SEBI issues circular against crowdfunding platforms

ECPs essentially help start-ups to raise funds from multiple investors by connecting them to a closed group of registered investors.

In start-up crowdfunding, investors expect huge returns from their investments, which is not the case with normal crowdfunding.

In exchange for their services, crowdfunding platforms charge listing fees, fund raising commissions and sometimes a percentage of equity, from the start-ups they help raise funds.

SEBI has reportedly issued an investor-warning circular to equity crowdfunding platforms that help start-ups, questioning their legality.

The notice, dated 30 August 2016, listed over 6 digital equity crowdfunding platforms, including Grex, Termsheet, LetsVenture, Equity Crest and Tracxn, calling them 'unauthorized, unregulated and illegal'.

Start-ups termed this circular as "one-sided, arbitrary and possibly motivated" and a let down on SEBI's part.

Addressing the investors, the release stated that since electronic platforms facilitating fund-raising on digital platforms are not authorized under any law and are open to all investors registered with the platform, they amount to a contravention of the Securities Contract Act and the Companies Act.

It also asked Grex Alternative Investments Market to stop taking new investors on-board or fund raising mandates from start-ups.

According to reports, SEBI is not on-board with the present structure of ECPs in the country because they don't meet the net-worth criteria of $14 million required to set-up security exchanges.

It is also skeptical about the quality of firms raising funds on these platforms.

Only recognized stock exchanges can provide electronic platforms where equity and other corporate securities could be listed and traded.

In 2014, SEBI released a consultation paper, proposing legal, structural and regulatory framework around crowdfunding in India.

In January 2015, it held talks with the government to evolve guidelines on crowdfunding to help start-ups raise funds.

In June 2016, it reworked its plans and considered changes to the listing framework for tech-based start-ups, allowing them to trade publicly on regular stock exchanges.

According to start-ups, it would be better if a regulatory mechanism is evolved for the ECPs, instead of brandishing all of them as "illegal".

It comes as a setback when Modi government is promoting start-ups through their 'Make in India' program.

Start-ups like Grex and Catapooolt claim that they conduct proper customer verifications and due diligence, before on-boarding both the start-up and the investors.