Is crowdfunding legal in India?

The answer, in a nutshell, would depend on the type of crowdfunding. Equity

Crowdfunding, specifically digital equity crowdfunding platforms, is illegal.
Reward-based crowdfunding and donor-based crowdfunding is not.

Does crowdfunding work India?

According to the rules in India, equity-based crowdfunding is illegal, whereas
peer-to-peer lending is regulated by the RBI. 4. Community crowdfunding which
includes donation based and rewards-based crowdfunding are legal and are quite
popular to raise funds for social causes.

The Securities and Exchange Board of India (SEBI) has issued laws on digital equity
crowdfunding in India as “unauthorized, unregulated and illegal”.

According to industry estimates, close to 200 companies have raised INR

35,057,840- INR 45,074,366 on these platforms over the past 18 months.
SEBI has declared that the “electronic platforms open to all investors registered
with the platform, amount to a contravention Securities Contract Act and the
Companies Act”. Most startups that have been relying on equity crowdfunding have
hit rock bottom owing to the regulation.

SEBI’s newly formed framework struggles to find the right balance between
protection of investors and promotion of entrepreneurship.

There is clearly a case for a balanced crowdfunding regulations in India that

lowers the cost of capital and increases liquidity while ensuring adequate investor
protection and minimizing investment risks.

Breaking down the SEBI guidelines on Crowdfunding

Many startup founders and other people in the industry were not clear about
crowdfunding and its legal implications. At the right time recognizing start-ups’
potential in boosting the economy,

SEBI has proposed guidelines for crowdfunding aimed at improving access to funds
for start-ups and small-to-medium enterprises.
In light of this positive trend, in 2014, SEBI released a ‘Consultation Paper on
Crowdfunding in India’. This defined crowdfunding as “ solicitation of funds (small
amount) from multiple investors through a web-based platform or social networking
site for a specific project, business venture or social cause.”

Some of the key SEBI guidelines on crowdfunding:

Only ‘Accredited Investors may invest;
Qualified Institutional Buyers (“QIBs”) to hold 5% of issued securities;atleast 5%
of issued securities;
Retail Investor contribution: Minimum- INR 20,000 and maximum- INR 60,000;
Maximum number of retail investors- 200;
Only start-ups less than two years old eligible to participate;
Disclosure requirements such as anticipated business plan, intended usage of funds,
audited financial statements, management details etc.;
Registered crowdfunding platform to conduct regulatory checks and basic due
diligence of start-ups and investors; and Constitution of ‘screening committee’ by
each platform comprising 10 persons with experience in capital markets, mentoring
start-ups etc.
SEBI has taken cautious steps that lean towards investor protection. The rising
need for the safeguard is indisputable. But it also falls short in upholding
economic objectives that make equity-based crowdfunding viable in India.

According to the report India- Crowdfunding Myth: Three’s a Crowd, the Consultation
Paper proposes a framework for ushering in crowdfunding by giving access to the
capital market to provide an additional channel of early stage funding to startups
and SMEs and seeks to balance the same with investor protection.

The key points raised in the proposal uncovers whether crowdfunding is allowed in
India. The legal issues with crowdfunding for business ventures have continued to
raise eyebrows.

On June 23, 2015, SEBI made it easier for entrepreneur-driven new companies to list
on stock exchange platforms with an easier listing, shareholding and disclosure
norms.

Later in 2016, SEBI declared over twenty equity crowdfunding platforms as illegal.

Why is Digital Equity Crowdfunding Illegal in India?

The root cause of the restrictions imposed on equity crowdfunding can be traced to
money laundering. An example of laundering under the label of crowdfunding is the
Sahara case. These activities have led to monitoring crowdfunding that involves a
huge amount of money or is equity based.
The investors tend to turn fraudulent involving the large sums raised. The campaign
owners can be affected negatively. This is because there is no recourse for the
backers.
For crowdfunding based on lending, authorization from RBI is required as it comes
under its regulations. There is a need for documentation of formalities and
disclosures related to utilization of funds and other relevant details.
In the SEBI norms, issuers can raise only up to Rs 10 crore by issuing equity
shares. No single investor shall hold more than 25% stake in a company. The
promoter(s) should have a minimum of 5% equity stake in the company for at least 3
years. There is this thin line in SEBI crowdfunding guidelines that would make
equity crowdfunding illegal.
Since India is an emerging platform for online transactions, the digital market is
susceptible to security threats while funding business models online. Another
reason why SEBI has issued regulations in the name of public safety.

Why is Crowdfunding Legal in India? Rewards Based Crowdfunding Legal in India?

Rewards based crowdfunding is free from the regulatory framework of SEBI. And so
are other kinds of funding such as crowdfunding or peer-to-peer lending. This is
because it does not include any security issuing. While the latter is governed by
RBI, under the purview of SEBI. under the purview of SEBI.donation based
crowdfunding or peer-to-peer lending. This is because it does not include any
security issuing. While the latter is governed by RBI,

Business Standard has detailed the Crowdfunding blues in the Indian economy. SEBI
is worried about small investors being sucked into unknown, illiquid companies, as
these platforms operate in a regulatory twilight zone.

SEBI’s discomfort also stems from the fact that none of these platforms meets the
critical net worth criterion of Rs 100 crore required to set up securities
exchanges.

Fund based Crowdfunding (FbC)

Funds of the accredited investors registered with a recognized platform will be

collected online through the platform and pooled under the AIF to invest in shares
or debt securities. – Provide a separate class of funds under Category I AIFs to
offer Fund based
Crowdfunding as Category I AIF-Crowd Funds. The Crowd Funds can post registration
with SEBI, get displayed on any Crowdfunding Platform set up by either Class I or
Class III entities. Funds may not be required to be subjected to the scrutiny of
the Screening Committee of the platform
The minimum and maximum corpus of such funds would be Rs. 10 Crores and Rs. 25
Crores respectively.
Such funds will be able to solicit funds online from a maximum of 1,000 accredited
investors.
A requirement of the minimum investment of Rs 1 Crore by every investor for an AIF
is also proposed to be relaxed.
All accredited investors viz. QIBs, Companies, HNIs and
Rewards-based crowdfunding raises funds lower than those raised by equity funds.
The model gives tangible rewards in return for the money rather than equity/stakes
in the company. These differences reveal that it is prominently equity crowdfunding
that has come under the sullen scrutiny of SEBI.

What is the Future of Crowdfunding in India?

A promising growth.

Will crowdfunding die a natural death?. Not at all.

Even though it is regulated in India, it will nevertheless flourish. IndiaCorpLaw

asserts that even though SEBI may have introduced easier listing, shareholding and
disclosure norms for start- ups, the fact remains that quality of investors is much
more advanced with investors overseas than in India.

While listing on Indian stock exchanges will ensure a wide array of investors,
crowdfunding will ensure that the company receives funds not only from investors
across the globe but also from investors who feel for the project.

The emergence of India as a start-up hub with wide options on how to raise funds
has most business ventures turning to reward based crowdfunding as the best way to
raise quick funds!

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What is Crowdfunding?

Crowdfunding is the practice of funding a project/venture or social cause

(Medical/Education/ Sports) by raising money from many individuals for a common
goal. Continue reading more on equity crowdfunding, reward-based crowdfunding, and
what are the SEBI rules in India about Crowdfunding. Different crowdfunding
platforms in India are also compared.

Before going deep into the topic of crowdfunding, let us know the exact definition
of crowdfunding and how it differs from fundraising. Most often, people get
confused between crowdfunding and fundraising.

Getting to the absolute basics, we know:

Crowdfunding is the practice of funding a project or a venture by raising money

from a large number of people, especially via the internet. These people are called
investors, and they can contribute any small amount of money depending on their
capabilities. It targets individual donors.

Fundraising is seeking financial support for a cause or a charity. It reaches more

audience because Someone who starts a fundraiser campaign has a lot of
followers/support and the supporters persuade their networks to garner more reach.

There is a misconception that fundraising is more effective as compared to

crowdfunding. However, the power of Internet, social media, virality and trends
make crowdfunding campaigns more successful as opposed to traditional fundraisers.
Did you know over US$34 billion was raised during 2015 using crowdfunding?

How Does Crowdfunding Work And What Is Its Origin/History of Crowdfunding?

If you're wondering that crowdfunding is a new concept which is slowly taking over,
it is not. It has been practiced in India since ancient times, mostly for funding
cultural and religious causes. We called it "Chanda" back then. The modern day
crowdfunding originated from the West and is one of the best financing options for
any cause, especially if it has a mass appeal.

Types Of Crowdfunding:

Is crowdfunding a single element?

The answer is NO. There are various branches which come under the umbrella of
crowdfunding.

Equity-based crowdfunding
Reward-based crowdfunding
Debt-based crowdfunding
Litigation crowdfunding and lastly,
Donation-based crowdfunding
Here's more about each of them.

Types Of Crowdfunding:

Equity-based crowdfunding: Before knowing more about this kind of crowdfunding,

you should know that equity-based funding is illegal in a country like India. In
simple words, it is a joint effort made by individuals to support the cause of
other people or any other organizations in the form of equity. This is legal when
we consider the United States, where it is mentioned in the 2012 legislation which
allows a pool of small investors to come together.
Reward-based crowdfunding: This type of Crowdfunding is also known as the non-
equity way of funding your project. It has been widely used for funding campaigns
like supporting a free development of software, promotion of motion pictures,
aiding scientific research and development of inventions, etc. The people who are
funding are hopeful of returns from the project.
Debt-based crowdfunding: This is popularly known as 'Peer to Peer,' 'P2P,'
'marketplace lending' and even 'crowdlending.' Borrowers create campaigns to
fulfill their financial needs, and lenders contribute towards the goal for an
interest.
Litigation crowdfunding: It is a type of crowdfunding in which the plaintiff
reaches out many different people to get funds for a court case; it mostly happens
confidentially. The plaintiff asks money either in the form of a donation or gives
a reward in return. Later on, if the claimant wins the case, the investor may get
more than what he has invested.
Donation-based Crowdfunding: The best example for this would be raising funds from
individuals to support personal or social causes.
Each of these types of crowdfunding has its own applications. Let us take a look at
the use cases.

Applications Of Crowdfunding India

Crowdfunding for personal & Individual Use

Crowdfunding for real estate
Crowdfunding for startups (In India)
Crowdfunding for businesses in India
Crowdfunding loans
Crowdfunding college debt
Do you find yourself applicable to any of the following applications? Let's explore
different aspects of these applications.

Applications Of Crowdfunding

Crowdfunding for Personal Use:

At any given time in life, you may be in need of financial assistance. It could be
for a celebration, travel, medical emergency, education, a social cause, or more.
And much more, depending on your interests. So, If you lack funds to pursue your
interests, you can opt for crowdfunding. Many individuals have chosen for this
method and have succeeded in gaining funds.

Real Estate Crowdfunding:

Gathering of funds from various investors to support a housing project is all that
is involved in this kind of crowdfunding. It is also used to fund mortgages secured
by real estate. You can invest in this via debt and equity-based investments.

Crowdfunding for Startups:

In the recent times, India has witnessed a massive growth in the startup industry.
It is because people want to break out of the barrier of working 9-5 and our
government supports it. The government has a significant role to play in this, as
they're offering some advantages for startups such as relief from paying tax for
the first three years and much more. Startups often look out for investors and try
to approach VCs to get funding. Sometimes it gets tedious. Startups can try using
crowdfunding as it increases the brand reach and it's easier than approaching a VC.

Crowdfunding for businesses also comes under this.

If you're starting a business and running short of funds, then you might have
thought of approaching a bank to get a loan for yourself. Getting loans from banks
isn't easy as it has a lot of formalities involved. Crowdfunding will help you
fetch funds easier than any bank.

Crowdfunding Loans and College Debt:

Loans can be of any type - Personal loans, home loans, and even educational loans.
Crowdfunding can be of great help to you in these cases. Whether you're a college
student who's unable to repay the loan taken for completing your university
education or you or your family member wants to undergo treatment for an ailment,
crowdfunding is the answer as many generous individuals contribute to such causes.

Before getting started with crowdfunding, you need to be aware of certain legal
implications and rules related to it.

Crowdfunding Rules In India:

This is the most common question we hear today - “Is crowdfunding even legal in
India?”

Yes, apart from equity-based crowdfunding, other types are completely legal.
Crowdfunding in India is governed by Securities and Exchange Board of India,
popularly known as SEBI. It is the market regulator which mainly regulates the
securities market. SEBI was set up in the year 1988 as a non-statutory body. The
parliament passed the SEBI Act in 1992, which granted statutory powers to SEBI.
There are certain guidelines laid down by SEBI to govern crowdfunding.
Now that you've got complete knowledge of crowdfunding and its applications and the
legalities associated with it, You might be wondering how to get started?

We've got you covered as we've curated the list of top websites in India, where you
can put forth your project, be it charity based or you've got a certain cause,
these sites give wings to it.

How Do Crowdfunding Platforms Work?

Crowdfunding websites list your project/cause and help you raise money for it. You
just have to create a campaign, set a goal and promote it. Some websites allow you
to set up a campaign free of cost and charge you a minimal platform fee of 5% on
the total funds raised. You can drive the campaign by yourself or for an additional
fee, request the platform for assistance to reach your goal faster.