Equity crowdfunding (ECF) and peer-to-peer financing (P2P) are new innovative ways to raise funds for companies. Skeptics used to make fun and say these platforms are a “flop”, or “exclusive” only for industries like technology companies. This is no longer the case.
Based on the SC’s latest annual report, alternative financing markets raised over RM706 million for 1,943 Malaysian companies. The bulk came from P2P financing for small companies in the retail and trading sectors.
We know how hard it is for small businesses to get bank loans. Apart from the long waiting period, rules like putting up collateral and submitting financial records to show creditworthiness are few of the many challenges which makes bank borrowing impossible for someone who just started a business.
Frustrated entrepreneurs have resorted to taking personal loans or maxing out their credit cards. They are yearning for new ways to raise funds. Here comes ECF and P2P platforms. What are ECF and P2P platforms? ECF and P2P financing platforms are often lumped together, but they are not the same thing. ECF allows investors to buy shares in a company. Investment documents like shareholders’ agreement will govern the rights of the new shareholder. P2P financing is when a company borrows from investors. The terms are set out in investment notes which includes interest rate, repayment terms and so on.
With a strong and supportive regulatory framework, the Securities Commission (SC) is at the forefront of the digital agenda while upholding and protecting the investors’ rights. Since becoming the first country in ASEAN to regulate crowdfunding in 2015, followed by P2P financing rules in 2016, we now have ten ECF and eleven P2P registered platforms.
The SC imposes strict rules such as disclosures by companies so that investors can make an informed decision. Audits and due diligence will be done on the company’s business, directors, shareholders and disclosures before they can raise funds. Platforms need to display disclosures on their websites like their fees and charges.
In October last year, the government launched Malaysia Co-Investment Fund (MyCIF). Every RM1 invested is matched on a 1:4 ratio by MyCIF up to a cap of RM500,000 in the scheme. To get more companies to join, the matching ratio is now increased to 1:2 instead. The scheme is extended to 30 September.
The SC also made two key updates recently. First a company can now raise up to RM10 mil in an ECF platform from the earlier RM5 mil cap. Second is the secondary market framework. Secondary market lets investors sell and buy investments bought on the platforms (either shares in a company, or investment notes in a P2P financing). This option gives flexibility for investors to realise their investments sooner.
Malaysia Digital Economy Corporation (MDEC), an agency pushing for digital adoption has extended its current campaign this week to get more companies to raise funds on alternative platforms especially those affected by the Covid-19 crisis.
These are some of the positive trends which will stimulate and encourage more companies to do crowdfunding.
Greater online brand awareness. The pandemic has accelerated digital adoption, especially brick and mortar companies. Many realise that they need to have an online presence for them to stay relevant (yes, there are still companies using Hotmail as their official emails!) As we see more companies going online, those with a strong customer base may benefit from crowdfunding. Companies tend to give discounted products apart from the usual business updates and being part of the business journey. Same goes to P2P financing, where a business can get its supporters to fund the purchase of the raw materials.
Broader investors demographic. Crowdfunding is not only limited to Malaysians. So long as an investor passses the screening, an investor can be from anywhere. Some platforms have presence in other regions. If you are hosted on one of these platforms, your business is also open to their investors’ network.
According to the Internet Economy Report by Temasek, Bain & Co, and Google, 10 million Southeast Asian are joining the workforce annually. They are young, educated, tech savvy, and digitally connected. Millennials with disposable income are able to invest in riskier investments as they seek good returns for better social mobility.
They also invest in companies that share the same values as them. An agriculture business that leverages smart farming tools may get a strong interest from someone who feels strongly on sustainability. Social media will also amplify these campaigns to go viral and get more people onboard. Crowdfunding is also democratising investments, as investors can invest as low as RM500 for most campaigns.
If you plan to invest, please read more on crowdfunding and understand the risks involved. The new digital economy is here, and it will change how we run our daily life, businesses, and society. Traditional banking will need to do more to catch up with these young, innovative, and agile fintech companies.
