As a busy working professional, startup investing can be an exciting and financially rewarding journey. It also allows you to diversify your investment portfolio. Early stage startups are usually not “bankable” as they cannot fulfil banks stringent loan requirements. So raising funds by selling their shares tend to be the usual way to extend their cash runway.
As a startup lawyer, I have acted for both investors and companies seeking to raise funds using equity crowdfunding (ECF), one of the increasingly popular alternative fundraising method. In this article, I want to share 5 steps to invest in ECF in Malaysia.
But before we get started on the 5 steps to invest in ECF in Malaysia, let us cover what is ECF and how does it work in the context of the Malaysian regulations.
What Is ECF And How Does It Work In Malaysia?
ECF is an alternative fundraising method for entrepreneurs seeking to raise funds for their business. As an investor, you will receive new shares to be issued by the company in exchange for buying shares in the business.
In Malaysia, ECF is a regulated activity under the purview of the Securities Commission of Malaysia (SC). Therefore, every ECF platform needs to be licensed by the SC before a business is permitted to raise funds and be hosted on such an ECF platform.
5 Steps To Invest In ECF In Malaysia
As promised, here are the steps to invest in ECF in Malaysia.
1. Get Registered As An Investor
Before finding and investing in a campaign, you must register and get verified as an investor. To date, ten ECF platforms are regulated by the SC. Different ECF platforms may have different businesses seeking investments. Do the necessary research on these ECF platforms and find out their past and existing campaigns to see if they are aligned with your risk appetite and interests.
After filling up the personal details, your investment limit will be fixed based on your investor category. The SC’s rules prescribed three investor categories, namely retail investor, angel investor or a sophisticated investor. An angel investor who is accredited by the Malaysian Business Angels Network can invest up to RM500,000 per campaign while there is no investment limit for a sophisticated investor (i.e. high net worth individual or high income earner).
You can register as an investor in multiple ECF platforms.
2. Choose A Business To Invest
Once verified as an investor, you can invest in campaigns hosted on the platform. The platforms usually send newsletters to your email and updates on social media on new businesses looking for funding, so be sure to keep checking for new businesses that may interest you.
Generally, as a non-professional investor, you may want to invest in a company that you understand based on your industry’s knowledge and aligned with your value.
3. Read The Disclosures About The Business And Carefully
One of the next steps to invest in ECF in Malaysia, is not to get hyped out due to the ‘FOMO’ ‘Fear of Missing Out’ factor. Like any asset class, you need to figure out the features and characteristics of the investment and the risks involved.
As an investor you get the go through the find a list of documents known as the disclosures displayed on the campaign page. They usually include the latest audited financial statements, management accounts, an investment pitch deck containing the business plan, management team, their expertise, funding amount requested, and the breakdown of how the funds will be used for the business.
If there is anything that you need further input, you can ask the management team during the pitching sessions hosted by the platform or even ask the platform to set up a meeting with the company’s representatives to ask further questions on certain matters.
Also, all the material legal documents and agreements such as the term sheet (setting out the investment offer), subscription agreement and shareholders agreement are also uploaded on the website. Be sure to read them and understand your rights as a crowdfunding investor.
At this stage, you may want to engage your professional advisers (i.e. legal counsel, auditors and financial planner) that you usually work to help you conduct the necessary due diligence on the business to help you decide whether to invest in a company.
4. Transfer The Funds Into The ECF Trust Account
Once you have decided how much to invest in a campaign based on the investment offer, you will need to transfer the cash into a trust account using online transfer. The platform usually sends an email within a few working days to confirm that they have received your investment.
All the funds raised will be held by a custodian as an escrow agent and will only be disbursed to the company once the campaign is successful. If the company fails to raise the minimum targeted sum, the platform will refund back the money.
5. Monitor Your Investments
The final steps to invest in ECF in Malaysia, is to monitor your investments. Usually, the company’s management team will send you periodical (usually on a semi-annual or annual basis) updates setting out the progress of the business growth to the latest financials.
As an investor, you will also get regular updates and meet-ups with the management team to discuss about the business progress.
Read: Are Alternative Investments Right For Me?
Conclusion On The 5 Steps To Invest In ECF In Malaysia
Investing in high-growth companies via equity crowdfunding can be a great way to diversify your investment portfolio. But like all types of investments, equity crowdfunding is risky, and you can lose all your capital. As an investor, read and understand the risks before investing in a crowdfunding campaign.
But if you are raring to go, those are the steps to invest in ECF in Malaysia. It’s not that hard is it?
Read: Making Sense of Alternative Assets in Your Investment Portfolio
About the Author
Izwan Zakaria is a lawyer at Izwan & Partners, a corporate law firm helping startups do business and raise capital in Malaysia and overseas. He can be contacted at izwan@izwanpartners.com
