A term every entrepreneurial venture is way too familiar with; Crowdfunding is a form of investment from multiple sources to fund a new business venture. This funds are generally small amounts of capital taken from various sources. It is one of the most prevalent way of generating quick capital to set up a business and is more efficient than taking a large amount of capital from one source. This is due to the flexibility in terms of returning the money on a varied and spread out timeline.
The legal attributes that crop up in the area of crowdfunding are the misuse by some funding organizations that deliberately use such instances to create debt traps, also many times the investors do not have enough experience or knowledge to understand the risk of investment. The Securities and Exchange Board of India (SEBI) claims that due to this lack of knowledge in the field of investment the general public requires strict protection. SEBI has picked a new aim to create a regulatory framework for investment crowdfunding and equity crowdfunding in India as currently there are no laws that regulate the same. This comes at a time when their first incomplete attempt was first put on hold.
In India, a few peer-to-peer (P2P) micro loan service providers have made a big name for themselves. These loan providers function by giving donations and microloans. These players in the market have made a name for themselves and fund a lot of small and mid-range projects.
SEBI’s consultation paper on crowdfunding, which was released in 2014, acknowledged and categorized 4 kinds of crowdfunding models:
- Social lending/Donation crowdfunding;
- Rewards crowdfunding;
- Equity Crowdfunding;
- Peer-to-Peer (P2P) Lending.
While the first two categories are legal and fall under the ambit of community funding the latter two are the ones for which thorough regulation are required. Although (P2P) lending has already gained momentum due to its online presence, equity crowdfunding is yet to gain its stronghold.