Equity crowdfunding is the kind of crowdfunding in which the donor gets to hold shares of the company in return for their contributions to the company. It is usually for companies that are till then unlisted in the stock exchange, in the company’s very early stages.
In the initial days of Fundraising, there were no rules and regulations, but due to the very fast increasing volume and the immense popularity, it soon came under the purviews of the market regulator Securities and Exchange Board of India (SEBI).
As of yet, the sale of a company’s share digitally is illegal in India under the SEBI regulations. But there is a lot of conundrum involved. In the consultation paper issued by SEBI in 2014, only the crowdfunding platform fulfilling the high threshold Class I, Class II and Class III requirements were allowed. Also, no retail investors were allowed to invest through crowdfunding, the only ones eligible for crowdfunding were the unlisted public companies, there were no advertisements allowed, and finally, there were a lot of regulations imposed on the issuing company.
Most importantly, fundraising could be only done for raising capital, not for the resale of securities. In 2016, it became mandatory to issue disclaimers that the activities would not be authorised by SEBI. At the same time, there is a clear statement which makes all dealing with the unauthorized electronic platforms would be against the relevant security laws. In 2017, 10 crowdfunding platforms were banned by the entity. All combined together, it means that there is a lot of confusion and there is still no proper framework dictating equity crowdfunding in this country.
And yet, deregulation of equity crowdfunding is something which the country urgently needs. It was legalized in the US in 2014 in recognition of all the private help that startups need. And India, with its poor employment opportunities, its lack of government funding, high population rate etc., is actually in the urgent need of the deregulation of equity crowdfunding.
As of yet, it ranks third globally with around 4200 startups in total. Sure, a lot of regulation needs to be in place before it is made legal, but that would actually mean a leaner and a fitter government which would be benefiting the youth in return. Startups like Crowdfunding in India, after all, are the domain of young, bright, highly enthusiastic people.