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This article is written by Diksha Bhargav

This article has been published by Sneha Mahawar.


A Start-up grows when it has a steady flow of investments. A Start-up can finance itself from banking institutions, venture capitalists, private equity, or angel investors however there are multiple restraints attached to it as well. A small entrepreneur might find it difficult to have access to these financial methods. Therefore, it becomes necessary to broaden the range of financing instruments available to the Start-up ecosystem to continue their role in investment, growth, innovation, and generating employment. This is where crowdfunding comes into play. 

Initially, Crowdfunding gained popularity in India through various other sectors, including medical expenses and social impact businesses. Crowdfunding for Startups is still a growing concept in India, but with the boom in the start-up ecosystem, it could become the most popular source of investment opted by small enterprises.

This article aims to understand the concept of crowdfunding in India, its regulations, and its drawbacks. 

What is crowdfunding

Crowdfunding is a method used to raise money, where a group of people contributes by pooling funds for startups, projects, or any other ventures. Small amounts of funds are put together by a  large number of investors by way of fund-raising campaigns, accompanied by strong advertising for a specified period. These fund-raising projects are carried out on crowdfunding platforms, social media, etc. 

One can congregate crowdfunding from friends, family, and entrepreneurs who believe in the business concept. Crowdfunding could also be a very persuasive way to pitch your ideas to potential investors. 

Types of crowdfunding 

Crowdfunding is an umbrella concept under which there are various kinds of crowdfunding. The different types of crowdfunding are:

Equity-based crowdfunding

In this type of crowdfunding, the benefactor is allowed some equity in a company by way of trading capital. The owner of such equity has a share in the profit by way of a dividend or distribution. However, such a type of crowdfunding is illegal in India. 

Reward-based crowdfunding

Any contribution in exchange for a reward is called Reward-based crowdfunding. The reward can be in the form of giving access to the company’s products or services. It is non-equity-based funding. The reward-based funding is common for projects that involve free software development, motion picture promotion, scientific research, civic projects, etc. 

Donation–based crowdfunding

In Donation based crowdfunding individuals donate and contribute a small amount of finance without any expectation of return. This type of crowdfunding is mostly used for projects that involve social causes. We have seen that Donation-based crowdfunding is used in situations of natural calamities, disaster relief, charities, etc. 

Debt crowdfunding or Peer-to-Peer (P2P) lending 

P2P crowdfunding is similar to any other loans and these loans are repaid along with interest. The rate of interest can be decided by a mutual agreement between the borrower and the lender. In this type of setup, the borrower can be an individual or a legal person. 

Difference between crowdfunding, private equity, venture capital, and bank loan

S.NoBasisCrowdfundingPrivate Equity and Venture Capital Bank loan 
How is it raised?In Crowdfunding the business is pitched to a large online audience through which it can generate funds either through pre-order of products or through the sale of items at a discount. In PE and VC the  business idea is pitched to a limited set of investors or High Net Worth Individuals (HNIs)Banks usually require a proven track record or a proven business model for financing.
Return on Capital In crowdfunding, no equity is given in return for the finances provided. Also, Equity crowdfunding is illegal in India. In this type of investment, the Entrepreneur must provide equity in return for capital.A bank loan usually requires repayment and collateral.
StageCrowdfunding doesn’t require any previous track record and is used generally for raising seed capital. A business can raise finances from PE or VC after the business has generated certain tractions.A bank loan cannot be obtained without having a proven track record. 

Advantages of crowdfunding 


Anyone who has basic computer skills and a clear business idea can set up a crowdfunding campaign page. 

Vast network

For successful crowdfunding, it is important to increase its reach by adopting various networking strategies such as search engine optimization (SEO), etc. This helps create a vast network of people. 

Building a community

For raising funds through a crowdfunding campaign a business needs to share their business idea with people who could be prospective buyers or clients in the future. Through this, a community of people could be built successfully. 

Advancement in the business

By proposing your business idea before a targeted audience a business could receive positive as well as negative feedback. A business could make advancements even before entering the market based on this feedback.

Complete ownership 

No requirement to give up any equity or any requirement to have a repayment plan or interest payments.

Disadvantages of crowdfunding 

High scrutiny

The platforms that regulate crowdfunding campaigns might reject your business idea if it does not meet their criteria. The idea might also be rejected by the audience which might not be good for a business’s reputation. 

Lack of protection

By disclosing your project details on an online platform you are open to the risk of data and identity theft, and scams. 


Crowdfunding platforms as fees take some percentage of the amount received as donations, in case the business has received a very less amount then this option won’t be feasible. 

Regulatory framework of crowdfunding

Crowdfunding is rather an unconventional concept that could not be placed either under “Public offer”, “Private placement” or as “VCF or AIF”. However, since the Indian government has been focussing more on start-ups and small businesses, so for promoting their growth, the government realized the importance of crowdfunding platforms in India as a fundraising platform to meet the needs of start-ups and other smaller companies. 

Therefore to regulate, SEBI has brought a Consultation paper discussing the prospects of crowdfunding and its implementation in India. This Consultation paper aims to protect retail investors as well as provide capital to Startups and Small businesses. 

Scope of these consultation papers

Donation-based, reward-based, and peer-to-peer lending don’t fall under the scope of SEBI. Therefore the three types of crowdfunding that are regulated by SEBI are:

  1. Equity-based crowdfunding 
  2. Debt-based crowdfunding
  3. Fund-based crowdfunding

Regulations provided 

Eligible investors 

As per SEBI’s consultation paper, only “Accredited investors” are eligible to invest through crowdfunding platforms. These Accredited investors include:

  1. Qualified Institutional Buyers (QIBs) as per the definition provided in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. 
  2. A Company that is incorporated under the Companies Act with a net worth of Rs. 20 crores or more.
  3. High Net-worth Individuals (HNI) with a net worth of 2 crores or more. 
  4. Eligible Retail Investors (ERI) who have an annual gross income of Rs. 10 lacs or more. ERIs would include those retail investors who have filed an income tax return for a minimum of 3 financial years. Additionally, the ERIs should not invest more than 10% of their net worth i.e. a minimum of INR 20,000, and cannot invest more than INR 60,000 in an issue through a crowdfunding platform. 

Eligibility for companies and conditions 

SEBI has excluded any company which has evolved as a business and is at a better stage of benefitting from the crowdfunding option. Therefore only the following companies are eligible for benefitting from crowdfunding:

  1. A company that is not more than 2 years old,
  2. An unlisted company,
  3. A company that is not a branch or that is not an associate of any larger conglomerate or group of companies
  4. Not engaged in financing ventures like further lending
  5. Not engaged in real estate activities, and
  6. Not offering more than INR 100 million in a year. 

In addition to this, it also proposed that these issuer companies shall not engage in multiple platforms but route all their offers through one crowdfunding platform which is recognized by SEBI. They should not engage in advertising their offers to the public or in incentivizing others to promote their offers. They should also have provisions dealing with the oversubscription

Investment limit 

SEBI has proposed that the offer through the crowdfunding platform shall not be made to more than 200 ERIs and HNIs. This excluded QIBs, thus, the offer could be made to an unlimited number of QIBs. 

However, SEBI had further proposed that all QIBs should hold more than 5% of the securities issued collectively. Further, a company should purchase a minimum of 4 times the offer value per person, HNI should buy at least 3 times the minimum offer value per person and an ERI should purchase the minimum offer value per person which is INR 20,000 in a private placement of securities. Additionally, the limitation on investment by ERI is INR. 60,000. 

Disclosure requirement 

The whole crowdfunding procedure begins when a small company or a start-up sends an application to the crowdfunding platform. After the application is sent, the platform conducts due diligence if the results are positive, then the company’s information and requirements are posted on the platform. Accredited Investors can then assess the company and its requirements. If the investor is interested, then the issuing company can circulate the offer by private placement to the accredited investor who is registered on the crowdfunding platform.

In addition, SEBI has proposed that the private placement should be by provisions of Section 42 of the Companies Act, 2013. It provides details regarding the offer size and price, the financial condition of the company, details of the management and governance, and the risks associated with the business. 

Generally, the offer documents do not contain information regarding the future plans because of the lack of history of the company, but it is advisable for the company to also provide future growth plans to the investors. Furthermore, the company raising funds is required to make biannual disclosures to the crowdfunding platform regarding financial statements, usage of funds, state of business, other fundings, and pending litigations or penalties. 

Eligibility of crowdfunding platforms 

SEBI has classified entities into three classes that can set up a crowdfunding platform:

  1. Class I would include Recognized Stock Exchanges and the Depositories registered with SEBI. 
  2. Class II would include Technology Business Incubators that are promoted by state or central government and have experience of 5 years with a net worth of INR 10 crore or more and it should be registered as Society under Societies Act, 1860 or under Section 8 of Companies Act. 
  3. Class III would include the Associations of Private Equities and Angel Investors that have 3 years track record, 100 or more members, are registered under Section 8 of Companies Act, 2013, and have a paid-up share capital of INR 2 crores. 

SEBI has also proposed separate entities with experience and knowledge in the field to form the platforms. It has also put forward a separate new class of Crowdfund AIFs for Fund-based crowdfunding.


Crowdfunding is still an evolving concept in the business world. We have seen successful crowdfunding campaigns in other sectors but using this method of generating funds for small businesses and start-ups is yet to see its peak. SEBI released its consultation paper to provide a regulatory framework for this new evolving method, but it failed to take off the burden from early-stage businesses seeking funds, the framework is more investor-concentrated rather than business-friendly. However, this method is much more simple compared to other routes of investment. 

While opting for the crowdfunding method of raising capital a business should first investigate the platform on which it plans to set a crowdfunding campaign and protect itself from scams. A start-up or small business must go through the platform’s policies thoroughly and should also confirm that the platform is within the eligibility criteria of SEBI. 

Lastly, Crowdfunding is an unconventional but effective tool for raising funds. India is now the third largest country having start-ups, therefore in the future, we will see more growth in crowdfunding and it will be the more practised route of raising funds. 


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