SEBI Scrutinising Angel Networks, Crowdfunding For Operating In Regulatory Grey Area

The Securities & Exchange Board of India (SEBI) is now scrutinising angel networks and crowdfunding platforms in the startup ecosystem. The move is in a bid to rule out concerns of these bodies acting as unauthorised stock exchanges.

As per reports, SEBI has sent notices to at least half a dozen angel firms in the past one-and-a-half months, asking them to reveal details of their fundraising business.

The market regulator is also asking them to explain if they operate within the limits of the securities market law. Angel networks serve as a vital link between startups looking for funds and individual investors looking to invest. They help startups raise Seed money. The SEBI, however, is worried that these electronic platforms are operating in a regulatory grey area by acting like stock exchanges which they are not authorised for. Additionally, it feels that by facilitating issuance of securities to more than 200 investors, some networks may be violating the rules of private placement as well.

As per a SEBI official, a team set up by the regulator is examining if such fund mobilisation is a ‘deemed public issue.’ He stated, “We want to know who are the persons running these platforms, and whether these platforms are operating like exchanges; whether public issue norms are being sidestepped.”

Major Concerns Of SEBI Regarding Angel Networks And Crowdfunding

Besides worrying about small investors who are attracted to these networks, the SEBI is also concerned if companies raising money on such platforms are following the unambiguous private placement norms under the company law.

The regulator has sought the information under Section 11 of SEBI Act 1992 which empowers it to act in any manner as it thinks fit to protect the interest of investors.

Hence in the coming days, these angel networks may have to share the following information and possibly tweak their style to comply with regulations –

• How is the investor/company registered on the angel networks?
• Are there any restrictions on the type of investors who can register on the platform?
• The entire flowchart of fund raising activity by a startup on the angel network.
• Minimum subscription amount for an investor to invest in a startup.
• Disclosures of startups which have raised funds till date, number of investors who invested, and the type of security issued- stock, bond, or hybrid.
• Is the angel network complying with the private placement norms as stipulated under Companies Act 2013?
• Is secondary market trading permitted on the angel network and if yes, then is the process flow followed?

These notices come almost a year after the SEBI had cautioned investors about fund raising on unregulated electronic platforms in August 2016.

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.” The deadline for sending responses to the SEBI expired in July 2016. However, almost a year later, it still hasn’t announced its guidelines.

It was in June 2014 that the SEBI had released a consultation paper that proposed legal, structural and regulatory framework around crowdfunding in India. In January 2015, SEBI held talks with the government to evolve guidelines on crowdfunding in a move to help startups raise funds.

However, with its current stern view on angel networks and crowdfunding platforms, it could stifle an important source of finance for many startups. Currently, there are plenty of angel networks and crowdfunding platforms in India such as LetsVenture, Indian Angel Network, Termsheet, Equity Crest, AngelList and Tracxn, among others.

Angel investor Sanjay Mehta believes that the SEBI should look at angel networks as offline investment platforms and not put them in the crowdfunding category as they operate very differently. He said,

“No deal in India where angel networks are involved has crossed 200 individual investors. Hence, the case of private placement law does not apply. Finally, all of us would expect SEBI to ease out investing in startups than put up unnecessary impediments as far as compliance is concerned. Investors are duly doing offline due diligence, Share Holding Agreement (SHA) documentation and subscription of shares. So I find it difficult to comprehend where is the fraud happening.”

Meanwhile Shanti Mohan, co-founder of LetsVenture, stated that it is a good step for the SEBI to take the initiative to regulate angel investing.  She said, “We will wait to see the exact nature of the regulations to understand if this is restricting or enabling to the startup ecosystem but, overall, I do think it is good to have regulations in place, as startup investing is a high risk asset class.”

LetsVenture meanwhile sees itself more of an online discovery platform for startups than an angel network. It does not enable secondary transactions on the platform, and has a curation process before it  onboards investors. The same had been reiterated by investor Mohandas Pai, who stated, “I do not think LetsVenture is a crowdfunding platform. Everybody and anybody cannot come on the platform. There is an evaluation process, individual investments are larger sums, and the investors are sophisticated investors and not retail investors as per SEBI norms.”

While the SEBI’s concerns are reasonable in view of the increase in such angel platforms for ensuring the safety of small investors and for ensuring an audit trail of transactions on these platforms, but too much regulation could stifle innovation and entrepreneurship. Instead, what would be welcome is the SEBI taking a decision on announcing the equity crowdfunding regulations.

(The development was reported by ET)

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