Regulation proposed for crowdfunding in India

Crowdfunding is a popular mode for raising funds for startups and entrepreneurs. Simply put, crowdfunding is the solicitation of funds, usually a small amount, from multiple investors through an online platform or through social networking to launch a specific venture or cause. Investors are typically individuals, often forming part of an entrepreneur’s social network.

Risks associated with crowdfunding include: (a) shifting of risk from sophisticated institutional investors to retail investors; (b) lower success rate; (c) genuineness of ventures; and (d) illiquidity, given the absence of a secondary market.

Globally, crowdfunding has evolved largely into four models based on end use: (a) donation-based, where funds are invested with no expectation of repayment; (b) reward-based, where funds are invested with the expectation of a reward; (c) peer-to-peer lending, where investors lend funds to entrepreneurs at fixed interest rates through a platform; and (d) equity-based, where investors receive shares for funds invested.

Ganesh Prasad is a partner and Sharad Moudgal is a principal associate at Khaitan & Co. The views of the authors are personal, and should not be considered as those of the firm.