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Crowdfunding and SEBI

By: Sharanya Ranga and Riya Dutta

Crowdfunding platforms- A preferred source of funding for start-ups

Crowdfunding platforms have gathered momentum with the growth of the start-up ecosystem in India. These platforms have not only been helping start-ups in their fund raising activities but their platforms (electronic or otherwise) are also used in trading in their securities. Helping start-ups in raising the initial working capital from investors to run their business, these platforms have emerged as one of the most preferred source of funding.

Warning notice to the crowdfunding platforms

The Security Exchange Board of India (SEBI), in  its press release dated 30th August 2016, stated that certain electronic platforms facilitating fund raising on digital platforms (like websites and other internet platforms), similar to the platforms of stock exchanges, are neither authorized nor recognized under any law governing the securities market. The notice says that the electronic platforms run by these crowdfunding networks are violating the norms of private placements as the offer for investment is open to all the investors registered with their platforms, thereby contravening the provisions of Securities Contract (Regulation) Act, 1956 and the Companies Act, 2013 (“Applicable Laws”).

Present regulatory framework

Under the current legal framework in India, only recognized stock exchanges are permitted to run electronic platforms to list and trade in securities. However, several crowdfunding platforms have questioned whether the capital market regulator has any role to play if the funds are raised in the private domain. On strict interpretation of Applicable Laws, private placement norms may appear to have been violated by these crowdfunding networks as the fund-raising mandates received from startups are shared by these networks with all the investors (exceeding the permissible limit of 50 investors for a particular investment round and 200 investors in a particular year). 

Our observations

While there has been considerable government impetus to promote the start-up culture in India, a warning notice such as this can only be a dampener. We need clear legal and regulatory framework for the functioning of the equity crowdfunding market in India, which should not only aim to protect and promote the interests of the investors but also serve as an impetus to these crowdfunding/investment networks.

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