KUALA LUMPUR, Sept 3 — With the Sept 5 deadline looming for public comments on Securities Commission Malaysia’s (SC) proposed regulatory framework for equity crowdfunding (ECF), industry players — while lauding the move — have warned of challenges ahead.
While he feels the country needs such a platform, Malaysian Venture Capital Management Bhd (Mavcap) chief executive officer Jamaludin Bujang said he wonders if companies are ready to handle that many investors for the maximum US$1.6 million (RM5 million) they can raise.
“Whereas, if they go to venture capitalists (VCs) [and succeed in raising the same amount], they just have to deal with one party,” he told Digital News Asia (DNA) via email.
Mavcap is the Malaysian Government’s venture capital arm that invests in companies in what it sees as strategic industries.
The SC describes ECF as a new form of fundraising that allows startups or other smaller enterprises to obtain capital through small equity investments from relatively large numbers of investors, using online portals to publicise and facilitate such offers.
The SC considers alternative funding channels, such as ECF, a crucial and innovative market-based structure to facilitate growth of new small-scale enterprises, which it hopes will contribute significantly to the national economy.
Yet, having looked at its consultative paper, one seasoned market observer wonders where the path to a main board listing is, if some company is successful.
“If you are going to regulate it, show them the way,” said the observer, who preferred anonymity.
“Right now, it seems the SC is only showing how it will restrict those interested in ECF. I think the approach should be rapid inception, conception, growth and development.
“However, right now, the path appears to be one of inception and constriction,” he added.
The market observer mused that under the proposed ECF regulatory framework, Facebook could have started in Malaysia, but would have been stifled here as well.
Meanwhile there are questions over why the limit has been set at US$1.6 million, and that this seems to preclude the typical small and medium enterprise (SME) from participating in the platform.
In an email response to DNA, the SC said that as equity crowdfunding is an alternative source of financing for startups and SMEs, it is designed to encourage companies to raise funds up to a total paid-up share capital of US$1.6 million, excluding issuer’s own capital contribution or any funding obtained through private placement.
The SC pointed out that startups at the early stage of business do not typically have access to traditional financing methods that SMEs otherwise would.
Furthermore, a new funding initiative will be announced for SMEs in the upcoming national budget for 2015, the Commission added.
Buyer beware
The range of comments DNA has received clearly show that the ECF consultative paper has created a lot of interest, especially after the disappointment of the previous attempt in something similar, the stillborn Malaysia Unlisted Market or MyULM.
MyULM was the SC’s attempt to establish an alternative investment market in Malaysia along the lines of the over-the-counter market at Nasdaq. It was envisioned as a one-stop gateway for capital raising and trading of securities of startup companies and SMEs.
According to our sources then, 61 parties collected an RFP (request for proposal) from the SC.
In an article DNA wrote back in July 2013, intellectual property specialist Pintas IP Group described MyULM as an ambitious and comprehensive platform covering multiple asset classes such as unlisted shares, new asset classes (such as IP assets), crowdfunding, and so on.
Pintas felt the scope of the RFP was too extensive for a single player to submit a single comprehensive proposal within the time frame given — more so when it was to be a self-funded project.
While the ECF is much more narrowly defined — too narrowly, some contend — there are concerns over the commercial viability for those who get chosen to operate the platform.
Bob Chua, chairman of angel club Virtuous Investment Circle, is one. Incidentally, Chua claimed that he had approached Bank Negara Malaysia – the central bank and industry regulator – and the SC about two years ago to introduce the crowdfunding concept to Malaysia.
“The operators of the platform will have to survive on the percentage of fees made, which, if not sufficient, will inevitably kill all platforms/ facilitators, as there is usually a fee of 3-4 per cent ... as their incentive and monetising model.
“There will need to be an adequate amount of deal flow that goes through here to make it work,” he said.
While market talk has it that four companies will be considered to provide the crowdfunding platform, the SC has told DNA that it “has not authorised any equity crowdfunding platform as the necessary legislative amendment process has yet to be concluded.”
And while the SC is playing it cautious when asked by DNA about the timeline to implement the platform, an executive familiar with the matter told DNA that it could be as soon as the first half of 2015, but added this is dependent on Parliament approving the required legislative amendments.
Officially, the SC said, “We will consider the feedback received and expect to publish a response to the consultation paper in due time. The ECF regulatory framework will be implemented following the necessary legislative amendment process.”
Specifically, the SC is referring to the Capital Market Services Act and the elimination of some overlaps with the Companies Act of Malaysia. The SC has already submitted the amendments to Parliament and is awaiting that process to take its course.
Pleased that things are moving in the right direction, Chua listed a number of positives:
New source and avenue for fundraising on a small scale, perhaps a pre-seed or seed round;
Introduce a new breed of investors into the ecosystem;
Educate new investors on the fast and simple world of investing in exciting companies; and
Fuel passion projects by equally interested domain specialists
Mavcap’s Jamaludin concurred with the ECF being a platform to bring in a new breed of investors to enhance the vibrancy of the ecosystem.
“I am sure there are a lot of people who want to invest. This gives startups an additional avenue to raise funds. Now, it's only the VCs and angel investors.
“Furthermore, because there are not enough VCs in Malaysia, you can't depend on them to fund startups,” he said.
And while everyone is concerned for the investors and the companies raising funds, the SC said that both investors and business founders are expected to perform the necessary checks to ensure that each side knows what it is getting into.
“The platform operators are expected to have internal processes to filter and admit legitimate ventures only. In the event of oversubscription of shares, business founders should find it in their interest to conduct checks on investors wishing to purchase a large equity stake in their venture before parting with any equity,” it said.
To this, Chua added, “Buyers have to be especially [wary]. This is not an investment vehicle similar to a private share exchange market or angel investment, where one has the ability to [tweak] a term sheet, exit clauses, etc. The investor is bound to a group contract in a highly regulated marketplace.”
All having been said and done, he said he was keen to see equity crowdfunding get off the ground in Malaysia. “Let’s see how this goes.” — Digital News Asia
*This article was first published here.
