The Securities Exchange Board of India (SEBI) in its 2014 Consultation Paper on Crowdfunding has defined crowdfunding as means of raising money for a creative project (for instance, music film book publication), a benevolent or public interest cause (for instance, a community based social or co-operative initiative) or a business venture, through small financial contributions from people who may number in the hundreds or thousands. The contributions are sought through an online crowdfunding platform, while the offer may also be promoted through social media.
In layman terms crowdfunding, as the name suggests, is raising money for a specific purpose through a large number of people using an online platform.
Crowdfunding, from a regulatory perspective, can be categorised into three different types:
1. Donation Crowdfunding: This is the most basic form of crowdfunding where there is no expectation of return. These usually function to raise money for charitable purpose or a social cause. This form is fairly unregulated.
2. Reward Crowdfunding: Under this form, investors get a product or some benefit in return of their investment. However, it is important to note that that shares or any kind of equity given will not be considered a reward. This form is also not heavily regulated by the government.
The above two types are the most common forms of crowdfunding we see in India and being in the nature of donations, at present only attract basic fiscal legislations such as the Income-tax laws and Foreign Contribution Regulation Act, 2010. Some of the platforms that work under this sphere in India are www.ketto.org, www.milaap.org and www.wishberry.in
3. Equity Crowdfunding: Equity crowdfunding is when investors are given ownership in the company in lieu of their investment. This right now is the most controversial form of crowdfunding in India.
Equity crowdfunding in its traditional sense as of now is not permissible in India due to the provisions of a. the Companies Act, 2013, b. the Securities Contract (Regulation) Act, 1956, and c. the SEBI Act/ Regulations which govern equity fund raises by companies, and intermediary activities such as merchant banking, investment advisory, broking, exchange services, alternative investment funds and collective investments etc. Platforms presently operating in this sphere generally use a quasi-equity crowdfunding model on the basis of private placement principles under the Companies Act, 2013. A few of the companies working in this field are www.letsventure.com and www.grex.in
Some of the regulations under the Companies Act, 2013 that will apply are:
- A private placement can only be made to 200 investors in a financial year and can only make an offer to 50 people at one particular instance. The limit of 200 would exclude banks, mutual funds and other financial institutions and the employees of the company.
- A company that offers a private placement to more than 200 people in a year or 50 people in an instance would be deemed to be making a public offer and would require to follow the relevant procedure
- No company offering a private placement would release any kind of public advertisement
- The company should have a prior record of the investors the offer is being made to and the offer shall be made in the name of the investor.
Most jurisdictions, including the U.S., U.K., and Japan have enabled equity crowdfunding platforms as an exemption to general requirements regarding public solicitation through prospectus/offering memorandum. While in some jurisdictions such exemption is given only to offer made to “accredited/informed/wealthiest” investors, others exempt solicitation made through “crowdfunding platform” capping the amount that can be raised or the amount that can be invested by each investor. The SEBI in its consultation paper also concluded on having a similar regulatory regime for promotion of equity crowdfunding in India.
However, SEBI issued a notice on 30th August 2016 stating that digital platforms are facilitating fundraising similar to stock exchanges in contravention of the securities laws. The notice further stated that these platforms are neither authorised nor recognised under any law governing the securities market. Furthermore, dealings on such platforms would be a contravention to relevant securities law. This notice has questioned the existence of these quasi-equity crowdfunding websites.
Crowdfunding has become a popular method to raise money for early stage business and charitable organisations. Globally, it is approximately a $34 billion industry. Although donation based and reward based crowdfunding platforms are growing due to minimum regulatory expectation the same is not the case with equity crowdfunding. P2P lending an ancillary form of crowdfunding, however, is set to get an impetus with the RBI being expected to finalise its stance on regulation by the end of July 2017.
SEBI has not been clear on its stand on equity crowdfunding the suggestions in the consultation paper were at least a good first step in articulating a regulatory position. However, the notice issued in August 2016 acts as a blow to the industry making the regulatory future uncertain.
Jitender Tanikella
Partner, TRA
