This article first appeared in The Edge Malaysia Weekly on May 1, 2017 - May 7, 2017

IN July 2015, amid much fanfare, Malaysia moved to enable equity crowdfunding (ECF) in the country. The Securities Commission Malaysia (SC) issued licences to the operators of six platforms, namely FundedByMe, Ata Plus, Crowdo, Eureeca, pitchIN and CrowdPlus.asia.

This was quite a big deal at the time. After all, Malaysia was the first country in Asia to regulate this exciting new space. The grand promise was that “underserved” startups and small and medium enterprises would now have an alternative avenue of fundraising as they could now sell a small stake in their business to almost anyone.

On the investor side, retail and “sophisticated” investors could now take part in deals that were previously only available to angel investors and the ultra rich.

Then, things died down a bit as the operators got to work on their platforms to get them up and running last year. Nevertheless, the ECF industry appears to still be finding its feet.

According to the SC’s 2016 annual report, 14 companies, or issuers as they are called, raised a total of RM10.4 million last year across the six platforms.

Describing this as “encouraging”, the SC said it expected the platforms to gain momentum in the coming years.

As CrowdPlus.asia CEO Andrew Tan concedes, ECF is still not a widely known avenue here. “Malaysia is the first country in Asia to issue equity crowdfunding licences. However, equity crowdfunding is still not a household word. A lot of people are still wary of it,” he said at an event last Friday.

“But with a regulated operator; it [gives comfort] that the deal has undergone due diligence, it is bankable, there’s a plan to grow value and there’s an exit in mind.”

According to Tan, the six operators have raised about RM12.6 million in 21 deals to date. But there is still some way to go for the nascent ECF industry.

“I believe it may not mature this year due to liquidity. But it could be more exciting next year,” Tan adds.

At this point, there are two main things that the ECF industry is still grappling with.

Deals, deals, deals

Platform operators have two sides to manage: issuers and investors. Essentially, for ECF to work, there need to be quality deals on the table and enough money pouring in.

Industry players say there is a healthy appetite among investors who want to get in on the deals. The challenge then is finding quality deals.

As some investors on the startup scene point out, the ECF platform operators seem to find it more of a challenge to find good deals for people to invest in than the reverse.

“They have been pretty selective about the deals they do and necessarily so. This is so new.  The last thing you want is to give the early investors a bad experience. So, the deals have to be of quality. These do not come by every day,” says one angel investor.

Secondly,  the type of investment opportunities are not as exciting as anticipated. “Earlier, people were told that ‘this is your chance to get on board the next Grab’ but very quickly, we discovered that this wasn’t the case. A lot of the interesting startups can still raise funds from regional venture capitalists,” says another angel investor.

CrowdPlus.asia’s Tan says his platform sees a lot of investor appetite for small and medium enterprises in more conventional businesses such as food and beverage, retail and franchising. “These businesses are revenue-generating and profitable. More importantly, retail investors can relate to them. They are not so keen on the overly techy deals.

“A lot of entrepreneurs are trying to do things that are like ‘we are the first’ or ‘we are going to disrupt’ but in equity crowdfunding, we are looking for sustainable business models that solve real-life problems. I think that’s more relatable for the market.”

A case in point is VMO, a startup that raised RM250,000 via ECF on CrowdPlus.asia and another RM250,000 co-investment from Cradle Fund Sdn Bhd. Its business model is simple enough for most retail investors to appreciate. It enables users to book venues for events online.

According to its chief evangelist, Vincent Kok, the startup is not yet profitable but can achieve that by 2019. Last year, its revenue stood at about RM120,000, which is roughly 10% of the RM1.19 million in gross bookings that the platform handled last year.

So, why did VMO go the way of equity crowdfunding? “Chance,” is the short answer that Kok gives. He had considered raising money in Singapore but was told that equity crowdfunding was burgeoning in Malaysia.

“I was surprised by the response because we just put up the campaign and made a couple of Facebook posts. We had 30 days but we managed to raise (the targeted amount) in four days.”

Where’s the exit?

The second hurdle for ECF is the ever-looming question of the exit. How does one “unlock value” from an investment done through ECF?

At this point, there is no secondary market through which investors can  exit. The SC is said to be fine-tuning plans to enable platform operators to run a secondary market where investors can sell their shares to others and make an exit. This will boost liquidity and inject more vibrancy into ECF.

But even though there is no secondary market in place yet, it does not mean that the ECF investors are stuck.

As Tan notes, investors’ term sheets state that they can exit when the company or issuer goes for the next round of fundraising. Some companies may also opt to pay dividends to shareholders when the business is profitable.

Amid these challenges, industry players still argue that it is still very early days for ECF. But the clock is ticking and the young industry may soon have to compete with Bursa Malaysia’s proposed SME market and to some extent with peer-to-peer lending that is expected to be operational this year.

Recall that last September, Bursa issued a consultation paper to seek feedback on its proposal to establish a new market for SMEs to list their shares and access the capital market.

In this new market, which has been widely called the SME Board, the listing requirements are somewhat more relaxed than what is mandatory for companies seeking to get onto the ACE Market or Main Market. For instance, the proposal is for there to be “no minimum quantitative requirements in relation to profit or operating track record” for corporations seeking to list on the new market.

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