Crowdfunding is a process in which a large number of people come together and contribute small sums of money towards a cause. By doing so, they raise a large amount of money. There are four major kinds of crowdfunding – these include donations-based crowdfunding, rewards-based crowdfunding.
They also include equity crowdfunding and debt-based crowdfunding. Donations based crowdfunding involves people making small donations towards a cause and raising a large sum of money. Rewards based crowdfunding is the logical conclusion of donations-based crowdfunding. It involves small rewards given by the campaigner to the contributor in exchange for the donation.
Equity crowdfunding is unfortunately still illegal in India. However, in many other parts of the words it is not. In 2012, after the President Obama signed the JOBS Act, the United States legalized equity crowdfunding. The JOBS Act allows startups to raise an indefinite amount of money. By 2018, equity crowdfunding is set to change the world of startups. Since 2013, many businesses have found crowdfunding online a success.
What Is Equity Crowdfunding?
Equity crowdfunding is the process by which a lot of people (“the crowd”) contribute small amounts of money to a business campaign in return for ownership of the business venture. In other words, the contributors here are not donors, but investors. If the start-up kicks off well and the value of the company increases, this share can be sold later at a higher price.
It is significantly different from debt crowdfunding where a large number of people (“the crowd”) lend you small amounts of money for your business which you later have to pay back with interest. Debt crowdfunding is suitable for people already in business. For people who are just starting out with their business, equity crowdfunding is important.
The regulations of SEBI may dictate that equity crowdfunding is illegal in India but in other parts of the world, it is more than successful. For example, in the United States, some thirty-four crowdfunding platforms engage in equity crowdfunding. In the United Kingdom too, plenty of crowdfunding platforms offer the option of equity crowdfunding, some of these in very specialized fields.
Why Did The Need For Crowdfunding Arise?
Part of the reason why the need for crowdfunding arose is because of the damage left by the recession of 2008. The damage of the recession resulted in a large-scale loss of jobs for people from all walks of life. Big businesses crashed and the need to revitalize small businesses became important. The crowdfunding exemption movement gained momentum. The demand to provide small business valued at less than a million with the benefit of raising money was placed in Parliament. In 2012, President Barack Obama signed the Jumpstart Our Businesses Act.
Why Does India Need Equity Crowdfunding?
Equity crowdfunding allows small time business owners to raise money to kickstart their businesses without having to go through a lot of hassle. It helps in creating jobs by creating more businesses. As a result, it reduces unemployment.
The online market has kicked off well in India with access to the internet steadily increasing. This is a good time for Indian businesses to be able to start raising money as investment. India’s unemployment problem has existed for the past century. If this new wave of e-commerce can be used to generate employment, then it would be a healthy boost for the Indian economy.
Indian start-ups depend on Venture Capitalists and Angel Investors. But fundraisers in India have the potential to be so much more. A rapid democratization of the investment sector is what is needed in India.
