Under the proposed norms, crowdfunding platforms can be provided by only Sebi-registered entities, while companies can raise up to Rs 10 crore in a year through this route.
Given the high-level of risks associated with this new way of fund-raising activity, Sebi has also proposed that only 'accredited investors' be allowed to participate in crowdfunding activities.
Such investors would include institutional investors, companies, HNIs and financially-secure retail investors advised by investment advisors or portfolio managers. Besides, the crowdfunding investment of retail investors would be capped at Rs 60,000 or 10 per cent of their networth.
Also, only those entities would be allowed to raise funds through crowdfunding which are not associated with a business group having turnover of more than Rs 25 crore. Entities with an established business, already listed on an exchange or being in existence for four years or more would be barred too.
Those engaged in real estate and financial sector businesses would also be barred from tapping this route.
Crowdfunding is emerging as an innovative way of raising funds by pooling money from people through Internet, but lack of regulations for such activities has given rise to concerns of possible defrauding of investors.
Among others, social and professional networking websites like Facebook, LinkedIn and Twitter have been used for such fund-raising exercises, while money-pooling also takes place on some dedicated websites for such activities.
Taking cue from financial market regulators in the US and the UK, the Securities and Exchange Board of India (Sebi) today floated a 66-page 'consultation paper on crowdfunding in India', wherein it has proposed a new set of guidelines to regulate such activities.
The final norms would be issued after taking into account comments from public and other stakeholders till July 16.
Under the proposed norms, the issuer entities and their promoters and directors would need to meet 'fit and proper' criteria of Sebi, while they can not use multiple platforms to raise such funds within a year.
Also, issuers cannot directly or indirectly advertise their offering to public in general or solicit investments from the public, while they would need to compulsorily route all crowdfunding issues through a Sebi recognized platform.
Issuers will also be barred from directly or indirectly incentivisiong or compensating any person to promote its offering.
The proposed norms would provide an additional channel of early stage funding to start-ups and small and medium enterprises (SME).
Sebi said that there is a need for funding for SME through alternative sources as global financial crisis (2008) resulted in failure of number of banks and capital adequacy norms applicable to banks have made it difficult for them to lend money to the ventures or start-ups, which may have high risk element.
However, Sebi said there is possibility of systemic risk associated with crowdfunding. Besides, there are chances that genuine websites being used by fraudsters claiming to be promoters of projects or of false websites being established, simply to defraud the investors.
Earlier this year, the International Organisation of Securities Commission (IOSCO), a body of market regulators across the world including Sebi, also called for greater regulatory checks on 'crowdfunding' investment products to avoid any potential systemic risks in future.
While it is still in nascent stage in India, compared to large markets like the US, China and the UK, the trend is catching up fast especially in the wake of emergence of social media as a key platform for such activities.
Crowdfunding typically involves young entrepreneurs and small groups of people raising funds for their ventures through various online platforms. Of late, such platforms are also being used for launching products that promise certain financial returns to the contributors.
In a new report, the research department of IOSCO, of which Indian capital markets regulator Sebi is a key member, has said that the 'financial return crowdfunding market' has doubled year-on-year for the last five years to an estimated USD 6.4 billion in 2013.
This has been mainly driven by annual growth of 90 per cent in peer-to-peer lending.
In India, there are no clear regulations as yet for such activities and therefore a need has been felt to put in place a regulatory framework if such platforms involve large amounts of money or issuance of securities. This will help check any money-laundering activity or other fraudulent acts in the name of 'crowdfunding'.
In India, the few cases of crowdfunding involves raising of funds for films, technology start-ups, e-commerce ventures and some other businesses that are very small in size.
Crowdfunding has been mostly used so far to generate financial support for artistic ventures like films and music recordings, where typically small individual contributions are pooled in a large number of people.
To regulate crowdfunding, Sebi said that it is important to take note that while it is necessary to ensure that start-ups could raise funds at ease, it is equally important to ensure that no systemic risks are created wherein retail investors are lured by some unscrupulous players by substituting the existing framework, which has been developed over a period of time through experience and observation.