Sunday, November 27, 2011

Crowd-Funding and Its Regulation

The concept of crowd-funding seems to have caught on. In one form, it involves small and medium-sized companies raising funding from investors using the Internet (usually social networking sites or specialist crowd-funding websites). While the concept itself is quite wide and allows for fund raising in many different contexts, it is particularly useful for small entrepreneurs and start-ups. But, it does give rise to issues pertaining to securities regulation, especially if monies are raised against issuance of securities that provide investors with some interest in the issuing company.
Based on the US experience, there could two possible issues. The first pertains to whether the issuance of securities through crowd funding would require registration with the securities regulator such as the US Securities and Exchange Commission (SEC). The second is whether the Internet websites that peddle the securities require registration as broker-dealers that are subject to securities regulations. While some of these issues have been a subject matter of academic study (as indicated in this post on the Truth on the Market Blog), both the US Congress and the SEC have been considering, and even taking steps to introduce, exemptions to allow crowd funding so long as the amounts raised are capped (both at an overall level and per investor). 
A recent report in the Hindu Business Line indicates the emergence of the practice in India as well. The primary question under Indian law would be whether this would amount to a public offering in terms of section 67 of the Companies Act that requires a prospectus and associated compliances. If the specific form of crowd funding involves issuance of securities such as shares and debentures, then an offer or invitation made to 50 persons or more could fall within the purview of a public offer. This is particularly so when the offer or invitation is made through the Internet rather than to specified persons. Moreover, this issue has been magnified in the context of the litigation involving companies within the Sahara group culminating with the order of the Securities Appellate Tribunal. If the specific type of crowd funding indeed amounts to a public offering of securities, the secondary question would arise whether the Internet sites through which the funding is raised taken on the character of intermediaries that might require compulsory registration with SEBI. Of course, this is still early days in the Indian context, but these are issues worth considering in advance of crowd funding becoming more prevalent in the Indian markets.


Sudhakara Rao katika said...


We are just a startup and are seriously considering crowdfunding as the investment circles are demanding a high percentage of stakes and full control. It is almost selling the company. We are entrepreneurs with passion, not by choice. We are trying to understand what are the legalities associated to this type of funding. At least it is clear that this type of funding can not happen in India. Please drop me an email if you are ready to help us out. k.sudhakara at

Ashriya Films said...

We too are a startup film production house and are seriously considering crowd funding as most investors here are looking for total control of the company with scraps for us, the promoters.Should you get lucky do let me know how you did it..My email is

Anonymous said...


We are born in the family of small businessmen..we also want to start a new business with full passion..just help me, how I can exploit this opportunity in India. My mail id is

Anonymous said...

Aren't the VC regulations applicable?

Anonymous said...

If you are thinking of raising fund through India alone, use crowdfunding through LLP format. give the investors a partnership.
I hope this helps.

Sukhminder Singh said...

what laws applicabli in india in regad to crowd funding in films and real estate and how to distribute profits to investors. which laws will be applicable to distribution of profits to its investors. please reply on e mail adress at thank you

Anonymous said...

I can't fathom one thing. I have been at events and angel meetings where entrepreneurs pitch to 50-100 people to raise funds. How different is this from raising funds on the internet. Why would the latter be considered a "public offer" - when it is pretty much the same as earlier, the only difference being that it is on the internet while the other is in person.

What might be important here is to know what constitutes an "invitation".

Sam Bit said...


Why it can not be treated as peer to peer lending.Since I got lent by someone to whom I pitched on internet, the transaction is between two people and same equated to 100s of transaction. Does it come under the perview of RBI?

Esmeralda Mabli said...

Regulation A+, from Title IV of the JOBS Act, is another step in that direction. As of tomorrow issuers may file with the SEC and begin testing the waters to measure investor interest.