Wednesday, 7 September 2016

Crowdfunding platforms under regulatory glare

Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture

The Securities and Exchange Board of India (Sebi) is planning a crackdown on unauthorised crowdfunding platforms, which are gaining popularity in the country as alternative capital-raising facilitators.

Sebi has sent notices to as many as 10 crowdfunding platforms, which  predominantly operate through their websites. The market regulator has quizzed them on their business models and asked them how they are not in violation of the securities law, said sources in the know.

Similar to a stock exchange platform, crowdfunding websites act as a link between investors and companies, typically start-ups. Most of these entities are operating without any authorisation or registration with Sebi and, as a result, are not being governed under any law, said a source.

  • Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture.
  • It makes use of easy accessibility of vast networks of people through social media and crowdfunding sites to bring investors and entrepreneurs together
  • Information on prior investments in crowdfunded markets includes a time stamp and the specific amount contributed

Grex, Kickstarter, Indiegogo, Ketto, LetsVenture, Milaap, Wishberry, Fueladream, BitGiving, Catapooolt, DreamWallets, Start51, and Fundlines are among the active crowdfunding platforms in the country catering to various kinds of projects.

The exact amount mobilised by these players isn’t known. However, these platforms claim to have empanelled hundreds of investors and start-ups. It could not be ascertained which of the platforms have received Sebi notice.

However, crowdfunding operators claim their business doesn’t fall under Sebi’s ambit. “We are just providing a platform to fund certain projects by facilitating monetary contribution from a large number of people,” said the founder of one of the crowd-funding websites, requesting anonymity.

Last month, Sebi had cautioned investors against participating against dealing with digital fundraising platforms operating on the lines of stock exchanges without regulatory approval. Sebi has a view that these electronic platforms might be facilitating investment in the form of private placement with companies, as the offer is open to all investors registered with the platform, which would be a contravention of the provisions of the Securities Contract (Regulation) Act, 1956 (SCRA) and the Companies Act, 2013.

According to Sebi, only recognised stock exchanges can provide a platform where equity and other securities issued by companies are listed and traded in accordance with the provisions of the SCRA.

Not only electronic platforms, unauthorised prize money schemes and apps linked to the securities market, too, have come under the Sebi glare.

“Each gaming site and fact scenario would require a review and analysis as to whether it has invoked the prescribed provisions and has complied with such laws. No doubt, in the coming times, fantasy trading games, apps or websites and their promoters will face increasing scrutiny,” said or Sumit Agrawal, former Sebi official and founder of Suvan Law Advisors, a Mumbai-based law firm.

Sebi may consider these apps or websites as engaging in “any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities, which are listed or proposed to be listed on a recognised stock exchange as prescribed under Section 12A of Sebi Act, 1992, he added.

Sebi had floated a discussion paper two years ago, when it had proposed a framework to enable domestic start-ups and small and medium enterprises to raise capital from multiple investors through crowdfunding. It had defined crowdfunding as “solicitation of funds (small amount) from multiple investors through a web-based platform or social networking site for a specific project, business venture or social cause”. The regulator, however, is yet come up with final regulations on crowdfunding.

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