Fariz Abdul Aziz examines the Securities Commission’s guidelines on equity crowdfunding.

BACKGROUND
 
In “Joining the Crowd” in Legal Insights 3/2014, we provided an overview of the equity crowdfunding framework proposed by the Securities Commission of Malaysia (“SC”) in its Consultation Paper dated 21 August 2014 and Public Response Paper dated 22 September 2014 on the Proposed Regulatory Framework for Equity Crowdfunding (“Proposal Papers”).
 
On 10 February 2015, the SC released the Guidelines on Regulation of Markets under Section 34 of the CMSA (“REF Guidelines”). The REF Guidelines set out the registration and on-going requirements that apply to a “registered electronic facility” (“REF”) under Section 34 of the Capital Markets and Services Act 2007 (“CMSA”). In particular, Part E of the REF Guidelines contains additional requirements that apply to an REF which is an equity crowdfunding platform (“ECF Platform”).
 
On 11 June 2015, the SC announced that it had approved the registration of six out of 27 applicants, namely Alix Global, Ata Plus, Crowdonomic, Eureeca, pitchIN and Propellar Crowd+, to operate ECF Platforms in Malaysia (“Operators”). It is anticipated that the offering of equities vide the ECF Platforms will commence by the end of 2015.
 
In this article, we will discuss the requirements which an entity (“Issuer”) will have to comply with in order to be hosted on an ECF Platform as well as the provisions that will apply in relation to fundraising on an ECF Platform. 
 
CROWDFUNDING 101
 
Crowdfunding is a way of raising funds, primarily through the internet, by obtaining small sums of money from a large number of people. According to the UK Crowdfunding Association, there are three types of crowdfunding: donation/reward crowdfunding, debt crowdfunding and equity crowdfunding.
 
Donation crowdfunding is a form of crowdfunding whereby a person donates money to a cause without receiving any return, except for the satisfaction of having contributed to a cause which he believes in and the cause promoters retain 100% control over their products and services.
 
Like donation crowdfunding, reward crowdfunding is usually motivated by the donor’s desire to support a cause; the difference being that in the case of reward crowdfunding, the donor receives a form of reward, such as event tickets, gifts or coupons, in return for his donation. 
 
Debt crowdfunding is a form of fundraising whereby investors advance money (whether on an interest or non-interest bearing basis) to the promoter of a project.
 
In equity crowdfunding, an investor receives shares or stocks in return for his investment in the enterprise which promotes the business.
 
The REF Guidelines only regulate equity crowdfunding and not the other forms of crowdfunding described above.
 
THE ISSUER
 
Eligibility
 
An Issuer which proposes to offer shares under the ECF framework must be a locally incorporated private company (other than an exempt private company). It may be controlled by Malaysians or non-Malaysians. Certain companies, such as listed companies and their subsidiaries, companies with commercially or financially complex structures, companies with no business plans, companies which have a paid-up share capital exceeding RM5.0 million and companies (other than microfunds) which propose to use the funds raised to provide loans or make investments in other entities, are not allowed to raise funds through the ECF Platform.
 
An Issuer is not allowed to be hosted on multiple ECF Platforms concurrently.
 
An Issuer which is a microfund may be hosted on an ECF Platform if it is registered as a venture capital company with the SC and has a specified investment objective. A microfund may only raise funds from sophisticated investors and angel investors.
 
Disclosure requirements
 
An Issuer which seeks to be listed on an ECF Platform must submit all relevant information to the Operator, including the following:
 
(a)     the key characteristics of the Issuer;
 
(b)     the purpose of the listing and the targeted amount to be raised;
 
(c)     the business plan of the Issuer; and
 
(d)     the following financial information relating to the Issuer:
 

 

 

 
Limits on fundraising
 
An Issuer may only raise up to RM3.0 million in a 12-month period, irrespective of the number of projects for which it may seek funding during the aforesaid period. Further, an Issuer may utilise an ECF Platform to raise a maximum amount of RM5.0 million, excluding its own capital contribution and funding through private placements.
 
The above limits will not apply to an Issuer which is a microfund that satisfies the criteria set out earlier in this article.
 
THE INVESTOR
 
Equity crowdfunding will be accessible to sophisticated investors, angel investors and retail investors.
 
Investment limits
 
There are no restrictions on the amounts which a sophisticated investor may invest, but a retail investor is only allowed to invest a maximum of RM5,000 in any one Issuer and a total amount not exceeding RM50,000 within a 12-month period.
 
An investor that is accredited as an angel investor by the Malaysian Business Angels Network may invest a maximum of RM500,000 within a 12-month period without any limit on the amount which it may invest in each Issuer.
 
Investor safeguards
 
To safeguard investors, the SC has adopted an ‘all or nothing’ (AON) model, whereby an Issuer will only be entitled to the proceeds raised on an ECF Platform if the targeted investment amount has been met, instead of the ‘keep-it-all’ (KIA) model, where an Issuer will be entitled to receive the proceeds raised even if it falls short of the targeted investment amount.
 
An investor has a right to withdraw his investment within a cooling-off period of six business days.
 
An Operator will not be allowed to release the proceeds of the offer to the Issuer if any material adverse change occurs during the offer period. A material adverse change includes the discovery of a false or misleading statement in the disclosure document for the offer, the discovery of a material omission of information required to be included in the disclosure document, or a material change or development in the circumstances relating to the offering or the Issuer.
 
To give effect to the above safeguards, an Operator is required to hold the amounts raised in a trust account until the specified conditions for the release of funds are met.
 
FALLING BETWEEN THE CRACKS?
 
The following points which were addressed in the Proposal Papers appear to have been omitted from the REF Guidelines:
 
(a)     the right of an Issuer to accept an oversubscription, provided that the Issuer has reserved the right to do so and has disclosed to Investors as to the manner in which it proposes to use the oversubscribed amount and that the total amount raised, including the oversubscription sum, is within the fundraising limits mentioned above;
 
 (b)    details of the mechanism and the window period within which Investors may dispose of their shares in the Issuer through an ECF Platform in order to provide a measure of liquidity for investments;
 
(c)     the requirement for an offering to be a primary offering (i.e. the issue of new shares) and not the sale of issued shares by existing shareholders; and
 
(d)     the flexibility accorded for shares offered in a single offering to be ordinary shares or preference shares or a combination of both.
 
Another issue which has not been addressed is the effect of section 15(1)(b) of the Companies Act 1965 (“CA”) which, inter alia, limits the number of members of a private company to 50 (excluding present and former employees of the company or its subsidiaries). This restriction may affect the efficacy of equity crowdfunding as the raison d’etre of crowdfunding is to raise small sums of money from a large number of people. 
 
The omission of the above matters from the REF Guidelines will not preclude the Operators and Issuers from embarking on equity crowdfunding. Nevertheless, the inclusion of those points would have made the crowdfunding framework in Malaysia more complete.
 
ALMOST THERE …
 
No doubt the Operators are now in the midst of drafting their rules to comply with the REF Guidelines, including the requirements that have to be complied with for Issuers to be hosted on their respective ECF Platforms and for Investors to invest in the Issuers.
 
A ‘safe harbour’ provision will be introduced pursuant to the proposed Capital Markets and Services (Amendment) Act 2015. The proposed new section 40H of the CMSA provides, inter alia, that the provisions of the CA relating to the offering of shares to the public by a private company shall not apply where the offer or invitation is made by a private company on a “recognized market”, i.e. a stock market operated by an approved operator registered under section 34 of the CMSA. Once the amendment comes into effect, a private company may offer shares on an ECF Platform to members of the public. 
 
It would appear that we will be good to go once the rules of the Operators are in place and the safe harbour provision, enforced. Malaysia is almost ready to join the crowd.