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

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.