Digitisation of Financial Transactions for Malaysia
Updated: Dec 17, 2018
What is Crowdfunding?
Crowdfunding is a method of funding projects online where, typically, large numbers of people raise funds for cultural, social and commercial projects. Those providing funds and those seeking funds communicate through the internet, where a crowdfunding platform takes on the role of an intermediary. The intermediary receives a fee for the transaction. This referral commission is usually defined as a percentage of the amount raised. Those providing funds receive a monetary or non-monetary consideration depending on the type of crowdfunding. The term “campaign” will be used from now on for the funding phase of projects on crowdfunding platforms.
The term crowdfunding – defined as the online raising of funds for projects – can be divided into the following categories. The main criterion for distinguishing different types of crowdfunding is the nature of consideration received. The consideration can be of a monetary nature, with those providing funds receiving a stake in the business or a share in its profit (equity crowdfunding) or interest income (debt crowdfunding) on the capital provided. Due to their proximity to the finance markets, debt crowdfunding and equity crowdfunding are often defined as forms of FinTech (financial technology).
These four main types of crowdfunding are shown in Figure 1 and can be defined as follows:-
Reward crowdfunding: the reward crowdfunding segment allows investors to contribute to the venture in return for non-financial benefits which often includes creative, cultural or commercial projects as well as sport projects. With this type of funding, those providing funds usually receive one-off consideration in the form of products, works of art or services. There is no limit to the creativity of those seeking funding (e.g. invitations to events, special editions or pre-release access to a product).
Donation Crowdfunding: the contributions made in donation crowdfunding are simple donations that are usually not associated with any consideration. Examples include social, charitable and cultural projects. Donation crowdfunding can also be used to raise funds for political campaigns.
Equity Crowdfunding: instead of funding a project, the purpose of equity crowdfunding is to acquire a stake in a business or property via equity or mixed forms of equity and mezzanine capital.
In the area of equity crowdfunding, this form of financing is particularly suitable for businesses in an early stage of development, e.g. start-ups. Depending on the platform, equity crowdfunding also provides small investors with the opportunity to support start- ups in their growth phase. In return, these investors typically receive shares in the business and/or a share in the profit it generates. It should be noted that voting power is limited for many types of investments in this area in order to ensure that the owners of the business have freedom of manoeuvre.
Alongside equity crowdfunding, Real Estate Equity Crowdfunding is also part of the equity crowdfunding segment. With real estate equity crowdfunding, investors become co-owners of a property. Rather than individual freehold apartments, co-ownership involves purchasing a percentage of an existing tenanted property. As a result, the investors take a stake in the rental income and in any rise in value of the property itself.
Debt Crowdfunding: debt crowdfunding mainly refers to the financing of businesses or private individuals by means of loans (borrowed capital). Debt crowdfunding is also known as peer-to-peer (P2P) or marketplace lending. Lenders receive interest payments in return for their loan. The amount of interest payable depends typically on the risk presented by the borrower. Aside from private loans and SME loans, some countries authorised private individuals to acquire mortgages without a bank as intermediary.
Advantages and Disadvantages of fund raising through crowdfunding activities.
These are the advantages of crowdfunding:
It can be fast method to raise fund.
Pitching a project or business through the online platform can be valuable from of marketing.
Business idea can be shared to the crowdfunding platform and often obtain feedback and expert guidance for business improvement.
It is a good way to evaluate the market reaction to the business idea.
Crowdfunding investors can become the most loyal customers through the financing process.
An alternative finance option compare to bank loans or traditional funding.
These are the disadvantages of crowdfunding:
Not all projects that apply to crowdfunding platforms get onto it.
Issuer could not obtain the fund if unable to meet funding target as any finance that has been pledged will usually be returned to crowdfunding investors.
If business idea has not protected with a patent or copyright, someone may steal the concept from crowdfunding site.
Getting the rewards or returns wrong can mean giving away too much of the business to investors.
Development of crowdfunding activities in Malaysia
Malaysia is now the first ASEAN country to introduce a regulatory framework to facilitate crowdfunding activities. To date, there are seven (7) local companies registered with the Securities Commission of Malaysia (“SC”) have been approved to carry out Equity Crowdfunding activities and also six (6) local companies approved by SC to carry out Peer-to-Peer Financing activities.
Under the Capital Markets and Services Bill 2015, private companies with a paid-up capital of not more than RM5 million and with a strong business plan can now fund their ventures through crowdfunding. The amount of capital collected through crowdfunding is limited to RM5 million, while small and medium enterprises can crowdfund an amount of up to RM3 million in a year.
For investors, SC has classified three (3) categories of investor may invest in any issuer hosted on Equity Crowdfunding Platform or Peer-to-Peer Financing Platform to the following limits:
(a) Sophisticated Investors
Sophisticated Investor means any person who falls within any of the categories of investors set out in Part 1, Schedule 6 and 7 of the Capital Markets and Services Act 2012 (“CMSA”) and includes a Venture Capital corporation, Venture Capital Management Corporation, Private Equity Corporation and Private Equity Management Corporation registered with the SC. No restrictions on investment amount.
(b) Angel Investors
Angel Investor refers to an investor that is accredited by the Malaysian Business Angels Network as an angel investor. A maximum investment amount of RM500,000 within a 12 month period. For Peer-to-Peer Financing activities, angel investor may invest in any issuer hosted on the Peer-to-Peer Platform and shall not be subjected to any restriction in respect of his or her investment amount.
(c) Retail Investors
Retail Investor means any person who is not a high net-worth individual, a high net worth entity or an accredited investor. A maximum investment amount is limited to RM5,000 for each company (issuer) and not more than RM50,000 within a 12 month period for the total amount of crowdfunding investment.
E lease see below the Key Statistics as at June 2018 from Securities Commissions of Malaysia.
Equity Crowdfunding Key Statistics:
Successful Campaigns - 40
Success Rate - 89%
Total amount successfully raised - 38.36 million
Raised RM 500k and below - 48%
Local Individual Investors - 88%
Tech Based Issuers - 60%
Peer to Peer Key Statistics:
Successful Campaigns - 1160
Success Issuers- 227
Total amount successfully raised - 80.28 million
Success Rate - 100%
Raised RM 200k and below - 93%
Wholesale, retail & Consumer Products - 71%
Pros and Cons of Crowdfunding Investments
Transparent approach to early stage investing via regulated Equity Crowdfunding platforms.
Achieve portfolio diversification by spreading their investments across multiple opportunities.
Access to companies offering shares in exchange for funding.
Investment risk minimised across a large pool of investors.
Short-term investment period with fixed monthly returns for the investment in Peer-to-Peer Financing platforms.
Potentially higher returns than placed in a fixed deposit for the investment in Peer-to-Peer Financing platforms.
Arguably less volatility than shares or unit trusts, and uncorrelated movement to equity markets (investment diversification).
However, there are several risks investors should be aware of:
Investment Risks in Equity Crowdfunding
If the business fold, investor will not be able to recover the original investment.
Lack of liquidity as it may take a long time to dispose the shares.
Dilution of shares where subsequent fund-raising may reduce percentage of ownership due to new shares are issued.
Businesses focused on growth may reinvested into the business instead of declaring profits.
Investment Risks in Peer-to-Peer Financing
The risk of the issuer defaulting on debt and unable to receive investment returns.
The risk of the issuer going bankrupt and losing the original investment.
No PIDM protection (compared to Fixed Deposit / Savings Accounts).
INVESTORS AGE DEMOGRAPHICS FOR CROWDFUNDING IN MALAYSIA
Please see below the Investors Age Demographics as at June 2018 from Securities Commissions of Malaysia:
Investors Age Demographics for Equity Crowdfunding in Malaysia
Investors Age Demographics:
35 years old and below - 38%
34 to 45 years old - 34%
45 to 55 years old - 15%
55 years old and below - 8%
Investors Age Demographics for Peer-to-Peer Financing in Malaysia
Investors Age Demographics:
35 years old and below - 57%
34 to 45 years old - 29%
45 to 55 years old - 9%
55 years old and below - 5%
Governance mechanism for Crowdfunding activities?
Licensed Equity Crowdfunding Platform Operators and Peer-to-Peer Financing Platform Operators (collectively known as “Crowdfunding Operators”) are required to comply with the Guideline on Recognized Markets issued by SC (“Guideline”). The Guideline sets out the broad principles and minimum standards to be observed by Crowdfunding Operators in their operations. Breach of the guideline can result in SC revoking its approval to the Crowdfunding Operators for its license.
Within the Guideline, Crowdfunding Operators shall establish and maintain in a licensed institution, one or more trust account designated for the fund raised in relation to a listing on their platform and shall only release the fund to the designated issuer after the relevant conditions are met.
We, Pacific Trustees Berhad, will be able to act as the Custodian for the trust account arrangement as we are a qualified licensed institution as defined in the Guideline.
Pacific Trustees Berhad - www.pacifictrustees.com