Crowdfunding

Two definitions, and the exam can use either.

The general one: crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture.

SEBI's, from its consultation paper: a solicitation of funds (small amounts) from multiple investors through a web-based platform or social networking site for a specific project, business venture or social cause.

What made it possible is social media as a cost-effective platform for disseminating information, which lets a small entrepreneur appeal to a wide section of society. A technology platform sits in the middle, acting as an intermediary connecting fund seekers with potential investors or donors.

Three forms, three regulators — and that is the examinable structure.

Donations are largely for social causes. Loans and equity investments are meant for commercial businesses. And the workbook's verdict on Indian experience so far is that crowdfunding has proved effective for objectives with a social or humanitarian appeal rather than a business venture.

Loans sought through crowdfunding are known as Peer-to-Peer or P2P Lending, and these fall under the regulatory purview of the RBI — not SEBI.

Equity crowdfunding is quite uncommon in India because of the prevalence of private placement regulations — Section 42 of the Companies Act, 2013 read with the Companies (Prospectus and Allotment of Securities) Rules, 2014. A company is restricted to private placements to not more than 200 investors, which is the wrong shape entirely for raising small amounts from a crowd. Where a business venture needs higher amounts of capital, crowdfunding can prove infeasible and may exceed the permissible levels.

SEBI's own two-sided verdict. In favour: crowdfunding reduces the cost of capital by diversifying risk among a large number of retail investors. Against: it exposes retail investors to early-stage financing of businesses, and there is no standardisation of disclosures and transparency to make informed investment decisions.

Where it does work, it works early. As far as start-up businesses are concerned, crowdfunding acts as a catalyst for seed-stage financing — the stage before angels, when banks and institutional investors are still hesitant because there are no revenues and no profits.

Sahyog Krishi, a Pune agri-tech venture, needs money twice, and the two attempts end differently.

Attempt 1 — a social campaign. It raises Rs 40 lakh from 800 contributors at an average of Rs 5,000 each, on a web platform, to deploy soil-testing kits with smallholder farmers. Donations, a humanitarian framing, no securities issued, no SEBI question. It works.

Attempt 2 — Rs 6 crore of equity from the crowd. The plan is 900 retail investors at Rs 66,667 each.

Investors targeted                                900
Private placement ceiling, Section 42             200
Shortfall in permissible investor count           700

The raise is not merely difficult, it is structurally impossible at that shape. Compressed to 200 investors, each cheque becomes Rs 3 lakh — no longer small amounts from a large number of individuals, and no longer crowdfunding in any meaningful sense.

What the venture does instead. It raises Rs 6 crore from an angel fund, where there is no minimum investment value for an angel investor and the fund itself carries the SEBI registration, the disclosure discipline and the accredited-investor framework. Sahyog gets the money; the retail public gets the protection SEBI was worried about losing.

Had it wanted debt instead, the crowd route survives — as P2P lending, on an RBI-regulated platform.

Chapter 7 (AIF Ecosystem), section 7.1.2, carries both definitions, the donation/loan/equity split, the P2P link to the RBI, and SEBI's benefits and risks. Expect a definition-matching question, a 'which regulator' question on P2P lending, and a 'why is equity crowdfunding uncommon in India' question.

• P2P lending is the loan form of crowdfunding and is regulated by the RBI, not SEBI. This is the single most reliable question in the section.
• Equity crowdfunding is uncommon because of private placement regulation, not because it is prohibited by name — Section 42 and the 200-investor ceiling do the work.
• Crowdfunding is not an AIF and carries no SEBI registration; the platform is an intermediary, not a fund.
• Donations dominate social causes; loans and equity are for commercial ventures. The workbook draws that line explicitly.
• SEBI listed both a benefit and a risk — lower cost of capital through risk diversification, against retail exposure to early-stage financing with no standardised disclosure.
• It is a seed-stage catalyst. For larger capital requirements it becomes infeasible and may exceed permissible levels.