India: Crowdfunding platforms for startups may be illegal, regulators say

INDIAN regulators have questioned the legality of popular equity crowdfunding platforms designed to raise funds for startups.

The Securities and Exchange Board of India (SEBI), which regulates securities in India, sent out a warning to investors that prominent platforms like Letsventure, Tracxn, Grex, Termsheet, Equity Crest are not authorized under currents securities law.

The news could cut of a vital source of funding for India’s fledgling startup scene. According to the Economic Times, industry estimates show some 200 companies have raised INR3.5 billion to 4.5 billion (US$52 million – 67 million) via these platforms over the past 18 months.

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“If the Modi government is serious about startups, it should ensure that new businesses raising capital or platforms helping them to raise funds are not harassed,” Vivek Durai, founder of Chennai-based Termsheet, told ET.

These platforms are similar to normal crowdsourcing platforms, but fundraising requests are only visible to investors registered to the website and these investors expect a return on their contribution.

The platforms make money by charging listing fees, commissions and sometimes a percentage of equity in the startups.

Under SEBI regulations, only recognized stock exchanges are allowed to provide electronic platforms where equity and other corporate securities can be listed and traded. An editorial in the Business Standard over the weekend said the body’s concerns were valid.

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“SEBI is worried about small investors being sucked into unknown, illiquid companies, as these platforms operate in a regulatory twilight zone,” the editorial said.

But those behind the platforms said it was the regulators fault their status was so murky. “SEBI is justified in cautioning investors about such platforms, but it should not limit itself to just that. The regulator should come out with some enabling guidelines which will allow such platforms to co-exist,” Deepak Gupta, co-founder & CEO of Equity Crest, was quoted saying in the ET.

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