Move to provide alternative source of funds; safeguards built in to protect retail investors

In a move that will help start-ups struggling to raise funds, SEBI is warming to the idea of allowing crowd-funding, a popular concept in developed countries.

Crowd-funding is seeking funds (in small amounts) from multiple investors through a web-based platform or a social networking site for a specific project, business venture or social cause. SEBI came out with a consultation paper on crowd-funding on Tuesday to provide alternative financing sources to start-ups. It wants the issue fund-raising capped at ₹10 crore a year for each start-up.

However, companies which want to raise more than ₹10 crore may do so by listing shares on an SME platform or main board of a recognised stock exchange, SEBI said.

To ensure that retail investors do not end up bearing all the risks of start-up ventures, the market regulator proposes to permit only certain retail and accredited investors to participate in crowd-funding.

Retail investors who can participate in crowd-funding should be getting advice from an investment consultant or a portfolio manager or should have passed an appropriateness test (may be conducted by an institution accredited by the National Institute of Securities Markets or the crowd-funding platform).

Also, only investors with a minimum annual gross income of ₹10 lakh and those who have filed income-tax returns for at least three financial years will be eligible to participate.

Investors “have to issue a certificate that they will not invest more than ₹60,000 in an issue through the crowd-funding platform, and not invest more than 10 per cent of their net worth, which excludes the value of the primary residence or any loan secured on such property.”

Accredited investors, the other set that can invest in start-ups, include qualified institutional buyers, companies with a minimum net worth of ₹20 crore, and high networth individuals (HNIs) with a minimum net worth of ₹2 crore.

Though there is no cap on QIBs, a maximum of 200 HNIs and retail investors can participate in an issue.

Restrictions

There are curbs on fund raisers too. According to the SEBI proposal, a company promoted, sponsored or related to an industrial group with a turnover in excess of ₹25 crore or which has an established business is not eligible for crowd-funding.

Also barred are realty companies, listed corporates and firms which have been in existence for more than two years. The crowd-funding route is not open to a company that proposes to use the funds raised to provide loans or make investments in other entities.

Start-ups shall not use multiple crowd-funding platforms nor advertise their offering or solicit investments from the public. The issuer should compulsorily route all crowd-funding issues through a SEBI-recognised platform.

Only national stock exchanges and SEBI-registered depositories are eligible to set up a crowd-funding platform. SEBI is also open to allowing technology business incubators promoted by the Centre or a State government to set up a crowd-funding platform.

Now, the market regulator will wait for comments and suggestions on the consultation paper from industry and market participants.

(This article was published on June 17, 2014)
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