INVESTORS will soon be able to directly invest in start-ups via equity crowdfunding, following the Securities Commission Malaysia’s (SC) recent approval of the platforms.

During his speech at the SC’s Synergy & Crowdfunding Forum 2015 on June 11, chairman Datuk Ranjit Ajit Singh announced that six registered companies had been given approval to raise funds via equity crowdfunding.

“The six are Alix Global, Ata Plus, Crowdonomic, Eureeca, PitchIN and Propellar Crowd +. They were selected after being narrowed down from a pool of 27 applicants that underwent a rigorous assessment process. The companies should be operational by the end of the year,” he said. 

Ranjit said the equity crowdfunding framework (ECF) is an important milestone for inclusivity in the Malaysian capital market. “For capital markets to be inclusive, small and medium enterprises (SMEs) and start-ups must be able to obtain market-based financing. Hence, it is timely to further widen access through innovation in financial technologies such as equity crowdfunding platforms.”

Targeted at angel investors, high net worth individuals as well as sophisticated and retail investors alike, these platforms will allow a large number of investors to invest in unlisted companies or start-ups.

With the SC framework, Malaysia is the first country in Southeast Asia to regulate equity crowdfunding platforms, in an effort to provide greater investor protection. In Singapore, the first equity crowdfunding platform is awaiting the approval of the Monetary Authority of Singapore (MAS). Thailand’s Securities and Exchange Commission is still finalising its rules for such platforms. 

According to Ranjit, there is a need to regulate platforms “to enable funding channels to thrive in an environment that promotes confident and informed participation”. This development comes after the SC released its Guidelines on Regulation of Markets under Section 34 of the Capital Markets and Services Act 2007 in February to accommodate the new requirements for the registration of equity crowdfunding platforms. These guidelines were put in place to require platform operators to ensure that all issuers or companies comply with the rules of the platform.

Under the SC’s framework, an eligible issuer or company can raise up to RM3 million within a 12-month period or RM5 million within a time frame determined by the operator of the equity crowdfunding platform.

To protect investors, issuers are not allowed to raise funds concurrently on multiple equity crowdfunding platforms. This ensures that fundraising and investment limits are not breached. 

Alix Global, in partnership with FundedByMe, a Swedish crowdfunding platform, will allow Malaysian companies to raise funds from local and European investors, while Ata Plus is a shariah-compliant crowdfunding platform looking to match shariah-compliant businesses with investors looking for sustainable investments. 

Crowdonomic has offices in Singapore, Malaysia and Indonesia with the backing of US and Japanese investors, while Eureeca is a UK Financial Conduct Authority-regulated entity operating out of Dubai that will give Malaysian companies the opportunity to tap funds from the Gulf region. 

PitchIN is a Malaysian-based platform with strong partnerships with local government agencies such as MaGIC, and Propellar Crowd + has partners in the North Asian and Oceania markets. 

Last year alone, the online crowdfunding industry raised US$24.8 billion (RM93 billion) in the US, comprising 71,000 deals and about 300,000 angel investors, said Dr V Sivapalan, president of the Malaysian Business Angel Network (MBAN), during a panel session at the forum.

According to the SC’s framework, retail investors will be allowed to invest RM5,000 with each issuer and up to RM50,000 within a 12-month period. Angel investors can invest a total of RM500,000 within a 12-month period with no limit per issuer. There are no limits in place for sophisticated investors, who are defined as high net worth individuals with a minimum net worth of RM3 million under the SC’s guidelines.

There is a cooling-off period of six business days to allow investors to withdraw their investment should they change their minds. The framework also states that if a material adverse change affects the project or the issuer, investors have a 14-day period to opt out of the investment, similar to the legal provision found in company merger and acquisition contracts. 

Should there be oversubscriptions in its fundraising exercise, issuers may keep the entire amount — but how the funds will be utilised must be disclosed to investors. Platform operators can invest in the issuers hosted on its platform, but with no more than 30% stake and full disclosure must be made. 

According to the SC's guidelines, there is no hard and fast rule on how companies are valued and how much investors should be investing in them. Edmund Yong, a Singaporean investor in start-ups and managing partner of venture capital fund Accel-X, says traditional valuation tools such as price-earnings ratio do not apply when it comes to valuing start-ups. 

“There are no rules to valuing a company. But in Singapore, typically in the early stage, companies are normally valued at S$1 million (RM2.8 million) to S$2 million,” he adds. 

The SC warns that investors are responsible for selecting suitable investments for their risk appetite. Equity crowdfunding is considered high risk, and while the risk may be offset by potential high returns, investors are advised to always diversify their investments, the regulator says.

According to the SC’s framework, investors should note that there is no suggested time frame to exit a company, but an exit often happens during a trade sale or an initial public offering by the company.

However, investors should have a long-term horizon of up to five years before expecting to see returns, according to Yong. The key, he says, is patience. 

“Typically, seed round investing like this would require an investor to commit long term. We are talking about at least a five-year holding period with potentially no liquidity,” he says, adding that local investors should consider investing in local start-ups because they would be able to closely monitor the growth of the companies. 

“If you invest in an international company, you won’t be able to see what is happening,” says Yong. 

Investors should not put all their eggs into one basket and must be aware of the risks associated with the investments. Investors should use a “spray and pray” strategy, says Yong. “They should be spreading out their investments and praying that one of them comes through,” he quips. 

“Ultimately, investors should have knowledge of the companies and industries they are investing in, to play in this high-risk, high-return game.”

In a panel session on the second day of the forum, serial entrepreneur Joel Neoh advised investors and business owners to keep four things in mind when evaluating businesses, particularly start-ups. “They should look at how big, how fast, how much and how long,” he says.

A person should look at how big the business can become, depending on the problem the business is solving, and the geographical area in which the business is going to solve that problem, he explains.

Investors should also look at the speed at which the business can execute and deliver its solutions.

“Often, investors today are not going to ask you about [a company’s] two-year track record. They are just going to ask you what you were doing last week. It is all about traction in the time frame. It is about momentum and acceleration.” 

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 22 - 28, 2015.

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