Sebi wants to vet all crowdfunding

The Securities and Exchange Board of India (Sebi) issued a consultation paper on Tuesday on proposed regulations for crowdfunding, the term for collecting small amounts of capital from a large number of investors through social networks or other web-based platforms.

Sebi wants reactions by July 16. It has proposed that crowdfunding only take place through Sebi-recognised platforms. Entities which qualify include stock exchanges, depositories, technology incubators and associations of private equity or angel investors.

“It is necessary that crowdfunding platforms are not established or not used to facilitate fund raising by fraudulent entities….Therefore, it is proposed that any online offering or issue or sale through the internet can be made only through a Sebi-recognised crowdfunding platform,” said the paper.

The proposed regulations exclude donations or grants in which no financial return is expected. For others, the regulator has proposed three ways of looking at crowdfunding, based on equity, debt and funds.

Equity-based raising would allow up to Rs 10 crore through shares on this platform. Those raising capital through the debt route will issue securities, as well as maintain a Debenture Redemption Reserve of a fourth of the amount raised. Sebi has also suggested the creation of a separate category of alternative investment funds, with a corpus of up to Rs 25 crore. Unlike other AIFs which have a minimum size of Rs 1 crore, crowdfunding AIFs would have a a minimum size of Rs 25 lakh.

It would also require crowdfunding platforms to conduct due-diligence on companies raising capital. Sebi has also proposed the creation of a screening committee to filter ideas and business plans.

And, restricting access to such platforms to accredited investors. These can either be qualified institutional buyers, established companies or high net worth individuals.

Retail investors who wish to participate will need to pass a test or act under the guidance of an investment adviser or portfolio manager. They will also need to have an annual income of Rs 10 lakh and be restricted to an investment cap of Rs 60,000 an issue. “Thus, those retail investors who have knowledge, experience or have access to investment advice and have resources to cope with the losses on their investments in a start-up are eligible to invest in crowdfunding and come within the category of accredited investors,” it said.

The paper also said investments have to be made in demat form.

Sebi has invited comments on the consultation paper till July 16.