Crowdfunding has moved up the value chain - with UK permitting equity crowdfunding. In USA, SEC is currently drafting the rules. Can India follow suit?

1. SMART MONEY 6
WHERE’S THE MOOLAH?
The Crest Edition
THE TIMES OF INDIA
A STAKE IN
THE NEXT
BIG THING
Recently, the UK has allowed
entrepreneurs to issue securities to
the ‘crowds’ of investors. The US will
soon follow suit
LUBNA KABLY
TIMES INSIGHT GROUP
I
n the UK, crowdfunding is no longer restricted to
making a monetary contribution for a social or
creative cause but actual investments (in return
for equity shares) can be made in entrepreneurial
ventures. This will shortly be a reality in the US too.
In July 2012, UK’s Financial Services Authority
approved the first online funding platform — Seedrs,
which acts as the intermediary between the entrepre-
neur and the crowds of investors. Individual investors
can invest as little as £10 but to mitigate risks they
cannot invest more than 20 per cent of their declared
net assets in aggregate through Seedrs (unless they
are self-certified as high net worth or sophisticated
investors). Entrepreneurs can raise up to £150,000
and are given a three-month period to raise their tar-
geted initial seed capital. If this amount is not raised,
investors get their money back and if the target capi-
tal is raised, the startup has to issue ordinary shares,
PAISA FROM
which are held by Seedrs as a nominee of the
investors. This ensures that the entrepreneur is not
bogged down with investor relation issues.
Within a month of Seedrs going live, three start-
ups achieved their target capital (much earlier than
the available three-month window). Digital Spin
raised £60,000 (for a 15 per cent equity share of the
THE PUBLIC
Company); PlayBrighter and Satago raised £30,000
each (for a 8 per cent and 14 per cent equity share of
the company, respectively).
“Tax benefits for investments in eligible startups
under the newly introduced Seed Enterprise Invest-
Crowdfunding is gathering momentum in India with a shift towards funding of creative
projects. Yet, given our ecosystem, making the leap from fad to finance may be difficult
LUBNA KABLY goal is reached. Since crowdfunding is in its infancy ments to the Companies Act, allowing a special cate-
TIMES INSIGHT GROUP in India, Wishberry.in has slightly more relaxed poli- gory of companies. “A special class of participatory
cies. “We require people to raise 20 per cent of their equity can be created. Companies and their investors
C
rowdfunding, a trend that allows people monetary goal in 30 per cent of their chosen time pe- can convert to regular equity structures once they
to connect online with the public for riod (which can be 30, 60 or 90 days) and once this attain a specified turnover and even choose to list on
cash to fund their business ideas, is fast milestone is achieved they can keep whatever amount conventional stock exchanges,” he says.
catching on in India. Effectively tapping is raised. If this threshold is not achieved, the money Sandeep Singhal, co-founder of Nexus Venture
into the power of the crowd are individu- is refunded to contributors,” explains Partners, points out that India is a little far from
als or groups who want to raise money Anshulika Dubey, vice president, Wishberry.in. reaching this stage. “The entire ecosystem needs to
for social or charitable causes and, more recently, Crowdfunding, as a mechanism, is unique. The be aligned to this new concept of issue of securities
artists pursuing their dreams. contributor is not making a donation (unless it is for to crowds — right from a greater risk appetite on
Recently, Fresh & Local, a movement to facilitate a charitable cause), nor giving a loan nor investing in part of the investors (one of three new entrepre-
urban farming in Mumbai used Kickstarter, a website neurial ventures are likely to fail) especially since
that has led the way in raising funding from the no easy exit option is available, proper checks and
small donations of web users, and collected contribu- balances for investor protection, ease in doing busi-
tions of $6,510 (against a target goal of $5,500) for
Crowdfunding, however, does ness including quick settlement of bankruptcy ment Scheme, which provides an up-front tax relief of
facilitating phase 1 of their project. They aim to not provide the expertise or claims to name a few,” adds Singhal. 50 per cent of the investment and no capital gains on
transform 5,000 sq ft of the terrace of a low-income benefit of networks. The ‘smart’ Investor protection appears to be the crux of the sale of shares after a three-year holding, could also
housing society, situated in a congested area, into an debate. “Given that crowdfunding models could have boosted enthusiasm for crowdfunding,” points
urban farm thriving with organic herbs, vegetables part of ‘smart money’ from essentially leave potential investors to make their own out a UK-based tax advisor.
and fruits. Rewards for the contributors (funders) qualified angel investors and independent assessment of the initial opportunity and The Jumpstart Our Own Business Startups (JOBS)
depended on the cash they stumped up. Those who the later monitoring of their investment, we have to Act was signed by Presided Obama on April 5, one of
gave one dollar got a mention on the project’s Face- venture capitalists is often be careful of the many spurious operations which may whose provisions facilities crowdfunding against issue of
book page. The two supporters who contributed in critical to the success of early- surface. So, some element of screening and due-dili- shares, enabling entrepreneurs to raise up to
the band of US$500 to US$999 got their name gence prior to their posting for a potential investment US$1,000,000 in any 12-month period. The internet
inscribed on the farm’s tool shed. stage enterprises. That is not would help avoid abuse,” says Sridar Iyengar, Chair- funding portal that is used for crowdfunding will need
Filmmaker Anirban Dhar, better known as Onir, available in crowdfunding man, India Advisory Board, Bessemer Ventures. to be registered with The Securities Exchange Commis-
put crowdfunding on the map when he raised Rs 1 Rahul Chandra, MD,Helion Advisors, is equally sion (SEC). To mitigate investor risks, caps have been
crore for the movie I am, and the success stories wary. “A crowdsourced capital pool would not be a imposed. For instance, if the investor’s annual net in-
have only multiplied since then. Srinivas Sunderra- securities — at least not yet in India (this is now pos- good assessor of risk as there is no lead investor come or net worth during a 12-month period is less
jan, a 28-year-old Mumbai-based film producer, suc- sible in UK and will be a reality in the US). However, who can justify the investment diligence.” than US$100,000, such a investor can only invest 5 per
cessfully used the more India-centric Wishberry.in people (who may not even know the fund raiser) con- From the entrepreneurs’ perspective, crowdfund- cent of such amount or US$2,000, whichever is higher.
platform and found 85 supporters for his film tribute, sometimes generously, because they want to ing could provide quicker ways of raising money, At the other end of the spectrum, investors with an an-
Greater Elephant. He collected Rs 5.28 lakh (against participate in something they excites them. A men- but there are drawbacks. “Early stage ventures do nual income or net worth of more than US$100,000 are
a target of Rs 6 lakh). The 37 supporters who con- tion of their name as co-producer of a film or on the have the potential to fail, hence money invested can allowed to invest up to 10 per cent of their annual in-
tributed Rs 500 or less got a “thank you” mention on tool-shed of an urban farm is an added incentive. get lost. VCs would have the risk-bearing capability come or net worth, up to a maximum of US$100,000.
the film’s official website plus regular email updates. “In India, wishlists such as gift registry for wed- with a view to achieve long term value proposi- “From the entrepreneur’s perspective, crowdfunding
CINEMA FROM THE The two supporters who paid Rs 1.50 lakh or more dings made available to family and friends, was the tions,” explains Anjana Vivek, director,Venture Bean offers an easy-access, low-cost, low-risk method of rais-
MASSES: Filmmaker got a mention as co-producers in the opening title. first step towards soliciting contributions using an Consulting ing capital. Setting up a project on a crowdfunding site
Onir raised Rs 1 crore
for his movie ‘I Am’ Kickstarter, like most global platforms, adopts an internet platform. Social crowdfunding — raising An added dimension is that crowdfunding will is relatively easy, and is accessible to entrepreneurs who
with the help of all or nothing approach — the payment is collected funds for good causes, emerged in early 2010. not provide expertise or benefit of networks. “The may not have access to traditional angel or VC investors.
Facebook after the campaign deadline only if the fundraising Today, crowd funding is actively used for creative ‘smart’ part of ‘smart money’ from qualified Angels On the other hand, the JOBS Act, unfortunately, limits
pursuits, such as films,” explains Priyanka Agarwal, and VCs is often critical to the success of early stage crowdfunding by imposing arbitrary investment caps
CEO,Wishberry.in. She foresees a move towards pre- enterprises. That is seldom available in the crowd per investor, total investment caps per project and bur-
sales, where the contributors actually get a proto- funding model,” adds Iyengar. densome information requirements,” explains Aron
type of the product they have funded (say a software Chartered accountant turned entrepreneur Gau- Izower, New York-based partner (Corporate and Securi-
application). rav Taneja, founder of Fabulloso.com that is an ties Practice) of global law firm Reed Smith LLP.
The question being asked today is: Can India online curated store that sells lifestyle products, says At present the SEC is working towards greater
adopt the crowdfunding route to enable entrepre- the last thing that entrepreneurs like him would investor protection and bylaws will be issued (it has a
neurs to raise capital against issue of securities? want is complex legislation around small amounts of nine-month window from April to do so). “The SEC
Equity crowdfunding, a new model being eyed by funding. “However, entrepreneurs will be grateful for should look to the social media structure as the first-
startups in the UK and US, allows people to invest funds from known sources, where they do not have line of investor protection. Web-based crowdfunding
small amounts online to fund early startups. to bandy their business plans to lots of unknown peo- is a social media phenomenon, and relies on the feed-
The first stumbling block in India appears to be ple — angels and other investors. So a good middle- back and interplay among online groups. The SEC
The Companies Act, 1956. Any offer of shares or of-the-path approach could be a simple legislation to should make sure that this exchange of information is
debentures made to 50 persons or more is considered enable raising of funds from a select few. If possible, encouraged and easily accessed on crowdfunding sites,
a public offering, which requires listing of these secu- existing legislation could be amended and simplified, so that potential investors can be informed about a
rities on a recognised stock exchange in India. The to take care of funding below a certain limit,” he says. project and entrepreneurs. At the same time, the SEC
Supreme Court affirmed this in a recent judgment. Looking at global trends, perhaps it is time for should not over-regulate or require costly disclo-
Rishi Bhatnagar, corporate lawyer, suggests amend- Indian legislators to turn to the drawing board. sures,” suggests Izower.