Take it easy

| Updated on January 23, 2018 Published on August 27, 2015

Over-regulation could discourage crowdfunding, which is inherently informal in the way it raises funds

Crowdfunding as an informal source of capital for social causes, artistic projects and startups, is catching on in India, giving the financial market regulators a few sleepless nights. In a recent forum, Reserve Bank of India officials flagged the need to regulate crowdfunding even as the Securities and Exchange Board of India is in the process of readying guidelines for crowdfunding based on a discussion paper it released last June. While framing rules, it is important to refrain from over-regulation; what is needed is a light touch, an approach that will not impede this democratic form for fund-raising.

Globally, regulations for crowdfunding are still in flux. Most regulators are agreed that donation crowdfunding (funding social causes or projects without return expectations) is best left unregulated. But investment crowdfunding — either in the form of equity or peer-to-peer lending where a return is promised — does need regulation as it could entail securities law infractions and abet fraud or money-laundering. A few regulators have solved this problem by completely barring such activity, but others have sought to strike a balance between protecting investor interests and allowing genuinely innovative platforms to flourish. India has a thriving startup economy and a large investor base keen to participate in it. Seen against this backdrop, many of the eligibility criteria proposed by SEBI last year seem to be too restrictive. For retail investors wishing to crowdfund ventures, it proposes an ‘appropriateness’ exam, a minimum annual income of ₹10 lakh and mandatory IT filings for three years, apart from a cap on the amount invested. Most of these conditions can be done away with; a cap on the annual contribution at, say, ₹50,000 per investor should suffice to contain risks. Crowdfunding platforms are rightly required to register, do basic due diligence on offerors and disclose their fee. But allowing only the government, stock exchanges and select entities to operate such platforms stifles innovation. An overall cap (say ₹10 crore) on the monies that can be raised by a single venture should be sufficient to curb systemic risk and prevent misuse of these platforms for money-laundering.

For many years now, financial regulators have tried to forcibly discourage retail investors from risk-taking by setting up high entry barriers to vehicles like venture funds, private equity funds and even SME IPOs. But this hasn’t prevented investors from chasing high returns on fly-by-night IPOs or dubious money-pooling schemes. Given that some retail investors do clearly have an appetite for risk, maybe it is time to allow them to participate in startups through crowdfunding on a caveat emptor basis. After all, crowdfunding platforms only reach out to the internet-savvy population, which is well equipped to do its homework before investing.

Published on August 27, 2015
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