If you had been to websites such as Kickstarter, Indiegogo, GoFundMe or our homegrown website PitchIN, then you would have probably heard about crowdfunding.
In the simplest terms, crowdfunding offers a new way of raising funds whether for business or philanthropic purposes. The funds originate from a crowd of individuals, who invest in a cause/business/project that they believe in.
There are essentially 4 main types of crowdfunding:
- rewards;
- donation;
- lending; and
- equity crowdfunding.
The first 2 are unregulated while the other 2 are regulated, mainly because they deal with complex issues such as money-lending and trading of shares. This article focuses on equity crowdfunding (“ECF”).
In February 2015, the Securities Commission of Malaysia (“SC”) released a new Guidelines to facilitate ECF (“Guidelines”). The Guidelines seek to strike a good balance between the benefits of crowdfunding and its risk to the public.
Following the issuance of the Guidelines, the SC announced in June 2015 the approval of 6 registered ECF operators (Alix Global, Ata Plus, Crowdonomic, Eureeca, pitchIN and Propellar Crowd+) who are expected to start operations by the end of 2015.
The SC describes ECF as
“a new form of fundraising platform that allows startups or other small-and-medium-sized enterprises (“SMEs”) to obtain funding through small equity investments from a relatively large number of investors, using online portals to publicise and facilitate such offers to investors.”
The investors receive shares or stocks in return for their investments and can expect a return in the form of dividends if the company performs well.
The ECF Platform Operator
A person who wishes to operate, provide or maintain an electronic ECF platform (“Operator”) must register the platform with the SC. The Operator must be a locally incorporated company or a limited liability partnership formed in Malaysia.
In order to register an ECF platform, the Operator must exhibit to the SC that it will be able to:
- operate an orderly, fair and transparent market;
- its board of directors, CEO, COO, CFO, etc must satisfy the fit and proper test;
- it will be able to manage any risk associated with its business and operation;
- it will appoint at least one responsible person in compliance with the Guidelines;
- it will be able to take appropriate action against a person in breach; and
- the rules of the ECF platform comply with the requirements of the Guidelines and that it has sufficient financial, human and other resources for the running of the ECF platform at all times.
The SC places great emphasis on the security and integrity of the ECF platform’s IT system as it requires the Operator to put in place adequate security measures and hire sufficient and capable IT and technical personnel to maintain the system.
An ECF platform essentially works like a stock market or a derivatives market that connects entrepreneurs with investors.
As such, the SC sees it fit to require the Operator to carry out a due diligence exercise on prospective issuers; monitor conduct of issuers, investment limits of investors and any money laundering activities; carry our investor education programmes as well as protect personal data of individuals in accordance with the Personal Data Protection Act 2010.
The Issuer
A person who wishes to list his project on an ECF platform (“issuer”) must first incorporate a local private company. In terms of the limit to funds raised on the ECF platform, the Guidelines say that an issuer can raise up to RM3 million within a 12-month period, irrespective of the number of projects an issuer may seek funding for and a total of RM5 million through the ECF platform.
Raising money from complete strangers is never easy. The issuer will need to come up with a strategic business plan to effectively market and promote itself and its project.
First of all, the issuer must choose the right ECF platform to do its listing as it is not allowed to list on multiple ECF platforms concurrently. It should also target a specific pool of investors if the project is a very niche one. For example, if the project is about healthcare related product, it should first target people from the healthcare industry as they would be more inclined to invest in products or services that will improve or add value to their field.
Most of the crowdfunding platforms adopt the “all-or-nothing” model i.e. if the issuer fails to raise the targeted investment amount by the deadline, the fund raised will be returned to the investors and the issuer will get nothing.
That is why it is so important to have a strong, well-executed plan, as projects listed on an ECF platform can go by really quickly, especially when there are dozens of other projects listed on the platform at the same time, all vying for attention.
The issuer should develop an attractive name, a convincing description and an eye-catching image as part of the project to help the project stands up from the pool of projects.
The pitching message must be creative and concise enough to grab people’s attention. Getting listed on an ECF platform is just the beginning. The issuer will need to treat fundraising activity very much like how politicians run their political campaigns, and it has to continually drive traffic to its project page through social media, email marketing and other communication tools to engage with its potential investors.
In this Internet age, great ideas spread virally very easily and broadly.
Make good use of the Internet to reach out to large audiences. Highlight the potential ROI from the project. Show the investors how the fund will be utilized. Practice transparency as that is the key to gain confidence from the investors.
The Investor
Anyone can become an investor subject to certain restrictions.
If you are a sophisticated investor (i.e. accredited investor, high-net-worth entity or high-net-worth individual), there is no limit to the investment amount; if you are an angel investor (i.e. an investor accredited by the Malaysian Business Angels Network), you can invest up to RM500,000 within a 12-month period; and if you are a retail investor, you can invest up to RM5,000 per issuer with a total amount not exceeding RM50,000 within a 12-month period.
The Guidelines also put in investor protection mechanisms whereby the Operator is required to ensure that any fund raised in relation to a listing on the ECF platform must be kept and maintained in a trust account until the targeted amount sought to be raised has been met.
Investors are given a six (6) day cooling off period within which they may withdraw the full amount of their investment. If there is any material adverse change relating to the offer during the offer period, the investors must be notified of such change and will be given the option to withdraw their investment if they choose to do so.
The release of the Guidelines marks a progressive milestone by the Government in bridging the gap between investors who want to invest in startups and entrepreneurs who have great projects but lack of funding. This will certainly help Malaysia to create a thriving entrepreneurial ecosystem.
Disruptive technologies have changed the way we live and do business. The emergence of ECF is another innovative example of how technologies are disrupting the traditional means of funding, democratizing access to capital as well as offering up more investment opportunities to everyone.
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About the author:
This article was written by Edwin Lee Yong Cieh, Partner of LPP Law – law firm in Kuala Lumpur, Malaysia (+6016 928 6130, [email protected]). Feel free to contact him if you have any queries.
This article was first published in CHIP Magazine Malaysia.
The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional legal advice. You are advised to seek proper legal advice for your specific situation.
Edwin is a corporate and technology lawyer. He is also the founder and deputy managing partner of Lee & Poh Partnership (LPP Law). Edwin has advised a range of companies from technology startups to multinational corporations on a range of matters. In 2020, Edwin was named as a Malaysian Rising Star by Asian Legal Business, a finalist for the Young Lawyer of the Year at the ALB Malaysia Law Awards as well as a lawyer in the annual ALB publication of Asia 40 under 40.
View his full profile here.
