What do you understand by equity-based crowdfunding? Critically examine the role of internet in crowdfunding and the various challenges it is posing to regulators in developing countries like India. (200 Words)
Crowdfunding platform is an internet based market place for issuers to sell their own securities to raise capital. Thus the central role of the Internet and its wide reach would increase the number of persons potentially affected, which can be significantly greater than the traditional means of fundraising. Younger investors may get influenced simply because of its link to social media and the Internet.
Due to the nature of crowdfunding, it has several risks:
- The three parties (investor, intermediary and the issuer) may reside in 3 different jurisdiction with different regulations
- There is possibility of genuine websites being used by fraudsters or of false websites being established, simply to defraud the investors
- Retail investors may not be able to understand the risk in these investments and there is a possibility that investors may not practice diversification principles, thus they will be unable to bear the loss of investments.
- Uninformed and unsophisticated investors (retail investors) may act with a ‘herd mentality‘.
- There may be no secondary market in which investors can sell their investments and exit and hence, there is a risk of illiquidity.
- Black money could be invested.
SEBI’s role in crowdfunding, which is proposed, will mainly be to:
- Oversight and regulation of the Crowdfunding market in India
- Issuance of guidelines/circular regarding information required to be disclosed in offer letter or on an ongoing basis or requirements of due diligence and screening or any other matter
- Conduct of periodic inspections or audits and enforcement regulations. The proposed structure for crowdfunding will provide an enabling framework for crowdfunding, which will have the following benefits:
- Crowdfunding provides a much needed new mode of financing for start-ups and SME sector and increases flows of credit to SMEs and other users in the real economy.
- Banks have become increasingly constrained in their ability to lend money to the ventures or start-ups which may have high risk element. Hence, there is a need for funding for SME through alternative sources.
- New and potentially radical inventions may get funded.
- It increases competition in a space traditionally dominated by a few providers.
[film makers, software developers, scientists and others have successfully raised funds for projects through crowdfunding. Social campaigns like teach for India also used. Musical festivals and musical albums also used.]