As the internet becomes increasingly important in our lives, entrepreneurs are increasingly turning to it for fundraising. Entrepreneurs and business owners in India need to consider several factors before starting a business. Online fundraising is an option for raising funds. Find out more here.
What is crowdfunding?
With crowdfunding, aspiring businesses can raise funds from multiple investors using websites and social media platforms. You can raise money to fund projects like the release of a new book, the creation of a music video, or the launch of a new product. These funds can also be used to develop a business or community initiative. A number of these organizations provide alternatives to traditional methods of financing, such as borrowing funds from banks or other financial institutions. Your business can acquire funds by making small contributions over time.
Indie crowdfunding offers a variety
- Community-based crowdfunding, or social lending, is a legal way for people to contribute without expecting a return on their investment. Social lending is a common source of financing for artists and organizations.
- A pre-order is a commitment from an investor to receive a product or service in the future. The purchase of a product today is made with the understanding that the product will be delivered after a certain period has passed, for example.
- Community-based crowdfunding based on rewards: This type of fundraising gives donors the opportunity to give money with the expectation of receiving a reward in the future.
- Peer-to-peer lending, or crowdfunding for debt, allows investors to connect with issuers online. The platform allows these borrowers to obtain unsecured loans at a rate determined by the platform itself. These transactions can only be conducted by NBFCs licensed in India.
- A method of early stage funding, equity crowdfunding refers to the sale of equity interests to investors online.
Is online fundraising legal in India?
Indian Securities and Exchange Board states that equity-based crowdfunding is illegal. Its primary objective is to protect the interests of investors in India since SEBI regulates the securities market.
Equity-based crowdfunding involves a number of risks since it is an unregulated investment. An investor’s skills and experience may result in heavy losses if they do not have the ability to assess risk.
For investors with limited savings, higher returns can be tempting. In addition, issuers do not provide adequate security, which inhibits liquidity. Moreover, investors are unable to obtain hard information in such circumstances. As a result, they cannot conduct due diligence in the same way as venture capitalists or financial institutions.
Angel investors, bank loans, and private equity are the three main sources of funding for startups in India. Making an equity offering to the public requires that a company be commercially viable. Fundraising is typically used during the early stages of a product’s development, for example, during pilot testing. Crowdfunding does not have rules that protect investors. To minimize investment risks and increase market liquidity in such situations, India has not yet developed policies.
SEBI’s Guide to Fundraising Online
In 2014, the SEBI published guidelines on online fundraising in India in its “Consultation Paper on Crowdfunding in India”.
- Only accredited investors should be allowed to participate
- At least 5% of issued securities must be owned by qualified institutional investors
- A maximum of 200 investors must contribute between $20,000 and $60,000
- A startup that is less than two years old can hold a fundraising drive
- The program requires participants to disclose their business plans, financial information, and management information
- Screening committees registered with the SEC perform due diligence on startups and investors.