Story began with SEBI notice on August 30th
?B. UNAUTHORIZED ELECTRONIC PLATFORMS
It has also come to the notice of SEBI that certain electronic platforms are facilitating fund raising on digital platforms like websites and other internet platforms, which are similar to the platforms of stock exchanges. These digital platforms are neither authorized nor recognized under any law governing the securities market. The electronic platforms are allegedly facilitating investment in the form of private placement with companies, as the offer is open to all the investors registered with the platform amounting to a contravention of the provisions of Securities Contract (Regulation) Act, 1956 (SCRA) and the Companies Act, 2013. Only recognized stock exchanges provide a platform where equity and other securities issued by companies are listed and traded in accordance with the provisions of the SCRA. The details of SEBI recognized stock exchanges are available on the SEBI website www.sebi.gov.in.
Investors are hereby cautioned that all dealings on such unauthorized electronic platforms would be in contravention of the relevant securities laws.?
What happened next??
Angry Online equity crowdfunding platforms- seeking clarity from India’s capital markets regulator on the extent to which its recent cautionary notice would affect their operations.
What happened in the past?
As per SEBI ?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.?
Recognition of Crowdfunding Platform:
Class I Entities:
- Recognized Stock Exchanges with nationwide terminal presence (RSEs)
- SEBI registered Depositories
Class II Entities:
- Technology Business Incubators(TBIs) ?promoted by Central Government or any State Government through bodies such as NSTEDB under Department of Science & Technology ?functioning as a society registered under societies act of 1860/or as a non-profit making section 8 company,
- At least 5 years of experience, having a minimum net worth of Rs. 10 Crores ?should have attained self-sufficiency and,
- Should display only those companies which share a common focus thrust areas as the TBI
- A joint venture of a Class I entity and a Class II entity is also acceptable for setting up a Crowdfunding Platform as this would bring the best of both classes.
Class III Entities:
- Associations and Networks of PE or Angel Investors
- 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
- Paid up share capital of Rs. 2 Crores 22.214.171.124 Thus the platforms launched by Class I & Class III Entities can enable the FbC.
??Crowdfunding Platform – To do list:
- Conduct screening and basic due diligence of the business of the start up.
- No amount of due diligence can provide any form of guarantee of the commercial success.
- Conduct background and regulatory checks on the startups, whole time directors, promoters, shareholders holding more than 20% of equity shares in the company.
- Review the information presented by the startup on the portal’s website to confirm that the information adequately sets out the general features and structure of the security, issuer-specific risks, parties involved, any identified conflicts of interest, and the intended use of funds.
- Conduct due diligence of investors such as net worth requirement and KYC requirement, if any, while maintaining the privacy of the investors.
- Deny access to startups if it has reason to believe that the issuer or its offering is fraudulent.
- Maintain a record of all the issues brought by the companies and subsequently the disclosures of the issuing companies and make it easily accessible to the investors.
- Collect and transmit information to SEBI.
Eligibility conditions of the platform:
- Platform needs to own the Domain ID/website/URL and mention the same in the application for recognition with SEBI and
- Adequate systems and procedures to manage the daily operations as well as the emergency situations.
- Platform needs to have adequate human, technology and risk management capabilities
- Platform needs to have fair, orderly and transparent processes
- Procedure to address possible conflicts which may arise between issuers and the platform
- Fund raising by subsidiaries/associates or other entities related to the Platform Owners not allowed
- An elaborate contingency/termination plan to ensure a seamless operation in the event of closure or financial distress in the crowdfunding platform
- Crowdfunding platforms shall not offer investment advice, solicit, manage funds or securities, and incentivize employees for such sale of securities displayed on the platform or make recommendations to investors.
- 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 Redressed mechanism for the investors as well as the issuers
- The task of due diligence of the startup (issuing company)
- Filtering mechanism to differentiate between the quality of ideas and business plans- ‘Screening Committee’ with a variety of experience from different domains and sectors.
Screening Committee of a Crowdfunding Platform:
- 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.
Process of raising funds:
- Investors due diligence.
- Startup due diligence
- The task of due diligence of investors in crowdfunding could be given to the platform or some third parties which can be SEBI registered intermediaries.
- ERIs and HNIs may be required to submit, among other things, a net worth certificate from a Chartered Accountant to Stock Broker /Investment Adviser/Portfolio Manager and also make a declaration or sign a ‘Risk Acknowledgement’ regarding the understanding of risks in their investments.
- Crowdfunding Platforms may charge a nominal fee from the company seeking funds through the platform and the accredited investors looking for a good investment opportunity in the companies which shall be displayed on the website only after a comprehensive due diligence and screening.
- Protection from Cybercrimes
- Tax Treatment Taxation of funds will be in accordance with the current tax provisions applicable to the unlisted companies raising funds through equity or debt or an AIF.
SEBI’s role in crowdfunding:
- Recognition of the Crowdfunding Portals
- Oversight and regulation of the Crowdfunding market in India
- Playing no role in vetting of the Private Placement Offer letter of the issuing companies
- Issuance of guidelines/circular regarding information required to be disclosed in Private Placement Offer Letter or on an ongoing basis or requirements of due diligence and screening or any other matter.
- Conduct of periodic inspections or audits of Crowdfunding Platforms and enforcement of Crowdfunding Regulations
- Entities can raising funds even before their venture actually becomes commercially viable, is risk capital.
What can be expected?
SEBI is yet to propose a complete regulatory framework for equity crowdfunding like its international counterparts, that is the SEC (Securities and Exchange Commission) in the US and FSA (Financial Services Authority) in the UK. The Securities and Exchange Board of India (Sebi) has not drawn up an operations framework for electronic platforms that facilitate pooling of investments into startups
What is the take?
This article is not only for crowdfunding platforms but also to the 3rd
parties involved in it.
Startups, that want to raise funds, have to ensure the necessary legal and accounting documentations are done, because these are the ones that will support you through out
Investors, ensure that you have done your due diligence about the crowdfunding platform that you are going to be involved in and yes, the startup has more than Idea that has to be validated.
Finally, Crowfunding platforms, now you know what you should be doing, tick off the remaining ?things to do? in your checklist, and do the best out your businesses legally
For any Legal and Accounting support, Happy to help you,?let us?
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