Crowdfunding In India: A Beginner's Guide To Investing

Crowdfunding has become an increasingly popular way to raise money for creative projects, charitable causes, and business ventures. In India, there are several crowdfunding platforms that cater to different needs, whether it's for social and medical causes or business and startup funding. Before investing in crowdfunding in India, it's important to understand the regulatory landscape, which can be broadly categorized into three types: Donation Crowdfunding, Reward Crowdfunding, and Equity Crowdfunding. Each type has different levels of government regulation and offers distinct benefits to investors.

Donation-based crowdfunding

There are several platforms in India that facilitate donation-based crowdfunding, such as Ketto, Milaap, and Wishberry. These platforms allow individuals or NGOs to create fundraisers for various causes, including medical emergencies, social causes, creative projects, and business ventures.

To start a fundraiser on these platforms, you typically need to follow a few simple steps:

• Choose a platform that suits your needs and create an account.
• Set up your fundraiser by providing details about your cause, goal amount, and any relevant documents.
• Share your fundraiser on social media platforms to reach a wider audience and increase the chances of receiving donations.
• Withdraw the funds raised at any time during the fundraising process to access the financial support you need.

It is important to note that while these platforms provide an accessible way to raise funds, they also have certain limitations. For example, there may be restrictions on the number of people you can target with your fundraiser at one time, and you may need to provide regular updates to donors about how their funds are being spent.

Reward-based crowdfunding

Step 1: Plan Ahead

Planning is crucial to running a successful fundraiser. Start by defining your goal and calculating the cost of the product or service you wish to offer. If you are a startup, create a detailed plan for your product or service, and estimate the associated costs. For creative projects, determine the final cost of producing your movie, artwork, or other creative endeavour.

Step 2: Determine Rewards

Once you have established your funding goal, it's time to decide on the rewards you will offer to contributors. Some campaigners prefer to set a single contribution amount with a corresponding reward, while others offer a range of rewards for different contribution tiers. If you have multiple products or services, each with its own price point, you can assign specific rewards based on contribution levels.

Step 3: Start Your Fundraiser

Choose a crowdfunding platform that suits your needs and begin setting up your campaign. Write a compelling pitch that clearly communicates your story and the rewards you are offering. If possible, include a delivery date for the rewards. Remember to follow any guidelines and protocols provided by the crowdfunding platform.

Step 4: Find Backers

Promote your fundraiser to attract backers. Utilise social media platforms, offline events, and your personal network to spread the word. Target audiences who are most likely to be interested in your product or cause. For example, if you are developing a video game, focus your marketing efforts on gaming communities and enthusiasts.

Step 5: Fulfil Your Commitments

As the campaigner, you are typically responsible for fulfilling the commitments made to your contributors. Set realistic timelines, keep your backers updated on your progress, and express your gratitude for their support. Ensure that you can deliver on your promises within the specified timeframe.

Types of Reward-Based Crowdfunding Models:

There are two common models used in reward-based crowdfunding:

• All or Nothing Model: In this model, you must reach your funding goal for the campaign to be successful. If you do not reach the goal within the specified timeframe, the fundraiser is cancelled, and contributions are refunded to the backers. This model creates a sense of urgency and is often used for startups and creative projects, where the full funding amount is critical for the project to take off.
• Keep-What-You-Get Model: In this model, you get to keep all the funds raised, even if you don't reach your funding goal. This approach is more suitable for NGOs and medical causes, where any amount of funding is useful and can make a difference.

Examples of Reward-Based Crowdfunding Platforms:

• Kickstarter: A well-known global platform for reward-based crowdfunding, featuring campaigns from various industries.
• Ketto: A popular Indian crowdfunding platform that caters to a wide range of causes and projects, including startups, medical treatments, and social initiatives.

Equity crowdfunding

To comply with the Companies Act, 2013, there are several regulations that must be followed when engaging in equity crowdfunding in India. These include restrictions on the number of investors that can be involved in a private placement (limited to 200 investors in a financial year and 50 people at one time) and prohibitions on public advertisements for private placements. The offer must be made directly to the investor, and the company must have a prior record of the investors to whom the offer is made.

While equity crowdfunding is not widely available in India due to regulatory constraints, it is still possible to participate through quasi-equity crowdfunding models offered by certain platforms. These platforms allow investors to gain ownership in companies while navigating the legal framework governing equity fundraising in the country. It is important for investors to carefully review the regulations and seek specialist advice before engaging in equity crowdfunding opportunities in India.

In addition to equity crowdfunding, there are other forms of crowdfunding in India, such as donation crowdfunding and reward crowdfunding, which are more common and have fewer regulatory hurdles. Donation crowdfunding involves raising money for charitable or social causes without any expectation of returns, while reward crowdfunding provides investors with a product or benefit in exchange for their investment. These forms of crowdfunding are popular for social, personal, and creative projects, and there are several platforms in India that cater to these types of campaigns.

Popular crowdfunding platforms in India

Crowdfunding has become an increasingly popular method to raise money for early-stage businesses and charitable organisations in India. While donation-based and reward-based crowdfunding platforms are more common due to minimal regulatory expectations, equity crowdfunding is the most controversial form in India.

Ketto

Ketto is one of the most well-known crowdfunding platforms in India. It focuses on various social and personal causes, including healthcare, children, education, animal welfare, and women's empowerment.

ImpactGuru

ImpactGuru is a renowned crowdfunding platform that offers fundraising solutions for medical treatments, emergencies, NGOs, and startups.

Milaap

Milaap is a popular crowdfunding platform that helps individuals and NGOs raise funds for social and medical needs. They also offer micro-loans to people in rural and remote regions. Milaap has been praised for its transparency and dedication to keeping donors updated on how their contributions are spent.

Kickstarter

Kickstarter is a crowdfunding platform that allows individuals to raise funds for creative projects, including films, research projects, tech innovations, and even edible cutlery.

LetsVenture

LetsVenture is a platform that enables investors, family offices, and startups to be part of the Indian startup ecosystem. It provides tools and resources to invest in and lead investments in startups across all stages, from early-stage disruptive startups to growth-stage investment opportunities.

Grex

Grex is another company that operates in the field of equity crowdfunding. These platforms generally use a quasi-equity crowdfunding model based on private placement principles under the Companies Act, 2013.

Regulatory future of crowdfunding in India

Crowdfunding is a means of raising money for a creative project, a benevolent or public-interest cause, or a business venture. It involves collecting small financial contributions from numerous people, typically through online platforms or social media. The regulatory future of crowdfunding in India is a complex issue that has been the subject of recent debate and discussion.

In India, crowdfunding can be categorised into three main types: donation crowdfunding, reward crowdfunding, and equity crowdfunding. Donation and reward crowdfunding are the most common forms and attract basic fiscal legislation such as income tax laws. Equity crowdfunding, on the other hand, is more controversial and currently not permissible due to the provisions of the Companies Act, 2013, the Securities Contract (Regulation) Act, 1956, and the SEBI Act/Regulations.

The Securities Exchange Board of India (SEBI), the country's securities market regulator, has issued notices stating that digital platforms facilitating equity crowdfunding are neither authorised nor recognised under securities laws. This has created uncertainty in the industry and raised questions about the regulatory future of these platforms.

However, there have been some efforts to develop a regulatory framework for crowdfunding in India. SEBI proposed guidelines in 2014 via a 'Consultation Paper on Crowdfunding in India', aiming to improve access to funds for start-ups and small-to-medium enterprises. These guidelines include restrictions on investor type and contribution amounts, eligibility criteria for start-ups, and disclosure requirements.

While the regulatory future of crowdfunding in India remains uncertain, it is essential to formulate balanced regulations that lower the cost of capital, increase liquidity, ensure investor protection, and minimise investment risks. The development of a robust regulatory framework will be crucial for promoting crowdfunding as a viable alternative financing method for small and medium enterprises (SMEs) and start-ups, enabling them to access the capital they need to grow.

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