Crowdfunding is a method of raising funds from multiple investors over the web for a specific project, business venture or a social cause. The United States of America and the United Kingdom are seen as dominant players in this kind of funding. Crowdfunding has developed as an alternative means of raising funds, especially for start-ups and SMEs. Another reason for the popularity of this form of fund generation is the financial crisis in 2008 which resulted in restricted fund allocation by banks thereby giving rise to the need for an alternative method of funding.
Funding through this method has grown exponentially especially with innovative start-up companies. Max Gunawan’s startup managed to raise close to $600,000 in a span of 30 days through the process of crowdfunding. Julie Urman, a video game developer, raised close to $9 Million within a span of 30 days.
There are multiple types of crowdfunding:
- Donation crowdfunding: As the name suggests it involves generation of funds for charity and philanthropic purposes.
- Reward crowdfunding: A form of funding which is dependent on a future of existing reward as consideration.
- Peer-to-Peer lending: Is an online platform where lenders and borrows are matched for unsecured loans and the interest rate is determined or set by this platform.
- Equity Crowdfunding: As the name suggests, funds are generated with equity of the funded company as consideration.
The United States and the United Kingdom have regulations on crowdfunding. India has seen the growth of this kind of funding, but it still stands unregulated. Recently SEBI released a consultation paper on crowdfunding which discusses the methods, risks and advantages of this form of funding. It provides a comprehensive note on the regulations in other countries and pinpoints the regulations which can affect crowdfunding in India. The provisions of the Companies Act, 2013 and various SEBI Regulations such as ICDR has been discussed.
Crowdfunding can be categorized as a form of private placement, therefore the provisions of the Companies Act, 2013 are attracted. Advertisements by companies raising money through private placements is prohibited and securities cannot be issued to more than 200 persons. However, QIBs and employees availing the employee stock option by companies are excluded. Further such offers can be made only to such persons whose names are recorded by the company prior to the invitation to subscribe.
However, as mentioned above, Companies Act, 2013 provides a window for making private placement offers to Qualified Institutional Buyers (QIBs) and the 'limit of 200' is not applicable to such QIBs. QIBs are the entities such as a MF, Foreign Portfolio Investor (FPI), AIF, Scheduled Commercial Bank, IRDA registered Insurance company etc. as defined in SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. This exception can therefore be exploited in order to generate funds under crowdfunding.
Given the high-level of risks associated with this new way of fund-raising activity, SEBI has proposed that only 'accredited investors' be allowed to participate in crowdfunding activities. Such investors would include institutional investors, companies, HNIs and financially-secure retail investors advised by investment advisors or portfolio managers. SEBI has clarified that no regulations are under construction and this consultation paper is merely a medium to understand and garner public opinion on crowdfunding.