Does it constitute a public offer? Do they need any approval or authorization from the Securities Board of Nepal?
Social media has evolved to be a way of our life and it is almost impossible to stay away from it. While everyone shares a bit of their life through facebook posts, tweets or instagram photos or show their creative musings in Tiktok, it is inevitable that startup founders shy away from these platforms to seek support, guidance and even investments by sharing various aspects of their entrepreneurial journey including their ideas, experience, issues and fund requirements.
More often than not, we tend to ignore that our actions have consequences especially legal and that too when it involves financial transactions. You may have heard or been told that there are securities laws to safeguard the interest and investment of the general public and prior approvals and authorizations of the concerned government authorities like the Securities Board of Nepal is required.
While the law does not provide for such instances specifically, it is a matter of interpretation of the legal provisions. So as to speak, if you were to ask if I can ask for investment through my Facebook or Linkedin posts, you may want to know whether that qualifies as a “public offer”? And then the further implications depending upon the answer to that specific question.
Our understanding is that a lot would depend on a case to case basis but generally speaking asking for investment through a social media post would not qualify as a “public offer”, provided you take care of certain aspects.
Please note this post is for general information purpose only. It does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
Through this post, we seek to clarify those aspects and also discuss certain legal provisions that you may want to be aware about.
What does the Company Act, 2063 provide?
Sec 10 (c) of the Company Act 2063 prohibits private companies to sell their shares and debentures publicly. However, the Act has not defined what constitutes public sale of shares and debentures. So, while interpreting the very provision, unless the offer and other processes for sale of shares are not directly or indirectly communicated to others except those intended receivers, it cannot be considered sale of shares publicly. Similarly, if a private platform has been created between the company and the recipient to sell shares of your company, it also cannot be considered selling shares publicly.
In the context of asking for investment in social media, it can be acceptable if you create a private platform between the company and the recipients. Provided that you confine your audiences in social media while soliciting investment through settings provided for targeted audiences of your post and hence, ensure that your post is not sent to the public at large, it would rather refer to issuing securities privately. Since you make certain of the audiences who would see your post asking for interest in investment, you do not breach the prohibition. Hence, it would not be a problem for private startups to ask for investment in social media if you ensure the same since Securities Act, 2063 does not regulate private limited companies.
What are the provisions under Securities Act, 2063 (“Securities Act”)?
For corporate bodies except private limited companies and cooperatives (which means public limited companies), you have to register securities to be issued in the Nepal Securities Board (SEBON) prior to the issuance as provided by Sec 27 of the Securities Act. The Securities Act defines the term “issuance” as an offer made by a body corporate to raise capital and other related acts that also includes the issuance of securities to promoters.
Furthermore, Sec 30 of the Securities Act provides that you have to get your prospectus approved by the SEBON for making a public issue of securities and publish it. Hence, matters relating to registration and approvals are parts of procedures for asking investment by the corporate bodies having capacity to issue public offering. However, you are not required to issue a prospectus to issue the following:
- Securities issued against the full guarantee of the Government of Nepal
- Securities proposed to be sold to up to fifty persons at a time
- Securities issued to own workers or employers
- Securities permitted by the Board as to issue and sell without issuing a prospectus
Sec 2(m) of the Act defines private placement (परिपत्र विधि) which means an act to make an offer by a letter, dispatch or any electronic communication media for the sale of securities to a maximum of fifty investors. However, if a corporate body is to sell and distribute securities to more than fifty persons at a time, it shall make public issue for the sale and distribution of such securities. Thus, the mode of issuing securities depends upon the number of targeted persons.
Regarding collective investment schemes, Sec 71 of the Act prohibits operation of collective investment schemes without obtaining permission from the Board. Collective investment scheme refers to the investment fund operated by a scheme manager under which several individuals come together to pool their money for investment and share the returns accrued from efficient investment. Even for such investment schemes, prior permission from the Board is required for calling participation in it. You will be violating the provision if –
- You make an advertisement making an invitation to participate in the collective investment scheme or make an offer containing any kind of information for participating in such a scheme directly or indirectly.
- You provide opinion, advice or consultation to anyone to participate in the scheme.
So, asking for investment by posting on social media by startups that are private limited companies, should not be construed as violation of the securities law, provided certain matters discussed above are considered. For other corporate bodies, authorizations and approvals from SEBON are a matter of procedure.