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SEBI to regulate crowdfunding

Published: 31 Jan 2018

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 bhumesh.verma@corpcommlegal.com.

Bhumesh Verma

Firm: Corp Comm Legal
Country: India

Practice Area: Contract

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