Overall the Deal value as well as number of deals forfunding have been declining in 2022 and 2023. In other words, not only do the non-funded start-ups require channels for raising funds, but funded start-ups may also be looking for means to reduce their reliance on the venture capital and private equity investors.
The Aam janata can help here and the way to tap this segment is through crowdfunding. Start-ups in countries such as UK, US, Japan and France are already using crowdfunding to raise resources.
Numbers reveal that wealth and savings of Indian households increased during the pandemic. Over the last two years, poured copious amount of money into stocks, mutual funds, cryptocurrencies et al. It may be a good idea to allow retail investors with the wherewithal to take high risk, a foothold in the start-up ecosystem as well; through the crowdfunding channel. Not only will this allow small investors to benefit from the vibrant start-up ecosystem, it will also provide a more sustainable source of funds for the upcoming companies.
Crowdfunding, as the name suggests, asks the crowd to give funds for specific projects, businesses, social ventures etc. Small amounts of funds can be raised from a large number of investors by launching fund-raising campaigns, which are accompanied by strong advertising, and run for specified periods. These fund-raising projects are executed through crowdfunding platforms, social media etc.
In community crowdfunding, funds are raised for a social or charitable causes and money given here is akin to donations with no expectation of return. Some community crowdfunding platforms give rewards or gifts to donors.
But participants in financial returns crowdfunding platforms expect to earn returns for the funds given. These platforms could be either peer to peer lending platforms or equity crowdfunding platforms.
In India, community crowdfunding platforms are legal and allowed to function. Of the two types of financial returns crowdfunding, the RBI regulates peer to peer lending activities.
Crowdfunding platform in Ses
While the challenges seem to be many, they may not be unsurmountable. Investors face equally high risk in understanding and evaluating main-board and SME IPOs; yet there are many takers for those. Similarly, risk of companies defrauding investors exist in regular as well as SME segment of the stock market too. Retail investors wanting to participate in early stage start-ups should therefore be allowed to do so.
One way to kickstart start-up funding through retail investors is by allowing stock exchanges to have a platform dedicated to equity crowdfunding where the campaigns can be run. The exchange can oversee these campaigns and also whet the eligible investors.
The stocks issued through these campaigns can be listed and traded on the ITP platform. Not only will this provide liquidity to investors in crowdfunding campaigns, the ITP platform can also become an active hub for start-up investing.
Companies Act Provisions Applicable on Crowdfunding
PRIVATE PLACEMENT OF SECURITIES :-
“Private placement” means any offer or invitation to subscribe or issue of securities to a selected group of persons by a company (other than by way of public offer) through private placement offer-cum-application, which satisfies the conditions specified in Section 42.
Section 42 read with Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 deals with Private Placement of Securities.
Important Provisions :-
- An offer to be made only to a selected group of persons as identified by the Board whose number not to exceed 200;
- Private Placement Offer Letter in Form PAS – 4 to be circulated among the investors (Letter of offer, serially numbered, to be given either in writing or electronic mode within 30 days of recording of the investor’s name by the Company) ;
- Private Placement offer does not have any right of renunciation;
- The Company shall not utilize the money, unless the return of allotment has been filed with the Registrar of Companies;
- Approval from shareholders by way of Special Resolution is required for Private Placement (excepting non-convertible debentures);
- In Private Placement of Securities investor has to remit the funds from his bank account only;
- The Company to file return of allotment (Form PAS – 3) within 15 days of allotment and can use the money only if the Form PAS-3 has been filed;
- The Company also to maintain a complete record of private placement offers in Form PAS – 5;
- In case of different securities issued, the maximum limit of 200 persons in a Financial Year will be applicable for each of such securities, so issued.
- Further, No company issuing securities under this section shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an issue.
Practical Issues in Private Placement :-
1. No offer period timings has been prescribed in the Act for Private Placement of Securities.
2. Can a Company make one single Private Placement offer and have multiple times of allotment of securities to various investors?
Violations of Section 42 by Crowdfunding Platforms – Recent Order Dated 1st March, 2023
The office of the Registrar of Companies (RoC) in Delhi and Haryana has started taking action against firms that raise equity investment through platforms that make online pitches to investors in violation of company law.
The RoC issued an order this week imposing a penalty of ₹2 lakh on a small Delhi-based company and ₹1 lakh each on two of its directors for allegedly violating a provision in Companies Act by raising capital through a technology platform run by a Mumbai-based company, according to the website of the ministry of corporate affairs.
The RoC order said that section 42 of the Companies Act prohibits companies going for private placement of securities from releasing any public advertisements or using marketing or distribution channels or agents to inform the public at large about such an issue.
Using technology platforms to reach out to large number of investors makes such issues unauthorized public offers, rather than private placement, explained a person informed about the development, who spoke on condition of anonymity.
The RoC order also pointed out that private placement offer cannot be made to more than 200 persons. The RoC is expected to issue a second order sometime next week in the case of another company that raised capital from the same platform, the person said.
However, the regulator said in its order that the Companies Act provision dealing with private placements (section 42) does not allow it to impose any penalty on tech platform, in this case Tyke Technologies Private Ltd, which it alleged “clearly facilitated the subject company” in the default of sub-section (7) of Section 42.
An email sent to Tyke Technologies Private Ltd on Friday seeking comment for the story remained unanswered at the time of publishing.
The move is significant as start-ups tend to use such platforms to reach a large number of investors.
Author’s View :-
If Regulators really wish the allow the crowdfunding and retail investor participation in such investment opportunities subject to Checks and regulations, the current provisions of Section 42 and 62 needs to amended without a Doubt. Two reasons for this :-
- No Crowdfunding platform can operate without releasing any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an issue which will violate Section 42(7) of Companies Act, 2013
- No Crowdfunding platform need to make one single Private Placement offer and have multiple times of allotment of securities to various investors for business feasance which appears to violate the provisions of Section 42 in principle.