The concept of crowd-funding seems to have caught on. In one form, it involves small and medium-sized companies raising funding from investors using the Internet (usually social networking sites or specialist crowd-funding websites). While the concept itself is quite wide and allows for fund raising in many different contexts, it is particularly useful for small entrepreneurs and start-ups. But, it does give rise to issues pertaining to securities regulation, especially if monies are raised against issuance of securities that provide investors with some interest in the issuing company.
Based on the US experience, there could two possible issues. The first pertains to whether the issuance of securities through crowd funding would require registration with the securities regulator such as the US Securities and Exchange Commission (SEC). The second is whether the Internet websites that peddle the securities require registration as broker-dealers that are subject to securities regulations. While some of these issues have been a subject matter of academic study (as indicated in this post on the Truth on the Market Blog), both the US Congress and the SEC have been considering, and even taking steps to introduce, exemptions to allow crowd funding so long as the amounts raised are capped (both at an overall level and per investor).
A recent report in the Hindu Business Line indicates the emergence of the practice in India as well. The primary question under Indian law would be whether this would amount to a public offering in terms of section 67 of the Companies Act that requires a prospectus and associated compliances. If the specific form of crowd funding involves issuance of securities such as shares and debentures, then an offer or invitation made to 50 persons or more could fall within the purview of a public offer. This is particularly so when the offer or invitation is made through the Internet rather than to specified persons. Moreover, this issue has been magnified in the context of the litigation involving companies within the Sahara group culminating with the order of the Securities Appellate Tribunal. If the specific type of crowd funding indeed amounts to a public offering of securities, the secondary question would arise whether the Internet sites through which the funding is raised taken on the character of intermediaries that might require compulsory registration with SEBI. Of course, this is still early days in the Indian context, but these are issues worth considering in advance of crowd funding becoming more prevalent in the Indian markets.
Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.