SEBI Touching Upon Crowd Funding Norms Yet Again

The Securities and Exchange Board of India (SEBI) is taking a fresh look at setting up a regulatory framework for crowdfunding. SEBI’s proposals includes introducing a minimum net worth criteria for investors to be eligible to invest in start-ups through such platforms, capping individual investments, and standardizing disclosure requirements for start-ups raising the money, the two said on condition of anonymity.

This is a very important development, and has come up as, 'All the money invested through online companies goes to the unlisted space and it can be very risky. If the number of public investors crosses 200, the online entity is supposed to follow public issue norms'.

In recent years, the number of websites and digital platforms soliciting investments with promises of high returns has increased. GREX, LetsVenture, Termsheet, Equity Crest and Tracxn are some of the popular names in this space. Companies wishing to raise money from public may be required to make compulsory basic disclosures about the start-ups in which the money is invested such as the risks involved, the total amount raised and the investment terms.

SEBI has been mindful of the fact that start-ups are often very small businesses with innovative models and since they do not get funding either from the regulated banking channel or from venture capital, they seek funding through online platforms and other equity crowdfunding channels in which many are low-income investors.

Sebi has been looking at crowdfunding for almost three years now, but been unable to get a fix on them without hurting the fund raising ability of start-ups.

In June 2014, it put out a discussion paper, which proposed limiting the number of investors and prohibiting companies from publicizing their efforts through ads on media channels. This discussion paper didn’t go down well with the industry. A year later, the regulator was considering easing these provisions but the norms didn’t get crystallized.

In August, the legitimacy of equity crowdfunding platforms serving start-ups was again questioned by the regulator in an investor-caution note. It said these digital platforms are “neither authorized nor recognized under any law governing the securities market.”

In its latest plan too, SEBI is planning to retain some of the 2014 proposals, allowing only start-ups less than four years old to use crowdfunding platforms, capping fund raising at Rs10
crore a year and prohibiting start-ups from using multiple crowdfunding platforms.

Currently, in India, crowdfunding—financing a proposed project online through relatively small sums from a large number of people—is restricted to a reward and donation model. Here, contributors to a project in the domain of, for example, design or technology, receive some reward ranging from a thank-you note to the product itself, based on the contribution. In some social-cause projects, there are no rewards for the donation.
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Soumya Gupta

BW Reporters Soumya is a young writer and journalist, with bachelors in Multimedia and Mass Communication. She is an alumini of the Asian College of Journalism, and finds politics and sustainability intriguing beats to work with.

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