MUMBAI: Top crowd funding platforms lined up to register themselves as alternative investment funds (AIFs) after the Securities and Exchange Board of India (Sebi) pulled them up for not following private placement norms. All major crowd funding platforms, including One Crowd, Let’s Venture and Angel List, have registered with Sebi as (AIFs) in the last few months, said two people privy to the development.
This brings a major part of early start-up funding under market regulator Sebi’s purview and places serious restrictions on the ability of these platforms.
Sebi registrations will impact the freedom of these platforms that typically cater largely to smaller start-ups. For instance, as an AIF, these platforms will be able to pool money only from those individuals who have a minimum liquid networth of Rs 2 crore. Further, the minimum size of investment has to be Rs 1 crore.
Restrictions also apply on companies where these platforms can invest money. As a registered AIF, crowd funding platforms can only make investments in companies that fall under the definition of startup prescribed by the Department of Industrial Policy and Promotion (DIPP). Also, only those investors with proven experience in the early stage funding are allowed to put money through such vehicles.
“The compliance burden on the crowd funding platforms has also gone up as we are expected to file term sheets, pay various registration costs,” said the founder of a Mumbai-based crowd funding platform. “But we had to toe the line after Sebi sent us notices for violating fund raising norms.”
In 2016-17, Sebi had sent show cause notices to several crowdfunding platforms, including technology providers such as LinkedIn, for facilitating fund raisings that are in violation of Sebi rules.
As per the Companies Act, a company can allot securities to not more than 200 people in a financial year through private placement. If the number crosses 200, such issuance would be deemed as public offer and Sebi’s fund raising norms shall have to be followed. The crowdsourcing platforms often collect money from hundreds of angel investors but do not follow the public placement norms.
“The bigger concern was that the crowdsourcing platforms facilitate and execute the transactions and hence their activity could be construed as equivalent of a stock exchange,” said the founder cited above. “In such a scenario, we will be mandated to meet all the norms applicable for stock exchanges including minimum networth of Rs 100 crore.”
Another source cited above said Sebi’s intention was not to restrict the freedom of such newage platforms but only to create accountability if anything went wrong. “The platforms were raising public money and investing in unlisted companies. There is an inherit risk of fraud in such transactions,” he said.
“AIF rules are anyway light touch and give sufficient freedom for the entities.” Sebi had proposed special regulations for the crowd funding platforms in 2015. In 2016, the market regulator released a discussion paper proposing draft norms. However, Sebi dropped the idea subsequently due to multiple factors. The Reserve Bank of India (RBI) had released a set of rules of crowdsourcing firms in peer to peer (P2P) lending. This brought a significant number of crowd funding platforms under the central bank’s purview. There were also views within the government that the new-age platforms should not be over burdened with regulations.