Crowdfunding is a way of raising money to finance projects, businesses, or social causes by collecting money from a large number of people via online platforms.
What is Crowdfunding?
- Crowdfunding is a way of raising money to finance projects, businesses or social causes.
- It enables fundraisers to collect money from a large number of people via online platforms.
- Securities and Exchange Board of India (SEBI) regulates crowdfunding in India.
SEBI guidelines on Crowdfunding:
- According to SEBI, only accredited investors can invest through crowdfunding platforms.
- SEBI defines an accredited investor as an institution or business entity that trades securities through private placement and has a net worth of Rs 25 crore.
- Individuals must have a liquid worth of Rs 5 crore and a total annual income of Rs 50 lakh to qualify as accredited investors.
Other types of accredited investors include:
- Companies under Companies Act: Companies with a net worth of Rs 20 crore or more.
- High Net-worth Individuals (HNI): Individuals with a net worth of Rs 2 crore or more.
- Eligible retail investors: Must have a minimum annual gross income of Rs. 10 lakhs.
Benefits of crowdfunding:
- Fast finance without upfront fees.
- Allows for feedback and expert guidance on improving the idea.
- Tests public reaction, indicating market viability.
- Provides an alternative finance option for those unable to secure bank loans or traditional funding.
- Raising funds during natural calamities.
- Providing financial assistance to underprivileged individuals unable to afford expenses related to diseases like cancer.
Risks:
- Retail investors may lack understanding of startup investment risks and may struggle to bear losses.
- Genuine websites may be exploited by fraudsters.
- Lack of monitoring of web-based platforms can lead to risks such as terror financing and money laundering.
Types of crowdfunding:
| Type of Crowdfunding | Description |
| Donation-based crowdfunding | People contribute to a project or cause without expecting anything in return, driven by altruism or a belief in the cause. |
| Reward-based crowdfunding | Contributors receive non-financial rewards or perks in exchange for their financial support. These rewards could be early access to products, special editions, or acknowledgments. |
| Equity crowdfunding | Investors provide funding in exchange for equity stakes in the company. This type of crowdfunding allows individuals to become shareholders and potentially receive financial returns if the company succeeds. |
| Debt-based crowdfunding (peer-to-peer lending) | Investors lend money to individuals or businesses, and they expect to be repaid with interest over time. |
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