Crowdfunding is defined as the process of getting small amounts of money from common people in exchange for rewards. This process of collecting money can be performed in different ways like equity crowdfunding and reward-based crowdfunding.
In the case of equity-based crowdfunding, people exchange a portion of their company's share value with the investors. And in case of reward-based crowdfunding people provide gifts or rewards to the investors depending upon the entrepreneur. Even though crowdfunding has been accepted as a legal way of collecting money by most of the countries certain countries still have a problem with the system. In the case of India, the equity-based crowdfunding is considered illegal.
Crowdfunding in India has been growing at a larger scale. The crowdfunding is done through an online platform in India. Even though there are various types of crowdfunding practised in the country the reward-based crowdfunding is much more common when compared to other forms of crowdfunding. Mostly medical crowdfunding that involves collecting money for people unable to pay their hospital bills. Even though the government and SEBI have permitted the reward and donation crowdfunding based transactions, they have laid down strict rules on the transactions involving normal equity crowdfunding. Especially digital based equity crowdfunding is under severe restriction due to the increased number of malpractices happening in that particular region.
SEBI is continuously working hard to regulate the legal factors surrounding the crowdfunding market and regulate them. According to the consultation paper provided by the SEBI, they have categorised crowdfunding into Community crowdfunding and financial return crowdfunding. The community crowdfunding includes the reward and donor-based crowdfunding while the financial return crowdfunding involves the investment based equity crowdfunding.
But despite the rules and regulations the popularity of crowdfunding is still increasing at a rapid pace rather than decreasing. The NGO’s and other social organisations still involve themselves in donation crowdfunding for various social causes. They have been removed from the SEBI rules and regulations since they do not produce any form of returns.
Reward-based crowdfunding is helping many entrepreneurs from India to pursue their entrepreneurial dream and make innovative projects.
Crowdfunding can create a major development in the economy of the country creating more job opportunities and new business ventures. The government also have realised this and taking the necessary steps to make it legalised.