If you are on Facebook, Twitter or any other social media website you couldn’t have missed the “ALS ice bucket challenge”.
The idea was simple.
Take a bucket of ice-cold water, dump it on your head and pledge to donate money for research into a progressive neurodegenerative disease called ALS (amyotrophic lateral sclerosis). You then nominate three other people to do the same.
Many big celebrities have gone under the bucket and donated towards ALS research. Thanks to social media, the challenge has spread across borders rapidly and helped to garner huge sum of money which would otherwise be difficult to raise from conventional sources.
So why are we discussing this?
We are here to discuss the concept of Crowdfunding.
What is that?
Crowdfunding is the practice of raising capital for new projects, ideas and businesses from a large number of people, typically via the internet.
Over the past several years, Crowdfunding has become a popular means for entrepreneurs globally to raise funds.
So, what are the different types of Crowdfunding?
Equity Based: Investors receive shares and revenue in the company. Angel investors, private equity players and venture capitalists follow this model.
Lending Based: Investors are repaid their investment over a period of time either just the principle amount or with interest.
Rewards Based: Investors receive either tangible item or services in return for their money. Depending on the amount, different rewards are offered.
Donation Based: Contributors donate funds just like they do to charities and other non-profit organizations / causes.
The most popular way of securing Crowdfunding is the rewards based funding model.
How does it work?
The Crowdfunding is an easy process. It usually takes place in following order:
- Describe your idea / business proposal briefly but clearly.
- Determine the minimum amount of money required to translate idea into reality.
- Set what Rewards / Incentives will be offered to the crowd for funding the project.
- Make a video presentation.
- Put your project on Crowdfunding website for free or for a charge. There are plethoras of Crowdfunding websites that promises start-ups not just funding but also mentoring and advisory services.
- Ask the crowd to contribute money. Get your project successfully funded and receive money.
- And finally, after the success of the initiative, the contributors should get their rewards.
THE PROS
- Crowdfunding platforms help fund seekers with marketing strategies, mentorship, consulting and legal advice.
- Provides a forum for feedback on the project.
- Relatively inexpensive way to raise funds.
THE CONS
- Often limited amount of funds are raised compared to required funds.
- Suitable for raising funds for a one-time project and not viable for long-term funding strategy.
- Exposes the project / idea to public, thus compromising your business strategy.
- Some due diligence and caution by investors / contributors are required to avoid fraud.
Is crowdfunding legal in india?
The Securities and Exchange Board of India (SEBI), the regulator for the securities market in India, aims to protect the interests of investors in the country and due to various risks associated with Equity crowdfunding, it has classified the same as illegal.
The risk associated with unregulated investments is high because the investor may lack skills and experience of assessing the risk before investing. Small investors with limited savings may get attracted to such risky investments in the expectation of high returns if the start-up goes successful.
However, in the absence of any regulations in place and no to less recourse on the issuer of security, such securities are unsecured and could hamper the liquidity of a low-risk appetite investor.
