The central tension in securities regulation is between protecting investors and enabling broad capital formation. Focusing on VC fund managers, we study key tools of investor protection in private markets: enforcing relationship-based fundraising and restricting eligible investors. A new policy permitting public advertising is disproportionately used by less well-networked, underrepresented fund managers and is less sensitive to local conditions. Yet it has limited take-up because track record matters at arm’s length while strong networks matter in relationship financing; underrepresented managers more often have neither. Arm’s length fundraising also imposes costs to accessing the “crowd” and verifying investors, inducing negative signaling.
Authors
- Acknowledgements & Disclosure
- Howell and Parker’s work on this project was funded by the U.S. Securities and Exchange Commission (SEC) Office of the Advocate for Small Business Capital Formation. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w33080
- Pages
- 98
- Published in
- United States of America
Table of Contents
- Regulatory Background and Economic Context 10
- Data Sources 13
- Diversity & Personal Networks in Take-up of General Solicitation 15
- Arm's Length Fundraising Reduces Reliance on Networks 19
- Has General Solicitation Moved the Needle? 23
- Mechanisms for Low Take-up 25
- The Track Record Paradox 25
- Regulatory Barriers to Accessing the Crowd 27
- Verification Costs and Negative Signaling 29
- Alternative Channels 30
- Conclusion 31
- Figures and Tables 39
- Appendix: Regulations and Institutional Details 83
- Complete Rule 506 Text 83
- Private Fund Categories under the 1940 Investment Company Act 85
- Appendix: Surveys 87
- Fund Manager Survey 87
- Common First Page 87
- Remainder of Survey for 506(b)-Only Users 88
- Remainder of Survey for 506(c)-Only Users 90
- Remainder of Survey for both 506(b) & 506(c) Users 92
- Lawyer Survey 94
- Emails Requesting Survey Participation 97
