Sebi puts crowd funding regulations on the back burner

Lack of similar framework in other markets, treatment of cross-border investors creates hurdles

The crowd funding regulations proposed by the Securities and Exchange Board of India (Sebi) nearly a year before have gone into cold storage, said sources with knowledge of the development.

“The thinking within Sebi is that introducing (such) norms would be premature, as no other jurisdiction has a regulated crowd funding market,” said one.

The other important reason to shelve it for the time being is the issue of getting a handle on cross-border investments. “As the platform will be online, there will be overseas investment and transactions. There isn't enough clarity on how that can be treated,” said the source.

In June last year, Sebi had issued a discussion paper on crowd funding, to give entrepreneurs an additional avenue of raising capital. The proposed framework allowed capital raising from individuals using internet-based platforms and social media. Typically, young entrepreneurs and small groups of people use this route for their ventures, by spreading the word through their social networks.

 
After putting up the discussion paper for feedback, Sebi had representations from various market participants. Some highlighted that there was a need for more detailing and the issue hadn’t been addressed by even some of the advanced economies.

People in the know said Sebi might act on the norms after some other regulator experiments with these.

Meanwhile, Sebi is in the process of finalising the norms on capital raising for start-ups, allowing firms, especially in the information technology space, to raise equity capital under a separate trading platform. Experts said once Sebi introduced these, the need for a crowd funding framework might diminish.

In the discussion paper Sebi had proposed that crowd-funding platforms be provided only by registered entities, while companies could raise up to Rs 10 crore in a year through this route. Given the risks associated with this way of fund raising, Sebi had also proposed that only ‘accredited investors’ be allowed to participate in such activity.

What is crowd funding?

The Sebi discussion paper defines crowd funding 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.”

Reasons for putting it in cold storage

• Lack of similar regulation in other jurisdictions
• Issue over handling and treatment of cross-border investments

When are the norms likely to be introduced?

• After a regulator, preferably from an advanced economy, introduces such norms
• Sebi, in the meantime, will introduce norms on listing of start-ups
• The proposed framework is expected to improve access to capital for start-ups