SEBI’s Regulation of Equity Crowdfunding: Main Issues

SEBI’s Regulation of Equity Crowdfunding: Main Issues

Question: SEBI is making attempts to regulate equity crowdfunding. Discuss the main issues in its way.

- In 2014, SEBI set out a proposal to regulate equity based crowdfunding in India

- Under the proposed terms, three entities would be regulated namely the investor, issuing company and crowdfunding platform

- Issuing company is restricted as far as size and fund amount to be raised and age are concerned

- Investor is limited in terms of accreditation, minimum net worth and as far as eligible retail investors are concerned, maximum investment made overall or single crowdfunding event

- Crowdfunding platforms are also limited in terms of who may set them up and checks as well as balances put in place

- SEBI’s regulations do not provide exemptions to small companies seeking public funds

- Proposed regulations also required that equity crowdfunding companies follow requirements in Section 42 of the Companies Act 2013

- Companies may offer securities to not more than 200 persons and possess up to 50 shareholders without being required to take up public issue

- SEBI’s paper does not take cross border crowdfunding into account

- Countries that do not offer exemptions for cross border crowdfunding include India, Malaysia and Hong Kong

- Question arises as to whether foreign company can raise funds in India and foreign investors can take part in crowdfunding activities in India subject to policies for extant inward and outward bound investment

- Internet based corporate crowdfunding should also be taken into consideration; in jurisdictions where crowdfunding activities are not regulated or have minimal regulations, it is far easier to raise funds rather than investing in an Indian company straightaway; a way around is for companies offering minimal IPO in India to undertake higher fundraising exercise through GDR issue in listing friendly jurisdiction

- Regulator can deal with this by banning overseas investment by individuals in case they violate crowdfunding regulations

- Removing possible avenues of regulatory arbitrage is the key here

- A connected world in the realm of corporate finance must be considered by the rule making authorities

Facts and Stats

- There are many types of crowdfunding such as reward based crowdfunding, debt crowdfunding, equity crowdfunding and donation based crowdfunding.

- Three major types of crowdfunding platforms exist namely specialised platform, activity specific platform, and general purpose platforms

- 2 basic crowdfunding models are Earn What You Keep and All or Nothing model

- Crowdfunding platforms have different fee structures such as flat fee, subscription, and commission