Equity Crowdfunding: An Innovative Form of Alternative Fundraising

Equity crowdfunding is a new form of fundraising that allows a start-up or other smaller enterprises in an early-stage unlisted company (a company that is not listed on a stock market) to obtain capital through small equity investments in exchange for shares in that company.

In Malaysia, the practice allows small businesses to raise capital from the public using online platforms registered by the Securities Commission Malaysia to publicise and facilitate such offers to crowd investors.

A shareholder has partial ownership of a company and stands to profit should the company do well. The opposite is also true, so if the company fails investors can lose some, or all, of their investment.

An example of a start-up that is currently doing equity crowdfunding exercise is ULearnMONEY, an edu-tech platform that aims to elevate the financial literacy of Malaysians, particularly the young adults, through continuous education, counselling, and advisory tools. ULearnMONEY’s campaign is done on Ata Plus, one of the 10 platforms that have been registered under the Securities Commission Malaysia.

Previously only wealthy individuals, venture capitalists, and business angels could invest in startups. Equity crowdfunding platforms have helped democratise the investment process by opening the door to a larger pool of potential investors dubbed “the crowd”.

With equity crowdfunding, investors have the opportunity to diversify their investments beyond the traditional asset classes.

Who Can Invest?

Who can invest in an equity crowdfunding exercise depends on the investment platform. While some platforms require very few checks to register as an investor, others are more stringent in their guidelines.

Self-certification is often used as a method of telling an investment platform you have the appropriate level of experience, risk awareness, and means to invest in early-stage businesses.

Make sure to do sufficient research before you invest because the criteria for investment vary from platform to platform.

Is Equity Crowdfunding Legal and Safe?

All investments carry risks and equity crowdfunding is no exception. The typical company raising capital of an equity crowdfunding platform is an early-stage company with all the inherent risks a new business goes through. Companies can fail or perform below expectations. Fraud may be a risk too but this is where regulations come into play.

All over the world, equity crowdfunding is regulated by securities regulators. Locally, the Securities Commission of Malaysia only allows approved platforms to offer equity crowdfunding.

In addition to that, the Securities Commission has set rules and guidelines that must be followed by all approved platforms. You can look up the rules and guidelines in relation to Equity Crowdfunding on the Securities Commission of Malaysia website.

Why is Equity Crowdfunding So Exciting?

The most common kind of crowdfunding is reward-based crowdfunding. Popular rewards-based crowdfunding sites such as Kickstarter and Indiegogo in US list many projects where backers pledge money in return for ‘rewards’ from the project founders.

The popularity of rewards-based crowdfunding led to innovation in the crowdfunding industry. Today there are platforms that have taken different approaches to crowdfunding like equity crowdfunding, property and debt crowdfunding.

What are the Risks?

You are investing in early-stage companies which may not do well and could even fail which is why equity crowdfunding is risky. You could lose part or all of your investment and you may not be able to sell your shares easily.

Investments are speculative and carry high risks. To decrease exposure, these types of investments should only be made as part of a diversified portfolio. Spread your risks and only invest money that you can afford to lose. Make sure you do sufficient research first before investing and understand these risks and make careful investment decisions.

Registered Recognised Market Operators for Equity Crowdfunding

Malaysian equity crowdfunding platforms have seen significant growth in line with the government’s call for financial services providers to embrace technology to develop a more inclusive, innovative and efficient capital market.

As of December 2019, RM73.74 million investments were raised, with 80 successful campaigns and 77 successful issuers. The investment demographic revealed that 46% of the participants were below the age of 35 and 52% of the investment came from the retail sector.

Below are the 10 equity crowdfunding platforms that have been registered under the Securities Commission Malaysia: