Overall Summary of ECF and P2P Financing in Malaysia PDF

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Overall Summary of ECF and P2P Financing in Malaysia In the most recent years with the emergence of FinTech, the Internet has enabled innovative methods of fundraising for small businesses. A notable part of this is referred to as the concept of crowdfunding, in which companies raise funding through monetary contributions from a large pool of people. In the light of embracing and legitimising this concept, the Securities Commission (SC) has approved six Equity Crowdfunding (ECF) platforms in February 2015 through which individuals can invest their money. The six ECF platforms approved are FundedByMe (Alix Global), Ata Plus, Crowdonomic, Eureeca, pitchIN and Crowdplus. In less than a year, a total of RM10.4mil has been invested in 14 companies via these platforms. ECF platforms offer an opportunity for the public, specifically high-net-worth investors to invest in small emerging companies or tech start-ups, involving the sale of equity in small companies. Peer-to-Peer (P2P) financing platforms, on the other hand, permit individuals invest money in small companies in the form of debt, through licensed online platforms. Among the six platforms approved in early November 2016 are B2B FinPAL, Kapital, FundedByMe Malaysia, ManagePay Services, Modalku Ventures (Funding Societies Malaysia) and Peoplender. The platforms essentially match the investors with small companies that require capital. While P2P lenders, who can invest from as low as RM100, get a return from the money they have lent to SMEs, ECF investors on the contrary are investing for the long term in companies that are focused on growth. The profit ECF investors make is crystallised at an exit during an initial public offering or a sale of the company to new investors. While the risk may be higher, as the company takes time to grow, the returns from ECF can be much higher than that of P2P lenders. As to embrace further the investors’ protection against the concerns for money laundering, all ECF platform operators in Malaysia must be registered as a Recognised Market Operator and have to comply with guidelines to safeguard the interest of investors. P2P operators must be regulated under Securities Commission Malaysia’s (SC) revised Guidelines on Recognised Markets, chapter 13 for the type of issuers and investors who can participate in P2P funding, and states that the rate of financing for issuers cannot be more than 18% per annum. Both ECF and P2P platforms are regulated under Section 34 of the Capital Markets and Services Act 2007, the Guidelines on Recognised Markets and the Guidelines on Prevention of Money Laundering and Terrorism Financing for Capital Market Intermediaries. From onerous requirements perspective, the regulators have implemented stringent requirement for both ECF and P2P operators when conducting antimoney laundering (AML) checks and monitoring, and oversee both sides – screening the prospective issuers entering the platforms as well as the investors.

Equity Crowdfunding (ECF) Frameworks on how ECF works:

Peer-to-Peer Funding (P2P) Frameworks on how P2P works:

Source: Blockchain Lab (http://blockchainlab.com/Home/service/4) - Involving the sale of equity in small emerging companies or tech start-ups, mostly available to high net-worth investors.

Source: CrowdSmarter (http://letscrowdsmarter.com/how-p2p-lending-works/) - Individuals invest money in small companies in the form of debt, through licensed online platforms. Essentially match the investors with small companies that require capital. P2P Operators: - Six P2P operators were announced in early November 2016 – B2B FinPAL, EthisKapital, FundedByMe Malaysia, ManagePay Services, Modalku Ventures and Peoplender. - Responsible for determining the prospective issuer’s risk score, which will affect the amount that may be raised on P2P platforms or the rate of financing. P2P operators must develop a credit-scoring mechanism for potential issuers and need to thoroughly ensure the credibility of those trying to raise money on the platform. - Licensed P2P operators, which must be incorporated under the Companies Act 1965 with a minimum paid-up capital of RM5 mil, are responsible for determining the suitability of prospective issuers on the platform. They must conduct background checks, verify the issuers’ business proposition, and assess their creditworthiness.

ECF Operators: - Six ECF platforms are registered and approved by Securities Commission (SC) in February 2015 – FundedByMe (Alix Global), Ata Plus, Crowdonomic, Eureeca, pitchIN and Crowdplus. - None of the ECF operators involve the trading of foreign exchange (FOREX) or any propositions that offer lofty returns of up to 20% or more per month. - All ECE platform operators in Malaysia must be registered as a Recognised Market Operator and have to comply with guidelines to safeguard the interest of investors. These include minimum disclosures, investment limits, obligations to educate investors, keeping monies received in trust accounts, as well as monitoring anti-money laundering requirements. - They are required to observe the Guidelines on Recognised Markets,

which serve as an anti-money laundering (AML) measure. One of the prohibitions is that the ECF operators fail to allow companies with complex structures, without business plans or those that have plans to acquire another business to issue on the platforms.

Issuers – Small/Medium Enterprises (SMEs), start-ups: - Only the locally incorporated private limited companies are allowed to be hosted on the ECF platform. - The issuers are required to make disclosures to the platform operators and the SC on the information of the offering and the amount they wanted to raise. - The SC guidelines also entail that ECF platform operators are obligated to ensure issuers’ compliance with platform rules. - Malaysia’s equity crowdfunding (ECF) framework allows eligible issuers to raise up to RM3 mil in 12 months regardless of the number of projects. - A limit of RM5 mil (excluding internal capital contributions or funds from private placement exercises) has been put on the maximum amount a company can raise on ECF platforms. Also, regulations state no issuer can be hosted concurrently on multiple ECF platforms.

Investors - CROWD: - Funds raised through a listing on any ECF platform can be released only

P2P operators must ensure compliance with platform rules and make available to investors all relevant information. The funds obtained must be placed in a third-party trust account prior to its requirement and disbursement. Simply put, all fund related transactions between issuers and investors must be dealt through a trustee. P2P operators are important gatekeepers and moderators in ensuring the success of this lending platform. - P2P operators are required to implement processes to manage issuer default. This includes using its best endeavours to recover the amount outstanding to investors. Issuers – Borrowers, Small/Medium Enterprises (SMEs): - Regulated under Securities Commission Malaysia’s (SC) revised Guidelines on Recognised Markets, chapter 13 for the type of issuers can participate in P2P funding, and states that the rate of financing for issuers cannot be more than 18% per annum. - Thus far, the SC has not imposed any fundraising limit for issuers on P2P platforms. - Eligible issuers include registered sole proprietorships, partnerships, limited liability partnerships, private limited and unlisted public companies. These issuers able to host concurrently for different purposes on multiple P2P platforms but are required to disclose this to the operators. - P2P issuers are allowed to keep the funds raised if at least 80% of the target amount has been achieved, but oversubscription is not allowed (they are not allowed to raise multiple funds for the same purpose). In the latter case, P2P operators will return the money or reject additional offers. - SMEs/issuers must fulfil the entry requirements set by each operators to qualify for further evaluation. Upon satisfaction of assessment on the business and financial risks on the business along with other requirements, the P2P operators would list the SMEs on their platform for a fund raising campaign. - The issuers shall convince the investors of their sound business models, growth potential and sustainability in business operations. The perceived risks must be acceptable to the investors. Hence, it is vital that SMEs plan and prepare themselves well in order to successfully raise funds from the platform. Investors - Lenders: - There is no mandated cooling-off period for P2P investments, but -

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once they have reached the amount sought, factoring in a six-business-day cooling period for investors. During the cooling period, investors may withdraw their entire investments. If there is any material adverse change relating to an issuer, the investors must be notified of such changes. Investors have the option to withdraw their investment if they choose to do so within 14 days from notification. Investment limits: No restrictions on investment amount for sophisticated investors, a maximum of RM5,000 per issuer – with a total not exceeding RM50,000 – within 12 months has been set for retail investors and RM500,000 for angel investors who registered with the Malaysian Business angel Network. Sophisticated investors comprise of high net-worth individuals with RM3 mil in assets, as long as the amount subscribed to does not exceed RM3 mil a year. An angel investor must be recognised by the Malaysian Business Angels Network. A retail investor, which is any public investor, can subscribe up to RM50,000 worth of shares via the ECF campaign. ECF investors investing for the long term in companies that are focused on growth. The profit earned by ECF investors is crystallised at an exit during an initial public offering or sale of the company to new investors. While the risk may be higher, as the company takes time to grow, the returns from ECF can be much higher than that of P2P lenders.

Trustees: - The ECF operators will put the investors’ money in a trust fund to be maintained by a registered institution for the duration of the fundraising exercise. If the issuers do not meet their goal, all the money will be refunded to the investors.

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operators have the option of providing such periods on their platforms. Regulated under Securities Commission Malaysia’s (SC) revised Guidelines on Recognised Markets, chapter 13 for the type of investors can participate in P2P funding. When a fund raising campaign is listed on the P2P platform, interested investors will review and perform the necessary analysis on the request based on information shared by the platform. Investors being the ultimate risk takers will carry out whatever analysis deemed necessary before making a decision on the next step i.e. to invest or not to invest. Investors must establish clear and dynamic investment strategy in minimising risks associated with the decision they are making in seizing the new investment opportunities, while capitalising on the reasonably good returns from indulging in P2P investment platform. SC encourages retail investors to limit investment on P2P platforms to a maximum of RM50,000 at any one time. SC does not set investment limits for both sophisticated and angel investors. P2P lenders can invest as low as RM100 and get a return from the money they have lent to SMEs...