The consultation paper on crowdfunding released by Sebi this week provides an opportunity to consider a globally emerging model of raising money for start-ups and private enterprises. Several crowdfunded campaigns offer rewards or benefits in return for contributions, but the elegance of this model lies in the promise that the investment is not seen merely as an instrumental transaction. The internet, the primary medium through which crowdfunding takes place currently, allows ordinary folk to help realise the goals or dreams of entrepreneurs, artists or activists. Given that individuals can choose from an array of start-ups, there is a greater sense of ownership in crowdfunded companies than in a public listing.
Of course, the proposed regulations do not apply to donations or reward-based campaigns, but only to equity and debt-based crowdfunding. Currently, a start-up or small enterprise can raise money through loans, private equity or angel investors. But Indian banks are in poor financial health and there is a lack of a vibrant community of venture capitalists. There is also a prevailing perception among businesses that raising capital in line with the procedure prescribed under the new Companies Act and the Sebi Alternative Investment Funds regulations is cumbersome.
