There are four type of crowdfunding methods – donations based, rewards based, equity crowdfunding, and debt-based crowdfunding. As people are still exploring and accepting the potential of online fundraising, donations and rewards based campaigns are the only ones that are legal in India. Crowdfunding campaigns that solicit funds in exchange for equity or a share in the company are disallowed by law. The SEBI (securities exchange board of India) is the regulatory body that determined the legality of equity based crowdfunding. This article will explore the prospects of equity crowdfunding India campaigns, and how legalizing it can impact the burgeoning start-up culture in India.
To backtrack a little, we need to understand the emergence of angel investors. Earlier, a business that needed capital would go to a bank and ask for a loan. But the procedures involved in getting loans were long drawn and difficult, and you always ran the risk of getting denied. Eventually, people sought out angel investors or venture capitalists who provide funding in exchange for part ownership of the company. As we entered the technological revolution, the digital economy brought with it online crowdfunding, leveraging the power of the internet. As a result, more people would have the chance to become investors and invest in securities. The SEBI then deemed it illegal, after examining its high risk nature, and the potential disadvantages it posed to investors. In addition, the worry of online platforms being misused for money laundering and fraud led to the present legality of equity crowdfunding.
As a result of the illegal status of equity crowdfunding, businesses and start-ups in India found ways to avail some of the other benefits that online fundraising has to offer. Crowdfunding isn’t just a space to raise money, but rather platform that unifies startup/business owners with interested and potential investors. Moreover, it facilitated the sharing of ideas that allowed entrepreneurs to test the market demand for their product/ service. It was essentially a platform to make a pitch to the masses. Investors that were interested in an idea would simply carry out the investment process offline, making it a completely legal process.
SEBIs concerns regarding fraud, money laundering, and potential failure are legitimate. However, exacting some control by designing legal framework that will determine eligibility of investors and businesses both, may allow some control to minimize risk. On the startup front this could mean a stringent due diligence process, disclosure of risk, amount raised, and reporting rules. For investors it could imply a minimum net worth, and a cap on investments upto a certain percentage of their net worth. In addition, equity crowdfunding India platforms must ensure cyber security and safe fund transfers.
The question we are now left with is whether the economy will be able to progress in sync with the digital era. The fact remains that equity crowdfunding India campaigns can change the landscape of entrepreneurship and promote and environment that encourages new ideas and new business by making capital easily accessible.