SAFE agreement and convertible notes in Malaysia update

Earlier this week at the Malaysia Venture Forum 2023  the SC chairman said that an exemption will be introduced to further clarify the use of the Simple Agreement For Future Equity (‘SAFE’) agreements and convertible notes by investors investing in local startups in Malaysia. 

To summarise, SAFE notes including convertible notes are the usual funding agreements used by investors and VCs when making early stage investments in Silicon Valley such as by Y Combinator. The funding terms will defer dilution as the investor converts their investment into equity at a later date. 

The plan to regulate SAFE notes is not new as it was already mentioned in the SC’s masterplan sometime in 2021. The exemption will likely involve amending the current Capital Markets Services Act 2007, the existing capital market laws to include small offering exemption next year. Also, startups are already permitted to raise funds by issuing convertible notes but restricted solely to registered VCs since 2021. 

What do we know so far? First, the regulator said that the new law will allow sophisticated investors to invest in startups of a “certain size”. To recap, sophisticated investors refers to accredited investors (i.e. VC funds) and high net worth people (i.e. someone with at least RM3 mil in net assets or someone who earns at least RM300,000 in annual income). In other words, retail investors may only invest in startups via equity crowdfunding platforms.

Further, it is unclear what the “certain size” cap will be and what will happen if the cap is exceeded. Therefore we’ll have to wait until the regulator comes out with more details in the coming months. 

The exemption will of course give more regulatory clarity to investors and will be in line with the international practices such as those in the United States and Singapore for startup fundraising. As a startup lawyer that regularly deals with funding rounds, I am excited to hear about this update and will look to write about it again once the regulator hopefully issues the exemption amendment next year.

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