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:
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”).
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.
In order to register an ECF platform, the Operator must exhibit to the SC that it will be able to:
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.
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.
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.
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.
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.
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.