Crowdfunding is catching up fast globally among young entrepreneurs and some cases have come to light in India as well wherein individuals or small groups of people have raised funds for their ventures through such platforms.
However, there are no clear regulations as yet for such activities and therefore a need has been felt to put in place a regulatory framework if such platforms involve large amounts of money or issuance of securities. This will help check any money-laundering activity or other fraudulent acts in the name of 'crowdfunding', a senior official said.
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Another official said that any crowdfunding involving sale of securities can be either regulated under Sebi's existing norms for Collective Investment Schemes or Alternative Investment Funds, or altogether new rules can be prepared depending on discussions among various stakeholders.
The issue needs to be discussed among various financial sector regulators and ministries, such as capital markets watchdog Sebi, banking regulator RBI, Finance Ministry and Corporate Affairs Ministry, before taking a call on who can be the nodal agency for such activities, he added.
Among others, social and professional networking websites like Facebook, LinkedIn and Twitter have been used for such fund-raising exercises, while money-pooling also takes place on some dedicated websites for such activities.
The US markets regulator SEC last night proposed new rules to permit companies to offer and sell securities through crowdfunding, while the UK's Financial Conduct Authority (FCA) also outlined today how it plans to regulate crowdfunding.
In India, the few cases of crowdfunding involves raising of funds for films, technology start-ups, e-commerce ventures and some other businesses that are very small in size.
However, as the trend catches on, it is expected that large-scale funds can be raised through such platforms and that would further increase the risk of possible fraudulent activities, the official said, while stressing on the need for a clear regulatory framework in this regard.
Crowdfunding has been mostly used so far to generate financial support for artistic ventures like films and music recordings, where typically small individual contributions are pooled in a large number of people.
However, crowdfunding has not been used so far to offer and sell securities, as any offering of share in financial returns or profits from business activities could trigger the application of the prevalent securities laws.
However, the proposed rules by the US SEC will allow companies to offer and sell securities through crowdfunding under a prescribed regulatory structure.
Seeking public comments on the proposed rules over the next three months, SEC said that the intent is to make it easier for startups and small businesses to raise capital from a wide range of potential investors and provide additional investment opportunities for investors.
"We want this market to thrive in a safe manner for investors," SEC Chairperson Mary White said in a statement.
Under the proposed rules, a company can raise a maximum aggregate amount of USD one million through crowdfunding offerings in a 12-month period.
Besides, there are also thresholds for the amount that individuals can invest, while the norms also require companies to make certain disclosures about their offers. The norms also create a regulatory framework for the intermediaries that would facilitate the crowdfunding transactions.
Those ineligible to use crowdfunding are non-US companies, companies that already are SEC reporting companies, certain investment companies, companies that have failed to comply with annual reporting requirements, and companies that have no specific business plan or have plans to enter into a merger or acquisition with an unidentified company or companies.
The US has also proposed that crowdfunding transactions can place only through an SEC-registered intermediary, either a broker-dealer or a funding portal.
On the other hand, the proposed rules by the British regulator FCA states that these would apply to peer-to-peer lending and equity investment based crowdfunding.
"Consumers need to be clear on what they are getting into and what the risks of crowdfunding are. Our rules provide this clarity and extra protection for consumers, balanced by a desire to ensure firms and individuals continue to have access to this innovative source of funding," FCA said.
According to FCA, the crowdfunding market is currently worth about 360 million British pound in the UK and abut 90% of this is conducted through peer-to-peer platforms.
There are different types of crowdfunding activities, including those which are loan-based or investment-based, while other such platforms are for donations and rewards.
Under new rules, consumers willing to lend money to companies through crowdfunding websites will need to be provided details like key loan features, borrowers' creditworthiness, and a repayment plan in the event of company's collapse.
Besides, investment-based crowdfunding can be promoted only to those who understand the inherent risks or have the financial capacity to cope with any losses, the FCA said.