Crowdfunding: Sebi issues directive to startups, investors
The Securities and Exchange Board of India (Sebi) has directed angel investor networks and startup funding platforms to warn every company and investor through a disclaimer that crowdfunding platforms are neither stock exchanges nor authorised by Sebi to solicit investments. The disclaimer must also state that the securities traded on these platforms are not traded on any regulated exchange.
The directive, in a July-end letter, comes against the backdrop of a rise in crowdfunding activity in the start-up space and the absence of any law to govern it.
Mint has reviewed a copy of the letter.
Some of the angel-network operators and crowdfunding platforms have already complied with the directive. These include Venture Catalysts Pvt Ltd, Lets Venture Online Pte Ltd, and GREX.
Sebi’s move will help bring more clarity to investors on the legal aspect of start-up funding, which in turn will help build more confidence among potential investors, said Shanti Mohan, CEO of LetsVenture, which provides an online platform for enabling angel investments in startups.
“We, along with all angel investor networks and crowdfunding platforms, have received the Sebi letter.We are a serious enabler in the startup funding space and there is nothing we do that breaches the law framed by any regulator,” Mohan said.
“There is no clear law on startup funding or crowdfunding in India. All angel investors using our platform have investments of more than ₹5 lakh and we feel Sebi’s move will only help entities like us serve better by boosting investors’ confidence and removing some of the grey areas in the legality of startup funding.”
India has at least 3,100 startups and over the past few years funding activity in the unlisted space has intensified. The ministry of finance, in its last Budget, has clearly stated its intention to support startup activities, while Sebi has been working on ways since 2014 to bring start-up funding within its regulatory ambit.
Sebi’s diktat to crowdfunding entities stems from the concern that transactions on crowdfunding platforms somewhat emulate bourses, but since they are not regulated by Sebi, a clause of the securities law is violated.
As per the Securities Contracts (Regulations) Act (SCRA), any entity facilitating transactions in securities or investments between two or more parties falls under the definition of an exchange, which has to be mandatorily recognised by Sebi. And, if such an entity is defined as an exchange, it can deal only in listed securities.
The existing angel networks and online platforms breach these SCRA norms. So, there is no law at present, under which entities working like an exchange can be allowed to deal with unlisted companies or securities.