September 14, 2022

VC Adviser Settles SEC Charges for Making Improper Loans to Affiliates

A venture capital investment adviser settled SEC charges for making unauthorized loans from funds it managed and for failing to disclose such loans to investors.

According to the SEC's Order, the adviser repeatedly made loans to affiliated companies, a practice not disclosed or permitted by the relevant funds' governing documents. The SEC determined that the adviser, while sitting on both sides of the loan transactions, decided terms and repayment conditions in its sole discretion. The SEC found that several of these loans, which were not paid on time, were entered into on terms unfavorable to the lending funds or otherwise not enforced on multiple occasions.

On one occasion, the SEC found that the adviser agreed to repayment in the form of portfolio company shares, in direct contravention of the loan documents, which required cash repayment. The SEC said that by doing so, the adviser failed to conduct an independent valuation of the shares, instead relying on an outdated valuation from a prior funding round.

The SEC further found that the adviser breached its fiduciary duties by failing to establish limited partner advisory committees despite being required to do so under fund documents, and violating borrowing limitations with regard to both amount and duration of outstanding loans.

As a result, the SEC determined that the adviser violated IAA Section 206(2) and Section 206(4) ("Prohibited transactions by investment advisers") as well as IAA Rule 206(4)-8 ("Pooled investment vehicles"). To settle the charges, the adviser agreed to (i) cease and desist, (ii) accept a censure, (iii) pay a civil monetary penalty of $200,000 and (iv) initiate undertakings to prevent future violations. The adviser's owner also agreed to pay a $25,000 monetary penalty.

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