Equity crowdfunding is a prominent method to raise capital. It is a stem of crowdfunding where platforms are used to raise money for business ventures through a group of people.
Crowdfunding is typically carried out on the internet and investors usually contribute a small amount which collectively can achieve a certain threshold.
Equity crowdfunding is not the same as crowdfunding mainly in the returns that investors get. When one invests in a company through conventional crowdfunding, they might not necessarily get shares in return which is a common practice in equity crowdfunding.
Understanding ECF or Equity Crowdfunding
Equity Crowdfunding is a process that involves the general public often referred to as retail investors. Funds are raised to obtain capital mostly for SMEs (Small and Medium Enterprises) and startups.
In most cases, such businesses are regarded to be high risk. Typically, startups tend to have mortality rates of more than 90% while the yearly average returns are about 25% which is considered low by any standards.
That said, startups that succeed usually bring back higher returns which could be as high as 20 times more.
The Equity Crowdfunding process
Unlike rewards-based crowdfunding, equity crowdfunding is often perceived as a better option if the intention is to generate a larger amount.
Portals are commonly used as the platforms for equity crowdfunding and they are often managed by government agencies due to the large amounts involved. Hence, it is normal that they impose certain limits on the amount allowed to be generated and the purpose of the money raised.
The process is quite straightforward in that:
- First, you need to decide on which platform to use by understanding the duration of the campaigns they run. You need to find out how much you will be able to raise and who will be evaluating you.
- Then, create your online profile, provide any documents that they need and wait for the platform to approve you.
- Once that is approved, you will be required to pitch your case where you need to describe who you are and why are you looking for funds (as well as how much you need, of course!). Tell the investors what equity stake they will get if they back your business.
- If you pass that stage, you will then receive the funds accordingly.
Some will give you the entire amount you ask for while there will be others who might need you to achieve a certain target before the next stage (and more funds will be disbursed).
Guide to Raising funds via Equity Crowdfunding for startups
While equity crowdfunding can help startups tremendously, it can also be something that many such enterprises might not be comfortable with.
This is because if you use this option, you must be ready to have external stakeholders in your company. Hence, you should prepare a sound and good shareholders agreement.
Startups need to be transparent which means you should be ready to report your numbers on the platform so that they can evaluate and make a decision that favors you.
Be aware of the costs involved as some platforms charge you for certain processes like due diligence. Malaysia imposes a regulation that ECF operators can charge up to a certain percentage for any funds raised through their platforms.
Prepare a media plan to publicize your EFC funding process including a fundraising video while informing your friends and family about your plan.
Deciding on which equity crowdfunding platform to go with
Like any other investment engine, there will always be 2 sides of the coin when you need to decide. Each platform has its strengths (and surely weaknesses) but if you are to choose, perhaps knowing them might prove useful.
- Eureeca – Known for funding a lot of overseas businesses, particularly in the United Kingdom and the Middle East
- Ata Plus – Popular platform is known to fund social enterprise startups although it is also a preferred platform for other startups as well. Ata Plus has been one of the platforms which have been rising in popularity in recent years.
- PitchIN – Among the most popular platforms in Malaysia that has a good track record for funding startups. PitchIN is the market leader in Malaysia in this market.
- Funded By Me – Works with a lot of businesses in the north, mostly from Penang with some common interests in other parts of Malaysia as well.
- Propeller Crowd Plus – A popular choice among SMEs with an expanding reach to other industries.
- Crowdo – A platform popularly preferred by startups and P2P Money Lending companies.
Fundamentally, any company that is considering using the platforms should carry out substantial research and homework.
It is very crucial to go through each of the platform providers’ websites to find out who is backing them out. Then, go through what they have funded in the past and what type of companies have succeeded as well. If your business falls into the same categories as those that have succeeded, there is a good chance that you might succeed too.
All that should be done prior to making the final decision of which platform you should go with.
It must be noted that it is not always only about the money that you could potentially raise but also other support services that the platforms can provide as well.
Comparing the top crowdfunding platforms in Malaysia
In Malaysia, the largest equity crowdfunding platforms include Fundnel, Crowdo, PitchIN, Crowdplus.asia, Ata Plus, Eureeca and FundedByMe. Below are some of the important facts and information about the top crowdfunding platforms in Malaysia and their requirements.
- Free sign-up for a membership
- Members enjoy no additional costs or fees to make investments and have access to all the deals on the platform
- No restrictions are imposed on sophisticated investors
- Angel investors can invest up to RM500,000 in a year while retail investors can invest up to RM5,000 per issuer up to RM50,000 within a year.
- A percentage of the funds raised will be charged for administrative expenses while members will be charged basic fees for processing and onboarding
- Private limited companies (Sdn Bhd) can raise up to RM3 million within a year while the funds raised can be unlimited through a venture capital fund.
- Free registration for membership but a 1.9% fee is imposed on the amount invested.
- FundedByMe charges a EUR 2,900 listing fee for those that succeeded the application.
- An 8% fee is charged on the amount raised as well as any fees depending on any additional services required.
- A 2% fee is charged for total funds raised while there are situations where a monthly project retainer fee will be imposed.
- Access to the platform for investors is free.
- Application is free of charge with no additional fees involved but when an amount is raised, a 7.25% fee is imposed.
- An application fee of $1,500 is charged for companies that have been approved.
- The services offered on this platform is free of charge while a 5% fee is imposed for the successful amount.
- Processing fees are imposed for payment gateways such as PayPal and MOL Pay.
What other options are there in Malaysia besides ECF?
Equity crowdfunding is just one of the many options that you can consider when looking for funds for your business. Besides that, you can always consider alternatives such as:
- Funds between RM50,000 and RM1,000,000 from Angel Investor Networks or Groups
- Government-related funds like Cradle CIP 300
- Pre-Seed & Seed options or Early Stage Venture Capital (VCs) that could potentially raise between RM50,000 to RM3 million.
- Funds offered by public agencies like the Cradle Seed Ventures or PlatCom Ventures
Evaluating if you need ECF
In Malaysia, the Equity Crowdfunding market is considered to be still very new. Startups looking for funds and capital might find it slightly challenging to enter these platforms although it is rising fast in popularity.
Before deciding if you would take your business to this level, knowing why (and why not) would help you much in making that decision.
Using ECF means you can get a lot of focus on the media. Hence, charting your media strategy around raising funds through ECF would be ideal
ECF lets you work closely with your customers. When they have good reviews of your business, it helps to push your operations higher up the ranks.
Once you raise funds through ECF, you will be prepared to (or already know how to) report your numbers regularly to your stakeholders which is a great practice for being transparent and compliant.
You connect better and more frequently with the community of retail investors. Besides that, you also get to connect with experts who could help you much in your business process.
ECF might not be suitable for everyone
While there are a lot of benefits of using ECF to fund your business, there could be situations or certain businesses that might find ECF to be unsuitable. This include:
- B2B businesses especially those that are not prepared to report your numbers not only to your investors but to a public forum as well. Businesses that are not able to hold annual general meetings might find ECF processes too troublesome.
- If your business is not ready to have more shareholders (or a larger group of investors) than it already has, then you might want to evaluate a different option.
- You would also need to consider the idea of costs. Building up a crowdfunding campaign would require time and money and that might not be something you have at the moment.
- Furthermore, you might lose the initial capital you put in for your crowdfunding campaign (by losing your upfront fees) if you fail.
The ECF Market in Malaysia
The Securities Commission of Malaysia approved several equity crowdfunding platforms a few years ago. When it was first approved, about RM49 million was raised for 50 SMEs of which more than half of the parties that contributed were retail investors, showing how strong the public investment market was.
It was found that the largest investors in ECF are those aged between 35 and 45 years of age who are those that are able to set aside some money for such investments while being tech-savvy users.
The total amount involved in ECF saw a decline starting from 2017 but the numbers have been steady throughout. It must be noted that the years ensuing the COVID-19 pandemic also contributed to the shift in such investments.
Out of the many players in the market, PitchIN leads in market share, covering almost three-quarters of the total amount raised in Malaysia at one point.
Among the successful companies that PitchIN has helped include Fundaztic, QEOS LED and Commerce.Asian, all of which raised millions or Ringgit.
As of March 2019, PitchIN is the major player, raising more than half the funds in the market. Since 2017, Ata Plus has been steadily moving up the market with a strong portfolio of companies behind PitchIN.
So, how does it all add up?
The use of Fintech is very popular in today’s environment. Equity crowdfunding, seen by many to be a new way of raising funds for startups has taken the world by storm in the last few years while Malaysia has been steadily following this trend.
The sale of securities like shares, and revenue shares in a private company, has provided companies and businesses with a whole new world of options to consider.
It must be noted that, unlike conventional crowdfunding, it is what is being sold that differs from equity crowdfunding.
Investors today tend to be more receptive to equity crowdfunding mainly because they have a say in the company when they have certain shares (or other forms of stakeholding).
As mentioned above, ECF provides new options and opportunities not only for investors but for individuals too because they can now make their own judgments, invest the amount that they want and decide on their own.
In Malaysia, while Fintech platforms like ECF are still often regarded to be in their infancy, it is growing very steadily in the region with a lot of success having been reported in recent years while many companies that have already grown and expanded ever since.
Types of investments in Malaysia
Bonds are a type of investments under the fixed-income securities category. It is basically a type of investment that uses the debt concept. What it means is that you are actually lending money to the organisation when you purchase a bond from them.
These parties can be a large company and would commonly be a government. You then earn from the interest agreed when the time comes. It is seen as one of the most stable investments which are almost risk-free as compared to others.
Stocks are one of the most popular forms of investments. Usually managed by the country’s bourse (Bursa Malaysia in Malaysia), you naturally become a part-owner of the company when you buy its shares.
Whether it is one share or a million shares, you are entitled to vote during the shareholder’s meeting. It is one of the most volatile markets and can be quite risky although you are entitled to any profits the company enjoys
Options, other form of investment
Options is a form of security which is quite different from other forms of investments. When you buy an option, you are entitled to decide what you want to do although you are not entirely obligated to do so. Options have expiry dates which means that they become worthless if nothing is done then.
Options usually derive their value from something else, in most cases a type of asset. When you invest in options, you are basically dealing with that.
Unit Trust or Mutual Funds
Mutual fund is often referred to as unit trusts. It is actually a pool of investment tools. When you buy from a mutual fund, what happens is that the agency pools together a collection of funds and invest in low-risk and high-return securities.
In most cases, there will be a strategy in place which will be communicated to you when you buy the specific mutual fund.
Futures Investment or commodity
Investing in futures is more short-termed. It is all about predicting the movements and trends of the securities. When you invest in futures, you try to predict the market prices respectively whether they are supposed to go up or come down.
You basically agree to honour your deal in buying a certain commodity at a later date, thereby deriving the name futures. In many cases, it could be investing into the price of cotton, soya or other commodities in their respective markets.
Insurance packages you can trust on
As the name implies, investing in insurance is to guarantee a certain type of return for your money. There are many types of insurance packages ranging from life insurance, fire insurance and endowment plans where it is a form of forced savings.
Because of this nature, returns from insurance are a lot lower as compared to other investment methods. Besides that, the term needed for the returns can be quite long as well.
Many forms of Savings
Savings accounts would be a stable option if you are not intending to earn quick and high profits. This is the most conventional way of investing where you put money in the bank and wait for annual (or periodical) interests.
Apart from the usual savings accounts, you can opt to enter into a longer-term contract with the bank via fixed-deposits where a certain interest rate is agreed, signed and honoured. This means that you keep the amount in the bank untouched for the agreed term.
Forex and foreign investors flock in
Meanwhile, as currency and trades increase, we will see recovering signs and investors starting to flock in to the country with billions of investment funds. As such, we are looking urgently for new blood to take up the baton to actively lead the country. Forex trading is growing healthily.
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