The unknown, unmet general citizen investor (Crowdfunding):

In the era of internet, it has become very easy to get connected with potential investors on various social media platforms. One need not run around meeting every person individually and understand his investment orientation only to discover that it was simple wastage of time. The solution to this is crowdsourcing. Crowdfunding refers to collection of funds from multiple investors through the web-based platforms or social networking sites for business investment. The relatively small financial contributions from a number of persons cumulatively do fulfil the fund requirements of the businessmen. Crowdfunding provides a new mode of financing for the SME sector.
When two raise equity capital through crowdsourcing? It is a handy resource of capital when the personal social network is either small or not rich enough to provide capital. It is also a good tool when typically Indian banks ask a businessman to wait for minimum 3 years from the year of incorporation to be eligible to apply for loan. Crowdsourcing raises funds at relatively lower costs. There is no rigorous corporate procedures.

What is the process of equity crowdsourcing? The operators of a crowdfunding platform carry out the basic due diligence of projects to be included on their website basically to maintain the reputation of the website. The funds from the crowd are available in several variants. The promoters have to provide proposed business plan, intended fund usage, audited financial statements, management details etc.
What are the conditions for equity outsourcing in India? The business must be less than 2 years old. The retail investor can contribute between INR 20,000 to INR 60,000 only. The maximum number of retail investors can be 200. This limits the retail investment to 1.2 crore rupees. Only “Accredited Investors” can invest without much restrictions. The Qualified Institutional Buyers (QIBs) can hold maximum 5% of issued securities. As per the SEBI norms, issuers can raise only up to total Rs 10 crore by issuing equity shares. No single investor shall hold more than 25% stake in a company. The promoters should have a minimum of 5% equity stake in the company for at least 3 years. These conditions are very unfair to the Indian businessman especially in the light of highly efficient financial intermediaries in the legacy market.

Following are the types of mechanism of crowdsourcing:

Donation Crowdfunding:
Donation crowdfunding denotes solicitation of funds for social, artistic, philanthropic or other similar purposes, and not in exchange for anything of tangible value.

Pre-order Crowdfunding:
The investors contribute today with the objective of receiving a product later (may be at discount with respect to future market price) if it is an advance payment. The investors receive the product of the company if it is successfully designed and developed. This manner of capital funding not only provides capital but also creates a market.

Reward Crowdfunding:
In this type, funds are given with the objective to receive a tangible reward. So if you invest in business of a gym, you may get a free membership or a discounted membership.

Debt Crowdfunding (P2P lending):
This is a form of Peer-to-Peer lending. Apohan has covered it here only for the completeness sake.

Equity based Crowdfunding:
It refers to raising equity through crowdsourcing. You may have noticed that most other mechanisms are either for marketing or for debt. Technically, equity crowdfunding can be Deemed to be illegal in India unless carried out with the prescribed rules. The reason for this is that it can make the stock markets, the initial public offers and SEBI irrelevant and investor protection can go for a toss.