It is common for start-ups to incorporate a private company limited by shares and offering equity in its company in exchange for funding provided by investors, family and/or friends. The question that usually follows from this is whether can a private company limited by shares offer its shares to the public, which is the focus of this article.
General prohibition against raising funds from the public
The general rule in Malaysia is that private companies cannot offer shares or debentures to the public, cannot allot such securities with the intent to offer them to the public, or invite the public to deposit money with the company. If an offer of shares is made to the public within six months after allotment or agreement to allot, it is assumed to be a violation of the general rule unless proven otherwise. The company and every officer who contravenes this rule is liable to imprisonment for a term not exceeding 5 years or to a fine not exceeding RM3,000,000 or to both.
Furthermore, section 596 of the Companies Act 2016 states that it is illegal for a person to go from place to place (which includes digital spaces!) either offering shares for subscription or purchase to the public or any member of the public, or seeking or receiving offers to subscribe for or to purchase shares from the public or any member of the public, unless the offer is for subscription or purchase or invitation to subscribe for or purchase or recommendation to which the Capital Markets and Services Act 2007 (“CMSA”) applies. Anyone who violates this section or encourages or causes someone else to violate it, will be committing an offense and upon conviction, will be subject to a maximum prison term of 5 years or a fine of up to RM3,000,000 or both.
Some non-exhaustive examples of shares being “offered to the public” include:
- Initial Public Offerings (IPOs): when a company first sells shares to the public to raise capital. In Malaysia, these include the Main Market, ACE Market, LEAP Market and MESDAQ.
- Follow-on Public Offerings (FPOs): when a company that is already publicly traded offers additional shares to the public.
- Licensed crowdfunding platforms: when shares of a company are offered to the public through online platforms that allow individuals to invest small amounts of money in exchange for shares of a company.
What is NOT an offer to the public?
According to sections 43 and 44 of the Companies Act 2016, an offer of shares or debentures of a company is not considered an offer to the public if it meets one of the following criteria:
- The offer is not intended to result in the shares or debentures becoming available to persons other than those receiving the offer; or
- The offer is a private matter between the person making the offer and the person receiving the offer.
In other words, an offer of shares or debentures is not considered as an offer to the public if it is not targeted to the general public, but rather a private deal between the parties involved.
So, what exactly is a private deal or a private concern?
Section 44(3) of the Companies Act 2016 further explains that an offer is considered a ‘private concern’ between the person receiving the offer and the person making the offer if it is made to someone who is already connected with the company (ie, existing members, employee, debenture holder, trustee, family member), OR to subscribe for securities under an employees’ share scheme and the rights can only be renounced to another person already connected with the company.
In other words, if the offer is made to a person who already has a connection with the company and the rights can only be transferred to another person who is already connected with the company. Alternatively, if the offer is for an employee share scheme and the rights can only be transferred to another person who is entitled to hold securities under the scheme or to a person already connected with the company, the offer is considered as private concern.
How can a private company limited by shares make an offer to the public lawfully?
Section 43(3) of the Companies Act 2016 provides that a company would not violate the default rule that prohibits private companies from offering shares or debentures to the public if:
- it acts in good faith in accordance with the arrangements under which it is to convert to a public company before the shares or debentures are allotted;
- as part of the terms of the offer it undertakes to convert to a public company within a specified period, and that undertaking is complied with; or
- the offer is made in accordance with the arrangements as prescribed by the Securities Commission (“SC”) to any person on a stock market, derivatives market, exempt stock market or exempt derivatives market that is approved, registered or regulated under CMSA.
As such, aside from converting a private company (being a “Sendirian Berhad”) into a public company (also known as a “Berhad”), a founder of a private company limited by shares that wishes to raise funds via offering its shares to the public can explore the 2 existing fundraising platforms which are prescribed and licensed by the SC pursuant to the CMSA. These include both equity crowdfunding (“ECF”) platforms and peer-to-peer (“P2P”) financing platforms.
Also, since a private company is limited to a maximum of 50 members only, it is not uncommon for private companies wanting to raise funds from more than 50 investors, to explore the possibility of incorporating multiple private companies as special purpose investment vehicles. This endeavour may seem easy to set up, but can be quite tricky to manage thereafter. Hence, apart from being mindful of not contravening the prohibition of offering securities to public, the legal and constituent documents that govern the company, the special purpose companies, the investors and the founders need to be structured carefully.
Key Takeaway Points
Hence, if you are a founder of a private company limited by shares looking to raise funds from the public OR from a sizeable number of investors, do be mindful of the restrictions of making “offers to the public” that apply under the Companies Act 2016 to avoid penalty, persecution and potentially breaching any securities laws in Malaysia.
To summarize, the 3 main ways to do so apart from through the IPO route are:
- Incorporating a Berhad company or converting a private company into a Berhad company. However, a Berhad company comes with more administrative and legal requirements and it would be prudent to understand such requirements upfront.
- The other option would be to consider the ECF and P2P platforms that are licensed by the SC.
- Using multiple private companies as special purpose investment vehicles which can admit a maximum of 50 members each.
It is also advisable to first understand or seek legal advice on what actions actually amounts to an “offer to the public” and understand the practical do’s and don’ts when raising funds and how it should be done.
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This article was written by Shawn Ho (Partner) & Tan Wen Min (Associate) from the corporate practice group of Donovan & Ho. Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021. We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.
