The Securities and Exchange Board of India (SEBI) has issued a consultation paper on crowdfunding. The release was widely expected as India moves forward to regulate investment crowdfunding – similar to a growing number of countries around the world. Comments on the paper are being invited until July 16, 2014. The paper reflects much of the information in a previous IOSCO report and reviews the various approaches from other nations. Both debt and equity crowdfunding are reviewed.
The SEBI approach believes the crowdfunding platforms, approved by a screening committee, must play a role in reducing potential for fraud. Platforms are expected to screen startups, or curate, as a form of investor protection. Some of the proposed guidelines include:
- to conduct screening and basic due diligence of the business of the start up.
- However, no amount of due diligence can provide any form of guarantee of the commercial success.
- to conduct background and regulatory checks on the issuers, whole time
- directors, promoters, shareholders holding more than 20% of equity shares in the company
- review the information presented by the issuer 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
- to 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 an issuer 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 as may be called for
It is recommended that investors need to be “subjected to a moderate level of due diligence”. The issue of secondary markets is addressed by delineating specific situations where the crowdfunded security may be transferred including:
- to the issuer of the security in accordance with the provisions of Companies Act 2013 and the rules made thereunder, pertaining to the buyback of securities by unlisted public limited companies,
- to another accredited investor registered with the platform,
- to a family member or relative or friend of the accredited investor or the equivalent.
SEBI’s role regarding crowdfunding is viewed as facilitating a cost effective and efficient method for capital formation to occur. SEBI will mainly be limited to:
- 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
Investment crowdfunding will be allowed for accredited investors, as SEBI defines and to “Eligible Retail Investors” (ERI) who qualify under the following guidelines:
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).
India, the worlds 10th largest economy by nominal GDP and the second largest national population, has been described as a “country in a hurry”. If investment crowdfunding is effectively regulated it could have a dramatic impact on the efficient allocation of capital for small companies and startups.
The consultation paper is embedded below:
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