How the capital market laws affect the development of venture capital industry

Given that the stock market is essential for the venture capitalists to exit through an initial public offering (IPO), this study explores how the laws and regulations governing the capital markets affect the venture capital industry. The paper discusses the impact of US federal state laws and Securities and Exchange Commission (SEC) regulations to the venture capital markets, arguing if the rules and regulatories are burdensome to entrepreneurs and new‐growth businesses. The impact of Sarbanes‐Oxley Act and the future Investment Act on venture capital funds and entrepreneurial companies going public are also discussed. The paper proposes the model of venture capital financing describing the process from fund raising to investment exits, the linkages of the venture capital market to the financial/capital markets and the related capital market laws. The policy implications on SEC regulations essential to the development of venture capital industry are suggested.