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We’ve been big supporters of Crowdfunding. After all, it means that retail investors get to participate in the success of some of India’s most promising companies. Of course, it comes with its risks but we are thrilled to know that things are moving forward in this country.
As promised in April, India’s market regulator has floated a consultation paper on crowd funding in the country.
There are some funny proposals in here. For instance, the SEBI has proposed, among other things that if you want to invest you need to pass a test. Ha ha ha. Nevertheless, here are some of the key points.
What is crowdfunding?
Crowdfunding is 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.
Types of Crowdfunding?
What SEBI fears about Crowdfunding
The SEBI has no business in Donation Based Crowdfunding, Reward Based Crowdfunding and Peer-to-Peer lending. Some of it is up to the Reserve Bank of India to sort out.
Being the market regulator tasked with protecting the retail investors interest, Sebi is concerned about equity based crowd funding. It worries
Retail investors may not be able to understand the risk in these investments and will be unable to bear the loss of investments.
They are also concerned about the risk of default, lack of control or influence over the management, lack of collateral (especially in peer lending), fraud and lack of jurisdiction over the Internet.
SEBI has proposed to explore three types of security based Crowdfunding
1. Equity based
2. Debt based
3. Fund based
Before that, it wants to lay the ground rules on
1. Who can invest.
2. Type of entities who can raise funds & disclosure requirements.
3. Type of entities that are allowed to set up internet based Crowdfunding
The Accredited Investors
Accredited investors who may be allowed to invest through are
a) Qualified Institutional Buyers (QIBs) as defined in SEBI (Issue of Capital and Disclosure Requirements) regulations.
b) Companies incorporated under the Companies Act of India, with a minimum net worth Rs 10 cr.
c) HNIs with minimum worth of Rs 2 cr or more.
d)Eligible Retail Investors (ERIs) who receive investment advice from an Investment Adviser, or who avail services of a Portfolio manager, or who have passed an Appropriateness Test (may be conducted by an institution accredited by NISM or the Crowdfunding platforms).
- who have a minimum annual gross income of Rs. 10 Lacs,
- who have filed Income Tax return for at least last 3 financial years,
- who certify that they will not invest more than Rs. 60,000 in an issue through crowdfunding platform,
- who certify that they will not invest more than 10% of their net worth through crowdfunding. (Net worth excludes the value of the primary residence or any loan secured on such property).
Some Key Restrictions
EbC and DbC can allow private placement offers to any number of QIBs and a maximum of 200 HNIs and ERIs combined.
QIBs, Companies and HNIs should be required to own at least a certain percentage in every issue through EbC and DbC.
If you are a company, you need to submit an Private Placement Offer Letter to the Crowdfunding portal.
Who can be a platform
- Recognized Stock Exchanges with nationwide terminal presence (RSEs)
- SEBI registered Depositories
- Technology Business Incubators(TBIs)
- Associations Networks of PE or Angel Investors be allowed to setup such platforms.
Here’s the full text of the consultation paper by SEBI which details some of the ground rules. We’ll be sending some of our own views as well. If you have a view on this, leave a comment, we’d love to hear from you.
Many Indian startups and product companies have raised money on US based crowd funding platforms such as Indiegogo & Kickstarter. Indians have contributed to over $1 mn on Kickstarter.
Crowdfunding Success from India
Unrest, an RPG set in ancient India by Jaipur based Pyrodactyl Games, successfully raised $36,251, nearly 12 times its initial goal of $3000, from Kickstarter.
Dabba Radio, a Mumbai based public radio service successfully raised $ 5,502 from its Kickstarter campaign.
Gecko, a low powered Bluetooth device which can gesture control your smartphone and be used to track things has successfully raised $135,410 from a crowdfunding campaign onIndiegogo.
Fin, a wearable technology startup from Cochin, successfully raised over $100,000 from itsIndiegogo campaign.
Printajoy, an Ahmedabad based startup that will print your Instagram photos and ship it to you, raised Rs 102,500 from its successful campaign on Wishberry.
Lucia, an independent Kannada film by an ex-IT professional Pawan Kumar, raised Rs 51 lakhs in just 31 days through a crowdfunding campaign.
Recommended Read: Crowdfunding in India : Waiting for ONE Big Deal