Sebi proposes to regulate crowdfunding for start-ups
Mumbai: The Securities and Exchange Board of India (Sebi) has proposed new regulations for crowdfunding in a bid to create new avenues for entrepreneurs and start-ups to raise money from the public.
Crowdfunding is the practice of collecting small amounts of money from a large group of investors, typically done on the Internet.
“In addition to the available frameworks, Sebi seeks to provide fresh avenues for start-ups and SMEs (small and medium-sized enterprises) set up by young entrepreneurs and technology professionals to raise early stage funding through Internet-based platforms, potentially more efficiently and cost effectively than through public issue or private placement offering,” said Sebi in a discussion paper released on Tuesday.
Sebi has proposed that a start-up has to be less than four years old to be eligible to use crowdfunding. It can raise a maximum of Rs.10 crore in a year.
Such a start-up also cannot be associated with any industrial group which has a turnover above Rs.25 crore, or an established business. Also, in a given year, the start-up issuer cannot not use multiple crowdfunding platforms to raise funds, the paper said.
Sebi described crowdfunding as an innovative way to raise additional money that may spur entrepreneurship and ultimately assist in boosting the growth of the real economy.
Sebi plans to categorize crowdfunding into equity-based crowdfunding (EbC), debt-based crowdfunding (DbC) and fund-based crowdfunding (FbC).
The proposed regulation for crowdfunding comes a year after the market regulator tried to encourage angel funding for start-ups. In July 2013, the capital markets regulator had published guidelines for angel investors and funds, bringing them under the ambit of alternative investment funds (AIF) regulations.
For the first time, angel funds have been included in the definition of venture capital (VC) funds, a move seen as Sebi’s bid to recognize and safeguard investors who help start-ups.
However, to ensure that retail investors are not exposed to the risks of start-up ventures, the regulator proposes to initially allow only accredited investors to participate in crowdfunding.
Such accredited investors may include qualified institutional buyers (QIBs), companies with a minimum net worth of Rs.20 crore and high net worth individuals (HNIs) with a minimum net worth Rs.2 crore.
Retail investors who receive advice from an investment adviser and have a minimum annual gross income of Rs.10 lakh may also be allowed to invest in crowdfunding, on the condition that they do not invest more than Rs.60,000 in an issue, or more than 10% of their net worth through the crowdfunding platform, Sebi proposed.
The regulator said crowdfunding platforms can be provided only by stock exchanges with a nationwide presence and depositories registered with Sebi.
Pure donation-based crowdfunding (where issuers directly seek donation from the grantors), reward-based crowdfunding (where issuers directly offer rewards like movie tickets, new computer game, download of a book etc.) and peer-to-peer lending do not fall under Sebi’s jurisdiction, as they do not generally involve issuance of securities for financial returns.
Peer-to-Peer lending typically falls under the purview of the Reserve Bank of India (RBI).
Under equity and debt-based crowdfunding schemes, private placement is allowed to any number of QIBs and a maximum of 200 HNIs and eligible retail investors combined. In such cases, collectively all the QIBs must hold a minimum of 5% of the securities issued.
A company using the EbC route to raise money has to ensure that no single investor holds more than 25% and the promoter maintains a minimum of 5% equity stake in the company for at least three years.
A company opting for the DbC route will need to appoint a debenture trustee to hold the assets on behalf of the investors and create a debenture redemption reserve (DRR) of 25% of the value of the debentures, Sebi proposed.
“The proposed structure for crowdfunding will provide an enabling framework. Crowdfunding may provide an alternative source of capital for entrepreneurs that either have limited access to capital or have exhausted other available sources of capital,” Sebi said.
The regulator has sought public comments on the proposal till 16 July, 2014.