Crowdfunding mantras for start-ups and SMEs

What’s Crowdfunding-

Crowdfunding is the solicitation of funds (in small amounts) from multiple investors through a web-based platform or social networking site for a specific project, business venture or social cause.

Why do we need it in India –

Despite the evolution of Venture Capital Funds (VCFs) and Private Equity (PE) Investors it is not easy for a startup or an SME to raise money. The crowdfunding route entities would be able to solicit investments in smaller sums from large number of investors.

Crowdfunding provides new investment avenues and provides a new product for portfolio diversification of Investors. It seems to be the key towards boosting the startup-ecosystem in India.

The need for regulation –

Investment-decisions of investors are typically driven by company valuations, revenue-generation and return-on-investment.

However, perceived risks seem to be higher in case of start-ups, owing to –

• Higher Risk of Default
• No collaterals
• Inexperienced professionals in a startup
• Absence of a viable existing business model

While some start-ups have defied this perception and eliminated these risks, the ordeal of many retail investors over failed start-ups is not just a fable.

Alternative Investment Policy Advisory Committee, headed by Mr. Narayana Murthy-

SEBI has applied a cautious approach towards regulating crowdfunding structures in India. In June 2014, SEBI had issued a consultation paper to solicit comments from industry players. Also in May 2015 SEBI set up The Alternative Investment Policy Advisory Committee (AIPAC) to be headed by visionary founder of Infosys, Mr. Narayana Murthy.

The Committee would strive towards eliminating potential legal-hurdles and cater to the development of the alternative investment industry in India. Given the higher risk of fraud due to extensive internet outreach in India and Cross-border deviations in laws (particularly contract laws and securities laws), it seems that a lot of uncertainties would have to be weeded out before regulated crowdfunding is introduced into the system.

What’s in store under the new Crowdfunding Regulations –

Investors would find some solace in the compulsory routing of all crowdfunding issues through a SEBI-recognized crowdfunding platform. Besides companies can raise up to Rs.10 crore in a year through equities under this route.

As per the proposal from SEBI only ‘accredited investors’ would be allowed to participate in crowdfunding activities. Such investors would include High Net Worth Individuals (HNIs), companies, institutional investors, and financially-secure retail investors (accredited investors) as advised by portfolio managers or investment advisors.

Besides, it has been proposed that crowdfunding investment of retail investors would be capped at Rs.60,000 or 10 per cent of their net worth. 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.

Position globally-

In the recent past, other countries have attempted to regulated crowdfunding too. For instance, the Jumpstart Our Business Startups Act, 2012 (JOBS Act) in the United States streamlines provisions relating to raising capital for startups, enhancing the private placement market and the usage of the Internet to raise capital for startups and SMEs. Similarly, the Financial Conduct Authority (FCA) of United Kingdom also introduced crowdfunding regulations in 2014. Whereas France has brought in the concept of accredited investors in its laws, Japan has made an amendment to the existing Financial Instruments and Exchange

——————————————————————————————————————————————————————————————————

– by Amol Anaokar

(The Author is an experienced in-house Legal Attorney specialising in the Financial Services Industry)

Crowdfunding mantras for start-ups and SMEs

Crowdfunding mantras for start-ups and SMEs