Sebi likely to scrap crowdfunding norms

Poor response to its start-up platform, divergent views on its proposals among reasons

The Securities and Exchange Board of India (Sebi) has decided not to proceed with the final regulations on crowdfunding, according to people in the know. In a discussion paper floated two years ago, Sebi had proposed a framework to enable domestic start-ups and small and medium enterprises (SMEs) to raise capital from multiple investors through crowdfunding.

Divergent views from the market and lack of interest for its recently launched start-up platform have discouraged Sebi from issuing final guidelines on crowdfunding, said a source. Also, the market feedback given to Sebi was that there might not be enough takers for the regulator’s proposed framework as it was ‘too restrictive’, the source added.

Sebi’s discussion paper had defined crowdfunding as “solicitation of funds (small amount) from multiple investors through a web-based platform or social networking site for a specific project, business venture or social cause”.

Typically, crowdfunding involves a large group of individuals coming together to fund a business venture. However, to avoid systemic risks, Sebi had proposed to set minimum eligibility criteria for entities to be allowed to raise funds, to invest and to set up crowdfunding platforms. Interestingly, the proposed regulations would have kept out the ‘crowd’ as they allowed only ‘accredited investors’ — institutional investors or high net worth individuals with a net worth of at least Rs 2 crore to invest.

Sebi’s idea was to protect small investors. “Since the crowdfunding phenomenon is gaining popularity, its importance cannot be ignored. To regulate crowdfunding, it is very important to take note of that while it is necessary to ensure that start-ups, SMEs could raise funds at ease, it is equally important to ensure that no systemic risks are created wherein retail investors are lured by some unscrupulous players…”, the market regulator had said in its discussion paper floated in July 2014.

“There are severe consequences of fraud, which needed to be regulated. However, overregulation, too, may have killed the product,” said Sandeep Parekh, founder of Finsec Law Advisor.

TAKING A STEP BACK

What is crowdfunding?

• Sebi’s discussion paper defines crowdfunding as “solicitation of funds from multiple investors through a web-based platform or social networking site for a specific project, business venture or social cause”

Sebi’s proposed norms

• Companies could raise up to Rs 10 crore in a year via this route
• Only ‘accredited investors’ be allowed to participate in such activity
• One cannot use multiple platforms to raise such funds within a year

Reasons for scrapping the proposal

• Low demand  in India
• Chances that investors could be defrauded
• Globally, crowdfunding is facing several consequences
• Poor response to start-ups listing

Experts said although Sebi’s proposed crowdfunding norms would have provided start-ups and SMEs benefits over existing avenues, there was quite an overlap with its start-up platform, which has failed to take off.

Some experts believe despite the impediments, Sebi should still launch the platform and let it develop over a period of time. “Every new concept emerges because there is a need for it, and for all good concepts, demand grows as people become familiar with the same. Risk never travels alone, rewards are its permanent companion. I am of the view that Sebi as a proactive measure brings some guidelines and allow crowdfunding,” said J N Gupta, founder of SES, a proxy firm.

Experts say as crowdfunding gains popularity, Sebi will in future need to issue clear framework on the same.

“As this form of funding grows in India, there is a need for clear-cut regulations that guide the framework for this model to operate. In the absence of such norms, investors become susceptible and face business risks, proportional to the size of investments. A well-regulated platform should weed out the scamsters and encourage funding innovation,” said Karthik Mahalingam, national practice head (venture capital) at Shardul Amarchand Mangaldas.

Currently, Ketto, LetsVenture, Wishberry, Fuel-A-Dream and BitGiving are among the active crowdfunding platforms in the country catering to various kinds of projects.