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Securities & Exchange Board of India (SEBI) has come up with draft proposals which aim to provide a legal and regulatory platform for crowdfunding in India.
Crowdfunding being an alternate funding route for startups in the country is still at its nascent stage with no legal or regulatory framework around; SEBI, India’s Stock market regulatory body has released a consultation paper that proposes legal, structural and regulatory framework around crowdfunding in India.
The consultation paper proposes the following aspects of crowdfunding:
- The investors who are allowed to invest through the crowdfunding platforms;
- The types of entities that are allowed to raise funds through this channel;
- The types of entities that are allowed to set up internet based Crowdfunding platforms to enable online solicitation from such investors;
in addition to other associated aspects. Below are the highlights of the consultation paper:
Definition of crowdfunding
Crowdfunding is solicitation of funds (small amount) from multiple investors through a web-based platform or social networking site for a specific project, business venture or social cause.
Types of crowdfunding
Crowdfunding has been divided into 4 categories:
- Donation crowdfunding; (where issuers directly seek donation from the grantors)
- Reward crowdfunding; (where issuer directly offers rewards like movie tickets, new computer game, download of a book etc.)
- Peer-to-peer lending and
- Equity crowdfunding
SEBI’s norms will restrict itself to security-based crowdfunding and steer clear of donation and rewards based funding. Peer to peer lending will also not come under its ambit since it falls under the purview of RBI.
- Equity-based (EbC);
- Debt-based (DbC); and
- Fund-based (FbC)
Who can be the Investor?
With a view to provide alternative funding sources to Start-ups and at the same time to ensure that retail investors are not made to bear the risks of Start-up ventures, SEBI has proposed to permit only Accredited Investors to participate in crowdfunding:
The Accredited Investors
The proposed accredited investors who may be allowed to invest through crowdfunding platforms are as under:
- Qualified Institutional Buyers (QIBs), with a minimum net worth 20 crores;
- High Net Worth Individuals (HNIs) with a minimum net worth Rs. 2 Crores or more (excluding the value of the primary residence or any loan secured on such property), and of Rs. 20 Crore;
- Eligible Retail Investors (ERIs)
ERIs are those who
- receive investment advice from an Investment Adviser, or
- avail services of a Portfolio manager
- who have passed an Appropriateness Test (may be conducted by an institution accredited by NISM or the crowdfunding platforms),
They also need to
- have atleast a gross annual income of Rs. 10 Lacs;
- filed Income Tax return for at least last 3 financial years;
- certify that they will not invest more than Rs. 60,000 in an issue through crowdfunding platform;
- certify that they will not invest more than 10% of their net worth through crowdfunding. (Net worth excludes the value of the primary residence or any loan secured on such property).
Thus those retail investors who have knowledge, experience or have access to investment advice and have resources to cope with the losses on their investments in a start up, are eligible to invest as ERI in crowdfunding and come within the category of accredited investors.
- EbC and DbC shall allow private placement offers through internet based crowdfunding platforms to any number of QIBs and a maximum of 200 HNIs and ERIs combined.
- A QIB is required to purchase at least 5 times of the minimum offer value per person and collectively all the QIBs shall hold a minimum of 5% of the securities issued
- A Company is required to purchase at least 4 times of the minimum offer value per person
- A HNI is required to purchase at least 3 times the minimum offer value per person.
- An ERI is required to purchase at least the minimum offer value per person. The maximum investment by an ERI in an issue shall not exceed Rs. 60,000. The total of all investments in crowdfunding for an eligible retail investor in a year should not exceed 10% of its net worth.
- The ERIs and HNIs must sign a ‘Risk Acknowledgement’ that they understand the risk of ill-liquid nature of investment and potential loss of entire investment, and that they can bear the loss.
- The issue has to be in Demat form thus all the accredited investors need to hold a demat account.
- The payment has to be made through a cheque or a demand draft or another banking channel. Payment by Cash and Credit Cards shall not be accepted.
- The ERIs must be an Indian citizen / NRI.
Who can raise funds from Crowdfunding Platform?
SEBI has proposed that the additional channel of crowdfunding platform to raise modest amount of funds is allowed to be accessed by early stage startup or SME which is an unlisted public company incorporated in India, under EbC or DbC routes provided:
- The crowdfunding would be restricted to a maximum of Rs 10 crore in a period of 12 months for a single entity. Companies which intend to make bigger issue can list on one of the SME platforms or main board of a domestic stock exchange;
- such companies should not be promoted, sponsored or related to an industrial group which has a turnover in excess of Rs. 25 Crores or has an established business;
- such companies should not be listed on any exchange;
- Such companies should be under 4 years old;
- Such companies should not raise money to provide loans or invest it further;
- Such companies should not be engaged in real estate and banned activities
Further, to ensure only genuine entities raise funds through this mode, following other conditions have also been added:
- The issuing company, its directors, promoters or associates should not be defaulters in the past;
- In a given period of 12 months, issuers shall not use multiple crowdfunding platforms to raise funds;
- Issuers shall not directly or indirectly advertise their offering to public in general or solicit investments from the public;
- Issuer shall compulsorily route all crowdfunding issues through a SEBI recognized Crowdfunding Platform;
- Issuers shall not directly or indirectly incentivize or compensate any person to promote its offering;
- Issuers shall provide provisions for over subscription. This may include maximum over subscription amount to be retained, which should not exceed 25% of the actual issue size; intended usage of the oversubscribed amount. The total amount retained including the actual issue size and over subscription, shall not exceed the limit of Rs. 10 Crores.
Who can set up a Crowdfunding Platform?
SEBI has proposed that three sets of entities can set up a crowdfunding platform being the recognized stock exchanges or SEBI registered depositories as the first category. Under the second category comes the technology business incubators but with certain riders. These include having minimum net worth of Rs 10 crore and at least five years of experience (or being present for at least five years, which would rule out most private incubators in the country). Alternatively a joint venture between stock exchanges and such technology incubators can also start such a crowdfunding platform.
In addition to these platforms, a dedicated class of platform owners is proposed to enable fund based crowdfunding. To enable such FbC, it is also proposed that a new class of Crowd Fund AIFs be allowed to be displayed on the platforms launched by stock exchanges or depositories.
The third category includes associations and networks of PE or angel investors with a track record of a minimum of three years and having at least 100 active members and registered under the companies act and having a paid up share capital of at least Rs 2 crore.
Crowdfunding will provide an important platform where investors can meet promising start up companies. The web based crowdfunding platform will facilitate raising of capital through its website from investors who have access to such platform. An efficient crowdfunding system can really play the role of catalyst in bringing the startup ideas into reality. SEBI has called for public opinion on the draft proposals by July 16.