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This article was written by Ritisha Mukherjee, a student of ILNU.


Funding is the fuel without which no business can be run. Entrepreneurs and small business owners face the biggest challenge of arranging funds for the launch and growth of their ideas. The global financial crisis of 2008 had made it difficult for small business owners to raise money for their ventures. It became increasingly challenging for banks and credit providers to offer funds to the society. Over the years, start-ups gained better exposure to a wide range of funding options among which, crowdfunding is one most talked about in recent times. At an age when there was a funding vacuum, crowdfunding platforms took over the market and contributed enormously in reducing bank liquidity, and thereby gained considerable popularity. With internet playing a very significant and central role in its process, the concept of crowdfunding reaches out to a large number of people across the globe. Data suggests that crowdfunding accounts approximately for $6.4 billion outstanding globally, with its market worth being over $1 billion in the USA, the UK and China[1]. Owing to its prospects of lower cost of capital and higher returns to investors, crowdfunding acts as a low-cost alternative that channels savings to the real economy and provides affordable options for raising capital[2]; thereby increasing healthy competition in a market space that had been traditionally dominated by a few. By way of funding Small and Medium Enterprises (SMEs) and young entrepreneurs, crowdfunding directly influences the key financial growth of the respective countries. It enables entrepreneurs to raise funds without incurring too much of costs by eliminating the requirements of appointing merchant bankers and doing away with marketing and advertising expenses. Companies seeking display and exposure may only have to pay a bare minimum amount to the concerned crowdfunding platform which is way lesser than the cost involved in traditional advertising. Following its extensive practice in countries like the US, the UK, Italy, New Zealand, Canada and Australia, the concept of crowdfunding has now gathered momentum in India. To weigh and exploit the benefits offered by the concept as well as mitigate the risks concerned, a mature research must be made on the topic; and this paper attempts to do the same. 


 Crowdfunding is solicitation of funds (small amount) from multiple investors through a web-based platform or social networking site for a specific project, business venture or social cause[3]. It can be divided into four types- donation crowdfunding denoting solicitation of funds for philanthropic purposes with expectation of nothing tangible in return; reward crowdfunding referring to solicitation of funds where investors receive something tangible as consideration; peer-to-peer crowdfunding through which unsecured loans are provided at an interest rate set by the online portal and equity based crowdfunding which deals with equity shares being issued as consideration. One would not say that the idea of crowdfunding is new in India, for many temples have been built in the past using donations. However, the idea of freshly presenting it as an online platform is new. It involves a simple process whereby a person who wants to raise money for a project or initiative submits the same online where the public can check out various ideas and pledge money for the one they wish to see come true. As a result, cash-strapped small businesses, start-ups, creative minds, technical brains, young entrepreneurs and ones alike get exposure to better opportunities, broader investment base, improved funding prospects and wide-ranging social media presence. Crowdfunding hence uncovers an idea to millions of potential investors without the hassle of an intermediary. Through crowdfunding portals, a company can fund everything starting from specific projects and business ventures to music albums, films and social causes with the array of investment ranging from a few bucks to a few thousand bucks.  Investors subscribing to the service may be professionals or business people, or even common individuals. However, there being no upper limit for the amount being invested, crowdfunding leaves scope for money laundering and fraudulent acts. The pace at which the trend is catching on assures that large scale funds would soon be raised through crowdfunding platforms, thereby increasing the chances of risk. Hence, following the global precedent of framework with the JOBS (Jumpstart Our Business Startups, 2012) Act in the US that restricts the fund raised to $1 million per annum, and the Financial Markets Conduct Act 2013 of New Zealand that limits the funding to $2 million from 20 investors a year, the Securities Exchange Board of India (SEBI) has now put in efforts to come up with regulations to guide the concept in our country.


The consultation paper put forward by SEBI inter alia highlights the risks involved with the practise of crowdfunding. The concept deals with entities like Venture Capital Funds and Private Equity funds soliciting investments in small amounts from large investors for financing start-ups and SMEs that substitutes the risk taking abilities of informed investors with that of retail investors. Since retail investors have limited capacity of bearing loss of investments, the element of risk increases magnanimously with their involvement. Then there is the risk of platforms being temporarily or permanently shut down thereby causing investors to lose all recourse for gaining back their money. The risks of failure further increase owing to the fact that retail investors often do not have enough knowledge, skill and experience about assessing risks pertaining to investments. Furthermore, the risk of genuine websites being used by fraudsters or that of false websites being established lead to chances of identity theft as well as misuse of cyber security. The risks of illiquidity arise from the no-existence of a secondary market for investors to sell off their securities and recoup their investments to have immediate exit options.

In light of such prevalent risks, SEBI has put forward a set of regulations with the aim of striking a balance between the protection of the investor and the promotion of entrepreneurship so that the vulnerability of crowdfunding cannot be taken advantage of. The consultation paper suggests that companies making public issues of securities would have to comply with Public Issue Requirements as prescribed in the Companies Act 2013 as well as rules put down thereunder besides following SEBI regulations. Crowdfunding would stop being a viable fund raising method if the costs associated with regulation of investor protections turns out to be excessive. Hence SEBI through the consultation paper has proposed to strike a balance between investment and funding by providing investor safeguard without causing unnecessary barriers and burdens on any of the parties involved. Some regulations promote crowdfunding as an effective way of raising capital; some prohibit equity crowdfunding completely while some provide partial encouragement with preference to investor protection. SEBI however has made the clarification that the proposal put forward through the consultation paper does not imply mandatory framing of the draft rules[4]. If the consultation paper grows into a regulation, issuing of equity over the internet would be allowed only through those crowdfunding platforms recognised by SEBI; participation in crowdfunding would be restricted to those identified by SEBI as the accredited investors[5]; retail investors would not be allowed to invest more than 10% of their net worth a year[6]; a company would not be allowed to raise more than Rs. 10 crores a year through crowdfunding[7]; only those companies not more than 48 months old would be allowed to raise money through crowdfunding[8]. Furthermore, SEBI has proposed to introduce three classes of crowdfunding platforms – stock exchanges, government promoted incubators and private associations or angel investors, which would be screened by the screening committee before being recognised.


The concept of crowdfunding in India is still nascent. However, it is regulated under strict rules and guidelines in other countries where crowdfunding is more in practise. Donation and reward crowdfunding do not require supervision by a regulatory authority since they do not involve issuing of securities. The consultation paper put forward by SEBI is hence mostly in light of financial returns crowdfunding. There are possibilities of information being omitted and misrepresented likely to provide distorted idea about the investment which may result in over-estimation of the actual returns[9]. So far there has been no monitoring of platforms or accounts to which the money goes. Hence, if the potential risks take shape of reality in the near or far future, the ‘crowd’ would rightly blame SEBI for neglecting the issue while they could have taken the right measures. Once brought within the ambit of the regulations so put forward, financial returns crowdfunding will be subjected to a transparent system whereby the risk involved for an investor will be minimum. The strict provisions put forward for disclosure of information to be made by the investee would guarantee a secure platform for the investors and a level playing field for all the parties involved. However, limiting the number and class of investors, SEBI has reduced the exposure that SMEs and entrepreneurs had earlier. With such boundaries defined for the investors, the scope for small investment becomes very narrow and individual investment for promotion of a social or moral cause comes to be inexistent. Furthermore, SEBI proposes to restrict an investor from selling his shares to start-ups unless he is selling the same to the issuer of security, or other accredited investors registered with the platform, or to an acquaintance of such accredited member. Unlike contribution made to creative and social works in exchange for no expectations in return, the limited class of investors so proposed would expect an outcome to their inputs. It is evident that technical start-ups will benefit if such proposals come true, however, the earlier practice of crowdfunding being executed through donations from individuals investing for a friend’s project or on the basis of emotional vibes will take a backseat owing to the worth and potential of the project being subjected to the evaluation and scrutiny of the accredited investors before any investment gets done. Platforms like Milap and Ignite Intent in India have shown considerable progress so far in contributing to social causes. No one can but appreciate Milap’s admirable efforts in raising funds for a boy’s education whose parents, being in a meagre tailoring business, could not afford the same[10]. It would hence not be wrong to say that SEBI in its attempt to establish regulations for crowdfunding has put forward a proposal that tampers with the definition of ‘crowd’ and tends to change the basic idea dealing with the concept.

SEBI’s proposition does not include internet companies as an entity for providing platforms pertaining to crowdfunding investments. Internet companies who have so far handled Indian crowdfunding effectively have thus been left out of SEBI in spite of the fact that their existence would have made SEBI’s job easier since crowdsourcing is mostly done online.

CROWDFUNDING- where do we go from here

The consultation paper has raised concerns across the internet as to whether the new regulations would destroy the rapidly growing crowdfunding industry. New regulations are detrimental to Indian crowdfunding platforms like KETTO started by Varun Sheth and Kunal Kapoor that focus on philanthropy. In India, companies are restricted from issuing shares to more than 200 potential investors or allotting shares to 50 or more shareholders without undertaking a public offer[11] that inter alia concerns with appointments of merchant bankers and registrars, filling of draft documents and satisfying eligibility criteria. Crowdfunding did away with all such formalities and gave life to projects which would have died otherwise. India’s first crowdfunding portal ‘Pik A Venue’ was started by Ruchi Dana, an MBA student of Stanford Graduate School of Business that provides advice, guidance and consultations on various subjects. With crowdfunding as an alternative, people are trying to fund their projects with hassle free rules instead of taking frequent loans from banks.

Until now, crowdfunding has manifested both its positive and negative aspects. A few 25 year old film makers made a movie on a talented athlete named Virender Singh in 2012 with the help of an NGO named Drishti Media, who contributed 3.5 lakhs, and promoted it using a sum of Rs. 3.3lakhs of crowdsourced money raised by Wishberry in 11days, with contributions ranging from hundreds to lakhs[12]. However, there is a flip side to the coin., which got launched in Feb 2013, attracted 100,000 of investors whose contribution summed up to an amount of around 30 million donated for 2000 projects. 80 people who had invested around $1.3million to make real Qui Zhixin’s dream of building a kindergarten, are now about to lose their money since the government of the district concerned, Fengxian, has turned qui down saying that the area already had a lot of Kindergartens[13]. It is to address issues like these that the SEBI has put forward regulations.

There is no denying the power of the crowd that has successfully attracted global customers, grabbed investor attention and taken crowdfunding to a level that does way more than just raise funds. The Times of India rightly called crowdfunding ‘the democratisation of the funding process’ for letting plenty of investors be part of a large venture by means of relatively small investments[14]. With the US, the UK and China dominating the market currently, it is estimated that by 2025, there will be $95billion market captured by crowdfunding[15]. Research reveals that it has grown over 1000% in five years with $65billion dollar added to the global economy and 270,000 new jobs created within a year[16]. Rajan Srikanth, the co-president of the global forum of angel investors called Keiretsu said he believed the framework put forward by regulatory authorities will infuse confidence and vigour in investors and in turn encourage the concept[17]. However, there are a few start-ups who feel that such regulations will attain value only once they are made more liberal by inter alia permitting more than 200 retain investors and eliminating the cap of Rs. 60,000 from individual start-up investors. Indian portals like Wishberry, Catapoolt and Ketto are expected to lead the crowdfunding revolution in India in the coming years.


In a country like India where the role of internet is far reaching, essential and highly impacting, concepts like crowdfunding will make complete use of the internet market to boost the general Indian economy in one hand and uplift the country’s socio economic conditions on the other. Furthermore, it will act as a developmental endeavour to promote ventures originating in rural India. As long as regulatory regimes such as those put forward by SEBI provide ample safeguards to control frauds and money laundering, financial returns crowdfunding will go a long way to unleash the true potential of entrepreneurial ventures. The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, SEBI (Collective Investment Scheme) Regulations, 1999, the AIF Regulations or the Foreign Contribution (Regulation) Act, 2011 may be implemented to ensure smooth functioning of crowdfunding activities. The framework put forward by the SEBI in their consultation paper, if made a tad bit more liberal would serve as a huge leap ahead as far as the Indian crowdfunding market is concerned. But it is only prudent to expect that the step planned ahead by the industry will be one well-calculated, measured and taken with care.


[1] Crowdfunding- an infant industry growing fast – IOSCO paper page 3

[2] Id page 4

[3] Consultation paper SEBI

[4] Id page 1

[5] Id page 32

[6] Id page 32

[7] Id page 36

[8] Id

[9] Id at page 8

[10] Crowdfunding being welcomed to India, web publication, Bar & Bench, June 30th 2014

[11] Regulating equity crowdfunding in India, arya majumdar , web publication, march 4, 2015

[12] Get the crowd, and its money, behind you, Mitra Joshi &Vivina Vishwanathan, Mint e-paper, May 12, 2015, available online at last seen on 12.3.2017

[13] The Crowds Crash In,  Zhao Yashan, Global Times China, Aug 5, 2014

[14] Power Of The Crowd, Sindhu Hariharan and Sujit John, Feb 27, 20015, The Times of India, Tamil Nadu, available online at last seen on 12.3.2017

[15] Id

[16] 2014 And Looking Ahead: What’s In Store For Crowdfunding In India?,  Vinay Dora, Dec 29, 2014, available online at last seen on 12.3.2017

[17] Supra 14

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