Earlier this month, markets regulator the Securities and Exchange Board of India (SEBI) issued notices to several angel networks, seeking details of how their fundraising process works and whether they comply with the prevailing securities market and Indian company law provisions.
Presently, there are only two possible buckets where angel network platforms may fall into due to the role they play in fundraising. First, they may be akin to ‘a stock exchange platform,’ which is governed by SEBI’s regulatory regime, and second, they may be like ‘a crowdfunding platform.’ So far, SEBI has only published a discussion paper on crowdfunding platforms in 2014. It is yet to issue regulatory norms.
A stock exchange, as per SEBI-prescribed norms, refers to an entity or association organised for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. The fundraising facilitated by angel networks that matches a startup with a potential investor is paradoxically different from the match-making facilitated by stock exchanges between a buyer and seller, or for that matter, even between a company going for listing and its investors. The angel networks mostly operate as facilitators or an interface between startups and investors, where securities are issued directly by the startups. These networks do not engage in secondary trading, nor do they play any role in price discovery, clearing or settling transactions. Some may provide legal documentation and support services in order to develop a robust ecosystem. However, no buying or selling of securities takes place on the network platform, which is a core element required to be classified as a stock exchange.
The angel networks may fall under the ambit of a ‘crowdfunding platform,’ which as per a SEBI consultation paper issued in 2014, refers to solicitation of funds (small amount) from multiple investors through a web-based platform or social networking site for a specific project, business venture, or social cause.
SEBI’s concern with the angel networks is that they may be contravening private placement norms by offering shares to more than 200 investors. This can be best understood against the backdrop of the ongoing court battle with Sahara, where the company had accepted deposits/monies by issuing securities to more than two crore investors. The modus operandi of these angel networks, on the other hand, suggests that the startups issuing securities do not present the offer letter/private placement memorandum to more than 200 persons, which is in compliance with the legal requirements under the Indian company law provisions.
Besides, if the activities of an angel network are construed to be akin to an unauthorised stock exchange, then the role of a merchant banker or investment advisor, who engages in issue management and assists in buying, selling or dealing in securities, may also be questioned.
SEBI’s move to safeguard investor interest is understandable; however, the objectives of angel networks, which serve as a vital link to the startup ecosystem, should also be kept in mind. Internationally, these platforms have emerged as one of the most practical substitutes to venture capital funding. A desirable means of governing the activities of these angel network platforms could be by way of notifying long-awaited crowdfunding regulations by SEBI. The markets regulator should soon lay down a roadmap on this.
Puneet Shah and Dhruma Paronigar are Principal Associate and Associate, respectively, with Mumbai-based law firm IC Legal.