Startup funding is the act of raising capital to support businesses. The majority of firms seek funding to enhance their growth potential. There are a number of funding methods, but most firms choose to raise capital in one form or another.
There are two main funding methods that are frequently reported on in the news: outside investment and funding rounds. Investors exchange capital for partial ownership in a company in funding rounds.
What are Fundraising Compliances for Startups?
The founders of a start-up must be aware of the various provisions set out in the Companies Act, 2013, when deciding to enter the fund-raising process. Adhering to these statutes and procedures is the aim. A company may be subject to severe penalization if they are not followed.
What are the Pre -Funding Compliances?
In order to raise funds, you can do a private placement or a rights issue. A private placement involves offering securities to investors (as opposed to offering them to the public) as a means of raising capital. When shares are issued to investors that already own them as a means of raising additional capital, the rights issue is taking place. The process involves the following steps:
1. Increasing the Authorized Share Capital and Compliance with the Registrar of Companies
The authorised share capital is the maximum number of shares that a company can issue. Investors’ subscribed capital is the portion of authorised capital that they have agreed to subscribe to and it can’t exceed the authorised capital. Increasing the authorised share capital is the very first compliance.
The Companies Act 2013 provides for the Preferential Allotment of shares by a listed or an unlisted company to a select group of investors, in order to raise funding within India or outside India. A private limited company may also raise funds by issuing its shares. A Preferential Allotment is one of the quickest ways of raising funds and increasing the share capital of a company.
2. Conducting a Board Meeting
You must hold a Board Meeting to discuss fund-raising issues. Specifically, you must decide on a proper resolution. You must also address issues such as the valuation report, the list of beneficiaries, the closing date for applications, the final wording of the EGM notice, and so on. It is critical to comply with Indian pre-funding laws prior to funding your venture.
3. Conducting an Extra-Ordinary General Meeting (EGM)
Along with a certified true copy of the special resolution, Ministry of Corporate Affairs forms like MGT-14 and PAS-4 are sent to investors/allottees for an EGM for passing a private placement offer.
4. Issuance of Offer Letter
The letter outlining the private placement offer and the application form must be sent to the prospective investors within 30 days, either in writing or electronically. The record of the private placement must be submitted to the registrar of companies afterwards. Once this has been accomplished, the company can accept funds from investors.
What are Post-Funding Compliances?
Even after receiving funding from the investors, the company still has to fulfil a list of post-funding compliance. This ensures smooth functioning in the long run. Certain other compliances are optional depending upon the nature of transactions.
1. Allotment of Shares
The company should still meet a list of post-funding compliances after receiving funding from the investors. This ensures smooth operation in the long run. Other compliances may be optional depending on the nature of the transactions.
2. Issuance of Share Certificates
The company issues a certificate as proof that an investor named in the certificate has acquired shares in the company. This certificate confirms that the investor is now the company’s shareholder. In addition to the compliances required by the Reserve Bank of India for fundraising, a few extra compliances are necessary in case a foreign investor is involved.
3. Amendment of Articles of Association
In the event that the startup’s founders have already prepared a Share Subscription Agreement and Share Holder’s Agreement covering the transfer restrictions on issues shares, exit rights to investors, vesting schedule, affirmative voting matter, and more, then the Articles of Association (AOA) must be amended.
Conclusion
Startup funding is important. The aforesaid content explains the pre-funding and post-fundraising compliances for startups. The compliance for startup funding revolves around the provisions set by the Companies Act, 2013.
