Angel investment networks, which invests in startups at a very early stage to offer them capital to prove their business idea, are being scowled at by the financial market regulator.
The Securities & Exchange Board of India (SEBI) has sent notices to at least half a dozen angel firms in the past one-and-a-half months, asking them to reveal details of their fund-raising business and explain whether they operate within the contours of the securities market law.
Though angel networks help startups raise seed money, SEBI is worried about small investors and fears that these little-known electronic platforms are treading in a regulatory twilight zone — by playing matchmakers in equity or debt market, they are acting like stock exchanges which they are not authorised to do.
It also says that by facilitating issuance of securities to more than 200 investors, some networks may be violating the rules of private placement. Thus, the regulator has also set up a team which is examining such cases. An insider said, “we want to know who are the persons running these platforms, and whether these platforms are operating like exchanges; whether public issue norms are being sidestepped.”
Tejesh Chitlangi, partner at IC Legal, a law firm which advises some angel networks, as quoted by ET, says:
Treating an equity crowdfunding platform which is facilitating issuance of unlisted securities, as a stock exchange may not be appropriate. Under Securities Contracts (Regulation) Act, 1956, technically, any entity which assists in dealing in securities can be tagged as a ‘stock exchange’ but the application of such a wide provision has to be carefully thought through. Otherwise, any investment banker or an adviser facilitating a deal in unlisted securities (whether or not on an electronic platform) can be termed as a stock exchange.
The regulator has sought the information under Section 11of SEBI Act 1992 which empowers it to act in any manner as it thinks fit to protect the interest of investors. Last year, in August 2016, SEBI had cautioned investors about fund raising on unregulated electronic platforms.