The Securities and Exchange Board of India (SEBI), which regulates market capital in India, has reportedly issued an investor warning notice to equity crowdfunding platforms that aid startups. The notice questions the legality of these platforms.
The SEBI note, issued last week, has listed over six digital equity crowdfunding platforms (ECP) as unauthorised, unregulated and illegal.
The official notice from the SEBI addressing the investors stated, “Electronic platforms facilitating fundraising on digital platforms are neither authorised nor recognised under any law governing the securities market. Such platforms, which are open to all investors registered with the platform, amount to a contravention of the Securities Contract Act and the Companies Act.”
In accordance with the SEBI, only recognised stock exchanges can provide electronic platforms where equity and other corporate securities could be listed and traded.
In response to the notice, Sonia Pradhan, co-founder, Termsheet said, “We are particularly fastidious about complying with the law even in the face of unreasonable regulations. We are unique as a platform in that we provide a private but seamless way to close deals online. The SEBI note which paints all online platforms in the same light is seen by us as amateurish, ill-informed, and irresponsible.”
ECPs essentially help startups to raise funds from multiple investors. ECPs connect the startups to a closed group of registered investors. In case of normal crowdfunding, investors do not expect any return from their investments; but in startup crowdfunding, investors expect huge returns.
In lieu of their services, crowdfunding platforms charge listing fees, fundraising commissions and in some cases, a percentage of equity as well, from the startups they help raise funds.
According to an official statement, around 200 companies have raised $52-60 Mn (INR 350-450 Cr) on these platforms over the past 18 months.
According to sources, the SEBI is not on board with the present structure of ECPs in the country. None of these platforms meet the critical net worth criteria of $14 Mn (INR 100 Cr) required to set up security exchanges. Along with that, the regulatory authority is also skeptical about the quality of firms raising funds on these platforms.
In 2014, the SEBI released a consultation paper that proposed legal, structural and regulatory framework around crowdfunding in India. In January 2015, the SEBI held talks with the government to evolve guidelines on crowdfunding in a move to help startups raise funds.
Following that in June 2016, it reworked its plans for a capital-raising platforms targetted exclusively at startups. The regulatory body has considered changes to the listing framework for tech-based startups allowed them to trade publicly on regular stock exchanges.