The Securities and Exchange Board of India (Sebi) is finalising the regulatory framework for crowd-funding in consultation with the corporate affairs ministry. Sources said the regulator was in talks with the government to amend several provisions of the Sebi Act and the Companies Act, 2013, including private placement norms. According to legal expers, the crowd-funding regulations needed Sebi to step in to the unlisted space, and hence would require tweaking of the Sebi Act. Crowd-funding is a platform, usually an internet portal or a social media group, that can be used by companies to raise capital from hundreds of investors. The ticket size is usually small, with some issuances accepting as low as Rs 1,000 as the minimum ticket size. Sources said the framework would require all crowd-funding platforms to register with Sebi, and fulfil compliance requirements. For instance, these platforms will be asked to collect know-your-customer (KYC) documentation from all registered users. They will also be required to send reports of all successful fund-raising exercises to the market regulator. According to sources, Sebi wants to place a light regulatory burden on these platforms, as the rules are intended to fix accountability. However, a point of contention is private placement norms. Under the Companies Act, an unlisted company is not allowed to allot securities to more than 200 investors in a financial year. Crowd-funding exercises usually involve hundreds of investors, which results in start-ups violating the norms. Sources said start-ups using crowd-funding to raise funds would likely be exempt from the requirement. Another critical challenge for the government and Sebi is segregating crowd-funding exercises based on their objective and isolating the ones that can be regulated by the market regulator.
Currently, the purposes of crowd-funding are broad-based and could also involve non-equity purposes such as charity. Legal experts said the law must clearly state which type of activities Sebi would oversee. “There are several types of crowd-funding exercises and not all of them can come under Sebi’s ambit. For instance, consider fund-raising for charity or product design purposes.
Also, exemption from private placement norms cannot be given on a blanket basis. Hence, the regulator should examine various crowd-funding models and allow exemptions wherever necessary,” said Sandeep Parekh, founder of Finsec Law Advisors. Sebi has been working on regulating crowd-funding since 2015. Initially, it had released a discussion paper proposing a possible framework but the project was shelved for unknown reasons. In 2016, the Reserve Bank of India had come out with a framework for regulating peer-to-peer lending, a form of crowd-funding. Last year, Sebi reinitiated the process and served legal notices to 30 online platforms, including LinkedIn, for illegal fund-raising. However, the regulator has not prosecuted any of the entities yet. Industry experts said excessive regulations in the crowd-funding space could be a damper for fund-raising by small start-ups, where big-ticket private equity and venture capital entities did not invest. “Crowd-funding is a lifeline for many small companies. Hence, Sebi’s intention seems to be to regulate the space in a more affirmative way, where there will not be any difficulties for companies to raise funds. At the same time, there will be enough legal safeguards to prevent fraud and misuse,” said Surojit Nandy, co-founder, GREX, a private market platform. Earlier, Sebi had proposed categorising crowd-funding platforms as venture capital funds under Category-I alternate investment funds (AIFs). However, due to opposition from industry participants, the regulator dropped the idea. “Crowd-funding platforms are not pooling vehicles. They are also not funds, as the securities are held in the name of subscriber and not in the name of the fund or platform. Hence, it will be unfair for Sebi to categorise crowd-funding platforms as AIFs,” said Tejesh Chitlangi, partner, IC Universal Legal.