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Empowering Startups: Navigating The New Era Of Equity Crowd Funding


Equity Crowd funding: Investigate the opportunities and legal frameworks surrounding equity crowd funding for startups

Crowd funding is a term used to describe a mass communication method, usually the Internet, to request funds from the general public, with the project creator receiving small amounts of funds from a large number of donors or investors, which means natural affinity, microfinance and public service? Crowd funding can be done in many ways as Mass Philanthropy - Where contributions are made without the expectation of contributions or responsibility for the return of such funds.

Usually a lot of money is collected for charity because philanthropic Crowd funding funds are collected from contributors who agree to make a large contribution, such as an upfront payment for future products, free merchandise, or otherwise donate. Donations and rewards-based crowd funding typically do not offer returns or returns on investment. As a variation on the crowd funding model, fundraisers can also receive the model before buying! In the pre-purchase model, the contributor receives the product.

For example, if an entrepreneur wants to raise funds to produce and sell watch B that can interact with Android and ios devices; will contributors receive a watch for every $120 they donate?

Lenders and individual borrowers are matched with the help of online platforms. Basic loan claims are paid by individual lenders who may choose to provide funding for a portion of the claim. These sub-assemblies are brought together by the platform and loans are issued to borrowers. Equity crowd funding raising funds in companies where equity is offered proportional to the stored quantum.

Contributors assume the risks and obligations of shareholders in companies Government and securities regulators usually focus on peer-to-peer lending and equity crowd funding falls within the scope of debt and equity regulation. Consequently, many theories of crowdfunding, including this paper, or socio-economics, focus on these two models.

Equity Crowd Funding

With equity crowd funding, companies typically need funds for a specific purpose (fundraising) then it describes the funding needs and how the funds will be used, crowd funding website (portal). The fundraiser also specifies a financial or other form of reward portal, through which visitors (contributors) of the Portal may conduct electronic transactions in accordance with the electronic transaction selection presentations made by fundraisers.

Funds are transferred electronically through the donor. Portal account once the required amount of funds is reached, the portal will release the funds to the portal fundraiser. At the same time, the fundraiser issues securities to donors in the form of equity and contributors seek returns in the form of dividends or capital gains � similar to purchases and stocks in startups or small, medium and micro enterprise the portal charges service fees.

Benefits Of Equity Crowd Funding

Equity crowdfunding introduces a new approach to the investment and financing process. It can bring multiple benefits to companies and investors.

  1. Easier access to capital
    Online crowdfunding platforms allow entrepreneurs and companies to present their projects to a larger number of potential investors than traditional forms of financing.
  2. Reduce management pressure
    Compared to traditional forms of financing such as venture capital, equity crowdfunding does not dilute the power within a company. While the number of shares increases, the participation of a large number of investors means that power is not concentrated in a specific group of shareholders.
  3. Generous returns
    Although startups are inherently risky businesses, it is still possible for a company to become a unicorn and provide investors with very strong returns.

Risks Of Equity Crowd Funding

Any party that is willing to participate in equity crowdfunding must be aware of the risks that are associated with it.

Some of these risks include the following:

  1. Equity dilution
    Because equity crowdfunding involves the issuance of new shares, existing shareholders' equity is diluted. (Although as noted above, stock dilution generally does not have the same effect as a more traditional financing scenario.)
  2. Low liquidity
    Potential investors should be aware that securities purchased on equity crowdfunding platforms are extremely illiquid. Therefore, exit options are limited or virtually non-existent. Just like traditional venture capital investors, crowdfunding investors may have to wait several years for a return on their investment.
  3. Fraud risk
    Investors also need to be wary of possible fraud during stock crowdfunding. Fraudsters can exploit information asymmetries and regulatory loopholes to deceive investors. However, crowdfunding platform companies carefully verify the information provided by companies seeking funding.

Equity Crowd Funding As Investor's Growth Platform

Introduced by SEBI in 2019 exclusively for startups, offers relaxed listing norms for startups, including reduced trading lot size and a separate category for eligible investors. This is the intention behind the initiative to encourage the growth and progress of startups. However, these platforms face significant challenges. For a startup to be listed on the platform, it has to operate at a profit for the previous three financial years.

According to a news report, India has only 17 unicorns out of 80, which are highly valued startups managed to achieve profitability and so far six startups have successfully listed on this platform additionally, most startups find themselves in their early stages, where profitability may not be there. Consequently, these startups are automatically rendered ineligible for listing purposes.

Constraints placed on startups represent a reflective mindset that constrains their growth. While acknowledging the benefits of crowdfunding, SEBI continues to fear little or no leverage effective regulatory framework in place and risk of investor exploitation.

Conclusion And Way Ahead
There is huge demand for equity crowdfunding as a source of investment among Indian businesses. SEBI India and other authorities need to review and update India's current controversial laws to facilitate this develop start-ups and achieve effective financing.

The authorities must strike a balance and investor protection and opportunities for companies to achieve better financing through comprehensive and inclusive measures STOs and other framework conditions, there are no loose crowdfunding restrictions. These changes will encourage, innovate, increase investment opportunities and support the overall growth of Indian entrepreneurship ecosystem.

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