Crowdfunding is a manner of raising funds for a project or a venture through internet by raising capital from a large number of individual investors. Crowdfunding is mostly done online via social media and websites. In the present times, crowdfunding has been used widely for arranging funds for the entrepreneurial ventures such as artistic projects, startups, medical expenses, travel and community oriented social entrepreneurship projects etc.
The first company to engage in the business model of crowdfunding was the U.S website Artist Share. With the passage of time and as this model matured , more crowdfunding sites started to appear such as Kiva, GoFundMe, Microventures, YouCaring etc.
Crowdfunding is mainly of the following types, which are:
- Equity- based Crowdfunding: In this type of crowdfunding the contributors are allowed to become part owners of the company by way of trading capital for equity shares. In this type of crowdfunding the owner of the equity has a share in the profit by way of a dividend or distribution.
- Reward- based Crowdfunding: In the Reward based crowdfunding, the individuals contribute to the business in exchange for a reward. The reward may be in the form of a product or service which the company offers. The reward based funding is common for projects involving free software development, motion picture promotion, scientific research, civic projects etc.
- Donation –based Crowdfunding: In Donation based crowdfunding a large number of contributors individually donate and contribute small amount of finance without any expectation of return. This type of crowdfunding is done mainly for the projects which involve social cause. The Donation based crowdfunding has been widely initiated in situations of natural calamities, disaster relief, charities etc.
- Debt Crowdfunding or Peer-to-Peer (P2P) Lending: The P2P Lending is a type of crowdfunding which is used to raise loans and these loans are re-paid along with interest. The rate of interest is set by mutual agreement between the borrower and the lender. In this type of setup, the borrower can either be an individual or a legal person who requires a loan.
Benefits of Crowdfunding:
Crowdfunding has gained popularity in a number of ventures during the recent time. The various benefits of crowdfunding are given as follows:
- It helps in promoting and providing funding to new ideas. It encourages new startups in the country.
- Crowdfunding helps in raising funds during natural calamities and for social cause.
- It is also helpful in arranging money for those poor people who can't afford the expenses of severe diseases like cancer and kidney transplant etc.
- Crowdfunding provides access to capital and also serves as a marketing tool for new ventures.
Regulatory Framework of Crowdfunding
The Securities and Exchange Board of India (SEBI) in its Consultation Paper on Crowdfunding in India has furnished proposals for a regulatory framework which would be a governing procedure for the security based crowdfunding methods. It lays down that only the 'Accredited Investor' can invest money in a project of crowdfunding. There is a certain qualification criteria of 'Accredited Investor' which includes Companies incorporated under the Companies Act with a minimum net worth of Rs 20 crore, High Net Worth Individuals (HNIs) with a minimum net worth of Rs 2 crore and the Eligible Retail Investors who fulfil the prescribed criteria. SEBI has also proposed to place certain restrictions on the kind of companies which can raise funds through the Security based crowdfunding. These restrictions are given as follows:
- A company which is intending to raise capital should not be exceeding a maximum limit of Rs 10 Crore in a period of 12 months.
- A company which is should not be promoted, sponsored or related to any industrial group which has a turnover of more than Rs 25 Crore.
- The company should not be listed on any exchange.
- A company should not be more than 4 years old in incorporation.
- The company should not be engaged in real estate business and other activities which are not permitted under industrial policy of Government of India.
Crowdfunding is a phenomenon which is characterized with high dynamics. It promotes and represents new innovations and validates the market demands through investments by the investors. Through the process of crowdfunding a new product development life cycle is developed and promoted. Therefore it can be concluded that the crowdfunding potentially accelerates the innovations and new ideas.
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