All you need to know about equity crowdfunding in india

All you need to know about Equity Crowdfunding in India

Posted On: 2022-06-07 14:43:13

Crowdfunding has recently gained popularity in India. Traditional ways of crowdfunding like galas, events, and auctions were opted by many to raise funds, especially for social causes. Over time, the internet and technology grew and crowdfunding got a new face.

Online crowdfunding is one of the secure ways to gather funds. Crowdfunding platforms have changed the process of fundraising. With various social media sites like

and others the cause of fundraising reaches more people and a majority of the work takes place digitally. As a result, there are no geographical barriers.

Types Of Crowdfunding

There are various types of crowdfunding, including:

1.Donation-based crowdfunding- Designed mostly for charities, donation-based crowdfunding is where one raises funds for a social cause. Nothing is expected in return in this type of crowdfunding, major done for natural calamities and disaster relief.

2.Reward-based crowdfunding- In this type of crowdfunding, individuals contribute to an idea or a business. In exchange, a reward is promised to the donors which they receive when the fundraiser is completed.

3.Equity-based crowdfunding- In this type of crowdfunding donors contribute to a company or organization's goal or project. They own a certain part of that organization.

4.Debt Crowdfunding- Donors get repayment of their principal amount and interest on the completion of the goal amount.

To know more about types of crowdfunding visit: https://filaantro.org/blog/types-of-crowdfunding/

Let Us Know More About Equity-Based Crowdfunding

Equity-based crowdfunding is a unique way of raising capital for a business, or a new project of any organization. It's a type of fundraising in which you try to find investors who are prepared to donate money toward your company's aims in exchange for a financial stake in it.

How It Works

Equity crowdfunding is regulated by the government. Hence, it is also called 'Regulation Crowdfunding.' In India, rules regarding equity crowdfunding are regulated by SEBI- Securities and Exchange Board of India. Unlike other crowdfunding types, equity crowdfunding has investors in the form of donors, as they invest and are entitled to a share of equity in the company.

Earlier, there were no set rules for crowdfunding in India, later SEBI stepped in and started moderating only this particular form of fundraising.

Equity crowdfunding in India is mainly used for start-up companies and for the growth of an existing company. Here, donors do not invest in small but large amounts of money, usually in lakhs.

Rewards Of Equity Crowdfunding

Equity crowdfunding is a unique way of raising capital.

A few of its advantages are:

1. Easy access to capital

Equity crowdfunding has made it possible for virtually anyone to be an investor. Crowdfunding platforms run fundraising campaigns and showcase the company's cause on their websites. With these campaigns being on the websites and promoted on various social media platforms reaches more people.

2. Advantage Of Decisions

You have complete control over the firm valuation and share prices when you use equity crowdfunding. Furthermore, because there will be many smaller investors, there will be no large group of investors with good impact to influence choices. This may give you comfort in knowing that you are still in charge of your firm.

3. Market Research

Your start-up or the existing company that you are fundraising for is thoroughly understood by the investors including the prospective ones. This provides a chance of knowing the market. You get honest and a variety of feedback to work on before the product is launched.

Moreover, because of the promotions on social media, you have already gained a base of clients and/or end-users.

4. Minimal Costs

Equity crowdfunding takes place online. Crowdfunding platforms put the ideas and causes of companies on their websites and they charge very less or no fees at all. Many platforms charge platform fees which are minimal.

5. New Business Partners

You don't simply gain supporters and build a network. Create a buzz around your fundraising effort, and you might just attract some new partners. Although it may not be the primary purpose of the campaign, don't underestimate the power of a professional network.

Strengthen your fundraising campaign by ensuring that it is articulate and includes testimonials from participants for whom you are working to attract new partners.

Risks Of Equity Crowdfunding

1. Fraud

The idea or the cause for which the funds are to be raised is promoted on various social media platforms. This definitely gives a wider reach but at the same time, scammers get a chance to win in such situations. Hackers can create dubious ventures and can trap naive or first-time investors.

2. Risk of Failure

Most of the equity crowdfunding campaigns are for start-ups. And many start-up companies fail due to various reasons like competition, lack of knowledge, market fluctuations, inflation, and the like.

Therefore, there is a high likelihood that the company will fail, which means you lose your investors and their trust.

3. Equity Dilution

Because equity crowdfunding involves the issuance of new shares, present shareholders' stakes will be diluted. This hinders the trust and confidence of existing stakeholders of the company.

4. Low Liquidity

Investors should be aware that securities purchased through equity crowdfunding platforms are extremely illiquid. As a result, departure alternatives are restricted. Crowdfunding investors, like traditional venture capital investors, may have to wait several years for their investment to pay off.

This reduces the chances of fetching large investors.

5. Low Liquidity

Equity crowdfunding comes with low liquidity for the investors. This is because of locked-in investment. Unlike a stock exchange, funding portals allow you to buy but not resell shares or interests in a company. You'll probably have to hold on to your money until the company changes - for instance if it goes public on a stock exchange. This could take several years, or it could never happen.

The investor's money is locked in the investment until then.

Equity-Based Crowdfunding in India

In India, equity crowdfunding is illegal. It is so because the Stocks and Exchange Board of India prohibits enterprises from raising funds by selling securities to more than fifty people without first registering the offer with the SEBI. This ban applies to all types of securities, including debentures, shares, and units in mutual funds. However, equity crowdfunding is legal among the developed countries like Russia, U.S.A., Canada, Germany and others as well as low income countries.

The Bottom Line...

Out of various forms of crowdfunding, equity-based crowdfunding is different as it involves investors instead of donors. A large number of investors invest in a start-up or a project of an existing company that wishes to expand. This type of crowdfunding is generally regulated by the federal government.

Filaantro is an online crowdfunding platform that raises funds for all and every cause that one believes in. This also includes fundraising for start-up companies. Although Filaantro does opt for equity-based crowdfunding, it definitely supports start-up companies. Products and ideas are promoted on social media platforms to enhance their market presence.

Visit Filaantro.org to know more.

Author: Anjali Patel