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

Sabrina T. Howell, Dean Parker and Ting Xu

No 33080, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G21 G23 G32 J15 J16 (search for similar items in EconPapers)
Date: 2024-10
New Economics Papers: this item is included in nep-ban, nep-fmk, nep-lab, nep-pay and nep-soc
Note: CF LE PR
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