Regulating Equity Crowdfunding in India - A Response to SEBI's Consultation Paper

26 Pages Posted: 26 Jun 2015 Last revised: 3 Jul 2015

See all articles by Arjya B. Majumdar

Arjya B. Majumdar

OP Jindal Global University - Jindal Global Law School (JGLS)

Date Written: June 22, 2015

Abstract

In the aftermath of the 2008 financial crisis, small businesses found it increasingly difficult to raise funds. As a response, equity crowdfunding has emerged as a viable alternative for sourcing capital to support innovative, entrepreneurial ideas and ventures. Equity crowdfunding merges the complexity of public funding, with the systemic risks of venture capital funding.

The Securities and Exchange Board of India (SEBI) has recently released a consultation paper which, inter alia, proposes a framework for ushering in crowdfunding by giving start-ups and SMEs access to capital markets and to provide an additional channel of early stage funding. This paper seeks to address some of the issues concerning the regulation of crowdfunding in India. The first issue that is raised is why must crowdfunding be subject to regulation, when pre-existing securities laws may be interpreted to include crowdfunding activities. A discussion on the nature of crowdfunding and its inherent differences from venture capital and public funding sets up the foundation for which a separate exemption may be carved out of existing securities laws. Similar to the JOBS Act and other legislations around the world, SEBI’s consultation paper also seeks to create exemptions for crowdfunding activities. This raises the second issue involving a comparison of SEBI’s proposed regulations, particularly in terms of eligibility criteria for fundraisers and contributors, mechanisms, levels of disclosure and independent accreditation, etc, with that of other jurisdictions.

A review of SEBI’s consultation paper would ascertain whether the principles followed by SEBI in regulating this sector would culminate in the development of crowdfunding activity, or stifle it. At the same time, SEBI’s consultation paper does not take into account two key aspects of crowdfunding. The first is that of peer to peer lending – when the proceeds of crowdfunds are issued to an individual and not a company. The second is that of cross-border crowdfunded companies. Given that crowdfunding is typically facilitated by web-based portals and promoted through social media and other internet-enabled networks, it is likely that crowdfunding activities will transcend national boundaries.

Keywords: Corporate Law, Corporate Finance, Crowdfunding, Cross-Border Investment

JEL Classification: G34, K22, G24

Suggested Citation

Majumdar, Arjya, Regulating Equity Crowdfunding in India - A Response to SEBI's Consultation Paper (June 22, 2015). Available at SSRN: https://ssrn.com/abstract=2621488 or http://dx.doi.org/10.2139/ssrn.2621488

Arjya Majumdar (Contact Author)

OP Jindal Global University - Jindal Global Law School (JGLS) ( email )

Jindal Centre 12 Bhi12 Bhikaiji Cama Place
Near Jagdishpur Village
New Delhi, Uttar Pradesh/Haryana 110 066
India

Register to save articles to
your library

Register

Paper statistics

Downloads
565
Abstract Views
2,035
rank
47,159
PlumX Metrics