Comparative Analysis of The Emerging and Maturing Regulatory Frameworks

A Critical Comparative Analysis of the Emerging and
Maturing Regulatory Frameworks: Crowdfunding in

India, USA, UK
Divya Ashta
Dans Journal of Innovation Economics & Management 2018/2 (n° 26), pages 113 à 136
Éditions De Boeck Supérieur
ISBN 9782807391895
DOI 10.3917/jie.pr1.0031
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A critical comparative
analysis of the emerging
and maturing regulatory
frameworks: Crowdfunding
in India, USA, UK
Divya ASHTA1
MP Law Offices, India
div_ashta@yahoo.com
ABSTRACT
This research paper undertakes a critical comparative analysis of the emerging regulatory
framework relating to Crowdfunding and P2P Lending in India with the corresponding

rules and regulations prevailing in the USA and UK in order to ascertain whether the
draft regulatory framework in India is capable of extracting experiences and lessons from
already enacted and mature regulations. We find that in framing the draft legislation in
India, the regulators have obtained valuable guidance from a number of evolved legis-
lations inter alia including USA, UK, France, Canada and Japan. The draft legislation
proposed in India is innovative in many ways as the securities and banking regulators
have attempted to adapt the various rules and regulations to the existing institutional
infrastructure in India. However, in doing so, at times, the legislator forgets that at the
early stages of an industry, regulation should be enabling and not limiting.
KEYWORDS: Comparative Analysis, Crowdfunding, P2P Lending, India, USA, UK
JEL CODES: K22, D14, G2, L86, M38, O16
1. Acknowledgements: I would like to thank Umang Gupta for research assistance, Arvind Ashta and
Djamchid Assadi for their continuous encouragement and guidance all along during the tenure of this pro-
ject, Dipankar Vig for his support and Joan MacLeod Heminway and Jack Wroldsen for their valuable inputs
on the USA crowdfunding regulations.
n° 26 – Journal of Innovation Economics & Management 2018/2 113

Divya ASHTA
Online crowdfunding has become an increasingly popular source to raise

funds for startups and early growth stage companies in developing economies
around the world. Crowdfunding in the developing world is poised for an
explosive growth period (136% year on year). The World Bank estimates that
crowdfunding in the developing world could grow by up to $96 billion by
2025. While the market is still in a nascent stage, the demographics, infra-
structure investments, and favorable trends in the adoption of technology
mean that the market is on track to catch up quickly with the developed
world. While some countries have readily embraced the model, there are
many others that stand to benefit from facilitating crowdfunding for their
economies (AlliedCrowds, 2015a).
There are many potential opportunities in using crowdfunding to support
and fund projects in the developing economies. Crowdfunding has been a
highly effective medium for raising funds for emergency and disaster relief in
developing countries. Crowdfunding, both financial and non-financial, has
also played an important role in promoting the growth of renewable energy,
agriculture and services sectors in developing nations.
Amongst developing economies around the world, given its sheer size and
large population, Asia presents huge potential for crowdfunding. While in
some countries that potential is already being realized, in others there is still
a long way to go. As a country that is starting to transition to a consumer

economy, amongst the various Asian countries, India has been experienc-
ing fast growth in both internet penetration and e-commerce and is likely
to emerge as a crowdfunding powerhouse in the near future. According to
AlliedCrowds data, India scored top of the list amongst the countries that
raised the most money in 2015: India (USD 27.8 million), the Philippines
(USD 26.9 million), Nepal (USD 25.5 million), Mexico (USD 24.8 million),
and Kenya (USD19.9 million) (AlliedCrowds, 2016).
India, an archetype for crowdfunding success in Asia, is amongst the
nations presently in the process of considering crowdfunding regulation.
Recognizing the need to establish a regulatory regime for crowdfunding, the
securities and banking regulators in India have recently placed consultation
papers in the public domain in order to seek views from the various stake-
holders on the future course of action regarding the regulation of crowd-
funding and P2P lending in India. Despite attempts to establish a regulatory
framework since 2014, the regulators have failed to gauge the Indian crowd-
funding trend and promulgate decisive regulations, leaving the legal regime
shrouded in ambiguity.
While the introduction of crowdfunding has been particularly success-
ful in India, its development in satisfying the huge demand of finance for
114 Journal of Innovation Economics & Management 2018/2 – n° 26

A critical comparative analysis of the emerging and maturing regulatory frameworks
modest and poor projects, and for new high-tech and other startup ventures,
raises certain pertinent questions—whether the proposed draft framework
in India is capable of imbibing the key aspects and nuances of parallel model
regulatory frameworks prevailing in certain developed economies, which
have been recognized as being very supportive of crowdfunding? What expe-
riences can be extracted from already enacted and mature regulations in
order to promote a regulatory environment for crowdfunding in India, which
is capable of striking an appropriate balance between the growth of entrepre-
neurship and investor protection? With the ever-increasing financial needs
of venture capitalists against the backdrop of the liberalization of policies
in India, what regulations will allow the crowdfunding platforms to address
such needs?
In order to provide insights into these questions, which we present as our
research inquiry, we have undertaken a critical comparative analysis of the
emerging regulatory framework relating to security-based crowdfunding and
P2P Lending in India with the corresponding rules and regulations prevail-
ing in the USA and UK. The analysis is based on certain key parameters
which are integral to most crowdfunding and P2P Lending legislations across
the world. A comparative analysis in tabular format, based on the points of
distinction, has also been provided alongside for ease of reference. This is fol-
lowed by certain key recommendations with respect to security-based crowd-

funding and P2P lending regulations, which may be worthwhile considering
in the Indian context.
Crowdfunding and innovation have increasingly attracted attention as a
predominant research avenue. Beyond being an innovative way of financing
ventures out of conventional intermediation by collecting funds from a large
pool of backers through peer-to-peer platforms (Assadi, 2016), researchers
have increasingly studied crowdfunding as a way of enabling and raising
awareness of innovations. Stanko and Henard (2017) indicate that the mar-
ket performance of an innovation depends much more on the number of
backers attracted to the campaign than the amount of funding raised.
While all these studies have made a significant contribution to the prac-
tical and conceptual understanding of crowdfunding dynamism, there has
been less study by scholars of the innovations legal environments need to effi-
ciently support innovative crowdfunding for innovative ventures. Exploring
the legal environments is even more important for equity-based crowdfund-
ing, which is more complex than other forms of crowdfunding. Should it pro-
vide intermediation in the seed and early-stage market for young and inno-
vative firms that play the critical role for job creation and economic growth
(OECD, 2013; Haltiwanger et al., 2013), understanding the peculiarities of

Divya ASHTA
supportive legal framework seems to be decisive. We have also addressed this

issue in this research paper.
Methodology
The methodology of research primarily comprises online research. We have
reviewed the draft consultation papers issued by the securities and central
banking regulators in India, the relevant provisions of the Jumpstart Our
Business Startups Act, 2012, prevailing in the US, and the body of rules
developed by the Financial Conduct Authority in the UK in terms of the
Financial Services and Markets Act, 2000.We have also reviewed academic
papers and research reports published on crowdfunding, which are available
online. For triangulation, we have sought feedback from a law practitioner
and a law professor based in the US, who have both written extensively on
the USA’s crowdfunding legislation. The feedback primarily included con-
firmation on the various distinguishing features of security-based funding
between India and the USA, as discussed below, with special emphasis on
the concept of Intrastate Crowdfunding. The experts also shared with us
research papers and newspaper clippings on the latest developments in the
crowdfunding space, which facilitated our understanding of the crowdfund-
ing framework prevalent in the USA.

In this paper, the USA and UK regulations have been selected as bench-
marks for security-based crowdfunding and P2P lending respectively, primar-
ily due to each country being a pioneer in terms of the origination of the
relevant subjects. Also, in the USA, lending-based crowdfunding includes
P2P lending to consumers and peer-to-business lending, both of which are
essentially subsumed within the overall regulatory framework for security-
based crowdfunding and therefore the comparative analysis for P2P lending
vis-a-vis the USA has not been undertaken separately. At the same time,
donation and reward-based crowdfunding have not been considered for the
present analysis since such forms of crowdfunding are primarily free from
most regulations, especially securities and banking regulations.
In this paper, we have selected certain key parameters for undertaking the
comparative analysis on Crowdfunding and P2P lending which are integral
to most countries which have either adopted the crowdfunding regulations or
are going through the consultative process of developing new crowdfunding
regulations. The rationale for selection of these parameters is that a compara-
tive analysis based on such parameters would help in ascertaining whether the
regulation is capable of creating a fine balance between the twin objectives of
capital formation and investor protection and the specific measures that can

be suggested for attainment of the stated objectives. Moreover, studies have

also been conducted by researchers (Gilinisky, 2016; Yin, 2016; Quinn, 2014)
who have adopted and applied a similar methodology in comparing the regu-
latory frameworks in different countries on similar parameters as suggested in
the instant research study, which have yielded reliable results. Therefore, the
methodology adopted for the preparation of the research paper is suitable for
comparing the regulatory environments in India, the USA and UK.
Crowdfunding & P2P lending:

A comparative analysis
Security-Based Crowdfunding: India vs. USA
Regulatory Framework
In the United States, Crowdfunding is regulated by the Securities Exchange
Commission (‘SEC’) in terms of Title III of the Jumpstart Our Business
Startups Act, 2012 (‘JOBS Act’)2 which was enacted on April 5 2012
(‘Title III’) under the Securities Act, 1933 and Securities Exchange Act 1934.
Subsequently, the SEC has also adopted a new Regulation on Crowdfunding
to implement the requirements of Title III, which is effective from May 16

20163 (together referred to as ‘US Crowdfunding Regulations’).
The JOBS Act establishes a regulatory structure for startups and small
businesses to raise capital by way of securities offerings (both debt and equity)
using the Internet through crowdfunding. Title III prescribes rules governing
the offer and sale of certain securities under a crowdfunding issue which, if
fulfilled, would result in an exemption from registration of such securities
with the SEC.
Recognizing the need to establish a regulatory regime for crowdfunding in
India, the securities regulator in India i.e. the Securities and Exchange Board
of India (‘SEBI’), had come up with a consultation paper in June 2014 (‘SEBI
Consultation Paper’)4, proposing a regulatory framework (‘Draft Indian
Framework’) to usher in crowdfunding. Through its consultation paper, SEBI
had invited comments and suggestions from industry and market participants
2. Jumpstart Our Business Startups (Jobs) Act, Title III, H. R. 3606, available at: https://www.gpo.gov/fdsys/
pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf
3. Final rule on crowdfunding, RIN 3235-AL37 available at: https://www.sec.gov/rules/final/2015/33-9974.
pdf
4. Securities and Exchange Board of India (2014), Consultation Paper on Crowdfunding in India, Press
Release: PR No. 62/2014, available at: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1403005615257.pdf

Divya ASHTA
regarding the various possible structures for crowdfunding within the exist-
ing legal framework in India and other associated issues.
In its consultation paper, SEBI recognizes crowdfunding as the “solicita-
tion of funds (small amounts) from multiple investors through a web-based plat-
form or social networking site for a specific project, business venture or social
cause”. Further, Security-Based Crowdfunding is understood as a form of
Financial Return Crowdfunding and includes Equity, Debt and Fund- based
Crowdfunding.
Requirements for Investors
i. Eligible Investors
Under the US Crowdfunding Regulations, any person can invest in crowd-

funding offerings irrespective of whether such a person is accredited or not.
The USA Crowdfunding Regulations allow even small investors to partici-
pate in crowdfunding, while providing for appropriate safeguards for their
protection. Thus, while there is no restriction on who can invest under a
crowdfunding offering in USA, however, because of the risks involved, an
investor is limited on the amount he can invest during any 12-month period
in such offerings. The limitation on the amount that an investor can invest
depends on his net worth and annual income.

Unlike in the USA, where there is no restriction on who can invest under
a crowdfunding offering, the Draft Indian Framework permits only speci-
fied accredited investors to participate in a crowdfunding issue. Accredited
investors include the following categories: a) Qualified Institutional Buyers
(‘QIBs’)5; b) Companies incorporated under the Indian Companies Act with a
minimum net worth of Rs. 200 million (i.e. Euro 2.8 million approx.); c) High
Net Worth Individuals (‘HNIs’) with a minimum net worth of Rs. 20 million
(i.e. Euro 0.28 million approx.); d) Eligible Retail Investors (‘ERIs’) i.e. inves-
tors who receive investment advice or avail themselves of the services of a
portfolio manager and (i) who have a minimum annual gross income of Rs.
1 million (i.e. Euro 0.014 million approx.); or (ii) who have filed Income Tax
returns for at least last three financial years; or (iii) who certify that they will
not invest more than Rs. 60,000 (i.e. Euro 850 approx.) in an issue through
a crowdfunding platform; or (iv) who certify that they will not invest more
than 10% of their net worth through crowdfunding.
5. A QIB is defined under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 to
include a mutual fund, venture capital fund, Alternative Investment Fund, Foreign Venture Capital Investor
registered with SEBI, a scheduled commercial bank, registered insurance company, multilateral and bilateral
development financial institution etc.

ii. Maximum Number of Investors
The US Crowdfunding Regulations do not contemplate any limit on the

number of investors who can participate in offers made through a crowdfund-
ing platform.
The Draft Indian Framework, on the other hand, based on the existing
provisions of the Indian Companies Act relating to the private placement of
securities6, suggests that equity-based crowdfunding and debt-based crowd-
funding shall allow private placement offers through internet-based crowd-
funding platforms up to a maximum of 200 persons. However, any offer or
invitation made to QIBs shall not be considered while calculating the maxi-
mum limit of 200 persons.
iii. Investment Limits
The US Crowdfunding Regulations neither prescribe any restriction on the

number of investors who can participate in offers made through a crowdfund-
ing platform, nor any limits for minimum investment under a crowdfund-
ing issue. However, the US Crowdfunding Regulations do prescribe that the
individual investors are limited in the maximum amounts they can invest in
all Regulation Crowdfunding offerings over the course of a 12-month period
as follows: a) If either of an investor’s annual income or net worth is less than
USD 100,000/- (i.e. Euro 94,000/- approx.), then the investor’s investment is

limited to the greater of: (i) USD 2,000/- (i.e. Euro 1,800/- approx.) or (ii) 5%
of the lesser of the investor’s annual income or net worth; b) If both annual
income and net worth are equal to or more than USD 100,000/- (i.e. Euro
94,000/- approx.), then the investor’s investment is limited to 10% of the lesser
of their annual income or net worth; c) Further, during the 12-month period,
the aggregate amount of securities sold to an investor through all Regulation
Crowdfunding offerings should not exceed USD 100,000/- (i.e. Euro 94,000/-
approx.), regardless of the investor’s annual income or net worth.
While the US Crowdfunding Regulations prescribe only the maximum
limits for investment by an investor in a crowdfunding issue, the Draft Indian
Framework prescribes both minimum and maximum limits for such issue.
The minimum investment limits proposed by SEBI are as follows: a) A
QIB is required to individually purchase at least 5 times the minimum offer
value per person7 and, collectively, all QIBs are required to hold a minimum
of 5% of the securities issued b) A company is required to purchase at least
6. Chapter III—The Companies (Prospectus and Allotment of Securities) Rules, 2014 of Companies Act,
2013.
7. The minimum offer value per person must be at least Rs. 20 000/- (Euro 280/- approx.) of the face value
of the securities.

Divya ASHTA
4 times the minimum offer value per person c) An HNI is required to pur-
chase at least 3 times the minimum offer value per person d) An ERI is
required to purchase at least the minimum offer value per person.
Further, certain individual and cumulative limits have also been proposed
for maximum investment. It is proposed that the maximum investment by
an ERI in a crowdfunding issue shall not exceed Rs. 60,000/-(i.e. Euro 850/-
approx.) and the total of all investments for an ERI in a year through crowd-
funding platforms shall not exceed 10% of the ERI’s net worth.
Also, in the case of equity-based crowdfunding, no single investor shall
hold more than a 25% stake in a company and the promoters shall be required
to maintain a minimum 5% equity stake in the company for a period of at
least three years.
Requirements for Issuer Entity

Under the US Crowdfunding Regulations, certain companies are not eligible
to use the Regulation Crowdfunding exemption. These include a) Non-US
companies b) Exchange Act reporting companies c) Certain investment
companies and companies subject to disqualification under Regulation
Crowdfunding d) Companies that have failed to comply with the annual
reporting requirements under Regulation Crowdfunding during the two years
immediately preceding the filing of the offering statement e) Companies that

have no specific business plan or that have indicated that their business plan
is to engage in a merger or acquisition with an unidentified company or com-
panies (SEC 2016, A Small Entity Compliance Guide for Issuers).
On similar lines, it has been proposed by SEBI under the Draft Indian
Framework that an early stage startup or a Small and Medium Enterprise that
is an unlisted public company incorporated in India can access funds over a
crowdfunding platform, provided it is: a) a company intending to raise capi-
tal not exceeding Rs. 100 million (i.e. Euro 1.4 million approx.) in a period
of 12 months, b) a company that is promoted, sponsored or related to an
industrial group that has a turnover in excess of Rs. 250 million (i.e. Euro
3.5 million approx.), or has an established business, c) a company that is not
listed on any exchange d) a company that is not more than 48 months old,
e) a company that proposes to engage in non-financing ventures, i.e. funds
raised through the crowdfunding platform will not be further used for provid-
ing loans or investments in other entities f) a company that is not engaged in
real estate activity and activities that are not permitted under the Industrial
Policy of Government of India.
There are some common regulatory features between the Draft Indian
Framework and the US Crowdfunding Regulations in terms of investor

protection. Detailed provisions have been prescribed which place an obliga-

tion on the issuers in terms of disclosure requirements, inter alia including the
following: a) a description of the company’s financial condition, b) the name
of each person who is a beneficial owner of 20% or more of the company’s
outstanding voting equity securities c) Description of the valuation of securi-
ties offered d) Ownership details and capital structure e) Principal risks to the
issuers business etc.
The Draft Indian Framework differs from the US Crowdfunding
Regulations as far as the permissibility of a crowdfunding offering by a pri-
vate company is concerned. While a private company (with the exception
of non-eligible companies) is contemplated as an eligible issuer under the
US crowdfunding regulations, the Draft Indian Framework proposes to allow
only an unlisted public company to make a crowdfunding offering, provided
it fulfils the prescribed conditions.
Requirements for Crowdfunding Intermediary/Platform

In terms of the US Crowdfunding Regulations, in order to rely on the exemp-
tion, a crowdfunding issuer is required to conduct its offering exclusively
through an online platform operated by an intermediary that is registered
either as a broker-dealer or as a funding portal and is a member of a national
securities association i.e. the Financial Regulatory Authority (‘FINRA’) (SEC

2016, A Small Entity Compliance Guide for Intermediaries).
A funding portal is a crowdfunding intermediary that, in accordance
with Section 304(b) of the JOBS Act and Section 3(a) (80) of the Securities
Exchange Act, 1934, can engage in only limited activities. In particular,
amongst other things, the funding portal cannot: a) Offer investment advice
or recommendation; b) Solicit purchases, sales or offers to buy the securities
offered or displayed on its platform; c) Compensate employees, agents, or
other persons for such solicitation or based on the sale of securities displayed
or referenced on its platform; or d) Hold, manage, possess, or otherwise han-
dle investor funds or securities.
Therefore, in case a crowdfunding platform proposes to engage in any of
the abovementioned activities, it must register as a broker-dealer rather than
as a funding portal.
Under the Draft Indian Framework, it has been proposed by SEBI that the
entities which fall under any of the following classes shall be allowed to set up
a crowdfunding platform: a) Class I Entities i.e. Recognized Stock Exchanges
with nationwide terminal presence and SEBI registered Depositories b) Class
II Entities i.e. Technology Business Incubators promoted by Central or State

Divya ASHTA
Government and which, inter alia, have at least 5 years of experience and a
minimum net worth of Rs. 100 million (i.e. Euro 1.4 million approx.).
In order to enable fund-based crowdfunding, in addition to Class I entities,
a dedicated set of Class III Entities have also been prescribed i.e. Associations
and Networks of Private Equity or Angel Investors which, inter alia, is a
non-profit company having a minimum three-year track record, a mini-
mum paid up share capital of Rs. 200 Million (i.e. Euro 2.8 million approx.),
and a minimum member strength of 100 active members from the relevant
industry.
Under both the US Crowdfunding Regulations, as well as the Draft
Indian Framework, detailed provisions have been laid down which place an
obligation on the crowdfunding platform to perform a due diligence process
on both the investors and the issuing entities, which, inter alia, include the
following measures: a) conducting background and regulatory checks on the
issuers, whole time directors, promoters, shareholders holding more than
20% of equity shares in the issuing entity, b) due diligence of the business
of the issuing start up, c) obtaining positive affirmations/acknowledgement
from each investor that the investor understands that he is risking the loss of
the entire investment and, d) ensuring that the investors invest within the
prescribed limits etc.
In addition to the above, the Draft Indian Framework also provides for

the establishment of a Screening Committee which, apart from conducting
basic due diligence on the issuer companies, also ensures a filtering mecha-
nism to differentiate between the quality of its ideas and business plans.
An important point of distinction between the US Crowdfunding
Regulations and the Draft Indian Framework is that, under the Draft Indian
Framework, the crowdfunding platforms are restricted from undertaking cer-
tain activities, inter alia including the provision of investment advice and
solicitation and management of funds/securities. However, under US laws,
such activities are permissible for crowdfunding platforms provided that they
are registered as broker-dealers with the SEC.
Restriction on Transferability of Securities

The US Crowdfunding Regulations provide that securities acquired on a
crowdfunding platform shall be subject to a lock-in period and accordingly
shall not be transferable by the purchaser for a minimum period of one year
after the date of purchase. However, the said lock-in restriction shall not be
applicable where the shares are transferred to either of the following catego-
ries of persons: (i) to the issuer of the securities; (ii) to specified categories
of accredited investors; (iii) as part of an offering registered with the SEC;

or (iv) to a family member of the purchaser, or in connection with certain

events, including death or divorce of the purchaser, or other similar circum-
stances, at the discretion of the SEC.
Similarly, under the Draft Indian Framework, it has been proposed that
the securities acquired on a crowdfunding platform are not transferable unless
(i) they are either purchased back by the issuer under a buyback scheme in
accordance with the Companies Act 2013 or (ii) by another accredited inves-
tor registered with the platform or (iii) by a family member or relative or
friend of the accredited investor. Additionally, it has also been proposed that
exit would be available to the investor only in the event of the sale of the
company, management buyout, flotation of IPO, or listing of the company on
a recognized stock exchange in the SME segment or main board. Also, the
promoters shall be required to maintain a minimum of a 5% equity stake in
the Company for at least three years from the date of issue.
It is understood from the above that, unlike in the case of the Draft Indian
Framework, where exit is offered to the investor only upon the occurrence of
certain defined events, the US Crowdfunding Regulations facilitate an exit
for the investor at any time after the expiry of the lock-in period of one year,
and such an exit is not contingent on the occurrence of any event. Further,
unlike the Draft Indian Framework, the US Crowdfunding Regulations do
not require maintenance of a minimum equity stake by the promoters for a

specified period from the date of issue.
Applicability of State Laws
Under Section 305(b) of the JOBS Act, in case of a crowdfunding issue

which satisfies the prescribed conditions of Title III, the federal law pre-empts
the operation of state law and accordingly, while such an issue is exempt
from state registration, documentation and offering requirements, the state
authorities can continue to have enforcement authority.
Separately, Section 3(a) (11) of the Securities Act, 1933, as amended,
exempts from registration and many other rules under the Securities Act,
1933 “any security which is a part of an issue offered and sold only to persons
resident within a single State or Territory, where the issuer of such security is a
person resident and doing business within or, if a corporation, incorporated by and
doing business within, such State or Territory”. This section of the Securities
Act, 1933, together with Rule 147—a safe harbor rule simplifying compli-
ance with Section 3(a) (11), facilitated what has become known as “Intrastate
Crowdfunding”. Offerings of securities meeting the Section 3(a) (11) exemp-
tion are not required to be registered under the Securities Act, 1933, but are

Table 1 – Comparative Analysis—Security Based Crowdfunding
S.No. Parameter United States India

1. Eligible No restriction on who can invest under a Crowdfunding Only accredited investors permitted to participate under a
124
Investors issue. crowdfunding issue
• QIBs
• Indian Companies/ High Net Worth Individuals with a specified
minimum net worth.
Divya ASHTA
• Eligible Retail Investors

2. Maximum No limit prescribed on number of Investors Number of investors restricted to 200 persons (excluding QIBs)
Number of
Investors
3. Minimum No limits prescribed for minimum investment under a • QIBs: at least 5 times the minimum offer value per person,
Investment crowdfunding issue subject to a minimum collective investment of 5% of the
Limit securities issued.
• Companies: at least 4 times the minimum offer value per
person
• HNIs: at least 3 times the minimum offer value per person.
• ERIs: at least the minimum offer value per person.
4. Maximum Investment by individual investor in all crowdfunding Investment by ERIs:
Investment offerings in a 12-month period not to exceed: • Individual investment limited to Rs. 60 000/- (i.e. Euro 850/-)
Limit • If either the annual income or net worth of the investor per ERI
< $100 000: the greater of $2000 or 5% of the investor’s • Aggregate investment per ERI limited to 10% of ERI’s net
annual income or net worth, whichever is lower worth in one year
• If both the annual income and net worth of the investor
are ≥ $100 000: 10% of investors’ annual income or net
worth, whichever is lower.
5. Requirements • Negative List as prescribed above where certain entities • Positive List as prescribed above where certain entities are
for Issuer are not permitted to be issuer entities permitted to be issuer entities
Entity • Private Company permitted to be an issuer entity • Private Company not permitted to be an issuer entity
6. Requirements • Certain activities (e.g investment advice and solicitation Such activities prohibited for crowdfunding platforms
for and management of funds/ securities) allowed to be
crowdfunding/ undertaken by a crowdfunding platform if it is registered
intermediary as a broker dealer (and not permitted for a funding
platform portal)
7. Restriction on • Transfer permissible in the secondary market subject to a • Transfer not permissible on secondary markets
transferability lock-in period of 1 year or compliance with an exemption • Exit available to investor only upon occurrence of certain
of securities from the lock-in period events
• Exit available to investor not contingent on occurrence of • No lock-in period prescribed for exit
Journal of Innovation Economics & Management 2018/2 – n° 26

any event
8. Applicability • State offering registration requirements are pre- empted Not contemplated
of State Laws • “Intrastate crowdfunding” may be applicable

required to be registered or otherwise be exempt from registration under the

law of the particular state in which the offering is made. A number of states
have adopted registration exemptions for crowdfunded securities offerings,
enabling Intrastate Crowdfunding.
The SEC recently amended its safe harbor compliance rules in order to
better facilitate Intrastate Crowdfunding. The revised intrastate offering
regime retains the pre-existing Rule 147 safe harbor under Section 3(a) (11)
of the Securities Act, while simultaneously expanding the availability of the
intrastate offering exemption from Section 5 of Securities Act registration by
adopting the new Rule 147A. As a result of the amendments, certain issuers
will now be able to rely on the federal offering registration exemption, even
if offers are made outside of the relevant state, as long as sales are only made
in that state (SEC 2015, RIN 3235-AL80; SEC 2016 Press Release 2016-226;
Locavesting 2016).
Under the Draft Indian Framework, no parallel provisions in relation to
intrastate crowdfunding like those in the USA have been contemplated.
A comparative analysis in tabular format, based on the above points of
distinction for crowdfunding, has been given above in Table 1 for ease of
reference.

Peer-to-Peer Lending: India vs. UK
Regulatory Framework
P2P lending is regulated under the Financial Services and Market Act, 2000
(‘FSM Act’) with the Financial Conduct Authority (‘FCA’) being the regula-
tor, implementing new regulatory measures on crowdfunding. Previously, P2P
lending in UK used to be regulated as consumer credit by the Office of Fair
Trading, however, it was transferred to the FCA for regulation with effect
from 1 April 2014. The FCA has thus introduced a newly regulated activity
called “operating an electronic platform in relation to lending” into the FSM
Act in 2014 for the regulation of P2P lending businesses (Chu, 2016).
The FCA has gone to great lengths following a public comment process
to develop and implement a body of rules specific to the P2P lending industry,
which address the specific risks and operational features characteristic to the
industry (Quinn, 2014).
P2P lending is recognized by the FCA as “loan based crowdfunding where
people lend money to individuals or businesses in the hope of a financial return in
the form of interest payments and a repayment of capital over time” (FCA 2014,
PS14/04).

Divya ASHTA
While P2P Lending is currently unregulated in India, RBI is of the view

that P2P Lending Platforms need to be regulated, even though they have not
yet really taken serious magnitude (Gandhi, 2016). Accordingly, the Reserve
Bank of India (‘RBI’) published a discussion paper on P2P Lending on April
28 2016 (‘RBI Discussion Paper’)8 vide which the RBI had sought submission
of comments to its discussion paper until May 31 2016.
In its discussion paper, the RBI has examined international regulatory
practices on crowdfunding and the P2P lending available in the public
domain to obtain an understanding of the regulatory approaches adopted in
this regard by different jurisdictions such as China, Korea, Australia, France,
Germany, Italy, the United States of America and Japan.
It is proposed to bring the P2P Lending Platforms under the purview of
RBI’s regulation by defining P2P platforms as a separate category of Non-
Banking Finance Companies (‘NBFCs’) which are required to be registered
with the RBI under the relevant provisions of the Reserve Bank of India Act,
1934.
P2P lending is recognized by RBI “as a form of crowdfunding used to raise
loans which are paid back with interest. It can be defined as the use of an online
platform that matches lenders with borrowers in order to provide unsecured loans”.
Further, considering the present stage of development, it is proposed that
the lending platform shall be registered only as an intermediary i.e. the bor-

rowing and the lending activity shall not be reflected on its Balance Sheet.
The funds must necessarily move directly from the lender’s bank account
to the borrower’s bank account to obviate the threat of money laundering.
It has also been proposed that P2P Platforms must mandatorily adopt a
company or cooperative society format and shall not be operated under any
other alternative format such as individuals, proprietorship, partnership or
limited liability partnerships.
Business Trends/Developments
P2P lending business has taken off in a huge way and has grown rapidly,
especially in the recent past in the UK. The modern formula for P2P lend-
ing originated in the UK when, in as early as 2005, Zopa opened its doors.
Since then over £725 Million (i.e. Euro 850 million approx.) has been lent
to over 80,000 people, earning their lenders £45 Million (i.e. Euro 53 mil-
lion approx.) in interest payments (Osullivan, 2015). There are eight estab-
lished P2P Lending Platforms in the UK, all members of the UK Peer-to-Peer
8. Reserve Bank of India (2016), Consultation Paper on Peer to Peer Lending, available at: https://rbidocs.
rbi.org.in/rdocs/content/pdfs/CPERR280416.pdf

Finance Association, which states on its website that it represents over 90%
of the UK peer-to-peer and invoice trading market. This comprises Funding
Circle, Landbay, Lending works, LendInvest, MarketInvoice, RateSetter,
ThinCats and Zopa9.
In India, on the other hand, P2P Lending is still a nascent business model
that has begun to gain momentum only over the past couple of years. Faircent
was the first company to commence P2P Lending operations in India in April
2014. Currently, there are around thirty P2P Lending Platforms in India,
including Faircent, i2i Lending, Lenden Club, Lendbox etc. (Bhakta, 2016).
Prudential Norms
The FCA requires the platforms to maintain a certain amount of minimum
capital to ensure that they can withstand financial shocks. It is to be esti-
mated as higher than the fixed minimum amount that firms will be required
to hold i.e. £50 000; or a percentage of a volume-based financial resources
requirement calibration, which is the sum of (a) 0.2% of the first £50 million
of total value of loaned funds outstanding; and (b) 0.15% of the next £200
million of total value of loaned funds outstanding; and (c) 0.1% of the next
£250 million of total value of loaned funds outstanding; and (d) 0.05% of any
remaining balance of the total value of loaned funds outstanding above £500
million (FCA 2013, CP 13/13; FCA 2014, PS 14/4).

On similar lines, the RBI consultation paper also specifies the need for
the P2P platform to satisfy certain prudential requirements, which include a
minimum capital of INR 20 million (i.e. Euro 0.28 million approx.). Prudential
limits on a maximum contribution by a lender to a borrower/segment of activ-
ity may also be specified.
The draft framework in India, unlike the UK regulatory framework, also
contemplates a prescribed leverage ratio as part of the prudential require-
ments so that the platforms do not expand with indiscriminate leverage.
Client Money Rules

The UK framework envisages that P2Ps should comply with detailed Client
Money Rules10 in terms of monies received from lenders and in terms of act-
ing as a channel for borrower repayments. Platforms must abide by certain
rules regarding client funds, to the extent that they collect them includ-
ing not co-mingling the funds and performing a reconciliation (Quinn,
2014). Further, the platforms are required to deposit client money with an
9. P2PFA, available at http://p2pfa.info/

10. FCA Client Money Rules, Client Asset Sourcebook available at: https://www.handbook.fca.org.uk/
handbook/CASS/7/?view=chapter

Divya ASHTA
appropriate third-party institution and undertake relevant due diligence in

relation to such a third party.
On the other hand, the draft framework in India does not contain any
provision for the platform to hold client money through nodal or escrow
accounts and requires that the money should mandatorily pass directly from
the lender’s account to the borrower’s account without being reflected on the
balance sheet of the crowdfunding platform (Bhakta, 2016; Rao, 2016).
Business Continuity Plan

The UK regulatory framework requires platforms to ensure that they have a
robust back-up plan in place to service loans in the event they go out of busi-
ness or otherwise cease to operate (Quinn, 2014).
Similarly, the RBI Discussion Paper requires the platforms to put in place
an adequate risk management system for its smooth operations. In case of the
failure of the platform to continue its operations, it should have a ‘living will’
or alternative arrangement in the form of an agreement for continuation of
its operations.
Protection for Small Lenders

In the UK, each P2P Lending Platform is required to provide investors with
the latest and up-to-date educational materials based on which the investors

must consider the appropriateness of an investment through the platform.
Further, the UK regulations also prescribe that prior to accepting any inves-
tor commitment, the platform is required to obtain from the investor rep-
resentations that the investor has reviewed the intermediary’s educational
materials and a completed questionnaire demonstrating the investor’s under-
standing of the restrictions on investment cancellations, potential challenges
for resales, and the inherent investment risks. Also, the loan size for each
investor is restricted up to £25,000/-, thereby mitigating the risk attached to
the investment up to its maximum size (Leveque, 2016).
Under the draft guidelines in India, unlike in the UK, no separate provi-
sions have been considered to address risks where unsophisticated individual
investors/lenders may get involved and where they do not have sufficient
information to make informed decisions about whether or not to participate
on the P2P platform.
Dispute Resolution
In terms of the UK regulations, investors will have the right to complain first
to the platform and then to the Financial Ombudsman Service and disputes
are subject to a standards-based process (FCA 2014, PS 14/4).

Similarly, under the draft guidelines in India, the operators would also
be mandated to have a proper grievance redressal system to deal with com-
plaints both from borrowers and lenders.
Provision of Cancellation Rights

Platforms must allow investors to cancel their investments under certain
conditions and within certain timeframes. This basically makes UK law
conform to current EU regulations (Quinn, 2014). However, no such parallel
provisions have been contemplated under the Draft Indian Framework.
Ongoing Reporting
In terms of the UK regulatory framework, platforms are required to have
regular reporting requirements such as disclosing their prudential and finan-
cial position, notification of a change in the total value of outstanding loans
of 25% or more, client money positions, investor complaints and informa-
tion on loans arranged over the previous quarter, among other items (Quinn,
2014). Additionally, the rules require platforms to provide relevant and accu-
rate information to their customers under a high-level approach aimed at
providing useful information, and not overburdening consumers with too
much detail.

Table 2 – Comparative Analysis—P2P Lending
S.No. Parameter UK India

1. Client Money Platforms required to abide Client monies required to
Rules by certain Client Money Rules pass directly from the lender’s
regarding client funds, including account to the borrower’s
deposit of client money with a account: No role for platform in
third party. the collection of monies
2. Prudential The higher of £50,000/- or a Minimum capital of INR
Norms percentage of a volume-based 20 million (i.e. Euro 0.28 million
financial resources requirement approx.).
calibration
3. Leverage ratio Not applicable Proposed to be specified
4. Protection of Specific guidelines prescribed No specific guidelines proposed
small investors
5. Provision of Cancellation of investments by No such provision
Cancellation investors permitted under certain contemplated
Rights conditions
Similarly, in terms of the RBI Discussion Paper, the platforms are required
to submit regular reports on their financial position, loans arranged in each
quarter, complaints etc. to RBI. Minimum disclosures to borrowers and lend-
ers are also proposed to be mandated through a fair practices code.

Divya ASHTA
A comparative analysis in tabular format based on the above points of dis-

tinction for P2P Lending has been given above in Table 2 for ease of reference.
Key recommendations
Based on the above comparative study, the following recommendations
would be worth noting with respect to security-based crowdfunding and P2P
lending.
Security-Based Crowdfunding
Firstly, while framing the final legislation for the regulation of crowdfund-
ing in the Indian context, it needs to be borne in mind that the most likely
investors in crowdfunding issuances are small, unsophisticated individual
investors who may be interested in investing small amounts in a new idea or
business without exposing themselves to undue risks. The higher entry barri-
ers for retail investors, being knowledgeable in investments, or at least having
access to investment advice, along with being able to absorb losses on crowd-
funded issues, only exacerbate the removal of the crowd from crowdfunding.
The high threshold for qualifying as an eligible retail investor is opposed
to the crowdfunding model’s basics, which aim to pool small amounts from

“the crowd” i.e. non-sophisticated individuals who otherwise refrain from
investing in the securities market. Therefore, there may be a need to enlarge
the scope of accredited investors in order to facilitate participation by small
investors, subject to the provision of certain additional protections. Such pro-
tections may include limits on the maximum amounts that can be invested
in proportion to the investors’ net income, net worth etc. (Mukherjee et al.,
2014; Majumdar, 2015; Tripathy, 2016).
Secondly, considering that the underlying premise of ‘crowdfunding’ is
to raise funds through relatively small contributions from a large number of
people, i.e. “the crowd”, and not from a small group of sophisticated investors,
restricting the number of investors to 200 persons could severely hamper this
premise, which renders crowdfunding unique. Further, limiting the number
of investors to 200 could also affect the potential of a venture to raise the
desired amount of funding, especially considering that most QIBs are averse
to investing through the crowdfunding route and look at restricting their
investment to slightly less risky companies that have a proven track record,
and which provide clearer exit opportunities. While crowdfunding in its tru-
est sense is meant to engage with investors who would otherwise be unable
to participate in regular capital markets, the high thresholds for accreditation

or even for eligibility as a retail investor means that participation in crowd-

funding would remain isolated from large sections of potential retail inves-
tors. Accordingly, while framing the final legislation for regulation of crowd-
funding in the Indian context, SEBI may either consider an increase in the
abovementioned limit of 200 persons or the removal of the limit altogether
in order for “the crowd” to participate in the funding issue, thereby resulting
in the emulation of the US regulatory model on crowdfunding (Mukherjee
et al., 2014; Majumdar, 2015).
Thirdly, even with the inclusion of qualified retail investors, it would
be impossible for a startup to be truly crowdfunded. The SEBI consultation
paper suggests minimum investment limits for Qualified Institutional Buyers
as 5% of each company that they invest in, through the crowdfunding mech-
anism. Considering that QIBs are unlikely to invest in early stage ventures
and startups with no track record of operations, it may not be feasible to
require QIBs to hold a minimum amount of investment, both individually
and cumulatively, since this may impose an unrealistic burden on the issuer
companies and defeat their fundraising attempts. Such a requirement may
also lead to a situation where the company succeeds in raising the requisite
amount from HNIs and retail investors but cannot close the transaction due
to a shortfall in QIB investment (Mukherjee et al., 2014; Majumdar, 2015).
Fourthly, the rationale of limiting the crowdfunding platform only for

unlisted public companies to the complete exclusion of private companies is
unclear, specifically when most of the startups and small and medium enter-
prises are incorporated as private companies. On similar lines as in the USA,
in addition to an unlisted public company, SEBI may also consider includ-
ing a private company within the category of an eligible issuer company,
provided such a company fulfils the prescribed conditions (Mukherjee et al.,
2014; Tripathy, 2016; Bhargava et al., 2017).
Fifthly, drawing a parallel from the US Crowdfunding Regulations, where
no minimum investment has been prescribed for investors under a crowdfund-
ing issue, while drafting the final regulations, SEBI may consider dispensing
with any such requirement for minimum investment (Mukherjee et al., 2014).
Finally, under the Draft Consultation Paper, there is no secondary mar-
ket provided for the investors. Securities cannot be transferred to anyone
else except to the issuer (provided that the transfer has been made in accord-
ance with the sections of Companies Act 2013 and the rules made there-
under which are in relation to the buyback of securities by unlisted public
companies), another accredited investor who has been registered, and a fam-
ily member or a relative or a friend of the accredited investor, or any such
person who is an equivalent to these. Further, the transfer is contingent

Divya ASHTA
only upon the occurrence of certain events such as the sale of the com-
pany, a management buyout, flotation of an IPO, or listing of the company
on a recognised stock exchange in the SME segment or main board. Now,
since there is no secondary market provided, the investors do not have any
exit option available to them. This exit option is necessary because at times
the company may not be able to give expected returns or may have some
internal mismanagement, and in that case investors always prefer to have a
safe option of exiting the whole chaotic situation. The unavailability of this
option could create a deterrent for investors to engage in such crowdfunding
activities, they would rather prefer to go along with another option in which
they can safely back out if the venture does not work out according to their
needs (Bhargava et al., 2017). It is therefore suggested that, as in the case of
the USA, where flexibility for the investors is allowed, the exit should not
be dependent on the occurrence of the above-stated events and should be
permissible on a secondary market, subject to a reasonable lock-in period.
P2P Lending
The prescribed leverage ratio for the platforms may not be suitable because
the credit does not come from the platform. Instead, it is suggested that what
the regulator can ask the P2P lenders is to create a credit insurance fund of
some kind to offer relief in the case of default (Vishwanathan, Nair, 2016).

Further, it would be important for the draft Indian legislation to consider
the maintenance of an escrow/nodal account which will allow pooling of the
funds until the funds are ready for disbursal to the borrower. In the absence
of such a mechanism, the movement of funds between borrowers and lend-
ers will be extremely slow and it will be difficult for the platform to monitor
the flow of loan monies from the lender to the borrower (Vishwanathan,
Nair, 2016).
Finally, while issuing the final guidelines on P2P lending, RBI may con-
sider emulating the disclosure norms for platforms suggested by the UK
P2P Finance Association, including disclosures on cumulative lending,
outstanding loan book, net lending, number of lenders and borrowers etc.
(George, 2016).
Conclusion
The above comparative study points out both differences and similarities in
the proposed legislation in India to already enacted regulations in USA and
UK. The similarities may be related to the nature of the subject matter. The

regulatory authorities in the USA and the UK have made appropriate laws
to accommodate a new industry and to regulate related businesses effectively,
and at the same time have left enough space for industry innovation (Yin,
2016). Similarly, we note that the draft legislation proposed in India is inno-
vative in many ways as the securities and banking regulators have attempted
to adapt the various rules and regulations to the available Indian institutional
infrastructure. However, in doing so, at times, the legislator forgets that at the
early stages of an industry, regulation should be enabling and not limiting.
The findings as discussed in this research paper may be useful not only in
the Indian context, but also for other emerging countries which are in the
process of evolving crowdfunding regulations. Vietnam is exploring ways to
regulate the funding model. Thailand is looking to authorize its first equity
crowdfunding platform by the end of the year, while Malaysia’s Securities
Commission recently allowed six platforms to begin operating just this sum-
mer. If these platforms can show quick successes, more countries in the region
will consider implementing their own regulations (AlliedCrowds, 2015b).
In order to further understanding in this area, future researchers may con-
sider examining the corresponding legislation in China, which has seen the
growth of alternative finance, including crowdfunding, at levels far greater
than those found in the USA.
Enabling legislation is of course only one part of the crowdfunding indus-

try building process. However, legislation is only one facilitator among oth-
ers. The roles of customs and soft institutions such as charitable giving and
trust also need to be examined (Ashta, Assadi, 2010). With the benefit of
hindsight, once large-scale data is available, future researchers could exam-
ine all the different institutional rules and norms and their role in impacting
the probabilities of adopting crowdfunding.
This research has been based on comparing the content amongst legisla-
tions and not the regulatory process. According to the World Bank Global
Indicators of Regulatory Governance, the USA11 and the UK12 are both
model legislators scoring 6 points on a 6-point scale, while India13 scores 3.4
on the same scale. Therefore, a comparison of the regulatory procedure with
ideal-types would be a good area for future research. Individual researchers
could look at transparency, public consultation, impact assessment, access to
laws, as well as the process of challenging regulations.
11. World Bank Global Indicators of Regulatory Governance, available at: http://rulemaking.worldbank.
org/data/explorecountries/united-states
org/data/explorecountries/united-kingdom#cer_consultation
org/data/explorecountries/india

Divya ASHTA
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Divya ASHTA
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Comparative Analysis of The Emerging and Maturing Regulatory Frameworks

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A Critical Comparative Analysis of the Emerging and

Maturing Regulatory Frameworks: Crowdfunding in

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KEYWORDS: Comparative Analysis, Crowdfunding, P2P Lending, India, USA, UK

JEL CODES: K22, D14, G2, L86, M38, O16

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Online crowdfunding has become an increasingly popular source to raise

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supportive legal framework seems to be decisive. We have also addressed this

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be suggested for attainment of the stated objectives. Moreover, studies have

Crowdfunding & P2P lending:

Security-Based Crowdfunding: India vs. USA

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Requirements for Investors

Under the US Crowdfunding Regulations, any person can invest in crowd-

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ii. Maximum Number of Investors

The US Crowdfunding Regulations do not contemplate any limit on the

iii. Investment Limits

The US Crowdfunding Regulations neither prescribe any restriction on the

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Requirements for Issuer Entity

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protection. Detailed provisions have been prescribed which place an obliga-

Requirements for Crowdfunding Intermediary/Platform

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Restriction on Transferability of Securities

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or (iv) to a family member of the purchaser, or in connection with certain

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Applicability of State Laws

Under Section 305(b) of the JOBS Act, in case of a crowdfunding issue

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Table 1 – Comparative Analysis—Security Based Crowdfunding

S.No. Parameter United States India

• Eligible Retail Investors

Journal of Innovation Economics & Management 2018/2 – n° 26

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required to be registered or otherwise be exempt from registration under the

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While P2P Lending is currently unregulated in India, RBI is of the view

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Client Money Rules

9. P2PFA, available at http://p2pfa.info/

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