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SEBI to create crowdfunding guidelines

SEBI will soon come up with guidelines for crowdfunding in India to encourage Indian entrepreneurs to raise capital, reports PTI.

Sebi chairman UK Sinha today said at an investors’ conference organised by industry body IMC that the aim of these guidelines will be to help young people raise capital very smoothly. Sinha said that he is concerned about the decline in capital raising activities, as Rs 60,000 crore worth of approvals and intentions to raise money have either been allowed to lapse or withdrawn in the last three years.

This move sounds quite ironic coming from the same SEBI that came up with Angel Fund Regulations last year, according to which Angel Funds need to have a corpus of at least Rs 10 crore and a minimum investment limit of  Rs 25 lakhs! It is also not clear why SEBI is getting involved in crowdfunding at all since there is no equity involved. In most cases crowdfunding works like a pre-order and I haven’t heard of any startup that is offering equity as part of crowdfunding.

Some points SEBI should note about crowdfunding

All crowdfunding sites are not the same: SEBI needs to distinguish between something like a Kickstarter where people pay in advance for products and services like RangDe which is a micro-financing service where funds are raised via crowdfunding.

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Don’t force equity into crowdfunding: The fact that SEBI is trying to push these guidelines raises questions on what silly minimum guarantees crowdfunding projects will need to have. Please let this not be a repeat of the Angel funding guidelines.

How to handle fraud? SEBI needs to clarify who will be responsible if a company cheats people off their money. There have been several instances of people putting up false claims to raise funds for various projects and never delivering. Will the crowdfunding platform be held accountable in that case? Will these platforms need to screen these projects in advance?

Startups focussed? It is good that SEBI wants to help startups raise funds easily via crowdfunding, but we hope the guidelines are not made with startups alone in mind. As of now most of the crowdfunding projects in India are art related.

FDI in crowdfunding: Yes that sounds a bit silly, but it is an important point. Will SEBI let people raise funds via Kickstarter and bring it to India without much issues? Or will these guidelines be only about the policies Indian crowdfunding websites need to adhere to? Will SEBI let companies use the funds raised to set up offices abroad?

India and crowdfunding

We don’t have a lot of data on crowdfunding by Indians. The only number we have was released Kickstarter, according to which 5,689 Indians contributed a total $1.1 million ($1,117,294) for various campaigns as of last month. Though the amount raised from India might be low in comparison, Indians contributed an average of $196 per head, as opposed to $176 by Americans and $170 by people in UK. Among BRIC countries, Brazil was the biggest contributor with $3.77 million pledged by 21,052 people; Russia followed with $3.35 million from 15,183 backers and 4,413 Chinese raised $1.25 million.

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Why Indian startups need crowdfunding

MobME co-founder and CEO Sanjay Vijayakumar had told Medianama that IPOs used to be about companies trying to raise funds, but now IPOs are mostly for early investors to exit, which is fine from an investor perspective but doesn’t help startups raise cash.

Instead of the SME exchanges which requires the approval of the exchange, he says startups could use a crowdfunding platform like KickStarter or Indiegogo. SEBI’s guidelines makes sense in this context.

A few Indian companies have successfully raised funds from crowdfunding platforms till now including  GSF India-backed Biosense Technologies, Bangalore-based Gecko and Fin smart ring. Online fan merchandising store Bluegape had also raised Rs 1.56 crore from eight global angel investors via an online funding platform LetsVenture.com.

List of crowdfunding websites in India

LetsVenture – Fund raising for startups
Wishberry – Mostly projects related to art
IgniteIntent – Mostly hardware related; quite a few campaigns in the auto sector
Milaap – Micro-financing
RangDe – Micro-financing
Catapooolt – Mostly projects related to art
TheHotStart – Mostly projects related to art
BitGiving – Issue based
FundMyPitch – Fund raising for startups
Start51 – mixed bag
PikAdventure – Still in beta
Ketto – Social causes

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