This Article has been written by Sanjana Buch, a Corporate Lawyer from Mumbai. 

The Securities and Exchange Board of India (“SEBI”) has again brought into scrutiny in the activities of various companies involved in fundraising through the adoption of unconventional modes. One such mode of issue is through the medium of crowdfunding or raising funds from the members of the general public for the purpose of financing the company’s new venture.

Background to Crowdfunding in India:

As defined in the ‘Consultation Paper on Crowdfunding’ (“Consultation Paper”) floated in 2014 by the SEBI, the idea of crowdfunding typically involves the solicitation of small amounts of funds from multiple number of investors through a web based platform or social networking site for a specific project, business venture or a social cause.

The Board seeks to regularise this process of fundraising through crowdfunding by introducing crowdfunding model in India which may either be equity based, debt based or fund based i.e. a platform through which companies may issue securities to members of the public who would subscribe to them through contribution of small amounts.

As contemplated by the Consultation Paper, the crowdfunding platform shall be open for investment to those persons who qualify as ‘Accredited Investors’ in satisfaction of the eligibility criteria detailed therein such as qualified institutional buyers, high net worth institutions and selected retail investors.

The Consultation Paper has been the subject of discussion since the last two years but the proposals have remained mere legislative suggestions till date leaving behind a doubtful future for the utility of this method of fundraising in the hands of start-ups.

It is pertinent to note that crowdfunding is a popularly accepted method of fundraising several ventures in the country such as film projects, aiding the diminishing artisans in various parts of India as well quench the never ending aspirations of space scientists.

Current Position on Crowdfunding

The SEBI, through its press release issued on August 30, 2016 (“Press Release”) has cautioned investors who are involved in subscribing to securities which are offered through ‘unauthorised stock exchanges’ such as digital platforms, websites and other internet platforms.

The Press Release clearly condemns the fund raising activities initiated through several social media platforms and digital media soliciting investments through the mode of private placement of securities of the company thus amounting to a violation of the capital market laws such as the Securities and Contract (Regulation) Act, 1956 and the Companies Act, 2013.

Prior to this clarificatory measure, the capital markets regulator has expressed its lack of enthusiasm to promote a defined regulatory framework governing crowdfunding.

Impact of SEBI’s stand

The securities’ watchdog through this Press Release has surely thrown the start-up community as well as current operating crowdfunding platforms in a tizzy. The SEBI has tightened its grip upon internet based fund raising platforms by serving a very blunt and clear cease and desist notice.

The end result of this clarification is that various equity sourcing platforms through crowdfunding are now illegal, unauthorised and unregulated. The investors have been warned that equity sourcing by companies through the issue of securities to investors shall only take place through recognised stock exchanges whereupon the securities are listed and subsequently traded.

The Press Release has been said to strike the heart of equity based crowdfunding as it questions the very existence of these platforms without the mandate of any specific law or regulation to govern the same.

Moreover, it renders the start-up community in a helpless situation thereby compelling them to resort to traditional methods of fund raising such as bootstrapping or obtaining bank loans.


The digital platforms have raised funds through private placement of securities of the companies listed on it. The total amount raised being up to 350-450 crore rupees in the recent times.

The SEBI’s stand has been termed as excessively reserved in light of the absence of any evidence to prove the mala fides on part of crowdfunding platforms to take undue advantage of layman investors choosing to support projects initiated by start-ups.

Thus, the after effects of this Press Release will render thousands of start-ups a lurch, their life span shortened into half without a proper course of funding to build their pillars after the foundation is built.

Picture Courtesy: Wikimedia

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