2. Introduction
• Crowdfunding is a method of raising funds
from the public for specific purposes like for a
creative project like music, film or book
publishing, to fund a new business venture, for
benevolent causes like community-based
initiative, social cause or donations for medical
emergencies.
• The funds are collected by organizations,
groups or individuals by raising small amounts
from a large number of people.
3. Cont…
• Securities and Exchange Board of India
(SEBI), a regulatory body has defined
crowdfunding as solicitation of funds in small
amounts from multiple investors through web-
based platform or social media site for a
specific project, business venture or social
cause .
• Funds can be collected manually or digitally.
4. Cont…
• There are various websites available online to
raise money for different purposes, for
example, Indiegogo site is usually used by
start-ups and entrepreneurs having innovative
ideas, non-profit organisations usually
campaign through the site Ketto, similarly,
individuals who wish to raise money for their
personal purposes can use social media
accounts or GoFundMe platform.
5. History and Growth
• Crowdfunding is one of the oldest methods of raising
funds.
• For centuries, books are being crowdfunded.
• One of the earliest forms of crowdfunding is
subscription schemes, which required a minimum
number of subscribers for the books to be published.
• A renowned philosopher, Auguste Comte published his
work after issuing notes for public support. It is not
exactly crowdfunding as we have today but it helped in
building confidence in the investors to risk
publications.
6. Cont…
• Another form of early crowdfunding was the
war bonds issued by the British Government in
the 1730s, during the time of military conflicts.
• As the people lost faith in the currency and
demanded conversion of their currency into
gold, the London mercantile community
stepped in to support the bank and restore faith
in the currency by crowdfunding their own
money.
7. Cont…
• Another example of early crowdfunding is
when the publisher Joseph Pulitzer decided to
launch a campaign in a newspaper to raise
funds for the pedestal of Statue of Liberty after
the government failed to do so.
• The campaign was very successful in attracting
small donations from nearly 1,60,000 donors
and raising enough money to pay for the
pedestal.
8. Crowdfunding
• Crowdfunding is not a new concept for India.
• The founder of Reliance Industries, Dhirubhai
Ambani was first to use methodology of
crowdfunding for his small yet growing textile
business which was crowdfunded by
communities across the Indian state of Gujarat
9. Online Crowdfunding
• Usage of the internet for the purpose of
crowdfunding is increasingly gaining popularity.
• With 4.57 Billion people constituting the global
digital population and 59% of the entire world
population online, the internet has paved the way
for an alternative ecosystem.
• Crowdfunding campaigns online have a wider
reach, it is cheaper and more convenient
compared to using traditional ways of
crowdfunding.
10. Role of Crowdfunding Websites
• The crowdfunding platforms usually charge a
percentage of commission from the fund raised as
service charge for drawing traffic to the campaign,
providing the donors with smooth payment facilities
and running and operating the website.
• Donation crowdfunding websites like Milaap take 5%
of the total money raised, Ketto accepts a commission
of 6% along with an additional Rs. 2000 for setting up
the campaign at the website.
• Usually the websites collecting donations for medical
or social purposes, like Milaap, are also responsible for
informing the donors of the status of their donation and
updates on the campaign.
11. Regulating Authority
• There is no particular authority or department that regulates
all aspects of crowdfunding.
• The slight regulation that does exist in this sector depends
on the type of crowdfunding, for example debt
crowdfunding comes under the purview of Reserve Bank of
India, similarly, raising money by allotting ownership of the
company and issue of securities comes under the
jurisdiction of Security Exchange Board of India (SEBI).
• Reward-based or donation-based crowdfunding do not have
specific regulators but attract laws such as Income Tax Act,
1961, the Foreign Contribution (Regulation) Act, 2010
(FCRA) and the Foreign Exchange Management Act, 1999
(FEMA).
12. Cont…
• In Donation crowdfunding and Reward crowdfunding,
only donations or grants are solicited and no financial
return in the form of a yield or return on investment is
expected by the donor/grantor.
• Hence, such funding mostly falls outside the purview of
Securities market regulator. (In India, payment of
donations are mainly governed by the provisions of
Income Tax Act).
• Peer-to-Peer Lending, depending upon whether pure
lending or any debt securities are issued, are regulated
by Banking or Securities market regulator.
• Crowd Sourced Equity Funding are mostly regulated by
Securities market regulator.
13.
14. • Donation crowdfunding denotes solicitation of
funds for social, artistic, philanthropic or other
purpose, and not in exchange for anything of
tangible value.
• Reward crowdfunding refers to solicitation of
funds, wherein investors receive some existing or
future tangible reward (such as an existing or
future consumer product or a membership
rewards scheme) as consideration.
• In Peer-to-Peer lending, an online platform
matches lenders/investors with borrowers/issuers
in order to provide unsecured loans and the
interest rate is set by the platform. Some Peer-to-
Peer platforms arrange loans between individuals,
while other platforms pool funds which are then
lent to small and medium-sized businesses.
15. • Equity Based Crowdfunding refers to fund
raising by a business, particularly early-stage
funding, through offering equity interests in
the business to investors online. Businesses
seeking to raise capital through this mode
typically advertise online through a
crowdfunding platform website, which serves
as an intermediary between investors and the
start-up companies.
16.
17.
18.
19.
20. Challenges of Crowdfunding in India
• Low trust levels of doing the things online.
• The industry is not very investor-friendly
• Crowdfunding platform are not making any
financial promises to the contributors, they
should be theoretically safe to operate.
• Crowdfunding platforms have to work at
building an offline base to finally induce mass
awareness and encouraging participation.
21. Benefits of Crowdfunding
• Crowdfunding provides a much needed new mode of
financing for start-ups and SME sector and increases
flows of credit to SMEs and other users in the real
economy.
• Financial crisis (2008) resulted in failure of number of
Banks and, consequently the Basel III Capital adequacy
norms have been made applicable to Banks. As a result,
Banks have become increasingly constrained in their
ability to lend money to the ventures or start-ups which
may have high risk element. Hence, there is a need for
funding for SME through alternative sources.
22. • SMEs are able to raise funds at lower cost of
capital without undergoing through rigorous
procedures in this mode.
• Crowdfunding provides new investment avenue
and provides a new product for portfolio
diversification of Investors.
• It increases competition in a space traditionally
dominated by a few providers (providing finance
to Start-ups and SMEs).
• The operators of a crowdfunding platform may
engage in vetting or due diligence of projects to
be included on their website, to maintain the
reputation of the website.
23. Opportunities of Crowdfunding in
India
• An increase in social media presence
• Investment base and funding prospects
• Small businesses and startups with
opportunities to showcase their
product/services
• Feedback to startups about the general
perception of how good their business model is
according to the crowd.
