The Securities and Exchange Commission (SEC) recently sued the New York-based private fund adviser Adit Ventures Management LLC, its chief executive officer (CEO), and three affiliated general partners for allegedly defrauding investors and client funds in connection with investments in pre-IPO shares of private companies.
Without admitting the allegations, Adit has consented to a judicial finding that it was not entitled to rely on the venture capital (VC) fund registration exemption under Section 203(l) of the Investment Advisers Act of 1940. Adit has also agreed to pay disgorgement, prejudgment interest, and a civil penalty in an amount to be determined by the court.
SEC Claims
According to the SEC, from at least April 2019 through December 2024, Adit falsely claimed that its managed funds owned shares of private, pre-IPO companies. The SEC also alleges that the adviser overcharged client funds millions of dollars in unauthorized “acquisition fees” and improperly pledged client assets as collateral for a $10 million line of credit that it used in part to satisfy its own obligations.
In addition to the fraud violations, the SEC also alleged the following Advisers Act violations.
Breach of fiduciary duty
The SEC alleges that Adit violated its duty of loyalty and duty of care to its advisory clients by, among other things, charging undisclosed fees, failing to disclose conflicts of interest, and placing the financial interests of the firm and its principals ahead of those of the funds and their investors.
Undisclosed principal transactions
The SEC alleges that the defendants engaged in undisclosed and prohibited principal transactions by moving securities between affiliated entities and client funds at inflated prices while retaining the profits at the management company level.
Principal transactions require advance disclosure to, and consent from, the affected clients, neither of which the defendants allegedly obtained.
Venture Capital Fund Exemption Unavailable
Under Advisers Act Section 203(l) and Rule 203(l)-1, an adviser is exempt from SEC registration only if it exclusively advises one or more qualifying venture capital funds.
Among other requirements, a qualifying fund must represent to investors that it pursues a venture capital strategy, holds no more than 20% of its aggregate capital contributions and uncalled committed capital in assets that are not “qualifying investments” (generally equity securities acquired directly from portfolio companies), offers redemption rights only in extraordinary circumstances, and avoids significant leverage.
According to the SEC, Adit’s acquisition primarily of secondary shares in late-stage pre-IPO companies, rather than direct equity positions, did not satisfy the definition. By improperly claiming the exemption, the SEC alleges Adit avoided routine SEC examinations during the relevant period, furthering the defendants’ alleged fraud.
Continued SEC Focus on Offering Fraud
The SEC has emphasized a “back to basics” enforcement philosophy centered on cases involving “lying, cheating, and stealing.”
In an April 2026 case, the SEC brought civil fraud charges against an investment adviser and its CEO in connection with an alleged offering fraud. The Department of Justice (DOJ) brought parallel criminal charges the same day.
In a May 2025 case, the SEC charged two asset managers and their owner with misappropriating client funds through a vehicle that purportedly invested in IPOs.
Offering fraud cases recently enforced by the SEC can carry parallel criminal exposure and are often referred through the SEC’s Whistleblower Program. The SEC has also remained focused on adviser conflicts, including through its Division of Examinations. (See our previous Alston & Bird advisory here.)
Key Takeaways
- The VC exemption is not a safe harbor from enforcement. Advisers relying on Section 203(l) should periodically confirm that each fund they advise meets the “venture capital fund” definition under Rule 203(l)-1. Secondary-market acquisition strategies, in particular, may not satisfy the qualifying investment requirements.
- Offering fraud remains a top SEC enforcement priority for private fund advisers.
- Parallel criminal proceedings in more egregious offering fraud matters remain a realistic possibility. Advisers and principals facing SEC civil fraud allegations involving intentional misconduct and investor losses should be prepared for potential DOJ scrutiny.
Your Alston & Bird Investment Funds Group is ready to help with any questions concerning the SEC’s enforcement approach to private fund advisers, the venture capital fund exemption, and other fund adviser legal and compliance obligations. If you have any questions or would like additional information, please contact one of the attorneys on our Investment Funds team.
If you have any questions, or would like additional information, please contact one of the attorneys on our Investment Funds team.
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