SC issues guidelines for equity crowdfunding

OVER the past few years, the Internet has enabled innovative methods of fundraising for small businesses.

A key part of this is referred to as the concept of crowdfunding. This is where companies raise funding through monetary contributions from a large number of people.

In seeking to embrace and legitimise these concepts, the Securities Commission (SC) has approved a total of 12 crowdfunding platforms through which individuals can invest their money.

None of these involve the trading of foreign exchange (forex) or any other propositions that offer lofty returns of up to 20% or more per month.

The SC has issued guidelines for parties to operate platforms based on two concepts of crowdfunding – one involving the sale of equity in small companies, and the other for small companies to issue debt.

The first is called equity crowdfunding (ECF) and six parties have been issued licences to operate such platforms.

The six ECF platforms approved are FundedByMe (Alix Global), Ata Plus, Crowdonomic, Eureeca, pitchIN and Crowdplus.

In less than a year, a total of RM10.4mil has been invested in 14 companies via these platforms.

pitchIN Equity Crowdfunding chief operating officer Naysan Munusamy says the underlying premise behind peer-to-peer (P2P) financing and ECF is that they allow the public to invest in SMEs or startups.

“What these platforms provide the public is a new investment asset class, with the necessary safeguards in place.

“Unlike the investment schemes out there where people blindly invest by listening to past success stories, crowdfunding platforms are licensed and regulated by the SC.

“Also, these platforms offer an opportunity for the public to invest in emerging companies or tech start-ups, which prior to this, was only available to high-net-worth investors,” he explains.

The other is P2P financing platforms, where individuals invest money in small companies in the form of debt, through licensed online platforms.

The platforms essentially match the investors with small companies that require capital.

Among the six platforms approved are B2B FinPAL, Kapital, FundedByMe Malaysia, Managepay Services, Modalku Ventures (Funding Societies Malaysia) and Peoplender.

Of these, only Funding Societies Malaysia is up and running.

It is understood that Funding Societies Malaysia has facilitated two SMEs in raising debt on their platform from Malaysian investors.

These two companies, which are in the wholesale and retail trade, raised RM320,000 and offered investors returns of 12.5% per annum.

While P2P lenders, who can invest from as low as RM100, get a return from the money they have lent to SMEs, ECF investors do not experience such high returns upfront, as they are investing for the long term in companies that are focused on growth. The profit ECF investors make is crystallised at an exit during an initial public offering or a sale of the company to new investors.

While the risk may be higher, as the company takes time to grow, the returns from ECF can be much higher than that of P2P lenders.

So, how are investors protected when investing in ECFs?

According to the SC, all ECF platform operators in Malaysia must be registered as a Recognised Market Operator and have to comply with guidelines to safeguard the interest of investors.

These include minimum disclosures, investment limits, obligations to educate investors, keeping monies received in trust accounts, as well as monitoring anti-money laundering requirements.

If any operator is found to have breached any rules, the SC can take action against the operator.

The SC guidelines also entail that ECF platform operators are obligated to ensure issuers’ compliance with platform rules.

In addition, ECF investors are given a six-day cooling-off period, within which they may withdraw the full amount of their investment, the SC said.

If there is any material adverse change relating to an issuer, the investors must be notified of such changes.

The SC says investors have the option to withdraw their investment if they choose to do so within 14 days from notification.

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