Crowdfunding in India has emerged as a new and beneficial source of funds for young start-ups and early stage companies. Low cost of funds and access to wide pool of investors are key reasons for rapidly increasing demand of crowdfunding.

Following data shows current Indian Scenario:

Number of crowdfunded companies 200
Average Ticket Size 2-4 crore INR
Fund raising commission 4-6%
Time taken to close the deals 15-90 days

 
Of all the types of crowdfunding, equity-based crowdfunding (EbC) comes under the purview of SEBI as it related to Capital Markets allowing entrepreneurs to raise capital in exchange of company’s equity. In 2014, the SEBI released a consultation paper that proposed legal, structural and regulatory framework around crowdfunding in India. According to SEBI, Equity-based crowdfunding is primarily based on the Private Placement route as defined under section 42, Companies Act 2013. Key highlights of provisions proposed by Consultation paper are as follows:

1. Following class of entities shall be allowed to set up a crowdfunding platform:

Class I Entities:

  • Recognized Stock Exchanges with nationwide terminal presence
  • SEBI registered depositories

Class II Entities:

  • Technology Business Incubators (TBIs)
  • promoted by Central Government or any State Government through bodies such as NSTEDB (National Science & Technology – Entrepreneurship Development Board) under Department of Science & Technology
  • functioning as a society registered under societies act of 1860/or as a non-profit making section 8 company
  • having at least 5 years of experience
  • having at least 5 years of experience
  • having a minimum net worth of Rs. 10 Crores
  • should have attained self-sufficiency
  • should display only those companies which share a common focus thrust areas as the TBI.

A joint venture of a Class I Entity and Class II Entitiy

Class III Entities:

Associations and Networks of PE or Angel Investors

  • with a track record of a minimum of 3 years
  • with a minimum member strength of 100 active members from the relevant industry
  • which are registered as Section 8 companies under Companies Act 2013 with a paid up share capital of Rs. 2 Crores

2. No entity can raise funds through crowdfunding without channeling their issues through a recognized Crowdfunding Platform, subject to the approval of Screening Committee.

3. Some of the conditions which the crowdfunding platform is proposed to satisfy are as follows:

  • Platform needs to own the Domain ID/website/URL and mention the same in the application for recognition with SEBI
  • Platform needs to have fair, orderly and transparent processes
  • Only accredited investors registered with a crowdfunding platform can invest through that crowdfunding platform. Only Indian start-up companies or SMEs or Crowd Funds can raise funds through these crowdfunding platforms.
  • Platform shall provide a Grievance Redressal mechanism for the investors as well as the issuers
  • Apart from the basic due diligence, every crowdfunding platform will have a ‘Screening Committee’ with a variety of experience from different domains and sectors.

4. Screening Committee of a Crowdfunding Platform may have a strength of a minimum of 10 persons, which may have follow the following composition:

  • at least 40% of the committee should be composed of professional with expertise in mentoring of startups and early stage ventures
  • at least 30% of the committee should be composed of professionals with experience in banking or capital markets
  • not more than 30% of the committee should be composed of persons of high caliber and qualifications which are nominated by the owner of the crowdfunding portal, but not on its payrolls.

5. Only Accredited Investors shall be allowed to participate in crowdfunding. Accredited Investors as defined by SEBI are as follows:

  • Qualified Institutional Buyers (QIBs) as defined in SEBI;
  • Companies incorporated under the Companies Act of India, with a minimum net worth of Rs. 20 crores;
  • High Net Worth Individuals (HNIs) with a minimum net worth Rs. 2 Crores;
  • 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 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) 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,
    • ho 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)

6. EbC shall allow private placement offers through internet based crowdfunding platforms to any number of QIBs and a maximum of 200 HNIs and ERIs combined.

7. It is proposed that QIBs, Companies and HNIs should be required to own at least a certain percentage in every issue through EbC and DbC (Debt-based crowdfunding).

8. The Companies (Prospectus and Allotment of Securities) Rules, 2014 specifies that in case of a private placement of securities, the minimum offer value per person must be at least Rs. 20,000 of the face value of the securities. In view of the above, it is proposed that:

  •  A QIB is required to purchase at least 5 times of the minimum offer value per person as specified in the aforementioned rule. 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 as specified in the aforementioned rule.
  • 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.

9. Following class of early stage startup or SME which is an unlisted public company incorporated in India, shall be allowed to raise funds through EbC route:

  •  a company intending to raise capital not exceeding Rs. 10 Crores in a period of 12 months;
  • a company which is not promoted, sponsored or related to an industrial group which has a turnover in excess of Rs. 25 Crores or has an established business;
  • a company which is not listed on any exchange;
  • a company which is not more than 48 months old;
  • a company which proposes to engage in non-financing ventures;
  • a company which is not engaged in real estate and activities which are not permitted under industrial policy of Government of India.

10. A company intending to raise funds through crowdfunding platform submit an Private Placement Offer Letter to the Crowdfunding Portal.

Although Consultation paper was issued by SEBI but no decision has been taken in this regard by SEBI. Therefore, currently no definitive structure of regulations has been issued by SEBI. But on 30th August, 2016, SEBI issued a press release # 137/2016 cautioning investors about online crowdfunding platforms providing equity-based crowdfunding (copy of the press release has been attached).

Thus, non finalization of regulations and issue of notice by SEBI (which virtually pronounced over half-a-dozen digital equity crowdfunding platforms (ECP), including prominent ones like Grex, LetsVenture, Termsheet, Equity Crest and Tracxn, as unauthorized, unregulated and illegal) shows SEBI’s reluctance to recognize EbC platforms as legitimate fund raising option in India, for now.

 

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