SEBI Proposes Crowdfunding for SMEs

SEBI has acknowledged the need of alternate source of finance and emergence of social media. In it's bid to ease down the pressure of arranging financial support for any business, SEBI proposed to provide an additional channel of fund raising to the SMEs. This concept of ‘crowdfunding’ for collection of funds through web-based platforms and social networking sites will be a new way for SMEs to raise funds. Only SEBI-registered entities will be entitled to offer such platforms through which the companies raise up to Rs 10 crore a year.  

Some qualified investors, to be accredited, will be allowed to take part in crowdfunding, as per the SEBI proposal. 

These investors would include institutional investors, companies, high networth individuals and financially-secure retail investors.  Retail investors would be allowed to invest up to Rs 60,000 or 10 per cent of their networth.

Only those can raise funds through crowdfunding who are not associated with a business group with a turnover of over Rs 25 crore. Those with established business and already listed on an exchange or being in existence for four years or more would not be allowed. Besides, entities in the real estate and financial sectors would also not allowed.

Through Crowdfunding money can be pooled through internet. However, for the concept to become sustainable, it would need proper regulation so that chances of defrauding can be minimised. Channels like Facebook, LinkedIn and Twitter can be used to reach out to people interested in the Crowdfunding. Such concepts exists or is taking shape in several developed financial markets like the US and UK.

SEBI has floated a comprehensive consultation paper on crowdfunding proposing guidelines for regulation. The final norms would be issued after examining and taking into account comments from stakeholders. They can send their comments till July 16.

The issuer entities and their promoters and directors should meet ‘fit and proper’ criteria and they cannot use multiple platforms to raise such funds within a year.

They cannot directly or indirectly advertise offering to public in general or solicit investments from the public. They would be required to route all crowdfunding issues through SEBI recognized platforms. They will also not be required to directly or indirectly incentivise or compensate any person to promote its offering.