Monday, Oct 20, 2014

Sebi floats ‘crowdfunding’ rules; restricts investor access

The final norms would be issued after taking into account comments from public and other stakeholders till July 16. The final norms would be issued after taking into account comments from public and other stakeholders till July 16.
Press Trust of India | Mumbai | Posted: June 17, 2014 10:11 pm

Sebi today proposed new norms for ‘crowdfunding’ or collection funds through web-based platforms and social networking sites — a move that would help start-up companies raise capital and also check misuse of such avenues.

Under the proposed norms, crowdfunding platforms can be provided by only Sebi-registered entities, while companies can raise up to Rs 10 crore in a year through this route.

Given the high-level of risks associated with this new way of fund-raising activity, Sebi has also proposed that only ‘accredited investors’ be allowed to participate in crowdfunding activities.

Such investors would include institutional investors, companies, HNIs and financially-secure retail investors advised by investment advisors or portfolio managers. Besides, the crowdfunding investment of retail investors would be capped at Rs 60,000 or 10 per cent of their networth.

Also, only those entities would be allowed to raise funds through crowdfunding which are not associated with a business group having turnover of more than Rs 25 crore. Entities with an established business, already listed on an exchange or being in existence for four years or more would be barred too.

Those engaged in real estate and financial sector businesses would also be barred from tapping this route.

Crowdfunding is emerging as an innovative way of raising funds by pooling money from people through Internet, but lack of regulations for such activities has given rise to concerns of possible defrauding of investors.

Among others, social and professional networking websites like Facebook, LinkedIn and Twitter have been used for such fund-raising exercises, while money-pooling also takes place on some dedicated websites for such activities.

Taking cue from financial market regulators in the US and the UK, the Securities and Exchange Board of India (Sebi) today floated a 66-page ‘consultation paper on crowdfunding in India’, wherein it has proposed a new set of guidelines to regulate such activities.

The final norms would be issued after taking into account comments from public and other stakeholders till July 16.

Under the proposed norms, the issuer entities and their promoters and directors would need to meet ‘fit and proper’ criteria of Sebi, while they can not use multiple platforms to raise such funds within a year.

Also, issuers cannot directly or indirectly advertise their offering to public in general or solicit investments from the public, while they would need to compulsorily route all crowdfunding issues through a Sebi recognized platform.

Issuers will also be barred from directly or indirectly incentivisiong or compensating any person to promote its offering.

The proposed norms would provide an additional channel of early stage funding to start-ups and small and medium enterprises (SME).

Sebi said that there is a need for funding for SME through alternative sources as global financial crisis (2008) resulted in failure of number of banks and capital adequacy norms applicable to banks have continued…

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