Friday, July 19, 2013

Coordinated rulings by SEBI & SEC - Winds of Market Regulatory Harmonization OR plain coincidence?

Viewed solely from the perspective of rationalizing regulatory framework to support creation & sustenance of new enterprise, a lot has indeed happened in the fortnight between 25th June and 10th July in India & USA.

While I’ll desist from repeating what many other bloggers, journalists & analysts have already written on, viz., the obvious v/s inferred derivations of the enactments & how they’d impact the start-up scene et al., my intention in putting together this piece is from my point of view to highlight certain clear similarities, interesting contrasts and some uncanny conjectures these two sets of reform throw up when seen together & what would this coincidence amount to.

Before getting there, below is a quick snap-shot of the regulatory changes (wherever possible, I used the official language of the regulator) that may be cross-referred down the line;

25 June 2013, when the SEBI (Securities & Exchange Board of India) board took, among others, the following three key decisions that impact the start-up investment scene;

      1.   Amendments to SEBI (Alternative Investment Funds)      Regulations, 2012 – thereby recognizing the angel          investors pools as category I venture capital funds

2.       Enabling Listing of Start-Ups and SMEs on Institutional Trading Platform (ITP) without having to make an IPO
3.       Acceptance of recommendations made by “Committee on Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments”

10 July 2013, when the SEC (US Securities & Exchange Commission) met to approve, among other things, adopting amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933 to implement Section 201(a) of the JOBS (Jumpstart Our Business Startups) Act that essentially means enabling;

1.       Lifting the ban on general solicitation or general advertising for certain private securities offerings, thus improving the chance of a start-up raising requisite capital

Now coming back to the original story,

What is similar?

The Intent behind the reforms:  Enabling creation & sustenance of new enterprise within the respective countries

The primary approach of making funds available being by way of rationalizing  angel investment framework

Some level of similarity in enabling a regulator supported solicitation**;

o   Solicitation of investments by way of listing on ITP (Investor Trading Platforms) without having to make an IPO
o   Solicitation of investments by way of advertising on online & offline platforms after complying with filing of Form-D & submission of solicitation material with SEC et al

What is dissimilar?

While the intent is similar, it is interesting to note the subtle differences** of approach;

o   SEC comes across as more conservative in its approach of cautious provisions that simultaneously can OPEN-UP (owing to wider investment choices due to open solicitation) & CLAM-UP (some individual angels falling off the radar due to tightening the requirements of accrediting individual investors..) angel funding

o   SEBI on the other hand comes across as aggressive with its attempting sweeping changes to channelling & control of foreign investments while retaining FVCI as an independent investment class with benefits and simultaneously attempting to enhance access to domestic funds for the start-ups
**Just wondering, is this caution & aggression merely characteristics of a government that has just assumed power & one that is facing polls the coming year??

      While SEBI was at pains to formulate investor minimal requirements (min investment size, maximum angels in a particular scheme to be NMT 49 et al) – SEC seemed to have left the due-dil to the “issuer” by setting only some guidelines

      Finally, while the solicitation provisions are similar, the motivation/ rationale itself was pretty different with SEBI aiming to help improve exit-options of investors & SEC aiming to help raising of capital by the start-ups.

What are those uncanny conjectures?

Ponder this tango of “Accredited Investor” (SEC) ~ “Notified Investor” (SEBI);

-                  Portion of text from section 3.3ai of “Amendments to AIF Regulations” (SEBI):

Such investors shall also be required to have tangible net assets of at least Rs. 2 crore excluding the value of the investor's primary residence

                    Portion of text from text under Rule 506 of “New Rule Making” (SEC)

“An individual net worth or joint net worth with a spouse that exceeds $1 million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence

Contrasts apart, the similarities & conjectures make it appear like the market regulators in USA & India have been comparing notes, if not working in tandem, while formulating these acts, amendments – I wonder if this is some sort of market regulatory harmonization effort going on? – Surely not unlikely!

Food for thought!