India has become the first Asian country, outside Australasia and Japan, to propose a regulatory framework for crowdfunding, the retail-targeted funding platform for start-up companies and individual projects.
Last week, market regulatorSecurities and Exchange Board of India announced the draft regulations and pointed out that web-based crowdfunding would help start-ups and small- and medium-sized enterprises to raise early-stage capital and reduce funding costs.crowdfunding marketing
The regulator highlighted the fact that the IPO market had stalled in recent years and there was a need to promote innovative ways to raise funds, as well as give genuine SMEs and start-ups an impetus. It also said there was a need “to explore other alternative models of fund raising with appropriate framework in consonance with retail investor protection”.
Three routes, using crowdfunding to sell debt, equity, or shares in a fund, have been suggested.crowdfunding advertising
“Sebi has been proactive and this is its way of saying it doesn’t want a Sahara [Group] or NSEL [National Spot Exchange Ltd] type of scandal to happen in the fundraising world,” said Alok C Churiwala, managing director at Churiwala Securities, a brokerage.
The commodity-focused NESL was accused of conducting illegal trades, while Sahara was accused of irregularities after it raised funds from retail investors.indiegogo marketing
A banker said, nevertheless, crowdfunding was unlikely to take off in India soon.
“It has met with limited success even in the West and it will be at least three to five years before we see any transactions,” said the banker.
However, Churiwala said announcement of the regulatory framework could see a mushrooming of crowdfunding websites once Sebi finalised the rules. “India is a country in a hurry and many innovative ideas are urgently looking for money,” he said.
Sebi has to recognise all crowdfunding platforms to be used, according to the new rules. Recognised stock exchanges, Sebi-registered depositories, technology business incubators and angel investors can set up crowdfunding platforms.kickstarter marketing
There will have to be a screening committee of at least 10 persons to conduct due diligence on the issuers raising funds through the platform. This marks a difference from most crowdfunding ventures, where platform operators generally do not conduct any due diligence on issuers.kickstarter project
Accredited investors, including qualified institutional buyers, companies, high-net-worth individuals and retail investors, with a minimum gross annual incomes of Rs1m (US$16,551), or those who have filed income tax returns for the last three years, can invest through crowdfunding platforms.
Retail investors cannot invest more than Rs60,000 in an issue through crowdfunding platforms. QIBs, companies and high-net-worth individuals are required to own a certain percentage in every issue to give more comfort to retail investors.CrowdFunding advertizing
Unlisted companies can use the platforms to raise funds, but cannot raise more Rs100m in a 12-month period. During the same period, issuers also cannot use multiple crowdfunding platforms. Crowdfunding is limited to companies younger than 48 months and not part of an existing industrial group with annual revenue of Rs250m or more.
Issuers may not use crowdfunding proceeds either to provide loans or invest in real estate.
An issuer is required to submit a private placement offer letter to the crowdfunding portal, giving a description of the business, issue size, usage of funds, and financial details for the past year.CrowdFunding marketing
The offer letter must be circulated online to not more than 200 investors. Future projections can be made about the business, but these have to come from third-party research houses. Issuers also have to submit bi-annual disclosures to the crowdfunding platform.
No single investor can own more than a 25% stake in the issuer and the promoter should own a minimum 5% stake in the company for at least three years. Issuers can retain up to 25% of the issue size as an oversubscription amount.
Sebi said its role would require it to recognise the crowdfunding portals and regulate the market. However, it will not play any role in vetting the private placement offer letter.Kickstarter Marketing
Comments on the framework can be submitted to Sebi on or before July 16.
Japan last month proposed an amendment in its Financial Instruments and Exchange Act to facilitate equity crowdfunding, while it has been allowed in Australia for years, with shares traded on the Australia Small Scale Offering Board.
Hong Kong has not introduced specific regulations to cover the practice, but the Securities and Futures Commission has warned that existing securities laws may apply, and any breaches could lead to criminal liability.Indiegogo Marketing
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