Following from the previous article (Part 1), we discussed the restrictions placed on private company limited by shares to raise funds from the public. In this article, we explore (arguably) easier alternatives for companies to raise funds from the public legally, through licensed equity crowdfunding (“ECF”) and peer-to-peer (“P2P”) platforms.
Both ECF and P2P platforms are online fundraising platforms enabling groups of investors to provide funding to start-ups or micro, small and medium enterprises (“MSMEs”). However, the ECF platform allows its investors to receive equity or shares from the companies that they have invested in, whereas the P2P platform involves investors granting loans or short-term debt instruments at a fixed interest rate over a fixed tenure to MSMEs.
In order for MSMEs to fundraise from ECF and/or P2P platforms, the requirements under the Guidelines on Recognized Markets issued by the Securities Commission (“SC”) must be observed. A summary of such requirements and our views on a comparative basis are as follows:
| ECF Platform | P2P Platform | |
|---|---|---|
| Examples of licensed platform operators | MyStartr Sdn Bhd, Pitch Platforms Sdn Bhd, Leet Capital Sdn Bhd | Peoplender Sdn Bhd, P2P Nusa Kapital Bhd, B2B Finpal Sdn Bhd |
| Securities being offered by the issuer | Shares, which include ordinary shares or preference shares
Preference shares have a range of customizations (ie, voting rights, dividends, redeemable features, and liquidation preferences) that can be customized to offer attractive terms to investors while balancing crucial protections for the issuer. |
Investment note / Islamic investment note. Essentially, debt or its equivalent. The terms are usually focused on the yield to the investors. |
| Eligibility | Only Malaysia incorporated companies and limited liability partnerships will be allowed to be hosted on the ECF platforms. | A wider range of Malaysia incorporated or registered entities including –
are allowed to be hosted on a P2P platform. |
| Restricted Entities | The following entities are prohibited from raising funds through an ECF platform:
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The following entities are prohibited from raising funds through a P2P platform:
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| Restrictions on being hosted on multiple platforms concurrently | A person seeking funding via an ECF platform (“ECF issuer”) cannot be hosted concurrently on multiple ECF platforms or on any stock market of Bursa Malaysia Securities Berhad.
However, such person may be permitted to be hosted on an ECF platform and P2P platform at the same time, subject to the disclosure requirements as may be specified by the platform operators. |
A person seeking funding via a P2P platform (“P2P issuer”) cannot be hosted concurrently for the same purpose on multiple P2P platforms.
However, such person may be hosted on an ECF platform and P2P platform at the same time, subject to the disclosure requirements as may be specified by the platform operators. |
| Disclosure Requirements | The disclosure requirements for both ECF and P2P platforms are similar such as submitting information that explains key characteristics of the business and information relating to the business plan.
However, there are heavily disclosure requirements for an ECF issuer to be hosted on an ECF platform such as submitting information relating to the rights attached to the shares being offered, the number and price of shares being offered, subsequent use and application of the proceeds after the success of the fundraising exercise and information relating to key management, directors and promoters of the ECF issuer. If an ECF issuer is a public company, further information such as information relating to the risk factors and prospects of its business would have to be disclosed. |
The disclosure requirements for both ECF and P2P platforms are similar such as submitting information that explains key characteristics of the business and information relating to the business plan.
However, a P2P issuer must disclose information relating to his intention to seek funding from any other P2P platforms concurrently. |
| Funding Limit on Issuers | An ECF issuer may only raise, collectively, a maximum amount of RM20 million through ECF platforms in its lifetime, excluding the ECF issuer’s own capital contribution or any funding obtained through a private placement exercise.
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A P2P issuer is permitted to keep the amount raised through a hosting on a P2P platform provided that it must have at least raised 80% of the target amount.
Notwithstanding, a P2P issuer is not allowed to keep any amount which exceeds the initial target amount. |
| Investment Limit on Investors | The investment limit for each person investing in any ECF issuer hosted on the ECF platform is as follows:
Such investment limits are applicable to local and foreign investors. |
The investment limit for each person investing in any P2P issuer hosted on any P2P platform is as follows:
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| Offering of Shariah-compliant securities | Shariah compliant shares. | Islamic investment notes. |
| Fundraising Period | Typically runs for around 30 – 60 days. | Typically listed for 3 business days – 90 days. |
| Security / Guarantees | Typically, none required | Typically, directors and/or shareholders, partners, sole traders and members of the business may be required to provide a personal guarantee and indemnity. |
| Cost of capital to Issuer | ECF platform operators will typically charge administration / processing fees being a percentage (between 4% to 8% on average) of the amount successfully raised on ECF platform. | In addition to administration / processing fee, an interest of 10% – 18% is typically charged by the P2P platform operators on the investment note. |
| Post-funding bureaucracy | The number of shareholders of a private limited company must not exceed 50. Thus, all ECF platform operators will have to use a nominee structure to accommodate the larger number of investors. As such, additional buffer time should be expected in obtaining the signatures from these nominees (e.g. signing of resolutions) post-fundraising. | Depending on the terms, but there are usually little administrative red tape post-funding. However, issuers should be mindful of the approvals and restrictions that the P2P lending agreement impose on future fundraising. |
| Impact on control and decision making of the Issuer | Issuers will require a Shareholders’ Agreement or Constitution to regulate the rights and obligations of investors alongside the other equity holders of the issuer. While it is rare for ECF investors hold a board seat, the ECF investors will usually be entitled to participate in pre-emption rights for future share issuances, tag along and drag along rights, and to exercise their voting rights (if any) attached to the shares. | There is little impact to the decision making and control of the issuer as the P2P investors are not members or shareholders of the issuer. |
| Length of investment | ECF investors will stay as shareholders of the Issuer until there is an exit event (ie, acquisition or listing) or a secondary market for the ECF investors to dispose or trade the equity investment. | P2P investors are invested until the investment note matures, which is usually a short-medium term of 1 to 3 years. |
Key Takeaways
To summarize, while ECFs and P2P platforms are certainly attractive for MSMEs that are looking to raise funds via ECF and/or P2P platforms, it would be advisable to first obtain independent legal advice to understand –
ECF
- the rights and implications on the features of the shares being offered (especially if the offering is preference shares);
- terms of the agreements (e.g. Shareholders’ Agreement) provided by the ECF platform operator (which are represented as ‘standard’ agreements); and
- the practical implications to founders/issuers post ECF-fundraising.
P2P
- the implications of the legal terms to the founders/issuers albeit it may not be as complicating or important when compared to ECF offerings.
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This article was written by Shawn Ho (Partner) and Tan Wen Min (Associate). 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.
