The Securities Commission of Malaysia (Commission) has on 21 August 2014 published a consultation paper (Consultation Paper) to seek public feedback on the proposed regulatory framework (Proposed Regulatory Framework) for equity-based crowdfunding (ECF) in Malaysia.
This article seeks to provide an overview of the Consultation Paper, the first published by a South East Asian capital markets regulator. For more information on ECF, please see “Is Singapore’s Legal Framework Ready to Deal with Crowdfunding” published in the Stamford Law Chronicle Issue 31 which is accessible here.
INTRODUCTION TO THE CONSULTATION PAPER
In finalising the Proposed Regulatory Framework, the Commission has indicated that it will balance the need to nurture the ECF industry in Malaysia and provide an impetus to innovation and entrepreneurship in Malaysia, with the need to achieve an appropriate level of investor protection. Accordingly, the Commission has proposed to regulate the following:
- the operations of an online ECF platform (ECF Platform);
- who can seek funding through an ECF Platform; and
- the class of investors permitted to participate in ECF.
REQUIREMENTS FOR THE OPERATION OF AN ECF PLATFORM
Due to the fund raising nature of an ECF Platform which, albeit on a smaller scale, is similar to a conventional stock market, the Commission has proposed to regulate an ECF Platform as a stock market under existing provisions of the Capital Markets and Services Act 2007 (CMSA). A prospective operator of an ECF Platform (Operator) will be required to, among other things (i) register itself with the Commission; (ii) demonstrate it has adequate compliance procedures; (iii) demonstrate it is fit and proper with sufficient financial and human resources; and (iv) abide by such terms and conditions the Commission may impose to ensure the operation of the ECF Platform is fair and orderly.
The obligations proposed to be imposed on an Operator include among other things, the obligation to conduct due diligence on the directors, officers and substantial shareholders of any company seeking to raise funds on an ECF Platform (Issuer) and the obligation to verify the accuracy of the Issuer’s disclosure documents (including background and financial information of the Issuer) lodged with the Operator. Meanwhile, whilst the Commission has proposed that an Operator be permitted to host offerings, educate and police the types of investors who participate on an ECF Platform, the Operator shall be prohibited from offering any investment advice and offering compensation for the solicitation or sale of securities on its ECF Platform.
The Commission has also sought public feedback on the manner in which an Issuer may hold subscription monies, safeguards, which include a proposed cooling-off period and in the case where a material adverse change has occurred, a proposed opt-out option for investors, and dispute resolution mechanisms to ensure investors, in particular retail investors, are not unduly prejudiced. Interestingly, specific to the function of an ECF Platform, the Commission has taken the view an ECF Platform only serves as a an avenue for primary offering of start-ups, and holders of existing securities in an Issuer may not utilise the ECF Platform to sell their shares to other investors.
TYPES OF ISSUERS WHO MAY RAISE FUNDS THROUGH AN ECF PLATFORM
The Commission has identified small and medium enterprises in Malaysia as the primary beneficiary of ECF. Accordingly, the Commission has proposed that entities which are commercially established or have other avenues of funding be prohibited from raising funds through an ECF Platform. It is noteworthy that in a bid to ensure a level playing field, the Commission has proposed that only local private companies incorporated pursuant to the Companies Act 1965, which are subject to the statutory limit of 50 members, will be allowed to raise funds on the ECF Platform, as private companies incorporated in foreign jurisdictions may not be subject to such statutory restriction.
The Commission has proposed to only allow the offering of common shares, excluding derivatives and convertible instruments, to investors through an ECF Platform. An Issuer may only offer one class of shares in any one offering and that class of shares must be offered at the same issue price and carry the same rights. The advertisement of any offering of securities by an Issuer on an ECF Platform will be governed by the existing framework under the CMSA which governs the advertisement of mainstream capital markets products. Notwithstanding, the Commission has proposed to allow Issuers to use social media to direct prospective investors to ECF Platforms.
In regulating the amount of funds Issuers are permitted to raise on ECF Platforms, the Commission has among other things, proposed to (i) limit the maximum amount that can be raised by an Issuer to a sum of RM3 million within a 12-month period; (ii) a RM5 million fundraising threshold, after which Issuers will no longer be eligible to raise funds on any ECF Platform; and (iii) prohibit concurrent fund raising by Issuers on multiple ECF Platforms.
Requirements in relation to Investors
The Consultation Paper provides that accredited investors, high-net worth entities and high-net worth individuals, as defined in the CMSA (collectively Sophisticated Investors), will not be subject to any restriction on the amount of investments made via ECF. Meanwhile, in a bid to encourage diversification of risks and investment, the Commission has proposed that investors who are not Sophisticated Investors (Retail Investors) be subject to restriction of RM3,000 per Issuer with a total amount of not more than RM30,000 within a 12 month period.
Prior to making any investments, the Commission has proposed that Retail Investors and Sophisticated Investors both self-declare to the Operator that they among other things (i) fall within the investment limits (in the case of Retail Investors); (ii) understand that their entire investment may be lost; and (iii) understand the illiquid nature of their investments. However, the Commission has acknowledged that in the event a Retail Investor breaches these investments limits, it is likely that neither the Commission nor the Operator will be able to enforce the said limits.
Further to the expiry of the public consultation of the Proposed Regulatory Framework on 5 September 2014, the Commission is in the midst of consolidating feedback before introducing a conclusive framework to regulate ECF in Malaysia. Given the commercial proximity and cultural similarities shared between Malaysia and Singapore, the development of the regulatory framework on ECF in Malaysia will be a space to watch as it will likely have a significant bearing on the regulatory framework on ECF in Singapore, when introduced by the Monetary Authority of Singapore.