NOVEMBER 12 ― I have written several months ago on why crowdfunding platforms will be a “new normal” for companies in Malaysia to raise funds. Many agreed with my positive outlook though it was surprising that few even from the entrepreneurship community still had their reservation.
If you’re still sceptical about crowdfunding platforms and reading this I hope this article will change your mind.
In the recent annual SCxSC hosted by the Securities Commission of Malaysia (SC) this year, Fintech News Malaysia reported that over 2,500 small and medium enterprises have raised over RM1 billion using the crowdfunding platforms regulated by the SC. It is a staggering amount of cash raised over a span of several years. To give you a perspective the LEAP Market which is a new public market started in 2017 to get more high growth companies to get listed that may not be ready to be listed on bigger boards like ACE Market or MAIN Market have raised over RM61.3 million in aggregate for over 11 listed companies.
To recap, crowdfunding platforms can refer to either equity crowdfunding which lets your company sell equity in return for cash from investors or peer to peer (P2P) lending which allows you to borrow money by selling investment notes or invoice.
It is believed that the bulk of the amount raised came from the P2P platforms. So if you are a company that is seeking working capital or cashflow you may want to take a look at the registered platforms.
More matching grant funding for the crowdfunding companies
I am excited that the government is acknowledging the importance of fintech companies especially in capital raising space. In the recent budget announcement the government has doubled down its investments in equity crowdfunding and peer to peer (P2P) platforms in Malaysia for the coming year by announcing another RM80 million allocation into the matching grant Malaysia Co-Investment Fund (MyCIF).
In brief the MyCIF is a matching grant managed by the SC that invests into companies hosted on the equity crowdfunding and the P2P platforms regulated by the SC. In the announcement RM50 million will be allocated for P2P lending campaigns and the remaining RM30 million grant will be matched by the MyCIF for equity crowdfunding campaigns.
Additionally the government is encouraging more retail investors to invest in crowdfunding campaigns by offering a 50 per cent income tax exemption with a cap of RM50,000. This is encouraging because investors can invest in high growth companies and at the same time reduce their tax exposure.
The MyCIF was initially launched last year with a smaller amount of RM50 million with an additional RM10 million for social enterprises raising funds on the P2P platforms.
Forward thinking regulators
As a legal practitioner I am proud to say that Malaysia has one of the most developed regulatory frameworks when it comes to facilitating financial technology (fintech) adoption. Both the Central Bank of Malaysia and the SC have been forward thinking in their respective approaches when it comes to embracing fintech with their own dedicated officers in charge of assessing fintech applicants.
I have written previously that Malaysia was the first Asean country to launch an equity crowdfunding framework in 2015 and later updated its guidelines to include the P2P framework a year later. To date the SC has approved 10 equity crowdfunding platforms and 11 P2P platforms respectively. All the approved platforms have to provide reports on their performances to the SC.
In contrast, the Indonesia Financial Services Authority (OJK) (which is the equivalent of the Monetary Authority of Singapore with dual regulatory functions) only came up with their equity crowdfunding funding framework several years later in 2018 and P2P framework a year afterward. To date it appears that OJK has approved only 3 equity crowdfunding platforms, although they do have more P2P players with over 161 licensed platforms. It also appears that there are still many crowdfunding platforms that are operating without appropriate licences (around 115 according to Fintech Futures)
In the future I am confident that we will find more retail investors especially younger millennials being involved in crowdfunding platforms. This has been confirmed in a recent speech by the SC’s chairman when over 60 per cent of the investors are under the age of 35 years old.
Enter the new secondary market
Soon things will also get more interesting when the crowdfunding platforms begin operationalising the secondary market. Essentially a secondary market is a feature that allows you to buy and sell your crowdfunding shares to other investors registered on the platform.
Let’s say you have invested in a company hosted in a crowdfunding campaign. Currently you may not be able to realise your investment unless the investee company exits either by a trade sale (usually the company’s shares are sold to a third party or a buyer which is also known as a buyout) or an initial public offering (a situation where a private company gets listed as a public company and offers its shares to the public market for the first time).
This would allow you to “exit” and realise your investment earlier rather than waiting for an “exit event” which may take a longer investment horizon.
Buyers beware, of course
On a final note if you are planning to invest in a campaign please verify that the crowdfunding platform is registered with the SC. The existing crowdfunding platforms can be found on the SC’s website. Please read the warning statement and disclaimer carefully including other important disclosures published on the crowdfunding platform carefully so that you know and understand the risks involved before investing in any company including potentially losing all your money!
I do hope that more entrepreneurs will explore crowdfunding as another way to fundraise by getting their companies hosted on a crowdfunding platform. Any company with a good business plan including a usual mom and pop shops around your corner can raise funds on a crowdfunding platform.
* Izwan Zakaria is a practising lawyer at Izwan & Partners a corporate law firm specialising in technology companies, startups, and venture capitals.
** This is the personal opinion of the writer and does not necessarily represent the views of Malay Mail.
