Crowdfunding, social media investment schemes under Sebi lens

Oct 27 2013, 16:03 IST
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SummarySebi has enhanced surveillance to check fraudulent investment schemes being run through them.

As social media sites, mobile messaging applications and other web-based platforms emerge as avenues to lure investors, Sebi has enhanced surveillance to check fraudulent investment schemes being run through them.

The capital markets watchdog has come across numerous investment schemes being promoted through Facebook, Twitter, LinkedIn and WhatsApp, as also through dedicated websites and Internet groups.

While genuine investment schemes are also adopting such promotions, there are hundreds of suspected cases of fraudulent schemes that seek to lure investors with promise of huge returns, a senior official said.

Those under the scanner include entities offering "double your money" schemes in 2-6 years, sure-shot "inside information" investment tips, astrological stock market predictions, attractive portfolio management services, and "partnerships" in future's big business ideas.

These include traditional businesses like retail, real estate and bullion, as also business ideas like movies, music albums, carbon credits and renewable energy, while guaranteed returns are being promised after eventual listing or break-even point of such ventures.

While Sebi is itself probing some of the cases, it has alerted other authorities about those not falling under its jurisdiction, sources said.

A need is also being felt to put in place a regulatory framework for 'crowdfunding', an emerging way for raising funds by pooling money from people through Internet, they added.

Crowdfunding is catching up fast globally among young entrepreneurs and some cases have come to light in India as well wherein individuals or small groups of people have raised funds for their ventures through such platforms.

However, there are no clear regulations as yet for such activities and therefore a need has been felt to put in place a regulatory framework if such platforms involve large amounts of money or issuance of securities. This will help check any money-laundering activity or other fraudulent acts in the name of 'crowdfunding', a senior official said.

Another official said that any crowdfunding involving sale of securities can be either regulated under Sebi's existing norms for Collective Investment Schemes or Alternative Investment Funds, or altogether new rules can be prepared depending on discussions among various stakeholders.

The issue needs to be discussed among various financial sector regulators and ministries, such as capital markets watchdog Sebi, banking regulator RBI, Finance Ministry and Corporate Affairs Ministry, before taking a call on who can be the nodal agency for such activities, he added.

Among others, social and professional networking websites like Facebook, LinkedIn and Twitter have been used for such fund-raising exercises, while money-pooling also takes place on some dedicated sites for such activities.

US markets regulator SEC last night proposed new rules to permit companies to offer and sell securities through crowdfunding, while the UK's Financial Conduct Authority (FCA) also outlined today how it plans to regulate it.

In India, the few cases of crowdfunding involve raising of funds for films, technology start-ups, e-commerce ventures and some other businesses that are very small in size.

However, as the trend catches on, it is expected that large-scale funds can be raised through such platforms and that would further increase the risk of possible fraudulent activities, the official said, while stressing on the need for a clear regulatory framework in this regard.

Crowdfunding has been mostly used so far to generate financial support for artistic ventures like films and music recordings, where typically small individual contributions are pooled in a large number of people.

However, it has not been used so far to offer and sell securities, as any offering of share in financial returns or profits from business activities could trigger the application of the prevalent securities laws.

It is also suspected that some of the barred entities may have taken to the Internet to promote their fraudulent schemes and could be operating through closed member groups on websites, blogs and social networking media platforms.

Sebi has received numerous complaints about such schemes and has begun looking into the matter through its own technical systems to track the Internet and social media platforms, as also through use of its newly granted powers.

SMSes and emails are also being used in a big way to promote such fraudulent schemes and products, but many of these messages and mails have found their way to the regulatory and enforcement agencies.

While the unauthorised investment schemes, having a size of Rs 100 crore or more, can be probed under Sebi's Collective Investment Scheme regulations, the entities promising unrealistic returns and offering "sure-shot" investment tips can face action under the Prevention of Fraudulent and Unfair Trade Practices Regulations.

After its initial investigations, Sebi may also seek information from the concerned websites, social media platforms and mobile service providers, as it has been now allowed to seek information from any entity in relation to its probes.

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