SLATE. All you wanted to know about Crowd Funding

Would you like to chip in for a project to build the world’s largest Yoga Dome in Europe? Do you like the idea of mini-farms on the empty parking lots in your city? These are some of the real-life projects seeking capital on popular crowdfunding websites.

Crowdfunding allows entrepreneurs with bright ideas (and little money) to raise funds from ordinary folks like you and me. All you need is a web-based platform to bring together the entrepreneur and investors. Though social causes and creative projects dominate crowdfunding platforms, it can also be for funding startups for a financial return. The International Organisation of Securities Commissions (Iosco) has classified crowdfunding into four types. A first type is social or donation funding, where you mobilise funds for a social or an artistic cause. The donor makes no tangible return.

The second type is reward funding; investors receive a nominal reward. Here, again, the funds may be mobilised for a charitable or creative purpose. For instance, on Kickstarter, you can crowdfund a movie with a social theme and get tickets for the movie as reward.

The third and fourth categories — peer-to-peer lending and equity-based crowdfunding — make you an actual financial return. Equity-based crowdfunding is a retail version of private equity investing, where investors are allotted equity shares for the money they invest. This is riskier than stock market investing for two reasons. One, the investment is illiquid. You may have to stay invested until the company goes public to recoup your investment. Second, financial information about these companies may not be readily available.

Though crowdfunding is believed to have been in vogue as early as the 18th century, internet has given it a new lease of life. In 2012, about $2.6 billion was raised through crowdfunding websites. Crowdfunding, big way in the US and Europe, is now expected to gain ground in Japan and India as well. In fact, worried about the quantum of informal fund raising happening via crowdfunding sites such as kickstarter, indiegogo and fundable, global regulators such as the Iosco, Securities Exchange Commission and our own SEBI have put out discussion papers on crowdfunding and how to regulate it.

If you are retail investor who has always wanted to try your luck with a startup, you probably resented the high entry barriers to participating in private equity and venture funds. But if crowdfunding takes off in India, you can invest in businesses you believe hold good promise. If you have a philanthropic bend of mind, you can crowdfund charitable or social causes.

The great thing about crowdfunding is it democratises fund-raising. Anyone with a bright idea can raise money.

If you’re an investor, it usually pays not to follow the herd. But in crowdfunding, the mob helps you make money.

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