These days, it become quite
fashionable for small companies to generate funds via crowd funding on social
media platforms for the expansion of the business. Crowdfunding is capital
raised from a large number of individuals to finance a business venture. Crowdfunding
makes use of the easy accessibility of vast networks of people through social
media and crowdfunding websites to bring investors and entrepreneurs together.

The Securities Exchange Board of India
(SEBI) is at the moment en route to concluding norms for crowd
funding.  

Simultaneously, Indian government is
planning to bestow SEBI with the control of private placements by any Indian
companies. “Private Placement” means any offer of securities or invitation to
subscribe securities (equity or securities that convert to equity) to a
selected group of persons by a company, through issue of a private placement
offer letter (other than by way of public offer).

If the private placement offer letter
is issued to or subscribed by more than 200 members than such offer is no
longer qualified to be treated as private placement offer and will be
considered as public offer.

As of now, the Ministry of Corporate
Affairs is regulating the allotment of private placement by un-listed
companies. SEBI is empowered to regulate the fundraising activities of the
listed companies.

The underlying intent in endowing SEBI
with the control of private placements is to sidestep any clatter with SEBI
powers under the crowd funding norms and to take along private placement and
crowd funding under the realm of SEBI.

The main objective of articulating
crowdfunding norms and vesting on SEBI the control of private placement is to
reduce certain procedures and facilitate startups to generate funds from 200 or
more investors through their prospectus and advertisements on digital
platforms, which will be approved and regulated by SEBI – without breaking
Companies Act norms.

It will be hard-hitting task for
startups to meet the terms of stringent procedures incorporated under the
Companies Act – in order to salvage startups from such strict procedures – a
different set of norms is being articulated to facilitate startups to generate
quick funds without facing any stringent procedures and violating the Companies
norms.

One can hope that specific norms for
crowd-funding will establish a vibrant process for crowdfunding and incursion
accurate chord between the interests of all the stakeholders
involved. Further empowerment of SEBI to monitor crowdfunding and private
placement is a boon for startups to sustain their business objectives –
ultimately sidestep any clatter amid the private placement and crowdfunding
norms.

Research and inputs by Paruchuri
Baswanth Mohan

 

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About the author :

Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at [email protected].