How Crowdfunding works in India All about Crowdfunding

Mayukh Choudhury, CEO and co-Founder, Milaap | Thursday, 07 September 2017, 07:00 IST

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What is Crowdfunding?

Crowdfunding is the practice of funding a project/venture or social cause (Medical/Education/ Sports) by raising money from many individuals for a common goal. Continue reading more on equity crowdfunding, reward-based crowdfunding, and what are the SEBI rules in India about Crowdfunding. Different crowdfunding platforms in India are also compared.

Before going deep into the topic of crowdfunding, let us know the exact definition of crowdfunding and how it differs from fundraising. Most often, people get confused between crowdfunding and fundraising.

Getting to the absolute basics, we know:

Crowdfunding is the practice of funding a project or a venture by raising money from a large number of people, especially via the internet. These people are called investors, and they can contribute any small amount of money depending on their capabilities. It targets individual donors.

Fundraising is seeking financial support for a cause or a charity. It reaches more audience because Someone who starts a fundraiser campaign has a lot of followers/support and the supporters persuade their networks to garner more reach.

There is a misconception that fundraising is more effective as compared to crowdfunding. However, the power of Internet, social media, virality and trends make crowdfunding campaigns more successful as opposed to traditional fundraisers. Did you know over US$34 billion was raised during 2015 using crowdfunding?

How Does Crowdfunding Work And What Is Its Origin/History of Crowdfunding?

If you're wondering that crowdfunding is a new concept which is slowly taking over, it is not. It has been practiced in India since ancient times, mostly for funding cultural and religious causes. We called it "Chanda" back then. The modern day crowdfunding originated from the West and is one of the best financing options for any cause, especially if it has a mass appeal.

Types Of Crowdfunding:

Is crowdfunding a single element?

The answer is NO. There are various branches which come under the umbrella of crowdfunding.

  1. Equity-based crowdfunding
  2. Reward-based crowdfunding
  3. Debt-based crowdfunding
  4. Litigation crowdfunding and lastly,
  5. Donation-based crowdfunding

Here's more about each of them.

Types Of Crowdfunding:

  1. Equity-based crowdfunding:  Before knowing more about this kind of crowdfunding, you should know that equity-based funding is illegal in a country like India. In simple words, it is a joint effort made by individuals to support the cause of other people or any other organizations in the form of equity. This is legal when we consider the United States, where it is mentioned in the 2012 legislation which allows a pool of small investors to come together.
  2. Reward-based crowdfunding: This type of Crowdfunding is also known as the non-equity way of funding your project. It has been widely used for funding campaigns like supporting a free development of software, promotion of motion pictures, aiding scientific research and development of inventions, etc. The people who are funding are hopeful of returns from the project.
  3. Debt-based crowdfunding: This is popularly known as 'Peer to Peer,' 'P2P,' 'marketplace lending' and even 'crowdlending.' Borrowers create campaigns to fulfill their financial needs, and lenders contribute towards the goal for an interest.
  4. Litigation crowdfunding: It is a type of crowdfunding in which the plaintiff reaches out many different people to get funds for a court case; it mostly happens confidentially. The plaintiff asks money either in the form of a donation or gives a reward in return. Later on, if the claimant wins the case, the investor may get more than what he has invested.
  5. Donation-based Crowdfunding: The best example for this would be raising funds from individuals to support personal or social causes.

Each of these types of crowdfunding has its own applications. Let us take a look at the use cases.

Applications Of Crowdfunding India

  1. Crowdfunding for personal & Individual Use
  2. Crowdfunding for real estate
  3. Crowdfunding for startups (In India)
  4. Crowdfunding for businesses in India
  5. Crowdfunding loans
  6. Crowdfunding college debt

Do you find yourself applicable to any of the following applications? Let's explore different aspects of these applications.

Applications Of Crowdfunding

Crowdfunding for Personal Use:

At any given time in life, you may be in need of financial assistance. It could be for a celebration, travel, medical emergency, education, a social cause, or more. And much more, depending on your interests. So, If you lack funds to pursue your interests, you can opt for crowdfunding. Many individuals have chosen for this method and have succeeded in gaining funds.

Real Estate Crowdfunding:

Gathering of funds from various investors to support a housing project is all that is involved in this kind of crowdfunding. It is also used to fund mortgages secured by real estate. You can invest in this via debt and equity-based investments.

Crowdfunding for Startups:

In the recent times, India has witnessed a massive growth in the startup industry. It is because people want to break out of the barrier of working 9-5 and our government supports it. The government has a significant role to play in this, as they're offering some advantages for startups such as relief from paying tax for the first three years and much more. Startups often look out for investors and try to approach VCs to get funding. Sometimes it gets tedious. Startups can try using crowdfunding as it increases the brand reach and it's easier than approaching a VC.

Crowdfunding for businesses also comes under this.

If you're starting a business and running short of funds, then you might have thought of approaching a bank to get a loan for yourself. Getting loans from banks isn't easy as it has a lot of formalities involved. Crowdfunding will help you fetch funds easier than any bank.

Crowdfunding Loans and College Debt:

Loans can be of any type - Personal loans, home loans, and even educational loans. Crowdfunding can be of great help to you in these cases. Whether you're a college student who's unable to repay the loan taken for completing your university education or you or your family member wants to undergo treatment for an ailment, crowdfunding is the answer as many generous individuals contribute to such causes.

Before getting started with crowdfunding, you need to be aware of certain legal implications and rules related to it.

Crowdfunding Rules In India:

This is the most common question we hear today - “Is crowdfunding even legal in India?”

Yes, apart from equity-based crowdfunding, other types are completely legal. Crowdfunding in India is governed by Securities and Exchange Board of India, popularly known as SEBI. It is the market regulator which mainly regulates the securities market. SEBI was set up in the year 1988 as a non-statutory body. The parliament passed the SEBI Act in 1992, which granted statutory powers to SEBI. There are certain guidelines laid down by SEBI to govern crowdfunding.

Now that you've got complete knowledge of crowdfunding and its applications and the legalities associated with it, You might be wondering how to get started?

We've got you covered as we've curated the list of top websites in India, where you can put forth your project, be it charity based or you've got a certain cause, these sites give wings to it.

How Do Crowdfunding Platforms Work?

Crowdfunding websites list your project/cause and help you raise money for it. You just have to create a campaign, set a goal and promote it. Some websites allow you to set up a campaign free of cost and charge you a minimal platform fee of 5% on the total funds raised. You can drive the campaign by yourself or for an additional fee, request the platform for assistance to reach your goal faster.

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