Equity Crowdfunding (ECF) in Malaysia
I think it’s high time to discuss about equity crowdfunding (in short… ECF). This is following on from my last week’s post about Venture Capital.
Disclaimer: This article is based purely on my past experience, personal view, personal opinions and personal thoughts as someone who spent a year in the ECF industry building the business.
What is Equity Crowdfunding?
Equity Crowdfunding (ECF) is when a private company “lists” on an online platform to gather investments from the public in exchange for giving them shares in the company.
Sounds familiar? Yes. This is like an Initial Public Offering (IPO) on Bursa Malaysia, but for private companies. These companies on ECF platforms will not be trading their shares like in the stock market.
We, as investors, will have the chance to own a piece in a private company with as low as a few hundred bucks. Anyone can invest like a Venture Capital in a hot startup or private company via this channel.
Regulating Equity Crowdfunding
The first thing that comes to mind is… how “safe” are our investments in ECF?
Malaysians are generally still quite skeptical about this, which is understandable. What more with the recent fiasco that happened with a certain crab restaurant.
Regardless of what people think and what is happening in the market, we have to give credit to our regulator – Securities Commission – to be the first one in ASEAN to come up with the guidelines for ECF. Even our neighbour – Thailand’s SEC – took reference of our guidelines to regulate their own ECF scene. Woohoo!
As someone who was from the industry, I had to be familiar with what is written in the guidelines (which can be referred to here).
Let me summarise the important points for investors here:
- The ECF platforms must conduct due diligence (aka thorough checking) on the companies who want to fundraise through them
- Due diligence = background check of the companies and verify the business proposition of the companies
- Ensure the investors’ monies are properly safeguarded when investing in the companies (i.e. our money will be protected like how Lazada or Shopee makes sure we get what we bought before releasing the money to the other party)
- There are certain information that must be disclosed by the fundraising companies to the ECF platforms, which in turn will need to verify for accuracy of the information and display them on the website
- Investment limit for 3 kind of investors: Sophisticated (No limit), Angel (RM500k in any 12 month period), Retail (aka. the most of us, RM5k in 1 issuer)
I think it is blatantly obvious that the gatekeepers are the ECF platforms themselves as they are the ones who will perform the due diligence and verify the integrity of the companies.
On the bright side, at least SC has guidelines on this compared to companies who do their not-so-legal crowdfunding through LowYat forum.
Equity Crowdfunding platforms in Malaysia
The list of registered ECF platforms (along with other recognised market operators) is listed on SC’s website.
There are 10 companies registered with SC to operate as an Equity Crowdfunding platform in Malaysia. They come from different background and some are more active than others.
Here’s my point for this section: People will act in the best interests of those who pay them.
As ECF platform operators, they make money from a successful fundraise. This means that there is a high incentive to:
- Get more companies fundraising through the platform
- Build an investor base
- Successfully close these ECF campaigns
#readbetweenthelines
It is good to take note that ECF platforms are meant to act as platforms whereby they will facilitate companies who want to fundraise from the public to list on their platforms and make it easy for investors to invest into the chosen companies.
What goes on behind the scenes?
I can’t speak for all ECF platforms in terms of the process and I don’t want to bore you with the details.
Here’s what happens before any campaign goes “live” on an ECF platform:
- Company reaches out to ECF platform to fundraise.
- ECF platform organises a meeting with company to hear them out.
- Internal discussion happens to assess whether to take on the deal on the platform based on the attractiveness of the deal.
- The ECF platform collects documents from company for
documentationdue diligence. - The ECF platform works with the company to get ready for the fundraising campaign.
- Pre-live fundraising sessions are organised. The company will pitch to friends and family or investors on the platform to garner interests before it goes “live”. *Caveat: there are some ECF platforms who don’t do this
- Once it is “ripe” with investors’ interests, it will go “live” to have a successful close on the ECF platform.
I have friends whose companies were in the “pre-live” stage for over 6 months.
Picking Equity Crowdfunding deals
Yes, there are good deals in the Equity Crowdfunding scene. However, more work is required by investors because any company can list on the platform.
Things we should do: Participate in the pitch sessions. Ask all the questions that gives you comfort that the company is worth investing in. Think like a Venture Capitalist.
I have personally invested in 2 campaigns thus far. Both of which I know the founders well (emphasis on knowing WHO is driving the business) and buy in to the business. One of them have already redeemed my shares and I’ve gotten back my returns on top of the capital.
Equity Crowdfunding is the best avenue to back a good company at the early stages before they take off to become the next Facebook, Netflix, Tesla, etc.
Things we should know
An investor in the ECF scene should understand that the returns can take years to come back, at least until a secondary market is rolled out to allow trading. Before that happens, the only exit an investor has is if the company buys your shares, the company sells out to a bigger company or it goes for an IPO.
And who knows how long that will take?
*Exception is if they offer preference shares, which is a whole topic by itself*
Pitch sessions are avenues for the companies to sell you the dream. It is highly encouraged to do your own studies and research as thoroughly as you can as some can pitch very well. But the execution of the dream can be another story.
There is also a higher chance that your investment will be a complete loss if the company shuts down. Just like a Venture Capital, the risk (and the returns) when investing in an early stage startup or SMEs (small and medium enterprises) is higher than investing in the stock market.
If an investor loses money because the company winds up, there is very little recourse other than trying to prove that the deal was a fraud in the first place. That would be tough because the ECF platform will cover all bases (if they are smart enough).
Closing Thoughts
Equity Crowdfunding (ECF) presents a very interesting investment channel. We get access to private companies that we would not be able to take part otherwise.
At the same time, there is little protection that investors will get when investing in these companies so our best defense is our knowledge.
This is definitely a high risk, high return kind of investment. Tread carefully.
Happy Investing!
