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SEBI issues consultation paper on Crowdfunding

SEBI has come up with draft proposals which may provide a legal platform for crowdfunding in India, an alternate funding route for startups in the country. Some of the key proposals include:

Restricting the crowdfunding to accredited investors which include QIBs, companies and HNIs

Apart from the accredited investors, certain “eligible retail investors” with annual gross income of at least INR 10 lakhs and those who pass an “appropriateness test” can also invest through the platform

Receive capital from maximum of 200 individual investors (besides institutional investors)

Founders or promoters need to maintain a minimum of 5% stake in the company for at least three years from the date of the issue

Capping crowdfunding up to INR 10 crore within a 12-month period including oversubscription

A company is required to purchase at least four times of the minimum offer value per person and a HNI is required to purchase at least three times the minimum offer value per person

Crowdfunding platforms are being asked to appoint a 10-member screening committee to vet investments

We prospect that although crowdfunding opens up a new avenue for start-ups and SMEs to raise capital, the stringent regulations such as those above amongst others could potentially exclude a huge pool of investors from participating in crowdfunding. The feasibility and evolution of legal processes and documentation also remains to be seen.

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