Innovation Funding – Crowd Funding and Micro Finance

The recent JOBS (Jumpstart Our Business Startups )Act which was made legal in USA created quite a buzz in India. At times we may feel that India also should take same steps on creating law on these innovative funding options, but considering the fact that India is East and USA is West we cannot do the same for various reason, I mean even today if you tell an American that you stay with your parents (2-3 generations under one roof) they will find it hard to digest, Lets face the fact we are different. I dont know how it relates to the prior point but i think i made the point.

Crowd Funding

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!

Legal hurdles –

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)

Rational Difficulties

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.

Micro-Finance

Now the Good news is though how much ever difficult it may look that a law on Crowd Funding can form, there is always a silver lining given by Micro-Finance industry, because even this industry was considered very difficult to implement but now there is some clarity on the it and it has evolved as a successful model bringing about huge change in the poor entrepreneurs sector in our country which was untouched.

This is how Micro finance works- Many rich people come together and pool funds and form a society or a trust and purpose of this entity has to be charitable and upliftment of the poor. The entity has to be register and regular auditing has to be done, Taxation, and compliance with insurance regulation. More info on Micro-finance legal Framework.Once it is formed, loans are given to poor people to cover their operating costs.

For example a vegetable vendor can take a loan of   500, buy vegetable for a day and sell it and he may earn  800 at the end of the day. He gives back the loan amount and an interest on it say which varies  10 –50 depending on his previous track record. If you see it a small interest which the vendor has to pay for the days income he got but if you put that in percentage it becomes 2-10% that too for a day. Its a win-win situation for both the lender and the borrower. But there are lot of hurdles in setting up the institutions and also to build a reliable set of borrowers(imagine the vendor can run away with  500).

Now how this kind of innovative funding options can be applied to the small, medium and the technology startups in India and is yet to be figured out. Tell me if this article has sparked some imagination for your funding options! Good Luck!