start ups: Sebi stricture on startups: Angels must now learn to fly with clipped wings – The Economic Times–14.09.2017

Startups and their early-stage lifelines — angel networks — will now have to walk a thin line to be on the right side of law. A few weeks ago, Sebi told these networks that they can in no way violate the rules of ‘private placement’ of securities — a stricture that would restrict these crowdfunding agencies as well as the startups they help to raise money from offering and selling stocks to more than 200 investors.

Networks that break the rules will be labelled as “unrecognised stock exchanges” and penalised for misusing their platforms; along with their startup clients, the networks can be pulled up under various laws like Companies Act, Sebi Act, and Securities Contract (Regulation) Act.

“Sebi is correct in directing the platforms to ensure that the entities raising capital through such platforms are not in violation of the private placement norms prescribed under the Companies Act. However, any such violation should still not automatically tag a platform as a stock exchange,” said Tejesh Chitlangi, partner at IC Legal.

“A robust set of equity crowdfunding regulations,” said Chitlangi, who is advising some of the networks, “is the need of the hour so that such platforms which are strategically important for the startup ecosystem don’t get stuck due to inappropriate application of laws.”

The directive comes more than a month after the Indian capital market regulator asked half a dozen angel networks to share details of their fund-raising business.

Startups, under the circumstances, may have to play around the law to escape regulatory glare. For instance, even if they knock on the doors of thousands of investors in order to sense their interest about a startup, the final stock offering specifying the subscription price could be limited to 200 investors. Indeed, Sebi’s direction could force these fund-raising platforms to change tack.

There are about a dozen angel networks in India, some in existence for 7 to 10 years. At present, their password-protected websites can be accessed by investors (or, members paying annual fees) to find out more about companies before betting on them. In the recent letter, Sebi has alsolaid down that angel platforms cannot be used for trading of stocks after a company issues securities to raise fund.

“Since the angel networks and the equity crowdfunding platforms do not list the start-ups, do not facilitate any online buying or selling of securities, price discovery or order matching, hence treating such platforms at par with an electronic exchange may be misplaced,” said Chitlangi. For the regulator, it’s equally important that investors do not mistake the networks for stock exchanges.

According to the Sebi directive, an angel network will have to clearly spell out in its websites and communiques to companies and investors that it is not a Sebi-recognised stock exchange and securities offered on the platform are not traded on any regulated bourse in India.

via start ups: Sebi stricture on startups: Angels must now learn to fly with clipped wings – The Economic Times

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