Question
Which of the following statements about Crowdfunding is/are correct?
1Crowdfunding is solicitation of funds (small amount) from multiple investors through a web-based platform or social networking site for a specific project.
2Small and Medium Enterprises (SMEs) are able to raise funds at lower cost of capital without undergoing rigorous procedures.
A1 only
B2 only
CBoth 1 and 2 ✓
DNeither 1 nor 2
Each Statement — Both Confirmed Correct
1
✓ Correct — Standard definition of crowdfunding
Solicitation of funds (small amount) from multiple investors through a web-based platform or social networking site for a specific project
Correct — this is the textbook and regulatory definition. SEBI’s consultation paper on crowdfunding uses almost identical language. The key elements all in this statement:• Small amounts — each contributor gives a small sum (vs large institutional investments)
• Multiple investors/contributors — the “crowd” in crowdfunding — thousands of individuals
• Web-based platform or social networking site — Kickstarter, Indiegogo, Ketto, Milaap, ImpactGuru (India)
• Specific project — funds raised for a defined purpose (product launch, film, social cause, startup)
The aggregation of many small amounts from many people becomes a meaningful total — democratising access to capital for individuals and businesses who cannot access traditional finance.
✓ SEBI definition: “solicitation of funds from multiple investors through web platforms for specific projects”
India examples: Ketto (healthcare/social) · Milaap (social) · ImpactGuru · Global: Kickstarter, Indiegogo, GoFundMe
2
✓ Correct — Lower cost, no rigorous procedures for SMEs
SMEs are able to raise funds at lower cost of capital without undergoing rigorous procedures
Correct on both counts — lower cost AND simpler procedures.Lower cost compared to traditional financing:
• Bank loans: Collateral required, processing fees, interest rates 10-18% p.a.
• IPO/Public Issue: SEBI DRHP filing, underwriter fees (2-5%), legal/audit costs, roadshows — crores of rupees
• Venture Capital: Equity dilution, investor control, board seats demanded
• Crowdfunding: Platform fee only (typically 3-8%) · No collateral · No underwriter · No credit rating mandatory
No rigorous procedures:
• No mandatory SEBI DRHP (Draft Red Herring Prospectus)
• No credit rating requirement
• No mandatory auditor/banker/lawyer fees for listing
• Campaign can go live in days vs months for IPO
• Lower disclosure requirements than public issue
This makes crowdfunding particularly valuable for early-stage SMEs, startups, social enterprises, and creative projects that cannot meet banks’ collateral requirements or afford IPO costs.
✓ Crowdfunding vs IPO: No DRHP · No underwriter · No credit rating · Days vs months · Lower fees
Platform fee: 3-8% only · No collateral · Access to retail investors directly · Suitable for startups with no credit history · Also builds brand community awareness
Four Types of Crowdfunding — UPSC Reference
Reward-Based
Contributors get a reward (product, service, perk) in return. No equity. Most common model. Kickstarter, Indiegogo. Example: Fund a gadget, get early access.
Donation-Based
Contributors donate without expecting financial return. Used for social causes, medical emergencies, disaster relief. Ketto, Milaap, GoFundMe.
Equity-Based
Investors get equity (ownership stake) in the company. Regulated by SEBI in India. SMEs raise capital by offering shares to the crowd — lower cost than IPO.
Debt-Based (P2P Lending)
Borrowers get loans from multiple lenders via a platform. RBI regulates P2P lending in India. SMEs borrow at potentially lower rates than banks.
Crowdfunding vs Traditional SME Financing
| Parameter | Bank Loan / IPO | Crowdfunding ✓ |
| Collateral | Usually required (land, machinery) | Not required |
| Cost | High — interest + fees + underwriting | Lower — platform fee 3-8% only |
| Procedures | Rigorous — DRHP, credit rating, audit, legal | Simpler — launch campaign in days |
| Time to raise | Months (IPO: 6-12 months) | Weeks to months (campaign duration) |
| Access | Limited to creditworthy, asset-rich | Open to startups, social ventures, creative projects |
| Investor base | Banks, institutions, HNIs | The “crowd” — thousands of small investors |
| Regulation (India) | RBI (banks) · SEBI (capital markets) | SEBI (equity crowdfunding) · RBI (P2P lending) |
Memory Trick
🧠 Crowdfunding — Three Key Words: Many · Small · Web
Statement 1 definition — “Many people, Small amounts, Web platform”: Crowd (many) + Fund (small amounts) + ing (ongoing via web). The three defining features are: (1) multiple contributors, (2) small individual amounts, (3) digital/web-based platform. All three are in Statement 1.
Statement 2 — lower cost + no rigorous procedures = TRUE: Compare: IPO takes 6-12 months and crores in fees vs crowdfunding campaign takes weeks and charges 3-8%. No DRHP, no credit rating, no mandatory underwriter. This is exactly why SMEs find crowdfunding attractive.
Four models: R.D.E.D.: Reward-based · Donation-based · Equity-based · Debt-based (P2P). SEBI regulates equity crowdfunding; RBI regulates P2P (debt) crowdfunding in India. Reward and donation-based are less regulated.
