The Registrar of Companies has begun to crack down on crowdfunding platforms raising funds from the general public for private companies and businesses.
ROC Delhi & Haryana penalised Mumbai based crowdfunding platform Tyke Technologies and a Gurgaon-based company, SustVest, formerly known as Solargridx Ventures Pvt Ltd and three of its promoter-directors after the company used the platform to raise money from the general public.
The order also states that the company, Solargridx Ventures Pvt Ltd is also required to provide refunds to all the 565 subscribers along with interest. The RoC’s order states that such fund mobilisation is a violation of private placement rules under the Companies Act.
As per rules private placement of any kind of securities, a company raising funds must restrict the offer to a maximum of 200 investors. If the number exceeds 200, it is required to file a prospectus with the Securities and Exchange Board of India (Sebi) and complete the formalities of a public offering. In the said case, the company received the amount of Rs 52 lakhs from 565 subscribers of CSOP.
Earlier in March another Delhi based firm, Anbronica Technologies and two of its promoter-directors were penalised for using the platform offered by Tyke Technologies to raise funds from public investors by inviting them to subscribe to compulsorily convertible debentures (CCDs) issued by Anbronica.
SustVest, a sustainable investment firm based in Gurgaon, raised $160,000 in 2022, from early stage investors like Paurush Sonkar of Stallions Capital, Balaji Vaidyanathan, and Sandeep Shetty. In the aftermath of the collapse of American lender Silicon Valley Bank, startups are dealing with waning investor interest and closer scrutiny by Indian government agencies. Online portals like Tyke are campaigning and reaching out to the public to invest in startups through instruments like CSOP whose returns are linked to the future valuation of the company.
60 days to appeal against the order
The Company has a period of 60 days to appeal against the order before the Regional Director. RoC’s probe has revealed that Solargridx Ventures in FY 22 adopted and approved the community stock option plan (CSOP Plan) for granting to eligible community members identified and approved by the Board, the right to receive payouts pursuant to the plan. ROC, through this order has noted that CSOPs are 'derivatives' as it derives value from the equity shares of the company and accordingly it comes under the classification of 'securities'. Therefore the start-up has been penalised for violating private placement norms, for reaching out to more than 200 persons (through Tyke platform) and for non allotment of securities as per company law.
Ancillary activities, claims company
The company while contesting the government’s action contended that the subscription amount received by the company is related to its ancillary activities and not included as the main business. Moreover, the main intention of the company behind the CSOP agreement was to collaborate with the subscribers for future growth of the company by increasing the business operations.
“The company issued the CSOPs for subscription fee of ₹1000 incl. applicable taxes and GST. The total amount received from such subscriptions have been recognized as other income. The company has agreed to reward the holders based on future valuation of the Company and the reward may increase/decrease over a period. Thus, the company has created a provision for 'CSOP Liability' and expense has been recognized as 'CSOP Expenditure' of ₹52,42,373/- on the basis of recommendation issued by legal team hosted on the Tyke platform,” the order citing the investigation findings states.
“Thus, it appeared that the instrument of CSOP could be securities, if it were a "derivative" and/or "rights or interest in securities", considering that the holders were ostensibly promised that they would be rewarded based on future valuation of the company. Accordingly, a Show Cause Notice dated 20th April, 2023 was issued to the company and its officers as to why penalty should not be imposed on them for non-compliance of provisions of Section 42 of the Act,” the order shoots back at the company's claims.