Startup Compliance Checklist - A Guide to Pre and Post Fundraising

Starting a new business venture is an exciting and daunting task. There are myriad things that need your attention, ranging from ideation to execution. Compliance is one such aspect that needs to be considered while starting a business

Private Companies in India are only allowed to raise funds through the issuance of shares. Financing can be done in a variety of ways, but the most popular is to issue new / preferred stock in return for funding from investors.

Indian startups looking for investors must comply with the following regulations before and after financing. Compliance refers to the set of regulations, procedures, and rules that a startup must adhere to in order to operate lawfully. There are several pre and post-funding compliance requirements that every startup should be aware of, so let's dive into them.

Pre-Funding compliance

There are two ways to raise money. Private placement process and Rights issue. In a private placement, securities are issued to an investor or a pool of investors as a means of raising funds. A rights issue is executed when a stock is issued to an existing investor in order to raise additional capital from the same investor. This process involves the following:

1. Compliance with the Registrar of Companies (ROC)

Under the Companies Act 2013, Private Limited Companies may issue shares to raise funds either within or outside India through the Preferred allocation process for shares.

The preference share grant is to issue shares to a group of investors selected by private company. This is one of the fastest ways to raise money and increase your company's equity capital.

2. Conducting Board Meeting

Invitations must be sent to all  board members at least 7 days before the meeting takes place. The meeting will discuss the following:

• Valuation Report
• Opening a bank account at a Scheduled bank to receive money
• Finalising of draft offer letter
• Determine the date and time of the extraordinary general meeting (EGM).

3. Conducting Extraordinary General Meeting (EGM)

An extraordinary general meeting will be held to pass a special resolution regarding private placements. Required Ministry of Corporate Affairs (MCA) forms, including private placements, such as MGT-14 and PAS-4, will be mailed to investors / beneficiaries along with a certified  copy of the special resolution.  

4. Issuance of Offer Letter

• Once the majority of board members approve the proposal, the company must issue offer letters to investors in the specified formats.
• Within 30 days of issuing the offer letters, the company must file a complete record of the Preferential Allotment with the Registrar of Companies (RoC).
• Only after completing this step can the company receive money from the investors.

5. Intellectual property

Startups need to protect their intellectual property, such as patents, trademarks, and copyrights. Patents are granted for inventions that are new, useful, and non-obvious. Trademarks are granted for words, phrases, symbols, or designs that identify the source of goods or services. Copyrights are granted for original works of authorship, such as books, music, and software.

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Indian Startup Compliance is a complex and time-consuming process. Many early businesses struggle with the multitude of compliances that are part of doing business in India. The pre-funding compliance checklist for startups is a guide to help you adhere to the legal norms as laid down by the government of India and other statutory bodies.

Here are some additional tips for complying with the pre-funding requirements:

• Get help from a lawyer or accountant who is familiar with the Indian startup ecosystem.
• Start early and give yourself plenty of time to complete the required paperwork.
• Be organized and keep track of all of your documents.
• Communicate with your investors and keep them updated on your progress.

By following these tips, you can help to ensure that your startup is in compliance with the pre-funding requirements and that you can receive the funding you need to grow your business

Post-Funding Compliance Checklist for Startups

After completing the process of issuing an offer letter to investors and submitting a complete preferred allocation record to the Registrar of Companies (RoC), the next step is to allocate shares to investors.  

1. Allotment of Shares

Private Limited Company that receives the funds must issue the security to the investor within 60 days. The allocation must be made by a resolution of the board of directors. In addition, the refund of the allocation must be submitted to the Registrar of Companies (RoC) within 30 days of the allocation of the security.

This grant statement contains a list of the names of all shareholders, address details, percentage of shares allocated, and other relevant data.  

2. Issuance of Share certificates to Investors

In addition to the issuance of share certificates, another important post-funding compliance involves the issuance of documents certifying ownership of the company's shares  by the designated investor. Upon receiving this certificate, investors will become a shareholder of the company.

3. Other optional Compliance

If a new investor requests a seat on the board, he must also give approval for the option to add more directors.

In addition to these requirements, there are some documents that are required even if not required by law. It is important to have a good understanding of the documents needed to find startup funding.

Apart from these compliances, there are certain documents that are not required by law but are required to formalize equity finance transactions. We recommend that you familiarize yourself with these documents required to apply for startup funding.

Indian companies must comply with the requirements of the Companies Act and other statutory bodies. Violations will result in fines up to imprisonment.

We hope that this pre and post-financing compliance checklist for Startups will help raise awareness of the essential compliance and baseline requirements that must be met before and after the funding process.

Accounting and compliance submissions can be tedious and time consuming. Our experts will guide you through all the compliance you need for your business. This ensures that you are informed about your requirements from the beginning. Talk to a Jordensky expert today.

Raising funding for a startup is a major milestone, but it also comes with a number of compliance requirements. Startups need to be aware of the laws and regulations that apply to them, and they need to take steps to comply with those requirements. By following the checklist in this blog post, startups can help to ensure that they are in compliance with the law and that they are protecting their interests.

FAQ's on Startup Compliance Checklist

What is pre-funding compliance?

Pre-funding compliance is the process of ensuring that your startup is in compliance with all applicable laws and regulations before you receive funding. This includes things like registering your business, obtaining the necessary licenses and permits, and filing your taxes.

What is post-funding compliance?

Post-funding compliance is the process of ensuring that your startup continues to comply with all applicable laws and regulations after you have received funding. This includes things like filing regular reports with the government, disclosing material information to your investors, and protecting your investors' interests.

Why is pre- and post-funding compliance important?

Pre- and post-funding compliance is important because it helps to protect your startup from legal liability. If you are not in compliance with the law, you could be fined or even shut down. Compliance also helps to build trust with your investors and other stakeholders. When investors know that you are taking compliance seriously, they are more likely to invest in your company.

How can I ensure that my startup is in compliance with all applicable laws and regulations?

The best way to ensure that your startup is in compliance with all applicable laws and regulations is to consult with an attorney or accountant who is familiar with the Indian startup ecosystem. They can help you to understand the specific requirements that apply to your business and to develop a compliance plan.

What are the penalties for non-compliance?

The penalties for non-compliance can vary depending on the specific violation. However, some common penalties include fines, imprisonment, and the loss of your business license.

What are the benefits of compliance?

The benefits of compliance include:

• Protection from legal liability
• Increased trust with investors and other stakeholders
• Improved access to capital
• Increased credibility and reputation

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