Startup Compliance Checklist - Pre and Post Funding 🚀

Compliance checklist for a Startup. Often founders approach investors far too soon, before they are truly ready with the checklist

The Companies Act, 2013 clarifies various funding requirements for startups. If a startup wants to raise money, its founder needs to be aware of these legal requirements. To comply with the law, you need to comply with various regulations and procedures. If these requirements are not met, the organization may face severe penalties.

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.

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Indian startups looking for investors must comply with the following regulations before and after financing. This blog lists and briefly describes the pre and post financing compliance that Indian Startups looking for investment from investor must comply with.

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:

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.

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).

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.

Issuance of Offer Letter

The Private Placement Offer letter and application must be sent to the proposed investor / qualified holder in writing or electronically within 30 days. You will also need to submit a complete record of the private placement to the company's registrar. Once this is done, the Startup can start receiving funds from investors.

This is a compilation of the list of post-funding compliance that needs to be met.

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.

Share allocation

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.

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.

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.