Due to the internet’s growing importance in our everyday lives, entrepreneurs increasingly turn to it for fundraising. When starting a business in India, entrepreneurs and business owners need to take several factors into consideration. A good way to raise funds is through online fundraising. Click here to learn more.
How does crowdfunding work?
Using websites and social media platforms, crowdfunding allows aspiring businesses to raise funds from multiple investors for a specific purpose. By collecting funds, you can fund projects like the release of a new book, a music video, or the launch of a product. A business or community initiative can also be developed with the help of these funds. Alternatives to traditional methods of financing, such as borrowing funds from a bank or another financial institution, are provided by these organizations. Small contributions accrue over time to obtain funds for your business.
A variety of crowdfunding is available in India
- Social lending, a community-based crowdfunding technique, is a legal way for people to contribute without expecting anything in return. Organizations and artists usually seek funding to help with their projects through social lending.
- An investor contributes funds to pre-order a product or service to receive it later. A person buys a product today with the understanding that they will receive it after a certain period has passed, for example.
- Crowdfunding models based on rewards: This type of community-based crowdfunding allows donors to donate money with the expectation that they will receive a reward later on.
- Crowdfunding for debt is a peer-to-peer lending model that matches investors with issuers via the Internet. The platform allows these borrowers to obtain unsecured loans at an interest rate determined by the platform. NBFCs with licenses in India are the only ones allowed to conduct such transactions.
- Online equity crowdfunding refers to the selling of equity interests to investors as an early stage funding method.
In India, are there any legal forms of online fundraising?
Equity-based crowdfunding is illegal in India, according to the Securities and Exchange Board of India. Since SEBI regulates the securities market in India, its primary objective is to protect investors’ interests.
Since equity-based fundraising is an unregulated investment, several risks are involved. The skills and experience of investors who lack the ability to assess risk may result in heavy losses.
The prospect of a higher return can be tempting for investors with limited savings. There is, however, a lack of regulation, as well as lack of security from issuers, inhibiting liquidity. Moreover, investors lack access to hard information in such situations. This makes it difficult for them to perform due diligence in the same way as venture capitalists and financial institutions.
The three main sources of funding for startups in India are angel investors, loans from financial institutions, and private equity. A company must be commercially viable in order to make an equity offering to the public. When a product is in the early stages of development, such as during pilot testing, crowdfunding is typically used. Due to the lack of rules in crowdfunding, the investor is not protected. India has not yet formulated guidelines for minimizing investment risks and increasing market liquidity in such situations.
Fundraising Online: SEBI’s Guide
“Consultation Paper on Crowdfunding in India”, published by the SEBI in 2014, provided guidelines on online fundraising in India.
- Accredited investors should be the only participants
- Qualified institutional investors must own at least 5% of issued securities
- Investors must contribute between $20,000 and $60,000, with a maximum of 200 investors
- Fundraising drives can be held by startups under two years old
- Participants in the program must disclose their business plans, financial information, and management information
- Startups and investors are subject to due diligence by screening committees that have been registered with the SEC.