Tyranny of the Personal Network: The Limits of Arm’s Length Fundraising in Venture Capital

Abstract

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.

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