Crowdfunding is expected to be the next big thing in business, fundraising, according to experts. There are numerous ways to raise funds, including bank loans, corporate investments, and venture capital. However, online crowdfunding is by far the simplest and safest way to raise funds from people who believe in your cause. It has proven to be an excellent funding alternative for a variety of causes and emergency financial needs when properly managed.
The concept of online crowdfunding originated in the Western world. During the recent covid-19 pandemic, crowdfunding gained enormous popularity among Indian people. However, the term is new, many people are unaware of its power or whether it is legal in India. This article attempts to explain in brief the various forms of online crowdfunding and their legality in our country.
What is online crowdfunding?
The use of the internet for the purpose of crowdfunding is becoming increasingly popular. The internet has paved the way for an alternative ecosystem, with billions of people constituting the global digital population, and around 60 percent of the entire world population online. Crowdfunding campaigns conducted online have a wider reach, are less expensive, and are more convenient than traditional methods of crowdfunding.
What is the role of crowdfunding websites?
Crowdfunding platforms typically charge a percentage of the funds raised as a service charge for driving traffic to the campaign, providing donors with secure payment options, and operating the website. Donation crowdfunding websites take a certain percentage of the total amount raised. This commission percentage differs from the platform, along with some additional charges for setting up the campaign on the website.
What are the different types of crowdfunding?
1-Donation-based crowdfunding
In donation-based crowdfunding, the fund seeker creates awareness among the public through various social media platforms. There is no limit on the donation amount as the donations are made in the form of charity, and donors do not expect any return or incentives in the future. It supports philanthropic projects like contributing to education expectations, emergencies, medical expenses etc.
2-Rewards-based crowdfunding
In this type of crowdfunding, donors give funds to any start-up or a growing company involved in creating a product or service based on some scientific research and innovation. In return, the donor gets rewards based on the amount they contribute.
3-Debt Crowdfunding
In debt-based crowdfunding, donations are collected in form of loans where donors expect later payback. This crowdfunding is suitable for those organizations who want to get a complete hold of the company by paying back the capital to the donor. In this crowdfunding campaign, there should be a clear description of the expected repayment period.
4-Royalty based crowdfunding
In royalty-based crowdfunding, donors get a percentage of revenue generated when company becomes successful and starts making profits. This type of crowdfunding is different from equity crowdfunding only in the way that donors receive a royalty from the sale of products or inventions in which they have invested.
5-Equity Crowdfunding
Equity crowdfunding, also known as crowd-investing, is a type of crowd-funding in which donors receive ownership of the company in exchange for their contributions. It is similar to raising funds through an initial public offering or a subsequent public offering in which subscribers to shares own a portion of the company.
Is it legal to raise funds online in India?
There are many people who are in doubt about whether crowdfunding is legal and safe in India.”Yes!”, Raising funds online through crowdfunding is legal in India. There are many Online Crowdfunding platforms offering a secure, dependable, and simple way to raise funds online.
Anyone can raise funds to accomplish the following goals:
- Fundraising for medical emergencies
- To pay for expensive hospital bills, you can start an online crowdfunding campaign
- You can raise funds in the memory of your loved ones
- You can use this site to raise money for chemotherapy and expensive cancer medications
Crowdfunding that is illegal in India
There are many types of crowdfunding, but Equity-based crowdfunding is illegal in India. This type of crowdfunding involves raising funds for early-stage ventures or business ideas by providing equity interest to online investors in return for their funds.
According to the Securities and Exchange Board of India, equity-based crowdfunding is unauthorized and illegal. Not every investor in India is supposed to be skilled and experienced enough to identify the risk. The declaration of equity-based crowdfunding as illegal has been done to protect the interests of investors in India.
The decision of SEBI to prohibit equity crowdfunding is correct for the reasons stated by the regulatory body. There is no regulation to protect the interests of investors, no obligations for the company raising funds, and no liability on the websites creating campaigns for funds.
Crowdfunding can be a huge help to entrepreneurs and early-stage companies because funds can be raised easily, without major compliances, and at a lower cost than other methods. It is critical that the government creates appropriate regulations and laws to govern digital crowdfunding, as well as to determine the rights of investors and the liabilities of companies and intermediary platforms.