In a bid to protect investors’ interests, the Securities and Exchange Board of India (SEBI) has reportedly instructed the country’s startup funding platforms and angel networks to carry a disclaimer stating that crowdfunding portals are neither stock exchanges nor authorised by the market regulator to solicit investments.
Furthermore, the disclaimer should also state that securities traded via these crowdfunding platforms are not actually raised on any regulated exchange.
As per reports, the directive was sent towards the end of July. A number of angel networks and crowdfunding companies, including Venture Catalysts, LetsVenture Online Pte Ltd, and GREX, have already conformed to the guidelines put forward by the SEBI.
The move comes at a time when the capital market regulator is reportedly working to finalise crowdfunding norms. According to sources, mandating a disclaimer could help enhance clarity for the investors about the legal side of startup funding via crowdfunding.
SEBI: Finalising Norms For Crowdfunding Portals And Angel Networks
As per reports, the SEBI is considering exempting crowdfunding activities from the private placement norms under the Companies Act. However, these entities will be required to seek the SEBI’s approval before accessing crowdfunding platforms.
According to the soon-to-be-instated guidelines, information about borrowers and transactions will be available only to investors and not the public at large.
A source told Inc42 in an earlier interaction, “The idea is to help genuine, high-growth-potential entrepreneurial activities with a wider access to fundraising and not only a select set of angel investors, who may be providing finance to such companies but also often dictate the terms of their businesses and restrict the entry of other potential large investors in the funding plan for growth.”
To protect investors’ interests, the SEBI is also looking at specifying a minimum threshold for all transactions in terms of stake purchases. Furthermore, no single lender will be allowed to gain possession of more than 25% of the investee firm.
For all corporate decisions, crowdfunding platforms and angel networks will have to secure the approval of all shareholders, and will also be required to inform the SEBI of the decision. Information about company business and investors will be disclosed only to concerned parties.
According to one source, access to these startup funding portals will be password-protected.
In the case of larger firms, the SEBI is considering exempting crowdfunding activities from the private placement norms under The Companies Act. Aimed at ruling out concerns of these bodies acting as unauthorised stock exchanges, the norms dictate that a private company with over 200 investors should make a public offer and list securities.
To expedite the process of finalising regulations, the organisation has set up a Committee on Financial and Regulatory Technologies (CFRT).
SEBI Advocates Cautionary Stance For Crowdfunding; LinkedIn In Trouble
SEBI has long been deliberating over regulating crowdfunding activities in the country. In June 2014, it released a consultation paper outlining the legal, structural and regulatory framework of crowdfunding based startup funding in the country. Later in January 2015, it reportedly held talks with the government to issue guidelines on crowdfunding, as part of a move aimed at helping startups raise funds.
In June 2016, the market regulator released another consultation paper detailing norms for equity-based crowdfunding. Two months later, the SEBI cautioned investors about raising funds via unregulated electronic crowdfunding platforms.
Between July 2017 and August 2017, the SEBI sent notices to a dozen angel networks, asking them to reveal details of their fundraising business. The aim, according to a SEBI official, was to “know the persons running these platforms, and whether these platforms are operating like exchanges; whether public issue norms are being sidestepped”.
In a related development, the SEBI wrote to LinkedIn Corp in the final week of August, questioning the company over a potential breach of the Companies Act. As per reports, the regulatory body alleged that the business-oriented social networking service is providing startups and individuals a platform to raise money publicly, which could be violation of the Companies Act.
The platform currently hosts several funding groups that claim to offer financing to any registered LinkedIn users involved in entrepreneurial activities. Popular groups that fall in this list include “Startups and Entrepreneurs Get Funded” (62,396 members) and “Global Investment Network” (44,005 members).
Among the crowdfunding platforms currently operating in India are Ketto, Wishberry, FuelADream, Bitgiving, Catapooolt and Crowdera, among others. The latest directive by the SEBI mandating a disclaimer is likely aimed at ensuring the safety of small investors partaking in startup funding via angel networks and crowdfunding portals.
(The development was reported by Livemint)