The government announced that the current fundraising limit imposed on crowdfunding campaigns has been increased from RM10 mil to RM20 mil.
Currently, the Securities Commission of Malaysia (SC) crowdfunding guidelines only allow legal structures such as private companies and limited liability partnerships formed in Malaysia. The new announcement now also includes unlisted public companies to raise funds on crowdfunding platforms.
Earlier this year, the SC came out with a strong announcement warning against unlisted public companies raising funds from the general public without lodging the necessary prospectus and other compliance issues. It is no surprise that the SC is busier these days with so many scams and people offering “unsolicited investment advice” over social media platforms on how people should invest their hard earned withdrawn i-Sinar funds from their EPF deposits.
I am excited to see this recent regulatory change and hope to see a lot more companies raise funds using crowdfunding platforms. It appears that the regulator is seeking to increase the visibility of equity crowdfunding platforms as viable fundraising platform.
However, I do hope that the regulator will also consider several long-overdue changes when it comes to investors protection.
More disclosures and reporting needed for investors protection
The first is to require founders and issuer’s representatives to provide more disclosures and regular reporting to investors. In a usual investment scenario, investors will require companies to provide quarterly or semi-annual or even monthly business updates regarding the company’s business affairs, sales, customers deals, and so on. Currently, the guidelines are silent on this requirement. However, I do note that some platforms have already imposed such requirements for companies that have raised on their platforms to do so for their investors.
Strengthening due diligence and assessment process
The second issue is on the due diligence and assessment process. The existing assessment against the issuers i.e. the companies seeking to raise funds on the platforms may need to be strengthened including the necessary disclosures regarding the directors, shareholders and the business model. Presently, a company can raise funds using the crowdfunding platform by coming up with only a few documents such as incorporation details, term sheet (setting out the investment terms), audited accounts (or management accounts for a new company without one) and a business plan.
Also, the equity crowdfunding guidelines issued by the SC is silent on any legal requirement for the statement to be validated by an external professional like a legal counsel (unlike a prospectus in a retail investor issuance for an initial public offering). In other words, the equity crowdfunding operators are solely responsible in ensuring the accuracy of the facts and disclosures made by the company’s representatives.
Of course, all these additional due diligence checks would also mean that the companies seeking to raise funds on crowdfunding campaigns may have to pay more transaction costs including hosting fees may additionally increase due to the external service providers charges. But there is a need to strike a balance between ensuring a speedy application process while making sure that the appropriate disclosures are made to the investors deciding to invest in a particular campaign.
It’ll be interesting to see how equity crowdfunding platforms increase their marketing efforts to promote their platforms based on this new increase of fundraising limit. It’ll truly be a game changer for companies seeking to raise funds in Malaysia.