By Piyush Jain
Even in its relatively nascent stage, the crowdfunding industry has created a strong buzz due to its ever-expanding potential. From medical emergencies to the next big startup idea, backers, donors and supporters have stepped in from all parts of the world to help out for a cause that’s close to their heart.
As with all things millennial, the evolution of crowdfunding happened rather quickly, and since 2010, at least 15 crowdfunding platforms have emerged on the Indian web. With great growth comes great power and we all know that with great power comes great responsibility. Yet, as the industry grows, very little is known about the legalities surrounding it. As the Securities and Exchange Board of India (SEBI) continues to work strenuously to regulate the market, campaigners are waiting patiently to look for crowdfunding sources.
A source from SEBI said in an interview with Inc. 42,“The idea is to help genuine, high-growth-potential entrepreneurial activities with a wider access to fundraising and not only a select set of angel investors, who may be providing finance to such companies but also often dictate the terms of their businesses and restrict the entry of other potential large investors in the funding plan for growth.”
Legality of crowdfunding in India
Tackling the most popular question, is crowdfunding actually legal in India? Yes, absolutely. With various platforms vying together to launch the best crowdfunding sites in India, one can only hope to harness the power of this growing industry. In order to better understand the legalities surrounding crowdfunding, it is imperative for one to know about the different types of crowdfunding and its governing regulations.
Various types of crowdfunding have grown at different paces and along with them the laws that govern and regulate this growth have also evolved. According to SEBI’s consultation paper on crowdfunding released in 2014, crowdfunding can be broadly divided into two types- community crowdfunding and financial return crowdfunding.
Under community crowdfunding, there’s donation crowdfunding and reward crowdfunding, while financial return crowdfunding encompassess of peer-to-peer lending and equity crowdfunding. It is critical to explore different facets relating to a particular type of crowdfunding, along with its legal implications and development in the Indian context.
Perhaps one of the most popular types of crowdfunding, donation crowdfunding stands at a whopping Rs 300 crores. As per a report by the National Sample Survey, in India, about 80% of the total population is not covered under any medical insurance scheme.Out of pocket expenditure (OOPE) constitutes more than 60% of all health expenses, a major drawback in a country like India where a large segment of the population is poor. Donation crowdfunding has immense potential with banks and NBFCs unable to provide sufficient medical loans due to low credit scores, lack of collateral, high risk of death and default.
Donation crowdfunding focuses on collecting funds from individuals and readers who choose to contribute to a cause without the promise of any return in cash or kind. The cause can be creative, personal or even social in nature. Crowdfunding for creative and educational causes are not far behind- with NGOs endorsing various causes seeking to gather funds quickly on web-based platforms. Due to the fact that donation crowdfunding works on grants and donations which do not provide any financial it is exempted from SEBI rules.
However, it is regulated by the Information Technology Act (2000) and Income Tax Regulations. Income Tax Section 80G provides exemptions from tax deductions for all donations made to charities and non-profit organisations. According to the income tax regulations, any donation made above Rs 2000 in cash is not eligible for deductions, which has prompted web-based platforms to integrate online means to solicit funds. Additionally, IT (Information Technology) Act Section 66A covers regulations concerning misrepresentation, fraudulent publication and breach of privacy and confidentiality. Under the current Income Tax regulations, non-profit organisations that raise money using crowdfunding platforms are completely exempted from taxation. However, any individual receiving donations on any platform, unless the company is a non-profit itself, is liable to pay income tax.
This type of crowdfunding promises donors a tangible return or reward for their contribution and is commonly used for creative purposes such as books, music albums and art projects that look to get crowdfunded. Most platforms that deal with this kind of crowdfunding also have options where people can invest in ideas and get discounts when their ideas enter the mainstream markets as commodities.
Reward crowdfunding does not quite involve monetary returns, so it is exempted from SEBI regulations. It is legal and has given rise to many crowdfunding platforms. If the promised rewards aren’t delivered on time, it can be a problem and interestingly enough, the platforms that help them get crowdfunded are not liable to take any action. In such cases, sometimes the donors are left helpless as there is no grievance redressal.
Peer-to-peer and equity crowdfunding
Peer to Peer lending matches people who want to invest with people who want to borrow. The returns on the investment are paid to the investor while factoring in market fluctuations. In 2016, the Reserve Bank of India (RBI) came out with a framework for regulating peer-to-peer lending, which provided clarity and helped stakeholders form a solid framework that gave rise to a transparent market. Similarly, equity crowdfunding is when equity shares of the company are issued in return for someone’s contribution. It helps in accumulating easy capital for nascent companies. However, equity crowdfunding is not quite legal in India, as of now.
Earlier this year, SEBI announced that it is taking a fresh look at crowdfunding regulations, including perhaps, even formulating a legal framework regulating equity crowdfunding. As with any growing industry, it is critical to have a set of regulations and laws which will provide more protection to both investors and those who receive the funds.
Piyush Jain is the CEO and co-founder of ImpactGuru.com
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