It is as simple as the name suggest ”Crowd” funds your business. Now this may sound very simple process of collecting funds from the crowd or people who like your business, but underlies a giant puzzle which has to be sorted out. Crowd can be a boon or a disaster depending on whether it is with you or against you!
Firstly, for raising money legally you need to register your company, if it is private limited you can raise money from maximum 50 people and make them as shareholders, and if it is public limited company you can raise money from general public who will then be the shareholders.
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.
Second if you are raising money from general public with a promise of interest/returns then you have to compulsorily register with SEBI ( Securities Exchange Board of India)
So in general if you see, whenever there comes a situation where public money is dealt with, government has to be extra careful as there are many chances of scam and frauds happening as most of the time general public will not do any background verification or a fair analysis as to who they are lending money and will be cheated most of the times.
Greed plays a role when they are told that returns will be given on their small investment, you will not even know when they start expecting you to grow like Google or Facebook and, imagine if you dont live up to their expectation…, as i told the Crowd Power against you will be very hard to deal with.
How to use the Power of Crowd without violating Law
- Ask for Donation for a project in exchange of rewards (gifts, goodies … everything but not money)
- You want to spread the word about an idea, a cause or something you care about, submit your idea to the crowd, if they like they can support you by funding your advertising campaigns, billboards, flyers distribution, ads on public transportation, forward messages and promote in their Social Networks.
- Social entrepreneurs and social ventures to raise funds and build a crowd of supporters. Funding types from donation/goodies, pre-sales/perks and P2P Lending
- Donation/Reward Model -no exchange of money for the investment given for any other tech, social or research based startups
- Early Adoption/future customer Model – You ask crowd to pay for the development of the product and when it is ready they get the product at much cheaper price than for what it will be marketed for.