This article is written by Pratyush Pandey, a student of NLU Delhi.

SEBI had proposed a crowdfunding framework for India in a consultation paper in June 2014. It had invited comments and suggestions on the same by 16^th July. The consultation paper outlined the details of crowdfunding in various other countries (US framed its rules earlier this year, Canada released its crowdfunding rules last year). It also detailed the existing model of investment in startups and SMEs through public offers and private placements by companies. SEBI already provides for funding for SME’s by listing their securities on Recognized Stock Exchanges. A company which has its post-issue face value capital not exceeding ten crore rupees shall list only in SME platform while that having more than ten crore rupees and up to twenty five crore rupees, has an option to list in SME platform. In case the post-issue face value capital exceeds Rupees twenty five crore rupees, the issuer should compulsorily list only on main board of the Stock Exchanges.

SEBI has clarified that the proposal does not necessarily mean draft rules shall be framed and crowdfunding provisions shall be introduced in India.

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. This funding can be used to raise money for a creative project, a benevolent or public-interest cause or a business venture. Those contributions are sought through an online crowd-funding platform, while the offer may also be promoted through social media.

Crowdfunding increases flow of credit to SME’s as funds are raised at lower capital cost. This saves them from the rigorous procedures in this mode. It increases competition in a field traditionally dominated by a few providers. It provides a platform for ventures which have a higher risk element to collect funds.

Investments in SME’s and startups carry risk and higher chances of loss to investors. There is a risk of misuse as well as cyber security and identity theft. The crowd may not have a say in the decision making or an influence on management. The crowdfunding carries with itself high chances of loss which cannot be anticipated by these investors (crowd).

SEBI’s Proposal

SEBI has proposed to allow only Accredited Investors to participate in crowdfunding. These include Qualified Institutional Buyers (QIBs); companies incorporated under the Companies Act of India, with a minimum net worth of Rs. 20 crore; High Net Worth Individuals (HNIs) with a minimum net worth of Rs. 2 crore; and Eligible Retail Investors.

Most of this limited class of investors expect an outcome out of their investment. This is a setback to creative works and social causes which do not give return on investments. The technical startups will benefit the most from this new class of analyze-before-investing. Earlier, most crowdfunding was through small donations from individuals who invested because a friend had recommended or they felt for the project. The emotional vibes in investment will take a backseat as the accredited investors will evaluate the project and its potential before investing.

A QIB will prefer to stay away from investing in a project where the risk element involved is higher and therefore, there are chances of investment not being returned. However, SEBI has proposed that a minimum of 5 per cent of the total number of shares of the company shall be held by QIBs.

The number of investors has also been limited to 200 except QIBs (on which there is no limit). SEBI gives a startup the freedom to have as many QIBs retains the traditional crowdfunding model, but does not address the disinterest of most QIBs in investing in creative or social cause startups as the chances of a return are lesser. A startup must be less than 4 years old and cannot raise more than Rs. 10 crore in a year. The investment may not satisfy the capital requirements of a few technical startups.

For receiving crowding, a company must not be a subsidiary or related to any other company which has a turnover in excess of Rs. 25 crore. It must not be listed on any Exchange. Companies engaged in real estate and activities not permitted under industrial policy of the Government of India shall not be allowed to raise money through crowdfunding. Further, the issuer shall not raise capital from multiple platforms, and shall not loan out the funds. An issuer shall have to disclose certain details of the company, its functioning and the venture it seeks to start. Most of the details required are basic and can be provided by an issuer. This is to ensure that an investor can make an informed choice.

SEBI proposes to limit the entities which can establish portals to stock exchanges, depositories, technology business incubators (TBIs) and angel investors. Internet companies which have so far effectively handled the crowdfunding business in India should not have been left out SEBI. Since the crowdsourcing is mostly done online, letting the existing internet companies to carry out their process should have eased SEBI’s work. They also require a platform to own the domain name, then why not let the internet companies themselves run the crowdfunding business? SEBI should itself be the gatekeeper and verify the various the authenticity of various issuers and their rather than leaving the job on the portals.

SEBI proposes three routes for crowdfunding:

• Equity based Crowdfunding (EbC)
• Debt based Crowdfunding (DbC)
• Fund based Crowdfunding (FbC)

SEBI bars an investor from selling his shares in the startup except if he is selling it to the issuer of security, another accredited investor registered with the platform, or to a family member or relative or friend of the accredited investor. They do not want companies displayed on crowdfunding platforms to be treated as listed companies. However, not providing a secondary market or the right to sell shall act to the detriment of the investor and shall further restrict investments. SEBI could create a forum where the status of the company, its profits/losses could be shared, so the equity or debentures could be bought or sold at a fair price therefore, not resulting in any loss to the company.

SEBI seems to be introducing crowdfunding in India as a new concept, totally overlooking the fact that certain platforms are working well ahead of it. It has not included internet companies as an entity to provide platforms for crowdfunding. They have limited the number of investors to a few classes thus, blocking all the small amount investments from individuals who felt for the issue or wanted to promote an idea. SEBI’s proposal requires to undergo several modifications before the draft rules, if any, come out. SEBI has understood the concept of crowdfunding but seems to have decided to choose the ‘crowd’ itself.

The consultation paper by SEBI can be accessed here.