Crowdfunding With Reference To SEBI Guidelines In India

Author: LawSphereX

Category: Corporate & Insolvency

Published: 2026-08-23T19:06:51.180Z

Updated: 2026-08-30T07:06:52.971Z

CROWDFUNDING WITH REFERENCE TO SEBI

GUIDELINES IN INDIA Avanti Uday Balapure, BCOM, LLB, LLM, DES’s Shri Navalmal Firodiya Law College, Pune (SPPU)

ABSTRACT

Crowdfunding as a concept has been in the limelight for quite some time now. Small businesses are constantly searching for reliable sources of funding. The first online crowdfunding platform was launched back in 2001 and users began to create crowdfunding projects since 2003. In June 2014, the Securities Exchange Board of India released a consultation paper on crowdfunding in India to provide a brief overview of crowdfunding. SEBI asked for suggestions and public comments till July 2014 after which it came out with draft regulations. Crowdfunding platforms essentially allow almost anybody to raise funds for any cause, ideas or business ventures. Crowdfunding is an innovative strategy for financing a new business venture form general public instead of seeking funds in traditional ways such as issuing bonds or bank lending.

The most significant issue which arises is whether crowdfunding amounts to public offer or private placement. Another issue is regarding the regulation of an online trading platform in terms of internet security & risk awareness. Indian authorities have now started taking suo-moto actions against the companies raising funds through crowdfunding platforms, the business should carefully evaluate the terms as well as the overall model adopted by such platforms so that they do not end up committing any unintended contravention of the legal provisions. An offer can be made through a web based recognized and registered crowdfunding platform only to registered investors who have been given access to the platform.

The researcher aims to throw light on whether websites shall require registration as an intermediary, possible registration procedures and also to analyse the guidelines regulated by SEBI and Companies Act, 2013 for the crowdfunding platform in India. Keywords: Consultation paper, Investors, Public offer, Registration, Websites.

1 Introduction

- Crowdfunding is solicitation of funds (small amount) from multiple investors through a webbased platform or social networking site for a specific project, business venture or social cause1. Funding from a crowd involves raising money for various purposes such as creative projects, public interest causes, or business ventures through small contributions from a large number of people. These contributions are typically gathered using online platforms and are often promoted through social media. In addition to financial support, crowdfunding offers producers several advantages. It can enhance a producer's reputation and raise their profile by supporting compelling projects. Crowdfunding also provides a platform for project initiators to interact with their audiences and demonstrate the existence of an audience and market for their project.

It offers useful market input in the event of a campaign failure. Under Indian law, the main query is whether a crowdfunding offer qualifies as a public offering for the purposes of section

23 of the Companies Act, 20132, which call for the preparation of a prospectus and related legal

requirements. In a situation where India is still trailing behind in terms of internet security and risk awareness, there is still another question about the online trading platform. The researcher makes an effort to investigate crowdfunding platform registration processes, permissions needed to set up a platform, and the different aspects of crowdfunding as they relate to the Companies Act of 2013 and the SEBI Act. We're still in the early stages of crowdfunding in India, so it's too soon to predict how the domestic market will respond to this arrangement. However, before crowdfunding becomes common in Indian marketplaces, these are the factors that need be taken into account.

2 Crowdfunding

- Raising capital is crucial for the expansion of any business. Established companies often find it relatively easy to secure investments or take on additional debt. However, smaller firms and startups may encounter obstacles that impede their growth, making crowdfunding a valuable resource. Crowdfunding platforms facilitate interaction between fundraisers and the public, allowing financial pledges to be made and collected. Fundraisers typically pay a fee to the platform for a successful campaign, in exchange for a secure and user-friendly service. Many platforms follow an all-or-nothing funding approach. This implies that everyone will receive 1 Securities and Exchange Board of India, Crowdfunding, https://www.sebi.gov.in (last visited Nov. 24, 2023).

2 Companies Act, 2013, § 23.

their money back if they don't meet their goal and you will receive the money if you do. The same old idea, adapted for the internet, is what crowdfunding is in the present era. The entire process of circulating an idea and obtaining funding for it has been streamlined and expedited via the internet. A significant benefit beyond having access to capital is having the idea or concept validated. Many different for-profit entrepreneurial endeavours, including artistic and creative enterprises, travel-related expenses, medical costs, and community-focused social entrepreneurship projects, have been funded through crowdfunding.

2.1 Types of crowdfunding

- As per the IOSCO Staff Working Paper namely Crowd funding: An Infant Industry Growing Fast, 2014, crowd funding can be broadly classified into four categories: donation crowdfunding, reward crowdfunding, peer-to-peer lending, and equity crowdfunding3. A. Donation Crowdfunding: This type of crowdfunding for social or charitable causes involves raising funds for a variety of purposes, from disaster relief to education sponsorship, charity causes like free food camps, and payment of medical bills for those in need. This type of crowdfunding does not offer any monetary incentives to donors; contributions are made purely out of generosity, with no maximum or minimum amount. ImpactGuru in India is a successful example of donation-based crowdfunding, as demonstrated by Mrs.

Bhatnagar’s ability to raise 25 lakhs within 40 days from nearly 400 people to cover the cost of her unaffordable liver transplant4. B. Reward Crowdfunding: This approach is a modification of the crowdfunding donation method. Donors are persuaded to donate by offering a current or approaching material benefit. Rewards can take the form of goods or services, such as movie premiere tickets or coupons for free meals. Crowdfunding with rewards works well for companies involving creative ideas or inventions. FuelADream is a reward-based crowdfunding company located in Bengaluru that has achieved success5. In the next five years, it hopes to raise Rs. 10 crores in a single day. 3 Eleanor Kirby & Shane Worner, Crowd-funding: An Infant Industry Growing Fast, Staff Working Paper Series, Working Paper No. SWP3/2014 (2014), International Organization of Securities Commissions.

4 ImpactGuru, ImpactGuru, https://www.impactguru.com (last visited Nov. 25, 2023).

5 Fueladream, Fueladream

Best Crowdfunding Platform In India, https://www.fueladream.com (last visited Nov. 26, 2023).

C. Peer-to-peer Lending Crowdfunding: P2P lending, also known as peer-to-peer lending, involves crowdfunding to provide loans that are repaid with interest. It refers to using an online platform to connect lenders with borrowers for unsecured loans, which can be individuals or legal entities seeking financing. The interest rate can be determined by the platform or through an agreement between the borrower and the lender. Both the lender and the borrower pay fees to the platform. D. Equity Crowdfunding: Equity based crowdfunding describes the process of raising money by giving internet depositors equity rights. By acting as an intermediary between investors and start-up businesses, crowdfunding platform websites are typically used by entrepreneurs looking to raise capital online. In India, equity crowdfunding is prohibited and deemed unlawful, unregulated, and unapproved by SEBI.

2.2 Challenges

of crowdfunding in India: - In India, the idea of crowdsourcing is not new. Dhirubhai Ambani established the textile company Reliance Commercial Corporation prior to the term being coined, using funds contributed by Gujarati communities. A subsequent name for this business was Reliance Industries. However, as a number of crowdfunding sites have appeared in India in recent years, the idea of crowdfunding has been gaining significant traction. Among the most well-liked ones are Wishberry, Milap, and Keto. Facebook has emerged as one of the most widely used crowdfunding tools. However, crowdsourcing as an idea faces a number of difficulties as well. They are as follows: A. Lack of familiarity with the idea: The concept of crowdsourcing is still relatively new.

In India, people are willing to donate money to charitable trusts or to treat illnesses, but sponsoring an entrepreneurial endeavour is still considered a day dream. B. Ambiguity in the legal environment: Since SEBI has not yet approved equity-based internet crowdfunding in India, it is undeniable that the crowdfunding approach is not entirely permitted in that country. In equity-based crowdfunding, donors have a right to equity in the crowdfunding project. However, there is a significant danger involved because the receiving end could vanish overnight, confusing the investors. In India, most crowdfunding initiatives are either lending- or donation-based. India is trailing behind many other nations that have appropriate rules and regulations regarding crowdfunding. C. Intellectual property protection: Protection of intellectual property is crucial in crowdfunding.

Unlike traditional fundraising methods where only a limited number of depositors are privy to an entrepreneur's creative ideas, crowdfunding involves a larger group of people with knowledge about the business and the presented idea. This can lead to the undesirable consequence of allowing other entrepreneurs to potentially copy ideas before genuine investors have been introduced to them. Therefore, it is essential for entrepreneurs to secure the appropriate intellectual property protection for their ideas before launching their campaign online. D. Only theoretically safe owing to absence of regulations: In India, crowdfunding as a means of obtaining money is only theoretically safe. In India, the absence of restrictions has made things essentially dangerous.

As a result, it is imperative to establish a number of necessary restrictions in order to increase trust on these crowdfunding sites. E. Lack of internet literacy: With the introduction of JIO mobile phones and the widespread availability of the internet, research on global digital overview found that the number of internet users in India increased by 21% between January 2018 and January 20196. However, there are differences between utilising the internet and becoming internet literate. According to the Ministry of Internal Affairs and Communication, digital literacy is the capacity required to utilise the internet while taking into account the following four points: a. The capacity to react correctly to harmful and illegal content found online; b. The capacity to communicate appropriately on the internet; c.

The capacity to safeguard their privacy and take suitable security precautions. d. Based on the criteria given above, crowdfunding isn't experiencing a balanced regional upsurge in popularity because there is still a lack of digital literacy in 6 Data Reportal, Digital 2019: Global Digital Overview, https://datareportal. com (last visited Nov. 26, 2023).

India7.

3 How crowdfunding helps start-ups and new ventures

- In India, crowdfunding is gradually taking on a more tangible form and is quickly becoming the most popular method of raising capital. These platforms operate through individuals or organisations that invest or donate to these projects, with a determination of assistance or in return for a possible profit or reward. Crowdfunding allows an excessive number of people to take a position in affordable amounts, which when combined can amount to large sums of money. Increasingly, crowdfunding has become an online activity, usually stimulated through dependable platforms, where several people invest, lend, or contribute small amounts of money for one's commercial or social knowledge. It helps gather support for individuals, organisations, projects, and charitable causes.

It is especially helpful for those who don't have any other sources of money or when other funding sources are too costly for inexperienced entrepreneurs or social entrepreneurs to handle. Another benefit of using crowdsourcing for funding is that it may be done with little to no upfront fees. Not everyone is able to obtain other forms of borrowing or bank loans with success. Therefore, crowdfunding is essential since it's the finest way to finance a project without having to pay back loans. In this case, money is frequently obtained by the promise of awards or shares. An individual can become an entrepreneur or social crusader through crowdfunding, which also helps them realise their ideas and provides financial support for charitable work or possibly medical assistance.

In addition to giving money, it also encourages people to pursue their aspirations and objectives and advances them towards reaching them.

4 Crowdfunding and Companies Act, 2013

- The definition of crowdfunding provided by SEBI clearly indicates that it involves seeking funds from the public. According to Section 2(68)(iii) of the Companies Act, a private company is not allowed to invite the public to subscribe to its securities8. Therefore, a company or startup seeking investment should not be a private limited company, even though the funding 7 Ministry of Internal Affairs and Communications, Internet Literacy 2013, https://www.soumu.go.jp (last visited Nov. 26, 2023).

8 Companies Act, 2013, § 2(68)(iii).

scheme is intended for small and new private limited companies. As a result, section 2(68)(iii) of the Companies Act poses a challenge to the entire crowdfunding scheme. Section 42(2) of the Companies Act stipulates that the invitation to subscribe to securities of a private limited company should be directed to a maximum of 50 individuals9. If an offer or invitation is extended to 50 or more individuals for the issuance of securities, it may be considered a public offer, necessitating a prospectus, compliance requirements, and the listing of securities on a recognized stock exchange, which could be burdensome and costly for a startup. To avoid falling within this section, a company can make separate offerings, each directed to fewer than 50 individuals. However, simply limiting the offer to fewer than 50 persons may not guarantee compliance.

It is important to note that under section 42 of the Companies Act, if the offer or invitation to subscribe to shares is made to a specific group of individuals through a private placement offer letter, it will not be considered an offer to the public. Nevertheless, in the case of crowdfunding, the offer or invitation is typically made over the internet to unspecified individuals, making it difficult to control the number of offerees. Here are a few instances of crowdfunding; a. Ketto is a well-known platform that focuses on a variety of social and personal causes such as healthcare, children, education, animal welfare, and women empowerment. b. FuelAdream is a crowdfunding website designed for individuals seeking to raise funds for creative ideas, causes, charities, events, and community-led activities.

They have effectively raised funds for innovative projects like the smartest electric bicycle and more. c. BitGiving is another platform that raises funds for various causes ranging from disaster management to financing farmers and personal causes. It allows you to share stories about your experiences with crowdfunding and also read about others' experiences in this field.

5 Legal provisions related to crowdfunding

- In a 2014 consultation document, SEBI requested ideas and proposals for the rules governing equity-based crowdfunding in India. SEBI examined the idea of crowdsourcing in the study, as

9 Companies Act, 2013, § 42(2).

well as its benefits, drawbacks, and risks. The following are the consultation paper’s four main features: a. No retail investors took part in this. b. Crowdfunding was only declared to be appropriate for publicly traded companies that were not listed. c. It was not allowed for commercials. d. The issuing corporation had to endure a drawn-out, taxing registration procedure. According to SEBI, crowdfunding is not meant to be used for the resale of securities, but rather to help start-ups raise cash through an internet channel. Listing is not necessary for trading, and the issuer is not required to list10. If a newly formed, unlisted public company with Indian incorporation meets the requirements outlined below, it can raise money through crowdfunding: a. One that is no more than four years old. b. An organisation not presented on an exchange. c.

A business that does not plan to raise more than 10 crores annually. d. A company without funding from or affiliation with any industrial group, but with a turnover of at least 25 crores. e. Crowdfunding cannot be used by a company whose promoters or directors have been deemed defaulters by the RBI. The Consultation Paper by SEBI has expressed interest in introducing crowdfunding in India, including equity, debt, and fund-based crowdfunding. Currently, SEBI has not expressed interest in peer-to-peer crowdfunding. This discussion will focus on the legal and regulatory challenges involved in initiating equity-based crowdfunding. Under the current laws,

10 Securities and Exchange Board of India, Consultation Paper on Crowdfunding in India,

https://www.sebi.gov.in (last visited Nov. 28, 2023). crowdfunding schemes will be regulated by two legislations: the Securities and Exchange Board of India Act, 1992 and the Companies Act, 2013.

5.1 SEBI Act and Crowdfunding

- Examining the Securities Appellate Tribunal (SAT) ruling dated October 18, 2011 is crucial in relation to the two unlisted Sahara group firms' issuance of securities to around 30 million people11. In an order dated June 23, 2011,10, SEBI discovered that the entities had raised substantial sums of money from the general public without following Indian regulations pertaining to transparency and investor safety. A primary conclusion drawn by the SAT in its ruling was that known individuals with fewer than 50 are given private placements; hence, issues affecting more than this number are considered public matters. The Securities Appellate Tribunal (SAT) noted that in the present case, the companies had conducted a public issue by reaching out to over 30 million investors, while circumventing legal requirements.

SAT explicitly stated that the circulation of an information memorandum to more than thirty million individuals through ten lakh agents and over 2,900 branch offices amounted to public advertising12. Another significant matter discussed by SAT, which is also relevant in the context of crowdfunding, was whether SEBI has the authority to regulate unlisted companies. SAT ruled that SEBI indeed has jurisdiction over unlisted companies as long as they can be considered persons associated with the securities market'. Based on SAT's decision, the raising of funds by private companies through crowdfunding platforms on the internet, where the number of individuals to whom securities are offered is 50 or more and is not specified, might be considered a public offer.

The discussion above indicates that there are limitations on conducting public offerings unless they are done through a prospectus-based offer and require listing, except in the case of private placement of securities.

5.2 Registration of websites as intermediaries

- According to Section 12(1) of the SEBI Act, an intermediary connected to the securities market is not permitted to purchase, sell, or deal in securities unless it complies with the requirements 11 Sahara India Real Estate Corporation Ltd. v. Securities Exchange Board of India, Misc. Application No. 133 of 2013 and Appeal No. 206 of 2013 (Securities Appellate Tribunal, Oct. 18, 2011).

12 Id.

of the registration certificate that it has obtained from the SEBI in compliance with the rules and the SEBI Act13. A platform for crowdsourcing will fall under the category of intermediaries and will need to have registration requirements. Shares of any established business are considered securities under the definition given in section 2(h) of the Securities Contract Regulation Act, 1956 (SCRA)14. It is an act to provide for the establishment of a Board to protect the interests of investors in securities reads the preamble of the SEBI Act15. In Chapter IV of the SEBI Act, the Board’s powers and functions are outlined. Section 11(1) specifies that the Board is responsible for safeguarding the interests of securities investors16.

Therefore, as per the preamble and the provisions in Chapter IV of the SEBI Act, whenever a company issues securities and investors' interests are at risk, SEBI has jurisdiction. Based on the above discussion, if a company is issuing securities and raising funds through a crowdfunding website, the website might be considered an intermediary involved in securities dealings, bringing together the company raising funds and the investors. Hence, it may need to obtain registration from SEBI. Moreover, such an intermediary would be required to comply with the regulations, including regular disclosures, maintenance of records, addressing investor grievances, appointing a compliance officer, following a specified code of conduct, and being subject to scrutiny and inspection by SEBI.

After reviewing these legislations and subordinate legislations, it appears that the website providing services to connect the crowd and the company raising funds through securities issuance may be deemed an intermediary and be subject to registration requirements and ongoing compliances, which may or may not be acceptable to most service providers offering such services.

6 Possible structure of crowdfunding platform

- A possible structure that might be included in the draft regulations is one in which an offer is made through a reputable crowdfunding website just to investors who have registered and been granted access to the platform. A platform for crowdfunding needs to register with SEBI and meet all the conditions set forth by the regulator and intermediaries. A company that wants to raise money also has to register with a crowdfunding site and provide a copy of its proposed business plan or business model. The crowdfunding platform should also receive copies of the

13 Securities Exchange Board of India Act, 1992, § 12(1).

14 Securities Contract Regulation Act, 1956, § 2(h).

15 Securities and Exchange Board of India Act, 1992, https://www.sebi.gov.in (last visited Nov. 29, 2023).

16 Securities Exchange Board of India Act, 1992, § 11(1).

articles of association, memorandum of association, and certificate of incorporation. This will allow investors to thoroughly understand a firm before making an investment and will provide the companies with a chance to showcase themselves and raise further capital. In addition, the crowdfunding site will keep track of a list of registered investors who will be able to visit the platform and make investments in the companies featured there. The registration of registered investors will be contingent upon the review of their KYC compliances and the fulfilment of additional conditions, such as income or net worth verification and risk acknowledgement signatures, among others. These investors will receive a Login ID and password upon registration, enabling them to use the platform.

It is advised that in order to limit the offering to a private placement, a company looking to acquire capital can reach out to each individual registered investor and provide an invitation to subscribe for the firm's shares. In accordance with section 42 of the Companies Act, this invitation should be extended to no more than fifty investors. Additionally, the crowdfunding website ought to contain a chat window where investors can speak with the company in private before the offer is made, learn about the business strategy, and express interest in funding. An invitation to subscribe for shares of the company may be delivered to an investor who expresses interest in investing.

7 Conclusion

- In India, there are no laws specifically pertaining to crowdfunding, although using the Internet to raise money can provide certain challenges. It is necessary to establish explicit legislation regarding whether crowdfunding websites should adhere to SEBI requirements. India is still far from being able to handle issues related to internet security and people's knowledge on how to cope with spam and phoney web portals. When draughting rules, legislators should consider what IT policies and security measures should be implemented to protect the crowdfunding platform from various cyber dangers and hazards. Since crowdfunding is becoming more and more popular every day, it is preferable to regulate it rather than leave it unregulated or outlawed.

References

A. Case referred:

1. Sahara India Real Estate Corporation Ltd. v. Securities Exchange Board of India,

Misc. Application No. 133 of 2013 and Appeal No. 206 of 2013 (Securities Appellate Tribunal, Oct. 18, 2011). B. Statues referred:

1. Companies Act, 2013, § 2(68)(iii).

2. Companies Act, 2013, § 23.

3. Companies Act, 2013, § 42(2).

4. Securities Contract Regulation Act, 1956, § 2(h).

5. Securities Exchange Board of India Act, 1992, § 11(1).

6. Securities Exchange Board of India Act, 1992, § 12(1).

C. Websites referred:

1 Data Reportal, Digital 2019

Global Digital Overview, https://datareportal.com (last visited Nov. 26, 2023).

2. Fueladream,

Fueladream: Best Crowdfunding Platform In India, https://www.fueladream.com (last visited Nov. 26, 2023).

3. ImpactGuru, ImpactGuru, https://www.impactguru.com (last visited Nov. 25, 2023).

4. Ministry of Internal Affairs and Communications, Internet Literacy 2013,

https://www.soumu.go.jp (last visited Nov. 26, 2023).

5. Securities and Exchange Board of India Act, 1992, https://www.sebi.gov.in (last

visited Nov. 29, 2023).

6. Securities and Exchange Board of India, Consultation Paper on Crowdfunding in

India, https://www.sebi.gov.in (last visited Nov. 28, 2023).

7. Securities and Exchange Board of India, Crowdfunding, https://www.sebi.gov.in

(last visited Nov. 24, 2023). D. Working paper referred:

1 Eleanor Kirby & Shane Worner, Crowd-funding

An Infant Industry Growing Fast, Staff Working Paper Series, Working Paper No. SWP3/2014 (2014), International Organization of Securities Commissions.