Tyranny of the Personal Network: The Limits of Arm’s Length Fundraising in Venture Capital
U.S. securities regulators have sought to protect investors in private markets by forcing issuers to fundraise via personal networks. Focusing on VC fund managers, we study a 2013 policy permitting public advertising in private markets (“506(c)”). Less well-networked and underrepresented managers disproportionately use 506(c). Yet its take-up is limited because arm’s length fundraising depends on hard information, especially a track record, and few managers establish a track record without developing a network. Arm’s length fundraising also imposes costs—to access the “crowd” and verify investors—leading it to send a negative signal.
Related
Topics
More from NBER
In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Retirement and Disability, the Bulletin on Health, and the Bulletin on Entrepreneurship — as well as online conference reports, video lectures, and interviews.
