[Indrasish Majumder is a student at National Law University Odisha]


In today’s volatile business regime, fundraising and funding have emerged as important criteria that are considered before the commencement of any business. While government schemes and financial assistance of banks have made this process less cumbersome, some other ways of acquiring and investing funds have conferred a different outlook upon financing business projects. An example of such fund generation mechanism is crowdfunding.

Among a catena of fundraising mechanisms, crowdfunding comes across as a unique strategy of raising funds via the internet or any other electronic medium.

Seeking inspiration from the concept of “micro-finance”, crowdfunding is an application of crowdsourcing mechanism. The funds, solicited from the investors, are accumulated into a large amount to assist the target business. It also defies other conventional fundraising mechanisms by incorporating proactive roles for the consumers in terms of participation through social media by supporting the business’ initiatives. As an amalgamation of effort by various individuals, crowdfunding requires a smooth coordination between the project initiator and project investor.


In the last few years, while several nations have opted for crowdfunding as a fund sourcing mechanism, India seems to remain in its nascent stage of development. Though few platforms have informally existed, it is only in 2014, that the Securities and Exchange of Board of India (hereinafter SEBI), via its consultation paper, proposed a regulatory framework. By conferring the rights to invest only upon the accredited investors, SEBI attempted at unleashing another channel of fundraising to start-ups and SMEs, thereby giving them access to the capital market. However, till date, a proper policy pertaining to crowdfunding specifically seems lacking.

There are four models of crowdfunding that have gained precedence in the current times. Two of them are debt-based crowdfunding and donation-based crowdfunding. In debt-based crowdfunding, the financial aiders invest in the business through debt instruments like corporate bonds. Donation-based crowdfunding, on the other hand, is one of the most observed forms of crowdfunding marked by an amalgamated effort of individuals to financially assist a charitable cause.

The other two models are equity-based crowdfunding and Peer to Peer crowdfunding (hereinafter P2P). Former is a mechanism where funds are raised by a business in consideration of issue of equity interest in the business while the latter aims at unsecured loans to business organizations. For the purpose of carrying out a detailed study, this article intends to focus upon the analysis of P2P crowdfunding and Equity crowdfunding along with ascertaining their relevance in times of a pandemic.


The tumultuous times of COVID-19, has thrust people into a state of financial crisis making them resort to alternative sources of finance as against the conventional mechanisms. Among various outlets of financing mechanisms under the broad umbrella of crowdfunding, Peer to Peer (P2P) crowdfunding and equity crowdfunding, collectively referred to as Financial return crowdfunding, have emerged as a beacon of hope in the midst of an ongoing crisis.

The Lender

P2P crowdfunding functions on an online platform provides unsecured loans to either individuals or business organizations in fragments. In India, they are treated as Non-banking Financial corporations and are regulated by the Reserve Bank of India (hereinafter RBI) through the reverse auction model. In a time where the economy is hitting a new downturn, there seems to be very little mobility of finance. It is under such circumstances that P2P crowdfunding model comes to the rescue of businesses and startups by serving as a reliable source of financial backing. By replacing the traditional mechanisms of procuring finance, this online lending platform is encouraging a digital economy, thereby serving a crying need of the current times.

An illustration for a successful P2P platform is Faircent, India’s first RBI registered platform, which facilitates direct interaction between lenders and borrowers for granting unsecured loans. In the course of the pandemic, it has successfully assisted large numbers of individuals and companies by providing timely and consultation and thereby, rectifying their financial shortcomings.

The Financer

Equity crowdfunding, on the other hand, encapsulates the idea of financing through a pilot investment in return for a share of profit of the company and a part of its ownership. Here, an online platform serves as a mediator between the investor and the investee. After the money laundering witnessed in the Sahara case, RBI did not authorize this method of crowdfunding and was therefore, declared illegal in India by SEBI. The restriction also stems from the SEBI norms which sets the maximum cap of 10 crores INR to be raised by issuers through equity shares along with the highest limit of 25% stake in the company where the promoter is entitled to a minimum of 5% equity stake for 3 years. These norms are not efficiently crafted for online regulation.

It is this thin thread of guidelines that makes crowdfunding illegal in India. With the impact of the pandemic accelerating across the globe, several nations have shifted their primary focus onto regaining and streamlining their nation’s economic momentum. In such a scenario equity crowdfunding can serve as a ray of hope by channelizing the finance of people towards growing investments in business and ensuring their protection through fair and efficient policies.

The uncertainty associated with the uncalculated risks can be ably tackled through well-organized models like the US model of equity crowdfunding that was legalized through the Jumpstart Our Business Startups Act (JOBS Act). Under this regime, licensed brokers with expertise in the field of equity crowdfunding guide the investors towards making the right decision on an online medium. This not only serves as an educating tool for nascent investors but also brings a sense of awareness about the consequences of investments that will encourage them to take calculated risks.

Pathway to a digital financial market:

Equity crowdfunding also serves as an alternative to the traditional forms of angel investment and venture capital through a contemporary setup of institutionalizing digital money. It captures the interests of both, the investor and the investee. This is because equity crowdfunding envisages the idea of having a series of investor interests and linking it to the right investee who shares a common aspiration. The risks associated to the limitation under SEBI norms on crowdfunding can be moderated by adopting a limitation enforced in the United Kingdom wherein the Financial Conduct Authority (FCA) regulates Equity Crowdfunding. Here, if a company gets a raise beyond €5m, the regulating online platform and the company must notify the FCA and produce the prospectus and register under the Prospectus Rules and the FCA will regulate its activities in future and will place protocols based on the Financial Services and Markets Act, 2000.

A successful equity crowdfunding campaign that ensued in the testing times of COVID-19 is that of Crornbread Hemp. Initially, the company prepared to crowdfund through an offline medium but the pandemic became an obstruction in their path. However, this did not deter them and they launched a partnership with Render Capital and initiated a Wefunder campaign, raising close to $80,000. The company was launched through a seed funding by equity crowdfunding and has followed the same mechanism till date. Not only has it successfully raised finance, but has also created many virtual employment opportunities to manage these resources and finances. In this case, equity crowdfunding tackled the pandemic and also better of it through the aforementioned process.


A retrospective analysis of the country’s financing history is evidence that the success rate of crowdfunding has been significantly low in India as compared to other countries. The U.S. economy is brimming with startups and entities opting for crowdfunding, while, U.K. has permitted non-accredited investors to participate in this idea. This difference between other nations and India stems from the absence of a regulated structure, due to which, the vast crowdfunding market in India continues to remain untapped. This has further aggravated the impact of COVID-19 on several startups and small companies.

Already upended by the pandemic, today, companies have succumbed to a heavy financial crunch and have consequently sought assistance from the Government. While some concessions and financial aid has been extended to these companies, challenges continue to shadow these startups. This condition, perhaps, could have been better had India previously worked on online modes of giving finance. Another factor lacking in the Indian economy is the competition encouragement given to investors. New Zealand, Italy and even Kenya are encouraging competition in this arena by encouraging investment in novel ideas whereas India is failing to execute this enhancement in the SMEs growth.

The significance of crowdfunding in India can be drawn from a recent development in July, 2020, a Bangalore Student Community raised 3.8 Lakhs via crowdfunding in order to generate and donate beds and healthcare centers in the city. Such instances aptly depict the potential of crowdfunding in the Indian economy. However, India’s meager reliance on crowdfunding makes us aware of the gap in terms of knowledge, support and finance which continues to threaten the commercial market. Therefore, what becomes crucial is not to only to fill the gaps but, to also inculcate the features adopted by other countries so as to boost the business market and instill a new wave of positivity among the startups of our country.

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