How a zombie VC firm broke pay-to-play rules

June 23, 2014, 8:45 PM UTC
SEC Approves Systemic-Risk Reporting Rule For Hedge Fund Firms
The U.S. Securities and Exchange Commission (SEC) headquarters stands in Washington, D.C., U.S., on Wednesday, Oct. 26, 2011. The SEC approved a rule requiring hedge funds and private-equity funds to reveal internal information to U.S. regulators. Photographer: Andrew Harrer/Bloomberg via Getty Images
Andrew Harrer/Bloomberg—Getty Images

TL Ventures is a venture capital firm based outside of Philadelphia. Well, sort of. It’s actually a former venture capital firm based outside of Philadelphia, which gave up on raising new funds nearly a decade ago. Today it’s simply managing out its existing portfolio, trying to squeeze out any last drop of returns for its underwhelmed investors.

So it was fairly surprising to see TL Ventures charged by the SEC for pay-to-play violations, related to political donations made back in 2011. Let alone to see the firm settle for around $300,000. After all, how do you ‘pay’ in 2011 for a ‘play’ that happened so far in the past?

Here’s the history: TL Ventures raised $259 million for its fourth fund back in 1999, including a $35 million commitment from the Pennsylvania State Employees’ Retirement System (SERS). One year later, it raised $685 million for a fifth fund whose investors included both SERS ($40 million) and the City of Philadelphia Board of Pensions and Retirement ($10 million). Each fund was raised under standard terms, which included both a five-year investment period and 10-year total life-cycle.

The fifth fund was basically the peak for TL Ventures, which struggled to raise a successor — ultimately closing on less than $100 million in 2005. So it eventually began winding down, with most of its staffers moving onto other endeavors.

Then, in 2011, firm co-founder Bob Keith made a pair of political donations:  $2,500 to a Philly Mayor Michael Nutter (who appoints three members of the 9-person Philly Retirement Board), and another $2,000 to Pennsylvania Governor  Tom Corbett (who appoints six of the 11-member SERS board).

In theory, both of these donations should have been kosher, since the funds in which both pension systems invested should have been past their 10-year lifecycles (i.e., no more fees). The problem, however, is that each of the TL Ventures funds also had the possibility of requesting a pair of one-year extensions following that 10-year term’s expiration. What that means is that TL Ventures was asking the SERS and Philly Retirement Boards to effectively amend their investment contract after one of the firm’s managing directors had made political contributions, even though the original contract far predated such contributions.

Moreover, the fund extensions meant that the pensions systems would be on the hook for hundreds of thousands of dollars in additional fee expenses. Even if no fund extension vote had been required, Keith was prohibited from making a contribution until all regular fee payments had ceased.

File this one under: Sometimes it really bites to be a zombie VC firm.

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