Monday, 7 July 2014

Crowdfunding - need for a regulator

The concept of 'crowdfunding' for new ventures & ideas has been gaining momentum in India of late. Lots of Indian websites have mushroomed calling for funds from investors as well as calling entrepreneurs for funding their dream projects. You can find lots of video lectures on the crowdfunding on the internet.

What is crowdfunding?

In its simplest & historical form it is like funding of a new temple building by donations or contributions of residents or organisations of that area or the 'crowd'. Of course in such a case there is no payment of interest on the funds donated or repayment of the funds donated. This may be termed as 'donation-funding'.

But in case of funding of a business venture one would like to earn on investment made. One of the methods of repayment is in the form of rewards of product or services of the funded venture. This has been termed as 'reward-funding'.

Another form of repayment may be that investor subsequently gets a part of equity from the management of business venture in which investment has been made. This is termed as 'equity-funding'.

How it works?

This trend has caught up globally with entire process being done on internet. Funding includes small businesses, music album launches, production of small films, smaller industrial units, publishing, exhibitions & so on. The amount per business venture is going up by the day to  millions of dollars.

Following example might make things clear. This was found on an Indian website relating to crowdfunding which are also called crowdfunding platforms.Somebody has posted a request for funding of Rs. 50 lacs. Extract of the project is as under:

Cost of project of installation of solar pumps - - - -150 lacs,
Contribution to be made by end users - - 50 lacs,
Promoters own funds + arranged funds - 50 lacs,
Gap to be filled up by crowdfunding - - - - 50 lacs,
Rate of interest offered 15% p a &
Repayment in 12 months.
It is not clear what is meant by own + arranged funds as to whether they are from any bank or not. If from bank, it raises so many questions on viability, status of underlying security & risks of repayments.

Another interesting project posted on such a platform is a 'Rain & Mud Fest' to be held in August for which amount from $5 to $1000 are being requested from the crowd. Return shall be in the form of free entry tickets & interest @ of 2.5% p a on contributions over $50.

One Indian crowdfunding website or platform claims of having collected Rs. 300 lacs from 8000 investors through reward-based funding.

Now both these activities of collection of money from investors or funders and that of disbursement to entrepreneurs to start 'your dream venture' is outside of banking & shrouded in secrecy.

Who is the regulator of crowdfunding?

In many countries this is becoming a parallel or shadow banking activity being conducted on internet. The funders may not be related to or aware of that particular business or promoters and vice versa. As the funding increases from lacs to crores there are risks involved here for both funders & the recipients. It may affect banking in various ways directly or indirectly. This has caused unease in central bankers & regulators as well.

 As per newspaper reports SEBI has proposed new norms for crowdfunding. As per their proposed norms crowdfunding platforms have to be registered with SEBI and companies shall be able to raise funding up to Rs 10 cr per annum from such platforms.

There is a urgent need of a regulator & for stringent laws on the subject.

Long way to go

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