Crowdfunding Industry Seeks Regulatory Clarity and Legal Liability in Budget 2022

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In the upcoming Union budget for FY22-23, the government is set to make big announcements for various sectors including health, infrastructure, real estate, defence, hospitality and MSMEs . It provides each of these sectors not only with clarity, but also with the way forward and helps them develop their strategies for the year ahead.

The crowdfunding industry is also eagerly awaiting the budget for policy changes that would facilitate their growth. There is an urgent need to put in place an appropriate compliance framework and regulatory procedures for this industry to unleash its full potential. But its scope is still limited because of this lack of clarity. Millions of people and humanitarian organizations have been helped during Covid by crowdfunding. Many more can enjoy these benefits if the regulations surrounding financial transactions in crowdfunding can be streamlined.

Globally, the crowdfunding industry represents an industry of approximately $34 billion. According to a report published by BCG in July 2017, India will have over 850 million internet users by 2025, more than the combined population of the G-7 countries. Among the way investments are taking place, peer-to-peer (P2P) lending is $25 billion, donations are $2.9 billion, rewards are $2.7 billion, and crowdfunding in equity at $2.5 billion. This has created fertile ground for online crowdfunding platforms to grow rapidly. Massolution’s Global Crowdfunding Report predicts that crowdfunding will become a $300 billion industry by 2025, according to a Nasscom-KPMG report.

Data Protection Regulation

In the equity fundraising space in the US, UK, Italy and Singapore, there is a very clear set of regulations for small businesses with very little regulatory hassle and strong protection for small investors making it possible for even an ordinary middle-class person to invest according to their ability. India will demand more accountability from fundraisers to ensure that their call for fundraising is very clear, such as insurance and mutual fund companies which must statutorily declare responsibilities and risks involved. The Indian crowdfunding industry expects simplicity and clarity in the regulation of crowdfunding from the government. It is not easy to create regulations for charitable crowdfunding. Nevertheless, given the size of our country, we need regulations to hold fundraisers and fundraising agencies accountable for transparency and data protection compliance while soliciting new donors.

Regulations and legal liability

Several countries with much smaller populations than India have specific crowdfunding regulations in place, which has helped businesses, individuals and charities leverage the power of the crowd for their causes, dreams or their emergencies. For people without access to a primary mode of funding, crowdfunding is a new era fueled by the crowd that supports them. Clarity of regulation and legal accountability will make a big difference in how this crowdfunding-powered economy works.

Regulation for startups and MSMEs

India has over 63 million MSMEs and around 3 million charities, thousands of films are being made every day and thousands of students are waiting to access student loans. Clear crowdfunding regulations that are simple and can be used by MSMEs, start-ups, filmmakers and other small businesses to solicit small, affordable investments from ordinary people. Crowdfunding can also serve as a horizontal fundraising service for all industries. Therefore, a simple ethical charity fundraising code that organizes fundraisers or platforms soliciting donations online is a must. Startups and MSMEs will greatly benefit from this regulation, and as they expand their businesses, our economy will benefit and more jobs will be created.

Need for Equity Crowdfunding Regulation in India

Equity crowdfunding has evolved as a new funding environment for ideas and breakthroughs. While some countries have made significant progress in developing crowdfunding systems, others are moving more slowly.

Most countries, including the US, UK and Japan, have permitted equity crowdfunding platforms as an exception to general public solicitation requirements via a prospectus/offering memorandum. While some countries limit these exemptions to offers made to “accredited/informed/richest” investors, others exclude solicitation made through a “crowdfunding platform” which limits the amount that can be raised or invested by any investor.

With the expansion of fintech companies and new entrepreneurs, the Indian market is growing and crowdfunding has grown in India. Yet it remains silent on the regulation of equity-based crowdfunding and online crowdfunding. This creates a serious dilemma as to what the cure should be, given the positive role it plays in our society. It is important to note that the Indian market has “untapped potential”, requiring proper compliance laws and regulatory procedures.

The writer is founder of Crowdera.

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