The Securities and Exchange Board of India (SEBI) has issued a consultation paper for regulating online crowdfunding in India. Crowdfunding is the collection of funds or finance from backers - the "crowd" - to fund an initiative, startup or business idea and usually occurs on Internet platforms. The paper issued bu SEBI covers the extant legal structure governing the fund raising for start ups and SMEs in India. Sebi want to permit only Accredited Investors to participate in crowdfunding.
SEBI intends to invite comments and suggestions from industry and market participants regarding the different possible structures for crowdfunding within the existing legal framework and other associated issues.
SEBI issued paper categorized the crowdfunding into four categories: donation crowdfunding, reward crowdfunding, peer-to-peer lending and equity crowdfunding. For example, In the US, Kickstarter, Indiegogo etc. are some of the platforms that support donation based crowdfunding.
Why need regulation on Crowdfunding in India ?
SEBI (Venture Capital Funds) Regulations ("VCF Regulations") were framed in 1996 to encourage funding by entrepreneurs' early-stage companies in India. However, since registration of VCF was not mandatory under VCF Regulations, all players in the alternative funds industry were not registered with SEBI. Hence, it was felt that there was a regulatory gap which needed to be addressed. Further, SEBI Board had approved the proposal for a clear regulatory framework privately pooled investment vehicles under AIF (Alternative Investment Fund) framework to inter-alia pave way for increased investment in startups, SMEs etc.
As per the said Regulations, AIF should be prohibited by its trust deed/memorandum and articles of association/partnership deed from making an invitation to the public to subscribe to its securities. AIF shall not accept from an investor an investment of value less than Rs. 1 Crore and no scheme of the AIF shall have more than 1,000 investors. Further, each scheme of the AIF shall have a minimum corpus of Rs. 20 crore. Further, the manager or sponsor shall have a continuing interest in the AIF of certain percentage of the corpus.
Risk of Fraud
Risk of fraud is primary reason as why Sebi wants to regulate crowdfunding as there is possibility of genuine websites being used by fraudsters claiming to be promoters of projects or of false websites being established, simply to defraud the investors or to entice individuals to provide credit card details etc. Thus, there is a risk of misuse as well as cyber-security and/or identity theft.
Who can be the Investor?
Sebi has proposed to permit only Accredited Investors to participate in crowdfunding. The proposed accredited investors who may be allowed to invest through crowdfunding platforms are as under:
- Qualified Institutional Buyers (QIBs) as defined in SEBI (Issue of Capital and
Disclosure Requirements) regulations, 2009 as amended from time to time, - Companies incorporated under the Companies Act of India, with a minimum net
worth10 - 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):
- who receive investment advice from an Investment Adviser, or
- who avail services of a Portfolio manager, or
- who have passed an Appropriateness Test (may be conducted by an
institution accredited by NISM or the crowdfunding platforms),
and- who have a minimum annual gross income of Rs. 10 Lacs,
- who have filed Income Tax return for at least last 3 financial years,
- who certify that they will not invest more than Rs. 60,000 in an issue
through crowdfunding platform, - who 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).
Proposed Limitation of on investment through crowdfunding
EbC (Equity based Crowdfunding) and DbC (Debt based Crowdfunding) shall allow private placement offers through internet based crowdfunding platforms to any number of QIBs and a maximum of 200 HNIs and ERIs combined. It is also proposed that QIBs, Companies and HNIs should be required to own at least a certain percentage in every issue through EbC and DbC.
Who can raise funds from Crowdfunding Platform and Limitations on capital
raised?
- A company intending to raise capital not exceeding Rs. 10 Crores in a period of 12 months. Companies which intend to make issue more than size of Rs.10 Crores may raise funds by complying with the provisions of SEBI (ICDR) Regulations and list them on a SME Platform or main board of a recognized stock exchange,
- A company intending to raise capital not exceeding Rs. 10 Crores in a period of 12 months. Companies which intend to make issue more than size of Rs.10 Crores may raise funds by complying with the provisions of SEBI (ICDR) Regulations and list them on a SME Platform or main board of a recognized stock exchange,
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