Equity crowdfunding: The good, and not so good: Page 2 of 2

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.
 
Equity crowdfunding: The good, and not so good: Page 2 of 2While 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 (pic), 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% … 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

Equity crowdfunding: The good, and not so good: Page 2 of 2Mavcap’s Jamaludin (pic) 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.”
 
Related Stories:
 
SC seeks feedback on equity crowdfunding regulations
 
Malaysian VCs invested US$80mil in 2013
 
MBAN hopes for mindset shift among angel investors
 
Cradle-GGV funding pact to also help plug entrepreneur brain drain
 
Angels with pitchforks, VCs who don't venture
 
 
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