The Risks & Rewards of Equity Crowdfunding in Malaysia (for Business Owners & Investors)
Equity crowdfunding is becoming a popular way for businesses to raise money in Malaysia. Through equity crowdfunding, a business can raise money by selling ordinary shares of their company to investors.
As of June 2019, RM432million has been raised through equity crowdfunding in Malaysia.
If you are interested in raising money or investing in a company through equity crowdfunding, you might be wondering to yourself:
- How does equity crowdfunding work?
- Can I really raise money for my business through equity crowdfunding? What are the risks of doing so?
- Is it safe to invest in a company through equity crowdfunding? What should I know before I put my money down?
In this post, we'll take a closer look at the mechanism behind equity crowdfunding. By the end of this post, I hope you'll get a better idea of how equity crowdfunding works, and if you should raise or invest through equity crowdfunding.
Let's get started:
Overview of Equity Crowdfunding in Malaysia
Interest
Based on Google Trends, interest in equity crowdfunding is growing in Malaysia, and is likely to continue growing in months or even years to come.
Equity Crowdfunding Players in Malaysia
In Malaysia, equity crowdfunding is governed by the Securities Commission of Malaysia. As of 2020, there are 10 registered market operators for equity crowdfunding in Malaysia. They are:
- Leet Capital Sdn Bhd
- Ata Plus Sdn Bhd
- Crowdo Malaysia Sdn Bhd
- Ethis Ventures Sdn Bhd
- Eureeca SEA Sdn Bhd
- FBM Crowdtech Sdn Bhd
- Fundnel Technologies Sdn Bhd
- MyStartr Sdn Bhd
- Pitch Platforms Sdn Bhd
- Crowdplus Sdn Bhd
These platforms mainly help companies raise money online.
What is equity crowdfunding?
According to Wikipedia,
"Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital markets."
While rewards crowdfunding platforms like Kickstarter gives the backer a product, investors in equity crowdfunding campaigns become part owners of the company.
In Malaysia, investors mainly get ordinary shares in a company when they invest through equity crowdfunding. The companies raising money are usually early-stage start-ups.
Unlike other means of raising funds, equity crowdfunding welcomes investors of all types. Here, more than half of these investors are retail investors.
Why do businesses raise money with equity crowdfunding?
Control
One of the most appealing parts aspects of equity crowdfunding is control. The business owner raising money will be able to dictate the terms of the funding, including how much equity they're willing to give up and at what valuation.
Can't raise money elsewhere
The other big reason why businesses choose the equity crowdfunding is the lack of other fundraising options.
A business may go to equity crowdfunding route because they can't get a loan from the bank, or raise money from venture capital funds, for example.
How do investors earn money from equity crowdfunding?
IPO (List on the Public Market)
When a company IPOs, investors will have the option of selling their shares to buyers in the public market. If the company's value has appreciated from the purchase price, the investor will make a profit.
Company exit
A company may get bought out by another, often bigger company, years after an equity crowdfunding campaign has ended. If the purchase is favourable, the investor may be able to cash out when this happens.
Dividends
Depending on the company, investors may even get periodical dividends. This is a direct return on investment as a part owner of the company.
Raising Funds For Your Company through Equity Crowdfunding: Risks and Rewards
Risks
Hard to find a mentor in the investor pool
One of the most valuable things you can gain from VC funding is mentorship. VCs are often veterans who can provide insight into a specific industry.
This is something you might lose out on when you raise money through equity crowdfunding. If having a mentor is important to you, you might need to look for one outside of your equity crowdfunding campaign.
High level of scrutiny at an early stage
When you raise money through equity crowdfunding, you'll get a large number of shareholders who will be interested in how your company is doing.
For an early-stage startup, this level of attention and scrutiny may become problematic.
Rewards
Successful funding leads to much-needed cash injection
The most important reward from equity crowdfunding is cash injection. You can use this money to continue growing your business.
Public support
Your investors will likely become your best advocates. When you are successful, they are successful.
Investing in a Company through Equity Crowdfunding: Risks and Rewards
Risks
Paying too much for too little
While audited accounts are always provided, not all retail investors are savvy enough to understand it. This can results in most retail investors not knowing if the valuation is accurate, and paying too much per share.
Dilution
It's hard to predict what might happen to a company after a crowdfunding campaign. In some cases, shares may get diluted, making them much less valuable than when they were first bought.
Business goes bust before getting profits
Since most equity crowdfunding campaigns are run by early-stage startups, there is a real risk of companies closing shop way before the investor can realise any profits.
Rewards
Opportunity to invest
The biggest reward of equity crowdfunding is that it provides retail investors an investment opportunity into high-growth companies. These are opportunities which would otherwise only be available to high net worth individuals, VCs, or banks.
Conclusion
There is no stopping the growth of equity crowdfunding in Malaysia. More and more platforms have become available for businesses to raise funds on. An increasing number of businesses and investors have become interested in the investment vehicle.
For businesses, equity crowdfunding can be a good way for you to raise money to grow your business. You get to control the terms of the fundraising campaign.
On the other hand, equity crowdfunding gives retail investors access to investment opportunities that might otherwise be unavailable.
However, to get the best rewards, it's best to first have a good understanding of the risks of equity crowdfunding.
