Crowd Funding
Crowd Funding

The US House of Representatives has recently passed the ‘Entrepreneurs Access to Capital Act’. The passing of the Act has led to demand for similar legislation in India too. It is expected that the Act will make it easy for US startup companies and entrepreneurs to raise capital in early stage of their businesses. Crowd Funding is a method by which startups can sell their stocks and other securities through the internet, by using crowd funding sites or even social networking sites. Through Crowd Funding these companies can sell unregistered securities of upto $2 million. The act also ensures that crowd funded company gets no individual investment above $10,000 and that any investment is also lesser than 10% of the investor’s annual income.

Crowd Funding
Crowd Funding

The Crowd Funding Bill in US

Though the crowd funding laws were earlier non-equity based, now equity based crowd funding is also feasible in the US. Getting a seed loan is often very difficult right at the beginning for a startup. In fact most of the applicants don’t get their loan sanctioned. Crowd funding gives the process of selling shares a whole new dimension as companies would be able to interact with their shareholders closer than ever before. Crowd funding for the small entrepreneurs is a lot similar to like collecting money from peer-to-peer. In the peer-to-peer way of collecting money, entrepreneurs can ask every person from the vendor next street to the beer holder in the bar to give some money as fund to the company. All these persons then become the ‘shareholders’. Such peer-to-peer lending method helps to create deeper connection between investors and the company as they would now know the company more ‘personally’.

Crowd Funding and India

The passing of the Bill has led to discussion over a similar Bill in India. There is no specific regulations for Crowd Funding in India – and in the light of the current laws with respect to raising money from the public, a startup cannot really opt for crowd funding – as the same will lead to violation of prohibition against soliciting investment from the public by private companies. Yet the development of the Crowd Funding laws in India can open up a plethora of opportunities for entrepreneurs who would not be bound by the red tape as before.

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Crowd Funding Laws for India?

If the Crowd Funding laws like the U.S are passed in India then retail investors can fund the company using the Internet. However, using the Internet for raising funds can have its own issues. Clear laws need to be put in place whether the Internet sites through which crowd funding would be done should follow the regulations of SEBI. As offers of shares made to 50 persons or more are stated to be public offers according to the section 67 of the Companies Act the shares distributed in the Internet would also require a prospectus and associated compliances. Also a question might be asked if the site through which Crowd Funding would be done needs to have a registration with the SEBI as the site is acting as an intermediary. All these questions need to be addressed before the concept of Crowd Funding really kicks off in India as well.


Crowd funding ensures that the probability of committing a fraud is near to zero (provided some adequate steps are taken by SEBI to ensure this like by ensuring investor protection). This is because as Crowd Funding is done through the use of Internet platform it allows investors to directly connect with the company. Although it calls for some level of sophistication on part of the investor so that he assess the risks and opportunities, there is scope to create more transparency and democratize investment in startups. In the context of India transparency and trust is more essential as there are always numerous complaints of small level businesses committing ‘fraud’ with the people. A solid crowd funding law and good regulation will enable the Indian startups in a great way.

Option of SME Exchange in India

Under the current Indian legal scenario, the closest option available to start-up companies is to raise money from the SME Exchange, a recent project of the Bombay Stock Exchange and the National Stock Exchange that has recently got a nod from SEBI. SME Exchange is particularly a good option for the small scale start-ups given the relative gloom currently plaguing the market. The SME Exchange is nothing but a separate financial exchange catering to the small and medium scale enterprises, with less cumbersome processes and costs for smaller companies. The changes in the market intermediaries, regulatory supervision and maturity level and global integrity of financial markets are likely to boost start-ups intending to raise money from the mass by listing at the SME Exchange.

Among the prescribed criteria for a start-up venture intending to raise funds through this exchange, following deserve special mention:

1. The post-issue capital of the start-up should be less than Rs. 10 crores. If the capital is between Rs. 10 crores and Rs. 25 crores, it has an option to get itself listed at the main parent exchange or the SME Exchange.

2. The issue should be 100% underwritten.

3. Minimum trading lot is an amount of Rs. 1 lakh.

4. A company can appoint up to 5 market makers who will provide liquidity through two way quotes, i.e. to buy as well as sell, for at least 75% of the trading hours.

The SME Exchange is also likely to see investment from VC/PE funds because of the removal of the block to exit opportunity available to the promoters via strategic stake sale etc. Moreover, the requirements of obtaining pre-issue clearances from SEBI have been waived and it would be sufficient to get a compliance certificate from the Merchant Banker to raise money from the exchange. Nor do the companies need to send printed copies of the financial statements anymore, instead they can simply upload the same on their websites and publish half-yearly instead of the earlier quarterly results. All these additional advantages, along with the primary gain in being able tap a new source of crowd funding, are likely to prove beneficial to the start-ups intending to take recourse to the SME Exchange.

*Researched and drafted by Soubhik Chakrabarti, 1st yr, RGNUL, Patiala

*Special thanks to Shouvik Kr. Guha for his assistance in drafting this post.


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