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. Crowdfunding is predicted to be one of the biggest financial changes in history. Commentators believe that it would revolutionize the way money is exchanged in India. If regulated appropriately, crowdfunding can provide an excellent funding alternative for early-stage startups and ventures.
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. 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. 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 the 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.
Types of crowdfunding
Donation-based crowdfunding is where the seeker creates the campaign and spreads awareness about his campaign using social media and marketing. The people supporting the cause and contributing for the same are called donors. There is no threshold for donations and people are free to contribute as much as they want. The donations are in the form of charity and without the expectation of any return or incentive. It may also be referred to as Charity Crowdfunding and usually supports philanthropic projects like contributing towards medical expenses, education expenses, emergencies, etc.
Reward-based crowdfunding is to fund an idea, start-up, or organization offering products or services, for example, free development of software, aiding scientific research, and development of new inventions. The donors get rewards based on the amount they contribute. The rewards usually consist of handmade items, prizes, or free products by the company being funded. For example, an artist raising funds for an art gallery may include a free art workshop for donors donating a specific amount of money.
Equity crowdfunding is also known as crowd-investing, wherein donors receive ownership over the company in return for their donations. It is similar to raising funds through an initial public offering or further public offering where the subscribers to shares own a percentage of the company. The difference between the two is regarding compliances required and time taken to raise funds, which makes online crowdfunding better than traditional methods of funding. Due to the requirement of large amounts of money and a limited percentage of equity ownership, they do have minimum donation thresholds.
Debt crowdfunding is also known as peer-to-peer lending or crowdlending. Donations are collected in the form of loans with an obligation to pay back later. It is suitable for companies that would rather pay back the capital than hand out the equity of the company. The campaign for such crowdfunding should mention the purpose of collection and the expected repayment period.
Royalty based crowdfunding
Royalty-based crowdfunding offers the backers of an idea or donors a percentage of revenue accrued when the company becomes successful or starts making profits. The main difference between royalty-based crowdfunding and equity-based crowdfunding is that here the backers or donors receive the royalty obtained from the sale of the products or ideas in which they have invested in. They gain as long as the idea is successful and running, whereas in equity crowdfunding the donors own a percentage of the company and invest in the company as a whole.
There are three types of people involved in crowdfunding:-
1. The Entities that Intends to raise money through this platform
2. The Investor who support the idea
3. The platform which brings together the fundraiser and the Investor
Presently, raising funds in India by a Company is governed by the provisions of the Companies Act,2013, Securities Exchange Board of India Act 1992 Securities contract(Regulations)Act 1956 Depositories Act, 1996.
In India Equity Crowdfunding is Illegal. To issue equity shares in India, companies need to comply with the provisions of The Companies Act,2013.
The Companies Act, 2013 Provides detailed provisions and rules regarding the issue of Equity shares through public and private placement. Private placement of Equity shares is governed by section 42 of The Companies Act 2013
To regulate Crowdfunding in India it is important that the following are established:
- The investors that are allowed to invest through the crowdfunding platforms,
- The types of entities that are allowed to raise funds through this channel and the disclosure requirements,
- The types of entities that are allowed to set up internet-based Crowdfunding Platforms to enable online solicitation from such investors, and the different associated aspects
Who can be the investor?
In the Indian scenario, considering the necessity to provide alternative funding sources to Start-ups and at the same time to ensure that retail investors are not made to bear the risks of Start-up ventures, it is proposed to permit only Accredited Investors to participate in crowdfunding.
I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.
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