Crowd-funding firms jittery after Sebi notice, seek clarity

BENGALURU: Online equity crowdfunding platforms, several going through an identity crisis, are seeking clarity from India's capital markets regulator on the extent to which its recent cautionary notice would affect their operations. The Securities and Exchange Board of India (Sebi) has not drawn up an operations framework for electronic platforms that facilitate pooling of investments into

startups. But in a note on August 30, Sebi warned investors against putting money into these platforms because they were not authorised. "The Act under which Sebi is reviewing us is archaic and does not look at the distinction between online and offline channels, let alone the details of private placement," said Manish Kumar, managing director of Grex Alternative Investments Market, a two-year-old online crowd-funding platform. "We are talking to Sebi on how we can work with them for the regulations." Grex, LetsVenture and other similar platforms have become particularly popular with early-stage startups seeking to raise funds from wealthy individual investors, called angels.

The market regulator in its August 30 note titled 'Sebi cautions investors' states: "Certain electronic platforms are facilitating fund raising on digital platforms like websites and other internet platforms, which are similar to the platforms of stock exchanges. These digital platforms are neither authorised nor recognised under any law governing the securities market... Investors are hereby cautioned that all dealings on such unauthorised electronic platforms would be in contravention of the relevant securities laws."

According to Sandeep Parekh, head of financial law firm Finsec Law Advisors and a former Sebi executive director, platforms that help in raising funds and selling stocks without being registered as a stock exchange could violate the Securities Contract (Regulation) Act. Some startup industry experts, however, disagree with that interpretation. Sharad Sharma, angel investor and cofounder of software products industry think-tank iSPIRT, said Sebi's notice applies mainly to secondary markets that deal in the resale of shares. "I am told that the notice applies only to secondary markets, which have become active of late. It does not affect platforms where new equity shares are granted," Sharma said.

Several of these firms are asserting that their operations do not fall under the ambit of Sebi's notice. Tracxn cofounder Neha Singh said the company's arm Tracxn Syndicate, which allows investors and business angels to put money into startups, was not a public platform and that the deals were private in nature. While LetsVenture declined to comment, Mohandas Pai, an investor in the company, said: "I do not think LetsVenture is a crowdfunding platform. Everybody and anybody cannot come on the platform. There is an evaluation process, individual investments are larger sums, and the investors are sophisticated investors and not retail investors as per Sebi norms."