Looking to Invest in a Startup? Here’s what you need to know

by CA. R. Hariharan Thangavel

March 9th, 2024

Private placement means any offer of securities or invitation to subscribe securities to a select group of persons by a company through issue of a private placement offer letter. These offerings are typically made by private companies or startups that are not yet publicly traded.

Private placement can offer several advantages to both issuers and investors. For issuers, private placements provide access to capital without having to comply with the same disclosure and reporting requirements as a public offering. This can save time and money and allow companies to maintain greater control over their operations. For investors, private placements can offer access to exclusive investment opportunities that are not available to the general public.

Procedure for Private Placement

Pass board resolution for private placement
Perform valuation of the company
Proposal for private placement to be approved by the shareholders of the company by a special resolution for each of the offers or invitations.
Explanatory statement to be annexed to the notice for shareholders approval
A private placement offer cum application letter shall be made in form PAS-4 addressed specifically to the person within 30 days
The company shall maintain a record of private placement offers in Form PAS-5
The payment to be made for subscription to securities shall be made from the bank account of the persons subscribing to such securities
Return of allotment of securities shall be filled with the registrar within fifteen days of allotment in form PAS-3

Conditions for Private Placement

An offer or invitation to subscribe securities under private placement shall not be made to more than two hundred persons excluding QIB and ESOP
The payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities
The company shall keep the record of the bank account from where such payment for subscription has been received
A company shall issue private placement offer cum application letter only after the relevant special resolution or Board resolution has been filed in the Registry
A company shall not utilize monies raised through private placement unless PAS 3 is filed
A company issuing securities under private placement cannot release any advertisements
All monies payable towards subscription of securities shall be paid through cheque or demand draft or other banking channels but not by cash
A company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money
If the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days
If the company fails to repay the application money within the aforesaid period, it is liable to repay with interest at the rate of 12% per annum from the expiry of the sixtieth day
that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than for adjustment against allotment of securities; or for the repayment of monies where the company is unable to allot securities.
the private placement offer and application shall not carry any right of renunciation.

Investing in a startup can be an exciting opportunity, but it's important to approach it with caution and do your due diligence before making any investment.