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Pre And Post Funding Compliance For Startups

Updated on: Jul 13th, 2021


6 min read

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Compliance basically refers to abiding by the rules. In the world of business, compliance is integral to survival. Failing this, businesses are liable to various fines and penalties under the various regulations and laws. With the laws getting amended on a regular basis so as to tighten up the slip-ups made by businesses in the past, one cannot ignore the growing importance of compliance in this day and age. Moreover, when startups receive funding, it is the fiduciary duty of the founders to ensure the investor’s money is in safe and sensible hands.

Basic Startup Checklist

More often than not, early-stage founders tend to approach investors way too early, before they are truly ready. So what does it mean to be ready? Here are few pointers for a solid pitch presentation:

  • Introduction
    An introduction about the company gives the investors an idea of who they are and what they do. Investors always want to know more about the people behind the scenes, working towards the success of the company; therefore, an introduction of the team is also important.
  • What is the problem you are addressing?
    A detailed description of the problem that the company aims to eliminate or offer a solution to, what the impact of this problem has been so far, and its effect on commerce, industry and society.

What is your solution?
Investors need to be educated regarding the innovative solution that the company is bringing about to tackle the problem.

  • Marketing Plan
    The marketing plan looks to answer the questions as to who the target audience is, what markets the company is looking to enter into, what the proposed pricing strategy is and what the various distribution channels are.
  • Projected Financials
    An estimate of where the company aims to be, in financial terms, a few years down the line, thereby outlining the feasibility of the business as well. The financials will include a cash flow statement, statement of profit and loss and a balance sheet.
  • Sources of Finance
    Funding plays a vital role in a startup’s ability to scale and grow at a steady pace. It talks about what the capital structure of the company will be, whether primarily comprising equity or debt or both.

Pre Funding Compliance

  • Compliance with the Registrar of Companies
    As per the provisions of the Companies Act 2013, a private limited company may issue its shares to raise funding, either within India or outside India, through the process of a Preferential Allotment of shares.
    The Preferential Allotment is an issue of shares by a listed or an unlisted company to a select group of investors. It is one of the quickest ways of raising funds and increasing the share capital of the company.
  • Conducting a Board Meeting
    A notice has to be sent to all the board members at least seven days prior to the conduct of the meeting. At the meeting, the following matters are to be discussed:-
    • Considering the Valuation Report.
    • The decision to be made regarding the list of allottees.
    • The decision regarding the offer period.
    • Opening of a bank account in a Scheduled bank to receive the money.
    • Finalising the draft offer letter.
    • The day, date, venue and time of the Extraordinary General Meeting (EGM) is to be fixed.
    • Finalising the notice for EGM and the Explanatory Statement to be attached.
  • Conducting an Extraordinary General Meeting
    The EGM is conducted with the objective of passing the Special Resolution regarding the Preferential Allotment. The Special Resolution has a validity period of 12 months. MGT- 14 has to be filed and PAS – 4 containing the private placement offer is sent to the allottees along with-
    • A certified true copy of the Special Resolution.
    • Explanatory Statement.
  • Issuance of Offer Letters
    Once approval is obtained, the private placement offer letter cum application is to be given to the proposed allottees within 30 days, in writing or through electronic mode. A complete record of the preferential allotment is to be filed with the Registrar of Companies. Once this is complete, the company can receive funds from the investors.

Post Funding Compliance

  • Allotment of Shares
    Sixty days within receiving the funds with regard to the allotment of shares, the securities have to be allotted to the allottees. Within 30 days of the securities being allotted, a Return of Allotment needs to be filed with the Registrar of Companies.
  • Issuance of Share Certificates
    The share certificates are to be issued to the allottees, thus officially making them the shareholders of the company.
    However, it is to be noted that in case the investor is a foreign investor, there are a few additional compliances to be observed as per the guidelines issued by the Reserve Bank of India.

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

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