Alternative Investment Funds (AIFs) includes entities such as venture capital fund, social venture funds, SME funds
SEBI has been considering regulation of crowdfunding platforms since 2015
AIF tag adds a number of restrictions to crowdfunding platforms' abilities
Major equity crowdfunding platforms such as AngelList, and LetsVenture have registered themselves with SEBI as alternative investment funds (AIF). This move reportedly took place after Securities and Exchange Board of India (SEBI) sent notices to these platforms for not adhering to private placement norms, or in other words, for acting like unauthorised stock exchanges.
Alternative Investment Fund or AIF means a privately pooled investment vehicle which collects funds from sophisticated investors and invest it, for the benefit of the investors. These includes entities such as venture capital funds (including angel funds), social venture funds, small and medium enterprises (SME) funds and others.
According to Indian Companies Act, a company cannot allot shares to more than 200 people in a financial year through private placement (private placement is a method through which companies raise funding in return of equity shares). If the number of private placement crosses 200, it is deemed as a public offer and should be governed by SEBI’s fund raising norms.
The startups listed on crowdsourcing platforms used to source money from hundreds of angel investors without going public, which was a point of concern for SEBI.
Currently all major crowdsourcing platforms have released a disclaimer on their website.AngelList has declared that it is neither a stock exchange or fund raising platform. The company has defined itself as an Angel Fund, duly registered with SEBI.
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Also, LetsVenture has clarified in its statement to Inc42, that they are not a crowdfunding platform. They defined themselves as a curated closed marketplace for startups and investors to discover and syndicate. LetsVenture is also registered with SEBI as an Alternative Investment Fund.
This change in registration status puts a significant amount of restriction on these platform’s operation. As a registered AIF, these platforms can source money only from an experienced investor who has net tangible assets of at least INR 2 Cr. An experienced individual is defined as either an early stage investor, serial entrepreneur, senior management professional with minimum 10 years experience, or a corporate firm owner with net worth of at least INR 10 Cr.
AIF tag will also add restrictions to the startups listed on these platforms. Only startups which are incorporated in the past five years can receive investments from AIFs. Also, the startups’ turnover should be less than INR 25 Cr. and they should not be backed by any industrial group with revenues more than INR 300 Cr.
In 2017, SEBI has expressed concerns about crowdsourcing bodies acting as unauthorised stock exchanges and have reportedly sent half-a-dozen show cause notices. Also in 2016, SEBI has cautioned investors about fundraising on unregulated electronic platforms. Prior to that in June 2016, the SEBI released a consultation paper on regulating crowdfunding, especially the equity-based kind. The SEBI warned in the paper, “Uninformed and unsophisticated investors may act with a ‘herd mentality.”
In 2014, SEBI has released a consultation paper that proposed legal, structural and regulatory framework around crowdfunding in India. Followed up by a consultation with the government to evolve the guidelines on crowdfunding in 2015.
Crowdfunding has gained traction in a number of developed economies, including Australia, United Kingdom, Netherlands, Italy, and America. According to Technavio’s report, the global crowdfunding market is expected to grow at by almost $90 Bn between 2018 – 2022.
Note: Earlier version of this article included Tracxn Labs as one of the entities who are registered under the AIF tag with SEBI. However, Tracxn Labs later clarified that the company had been registered as an AIF since its inception in 24 February 2015, and its inclusion under the tag was not an aftermath of SEBI’s notice. The company also clarified that it has never received a notice from SEBI.