ICYMI: Sebi Announcing Online Funding Platforms to be Contravening Raised Hairs

Securities and Exchange Board of India (Sebi) had released a general announcement on 30th Aug. 2016, cautioning investors against online platforms that raise funds and those similar to the stock exchange saying these contravene existing laws. Here’s what a few of such online funding platforms had to say about the issue:

Varun Sheth, Founder and CEO, Ketto:

“We have not received any such notice from Sebi cautioning against our service. Ketto is not a platform for investors. Ketto is a donations platform.” When asked whether he knows of any scams that may take place on such digital platforms, he explained, “We do not promise anything in return for the donation made. Our donors will like a cause and give freely to it, or they don’t like a cause and won’t give to it. It’s our donors’ choice.”

Satish Kataria, Founder, Catapoolt:

“While I appreciate Sebi's concerns - I guess as a regulatory body representing progressive India - they need to realise that crowdfunding can't be wished away. Today - all the leading countries - be it USA to Europe to China to Singapore - have openly welcomed crowdfunding - as they realise that community engagement genuinely helps startups and employment generation.”
“What we need is right framework of policies. What is we need is dialogue between regulator and platforms on how can community participation really take the Indian entrepreneurial ecosystem to next phase."

"We as platforms are willing to work together to create a trustful structure to bring crowdfunding to India. What we request is openness from Sebi to adapt and work with us to bring the future of funding to India. While RBI has opened up p2p lending, I guess Sebi should take inspiration and work with platforms to open equity crowdfunding too.”

Mohammed Sirajuddin, Cofounder, Desired Wings:

"We are a reward based crowdfunding platform, so the Sebi statement doesn't directly impact us. However we feel that equity crowdfunding should be allowed in India soon, as it can be a great catalyst in fuelling entrepreneurship and innovation."

Priyanka Agarwal, Cofounder and CEO, Wishberry:

"Sebi has issued notices to equity crowdfunding platforms and not platforms which have adopted the reward based crowdfunding model. There is a difference between the two. Unlike the former, the project creators or campaigners crowdfunding on reward based platforms do not provide equity to the funders in their project. The funders here are rewarded with souvenirs or memorabilia related to the project by the campaigner. For instance, a film maker crowdfunding on Wishberry will keep an exclusive pre-release link to his/her movie as one of the rewards for the funders."

Manish Kumar, Cofounder, GREX

On the Sebi notice:

“They have done a very smart thing here. Instead of coming out with any laws or direct orders to these companies, Sebi has made a press release. A good question to raise is why are they shying away from actively regulating especially when the platforms are willing to get regulated? We are also startups and this just doesn’t go along with the Startup India program of the Prime Minister.”
“It’s a nascent market and we are all working very hard to grow it by creating new investors etc. The regulatory authorities can’t expect startups to all of a sudden list on the ITP, there’s a natural down streaming process that must take place. We have already submitted all required documents to Sebi for inspection and we look up to Sebi as a mentor. So this is very disheartening to see.”

On the contradictory media report:

Regarding a media article that said GREX was told to stop onboarding new investors by Sebi, Manish said, “We were the first ones of online equity raising platforms to voluntarily submit all documents to Sebi. Upon which Sebi informed us to cool down transaction until the authorities study and understand the nature of the business. But they did not tell us to cool down or stop new investor on boarding.”

While it is clear India has quite a few strides to make in further structuring regulations for these new age businesses, in the US, crowdfunding was allowed starting May 2016. The Securities and Exchange Commission (SEC) of US is even encouraging it while of course emphasising caution against associated risks and fraudulent behaviour.

Here’s the part of the Sebi notice on online funding platforms:

“B. UNAUTHORIZED ELECTRONIC PLATFORMS

It has also come to the notice of SEBI that certain electronic platforms are facilitating fund raising on digital platforms like websites and other internet platforms, which are similar to the platforms of stock exchanges. These digital platforms are neither authorized nor recognized under any law governing the securities market. The electronic platforms are allegedly facilitating investment in the form of private placement with companies, as the offer is open to all the investors registered with the platform amounting to a contravention of the provisions of Securities Contract (Regulation) Act, 1956 (SCRA) and the Companies Act, 2013. Only recognized stock exchanges provide a platform where equity and other securities issued by companies are listed and traded in accordance with the provisions of the SCRA. The details of SEBI recognized stock exchanges are available on the SEBI website www.sebi.gov.in.
Investors are hereby cautioned that all dealings on such unauthorized electronic platforms would be in contravention of the relevant securities laws.”

Here’s the part of the US SEC notice on crowdfunding:

“The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to educate investors about a new investing opportunity in the form of securities-based crowdfunding.

Crowdfunding generally refers to a financing method in which money is raised through soliciting relatively small individual investments or contributions from a large number of people. Over the last few years, crowdfunding websites in the United States have proven a popular way by which to solicit charitable donations and to raise funds for artistic endeavors like films and music recordings.

Under recently adopted rules, the general public will have the opportunity to participate in the early capital raising activities of start-up and early-stage companies and businesses. Starting May 16, 2016, companies can use crowdfunding to offer and sell securities to the investing public.”