BCI rules do not permit advertisement or solicitation by advocates or their firms. This website is for information only. See Disclaimer

Startup ecosystem under scanner: SEBI notice to Angel networks

Featured in

SEBI has shot off notices to at least half a dozen angel firms in the past one-and-a-halfmonths, asking them to spell out details of their fund-raising biz.

MUMBAI: Angel networks which serve as vital link between startups scrounging for funds and faceless investors, are being scowled at by the financial market regulator.

The Securities & Exchange Board of India has shot o notices to at least half a dozen angel rms in the past one-and-a-half months, asking them to spell out details of their fund-raising business and explain whether they operate within the contours of the securities market law.

Though angel networks help startups raise seed money, Sebi, besides being worried about small investors, fears that these little-known electronic platforms are treading in a regulatory twilight zone — by playing matchmakers in equity or debt market, they are acting like stock exchanges which they are not authorised to do. And, by facilitating issuance of securities to more than 200 investors, some networks may be violating the rules of private placement.

A stern view by Sebi could throttle the source of nance to many edging startups which are untouched by highstreet banks.

Notify Crowdfunding Regulations

“Treating an equity crowdfunding platform which is facilitating issuance of unlisted securities, as a stock exchange may not be appropriate. Under Securities Contracts (Regulation) Act, 1956, technically, any entity which assists in dealing in securities can be tagged as a ‘stock exchange’ but the application of such a wide provision has to be carefully thought through. Otherwise, any investment banker or an adviser facilitating a deal in unlisted securities (whether or not on an electronic platform) can be termed as a stock exchange,” said Tejesh Chitlangi, partner at IC Legal, a law rm which is advising some of the angel networks.

According to a Sebi official, a team set up by the regulator is examining whether such fund mobilisation is a ‘deemed public issue’.

“We want to know who are the persons running these platforms, and whether these platforms are operating like exchanges; whether public issue norms are being sidestepped,” he said.

Also, there are concerns whether some platforms are opening the doors to unscrupulous practices and alluring unsuspecting small investors, said the person. Chitlangi agrees that companies raising money on such platforms must strictly follow the unambiguous private placement norms under the company law.

“However, equity crowdfunding platform or an angel network merely acts as an arranger without regulating the actual trades or facilitating two-way quotes… also, early-stage startups are in no position to get listed. So, equating such a setup with an exchange can only harm the startup ecosystem,” he said. Instead, Sebi should notify the equity crowdfunding regulations, which never progressed beyond a consultation paper, said Chitlangi.

There are about a dozen angel networks in India, with some in existence for 7- 10 years. These password protected websites can be accessed by members (paying annual fees) to know more about companies and take a call on investments.

In the coming days, these rms may have to tweak their business model and style of operations as they prepare to share the following information:

** The entire process ow of registering an investor/company

** Whether there is any restriction on the type of investors who can register on a platform

** The entire process ow involved in fund raising activity by a startup

** The minimum subscription amount for an investor to invest in a startup

** Details of companies which have raised funds till date, number of investors who put money, and nature of security – stock, bond, or hybrid

** Whether the platform is complying with the private placement norms as stipulated under Companies Act 2013; and, if so how does a platform ensure that all the provisions of the law are complied with at the time of fund raising

** Lastly, whether secondary market trading is permitted on such platforms? If yes, the steps involved in the secondary market trading.

“Sebi’s concerns are reasonable in view of the increase in such platforms… Fund-raising on unauthorised electronic platforms has been on the radar of regulators in India and abroad for some time,” said Sumit Agrawal, founder, Suvan Law Advisors. “In the Indian context, Sebi and the government should look at regulating them to ensure an audit trail of transactions. However, entry norms for such platforms should not be same as stock exchanges. Else, it could scuttle innovation and entrepreneurship,” said Agrawal.

The regulator has sought the information under Section 11of SEBI Act 1992 which empowers it to act in any manner as it thinks t to protect the interest of investors. In August 2016, Sebi had cautioned investors about fund raising on unregulated electronic platforms. A year later, it is beginning to scrutinise the world of startup funding.