Official UPSC Format

Which of the following statements about Crowdfunding is/are correct ?
1. Crowdfunding is solicitation of funds (small amount) from multiple investors through a web-based platform or social networking site for a specific project.
2. 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 :

1. Crowdfunding is solicitation of funds (small amount) from multiple investors through a web-based platform or social networking site for a specific project.

2. Small and Medium Enterprises (SMEs) are able to raise funds at lower cost of capital without undergoing rigorous procedures.

⚡ Quick Recall Snippet

Crowdfunding platforms solicit small capital investments from a large pool of online backers. Small and Medium Enterprises utilize web-based financing to secure capital at lower costs without traditional banking friction.

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Detailed Solution & Authority Citations

Correct Answer is Option C
According to the Securities and Exchange Board of India (SEBI) guidelines on alternative investment mechanisms:
  • Statement 1 is Correct: Crowdfunding is formally defined as a method of raising capital through the collective effort of a large number of individual investors. This solicitation is executed primarily online via specialized web-based platforms or social networks, allowing creators to fund specific projects or ventures directly from the public.

  • Statement 2 is Correct: This model is highly advantageous for Small and Medium Enterprises (SMEs) and early-stage startups. By bypassing traditional financial intermediaries (like banks or venture capitalists), SMEs avoid massive collateral requirements, heavy bureaucratic compliance, and high interest rates. Consequently, they are able to raise necessary funds at a significantly lower cost of capital and without undergoing rigorous institutional procedures.
    • Conclusion: Both statements accurately describe the mechanics and benefits of crowdfunding.

    🚨 The Examiner's Trap

    This is a straightforward definitional question. Examiners might hope candidates confuse 'crowdfunding' with 'microfinance' (which usually involves NGOs/banks targeting rural poor) rather than web-based startup funding.

    Active Recall Flashcard

    Tap to Flip

    What alternative finance model involves raising small amounts of money from a large number of people, typically via the internet?

    Crowdfunding.

    Concept Flow Mapping

    Crowdfunding
    Solicits
    Small Funds Online
    SMEs
    Use
    Alternative Finance
    Crowdfunding
    Lowers
    Cost of Capital

    Logic Quest

    "Why does crowdfunding have a 'lower cost of capital'?"

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