PETALING JAYA: Malaysia’s decision to allow businesses to raise cash through blockchain technology some two years after the boom and bust of the scam-riddled initial coin offerings (ICOs) has sparked concerns.
Basically, the idea is to create an alternative fundraising option for the market by eliminating the need to undertake debt or sell equities.
This can be done through initial exchange offerings (IEOs) or the issuance of digital tokens, beginning the second half of 2020.
ICOs and IEOs are largely similar, however, the latter is more regulated, carries more credibility and is done through an existing platform. Under ICOs, issuers promote their own tokens or coins with influencers.
Digital tokens or coins are not entirely new concepts in Malaysia. Previous failed attempts to issue such instruments include cosmetics icon Datuk Seri Hasmida Othman, known as Datuk Seri Vida, and tycoon Tan Sri Lee Kim Yew, the founder and chairman of Country Heights Holdings Bhd.
The recently-launched Guidelines on Digital Assets by the Securities Commission (SC) allows companies to raise up to RM100mil through IEOs, subject to approval.
Public-listed companies may participate indirectly in the digital token offering for additional funding through its new unlisted subsidiary or a special purpose vehicle.
The need to legalise IEOs may be justified, given the country’s quest to remain updated with the latest developments in financial technology (fintech) and address the funding gap for growth stage scale-ups in Malaysia.
However, skepticism on the IEO as a fundraising mechanism is also understandable.
Digital tokens offered through IEOs are not necessarily backed by assets, hence making the investments high-risk, particularly in the event of a project failure.
In addition, the IEOs in Malaysia will serve only as a platform for token subscription, but not trading.
To cash out, investors would need to sell the tokens privately. A digital token may only be traded on the SC-registered Digital Asset Exchanges, if the demand for a particular token reaches a “certain volume such as bitcoin”, according to an SC official.
The bad experiences with global (ICO) previously, considering the scams and frauds, have also raised questions on how well the IEOs in Malaysia are protected from the recurrence of such scams.
In a report by Satis Group Crypto Research in July 2018, it was found that approximately 78% of ICO projects were identified as scams, although only 11% of ICO funding went to such scams.
Another concern revolves around whether alternative fundraising options in Malaysia is a “one too many” situation.
This is because, aside from the IEOs, investors and businesses in the country have several other options such as equity crowdfunding, peer-to-peer lending and Bursa Malaysia’s Leading Entrepreneur Accelerator Platform (Leap) Market.
Would the traditional capital avenues, namely the stock and bond markets see a “capital drain” into these alternative fundraising options, particularly with the introduction of the IEOs?
Edmund Yong, co-founder of Celebrus Advisory, told StarBiz that retail investors would be inundated with too many alternative capital market offerings at a time when Millennial interest is already waning in stock markets, venture-backed startups are choosing to stay private or moving offshore, and local initial public offerings are on a downturn.
“From the regulator’s point of view, the question is whether IEOs will help reinvigorate local investment activity or will they supplant it?” he asked.
Yong pointed out that Malaysia is the first country in Asean to introduce specific IEO regulations, although in practice Singapore has already allowed the trading of private tokens through its digital asset exchanges.
For context, Singapore issued its ICO guidelines in November 2017 and updated it a year later to encompass STOs.
Meanwhile, the ICO guidelines in Thailand were released as a royal decree in July 2018, followed by STO guidelines a year later. The Philippines, on the other hand, had established a consultation paper in 2018 but has yet to finalise its decision.
Commenting on the safeguard measures prescribed in the Guidelines for Digital Assets, Yong says SC made a “clever move” to make the guidelines principle-based, rather than taking a legalistic prescriptive approach.
“This gives regulators sufficient leeway to decide tough issues on case-to-case basis like token taxonomy and conflict of interest, which have stumbled lawmakers in other jurisdictions. More importantly, SC is expressly empowered to step in at any time should the issuer or operator go astray.
“Setting a retail subscription limit at RM2,000 per project is very conservative, perhaps as an involuntary stop loss measure. In comparison, Thailand set theirs at 300,000 baht whereas there is none in Singapore. One alternative is to use the Philippines model which sets stringent advertising and marketing limits instead because the push effect to investors is usually stronger felt than the pull.
“While nothing is scam-proof, the guidelines fall back on normal securities laws so the conventional safeguards like lock-up and cooling off periods, utilisation of proceeds, and continuous disclosure obligations are all there. Bear in mind that this is only for eligible blockchain projects, ” he says.Details of Malaysia’s IEOs
In order to raise capital through IEOs, companies must have a minimum paid-up capital of RM500,000 and seek to provide a solution for market problems or to improve the efficiency of an existing process or service.
The primary focus of the IEOs are the early-stage entrepreneurs.
All offerings of digital token must be done through a SC-registered platform operator and are required to include a White Paper that describes material information on the issuer, the digital token and the utilisation of funds obtained, among others.
The platform operators are required to assess the White Paper prior to the IEOs. The SC said it will work with the platform operators in assessing eligible issuers, during the first phase of the implementation.
The company or issuer ought to demonstrate that it has sufficient safeguards in place to protect the interests of existing shareholders and the token holders.
Once approved, the public may invest in the issuer’s tokens, which can be used to exchange for the issuer’s product or service.
Based on the Guidelines on Digital Assets, an issuer must comply with the existing requirements of the SC and Bursa Malaysia, if it issues a digital asset which is an existing type of securities such as unit trust funds, bonds, warrants and options.
On fundraising limits, the SC said a company can raise capital at a multiple of 20 times of its shareholders’ funds and subject to a ceiling of RM100mil.
Investments by retail investors are limited to RM2,000 per offering and a total of RM20,000 annually. Meanwhile, angel investors could invest in digital tokens up to RM500,000 per year.
On the other hand, there are no limits for sophisticated investors.
Recognising the high-risk nature of the digital token investments, the SC has introduced several safeguard measures for investors.
Among others, the funds raised from the IEO will be put under a trust account maintained with a licensed Malaysian financial institution and the cash disbursement will be “milestone-based”.
This means the funds will only be released to the company or issuer when the project target has been met.
The SC will also conduct post issuance monitoring of the utilisation of the proceeds.
Meanwhile, a digital token issuer is required to publish annual and semi-annual reports on the IEO platform. This enables the token holders to evaluate the issuer’s performance.