Several angel networks have welcomed the Securities and Exchange Board of India's (SEBI) recent move to form a committee to examine their models even as others question its role in regulating investments in early-stage ventures.
The market regulator has shot off notices to over a dozen such networks in the past two months, asking them to provide details on their funding process and explain whether they operate within the ambit of the securities law.
SEBI's concern is that since these platforms connect investors with enterprises, they are akin to public markets. However, some industry experts feel the comparison is unfair.
“This issue has been on SEBI’s radar since August 2016, when it issued a press release on how unauthorised electronic platforms facilitate fundraising...Angel networks have to adhere to norms relating to private placement under the Companies Act, 2013. But comparing them to a stock exchange is not seeing the wood for the trees,” says Sharanya Ranga, partner at law firm Advaya Legal.
Others feel the already tough private placement rules because of the Companies Act, 2013, and the way income tax authorities view private company valuations will make the going tougher for startups. "Imposing more restrictions is not going to help anybody,” says Vivek Durai, founder of Termsheet.io, which was one of the companies that got a SEBI notice.
“SEBI’s main job is to regulate public markets...But neither SEBI nor the government should be stifling experimentation that is largely private, even if it's online,” he explains. "Also, for the committee to be successful, it should have people who understand the ground realities of startup investing and how dynamic and chaotic the ecosystem is."
SEBI's role aside, what cannot be denied is that operating in a regulatory grey area is neither in the interest of early-stage companies nor investors.
Ranga says angel networks and crowdfunding platforms may be recognised as a new class of market intermediaries and specific norms relating to eligible startups, investors, minimum and maximum investment amounts, disclosure norms, etc. need to be outlined. "Many jurisdictions have already permitted equity crowdfunding subject to specific regulations such as the JOBS Act in the US. Not having a framework, be it strict or relaxed, is not going to help anybody’s case,” she explains.
Last year, the US Securities and Exchange Commission allowed all individuals to become startup investors in the US. Before this, only individuals whose net worth, along with that of their spouse, exceeded $1 million were allowed to invest in startups through the equity crowdfunding route.
Sreekanth P, director at Hyderabad Angels, agrees with Ranga, and says regulation will only help startup investments.
“All established networks already comply with the norms, but we do not know how smaller equity crowdfunding platforms are working. Those need to be looked into. There needs to be less uncertainty in the entire investing process,” he adds.