Investment Crowdfunding: New Way Of Raising Funds
New changes in the business environment and
the introduction of new firms is pretty common nowadays. Such firms can only
survive if they have a good amount of seed money quickly and efficiently. New
ideas and ways of doing so are being brainstormed everyday. One such way is
Investment Crowdfunding.
Being in a
dynamic environment, we witness rapid changes in everything we do, the way we
think, the way we live, the way we invest and do business and so on. While we
enter the new decade, new startups are found everyday. Young minds from various
business schools put their ideas to execution and try to make money off of it.
But execution of these ideas, obviously, require introductory capital or seed
money. Such seed money can be obtained through loans from family or friends,
loan from banks, venture capital investors etc.
Another method of raising seed money is "Investment
Crowdfunding".
Investment
crowdfunding is a process to input money for a company by asking a large number
of investors to each invest a relatively small amount in it. The investors
receive equity shares of the company in return. This method is helpful when
other methods are not available, or are very expensive.
Investment
crowdfunding may also consist of obtaining debt as well as equity shares. In
terms of equity shares, the backers receive equity shares according to the cash
amount invested. On the other hand, Micro-loan providers are a source of debt
investment whereby a large group of individuals may invest in a small piece of
a larger loan. Lenders typically know the reason of the loan and the terms
including interest rate, duration of the loan, and estimated credit rating of
the borrower. There is a difference between the
characteristics of both types of these investments. When investors invest in
start-ups in return for equity shares, they become part owners of the start-up.
They get returns in the form of dividends and increase in share value. They
also experience higher risk since companies, especially start-ups, are not
viable for long-term existence and growth. On the other hand, in crowdfunding
through loans, the returns are obtained in the form of fixed interest income
but no ownership rights. There is a lower degree of risk since they will be paid
the interest and the original investment even if the start-up doesn't make
profits.
There are
two other types of crowdfunding:
1.
Reward-based Crowdfunding:
In this
type of crowdfunding, the donors donate for a cause and receive a small reward
out of it, like a copy of the new album of a musician, or of a book of a new
author etc. It is generally done to support an artist like a musician, painter,
film producer etc.
2.
Donation-based Crowdfunding:
Donation-based
crowdfunding is the most preferred mode of fundraising, especially in India. An
individual or an organisation first creates the campaign and spreads awareness
about their purpose using social media and other platforms. Any donor who wants to donate to the cause is
welcome to donate towards the campaign. There is no upper or lower limit on the
amount to be donated.
Equity Crowdfunding in India:
As
discussed above, there are four types of Crowdfunding. Out of the four, equity
crowdfunding provides a stake in the start-ups that are being invested in. The
investment market in India is regulated by the Securities and Exchange Board of
India (SEBI). Earlier, there were no guidelines regarding equity crowdfunding.
However now, SEBI has set up certain guidelines for the investors to follow.
Equity crowdfunding is termed illegal in
India. The new start-ups can opt either of the other three ways of crowdfunding
but not equity crowdfunding. Why is it so?
The
Securities and Exchange Board of India (SEBI)
aims to protect the interests of investors in the country. The risk
associated with unregulated equity crowdfunding is high because the investor
may not have the skills and experience of assessing the risk before investing.
Small investors may end up losing money after being attracted to risky
investments, dreaming of high returns.
In
conclusion, investment crowdfunding emerges to be a novel way of raising easy
and quick funds for budding start-ups. Under tight supervision by SEBI, Indian
start-ups can gain the benefits of equity crowdfunding, experienced by foreign
start-ups.