The proposed norms would provide an additional channel of early stage funding to start-ups and small and medium enterprises (SME).
Sebi said that there is a need for funding for SME through alternative sources as global financial crisis (2008) resulted in failure of number of banks and capital adequacy norms applicable to banks have made it difficult for them to lend money to the ventures or start-ups, which may have high risk element.
However, Sebi said there is possibility of systemic risk associated with crowdfunding. Besides, there are chances that genuine websites being used by fraudsters claiming to be promoters of projects or of false websites being established, simply to defraud the investors.
Earlier this year, the International Organisation of Securities Commission (IOSCO), a body of market regulators across the world including Sebi, also called for greater regulatory checks on 'crowdfunding' investment products to avoid any potential systemic risks in future.
While it is still in nascent stage in India, compared to large markets like the US, China and the UK, the trend is catching up fast especially in the wake of emergence of social media as a key platform for such activities.
Crowdfunding typically involves young entrepreneurs and small groups of people raising funds for their ventures through various online platforms. Of late, such platforms are also being used for launching products that promise certain financial returns to the contributors.
In a new report, the research department of IOSCO, of which Indian capital markets regulator Sebi is a key member, has said that the 'financial return crowdfunding market' has doubled year-on-year for the last five years to an estimated USD 6.4 billion in 2013.
This has been mainly driven by annual growth of 90 per cent in peer-to-peer lending.
In India, there are no clear regulations as yet for such activities and therefore a need has been felt to put in place a regulatory framework if such platforms involve large amounts of money or issuance of securities. This will help check any money-laundering activity or other fraudulent acts in the name of 'crowdfunding'.
In India, the few cases of crowdfunding involves raising of funds for films, technology start-ups, e-commerce ventures and some other businesses that are very small in size.
Crowdfunding has been mostly used so far to generate financial support for artistic ventures like films and music recordings, where typically small individual contributions are pooled in a large number of people.
To regulate crowdfunding, Sebi said that it