Which of the following statements about Crowdfunding is/are correct ?
- Crowdfunding is solicitation of funds (small amount) from multiple investors through a web-based platform or social networking site for a specific project.
- Small and Medium Enterprises (SMEs) are able to raise funds at lower cost of capital without undergoing rigorous procedures.
Select the answer using the code given below :
Detailed Explanation:
Statement 1 — Correct. Crowdfunding (as defined by SEBI) = collecting small amounts of money from many people through a website/social media platform for a specific project. It skips traditional banks/investors and connects directly with the public.
Statement 2 — Correct. For SMEs and startups, crowdfunding offers:
- Cheaper funding (vs high-interest bank loans)
- No need for heavy paperwork, collateral, or compliance (unlike banks or stock exchange listing)
- They don't have to give up large equity stakes to big investors either
Both statements describe the same basic concept from different angles — no contradiction.
Memory Trick: Crowdfunding = "Many small hands building one big project" — cheap, easy, online.
Crowdfunding
Definition (SEBI): Solicitation of small funds from multiple investors via web/social platforms for a specific project, venture, or cause.
Types of Crowdfunding:
| Type | What it means |
|---|---|
| Donation-based | No return expected (e.g., disaster relief) |
| Reward-based | Backers get a product/perk in return |
| Equity-based | Investors get company shares |
| Debt-based (P2P lending) | Investors get repayment with interest |
Benefits:
- Low cost of capital for SMEs/startups
- No heavy compliance/collateral burden
- Wider investor base, faster access to funds
- Democratizes finance — bypasses traditional banks
Risks/Concerns:
- Lack of regulation in some platforms
- Risk of fraud
- SEBI has been cautious about equity crowdfunding in India — currently restricted/under regulatory scrutiny due to investor protection concerns
Related Terms:
- P2P Lending — regulated by RBI as NBFC-P2P
- Angel Investment — different from crowdfunding (few large investors, not many small ones)
Question 1 of 4 Capital Market
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