materials regarding management fees and any potential implied benefit to AV. This capital generally may now be put to use by those venture funds to further invest in startups to the potential benefit of AV investors. In a few cases where the funds have already closed or are no longer making additional investments, that small amount of capital is being returned to investors, who are being notified individually.

While the company seriously considered further contesting the matter, AV ultimately decided that resolving it in a mutually acceptable agreement was the prudent course for all our stakeholders — especially since AV’s business and legal costs and time spent in responding to the regulators has exceeded the penalties included. The company also views cooperating with regulators in building a mature, generational business is just another step forward in a journey towards becoming the most impactful and valuable venture firm on the planet.

Beyond this agreement, AV has — since its founding — continuously updated the company’s compliance and operational practices as the business has grown. This includes new senior leaders managing Compliance, Finance, and Operations activities at the company in recent years, as well as various updated policies and business practices reflecting the size and scope of the company’s current activities. An external review of the company’s compliance programs, requested by AV from a third-party firm, concluded this winter that the company meets and in some ways exceeds its regulatory obligations. AV’s work strengthening these capabilities has been an important step to ensure that the company can continue to enable thousands of individual accredited investors to own a key asset class and back promising, innovative ventures.

Alumni Ventures continues to make progress toward that goal. We’re pleased to report that to date, AV has raised well over $900 million in capital in support of the entrepreneurial economy and invested in another 291 promising ventures this past year alone — part of a total portfolio of nearly 1,000 startups we have invested in alongside some of the world’s most well-established VC firms. Alumni Ventures is excited to continue this work.