Crowdfunding is the new kid on the block in the financing world. For the longest time, traditional lenders were the only “go to” sources of funds for businesses.
Crowdfunding, on the other hand, involves the raising of capital for a commercial venture from a ‘crowd’ of investors, where many people contribute small amounts to add up to a large, lump-sum investment. With low barriers to entry, almost ANYONE can invest in a good business proposition, be it a product or a start-up.
The concept is relatively new in both the region and Malaysia – In 2015, Malaysia became the first country in ASEAN to introduce a regulatory framework to facilitate equity crowdfunding.
The Securities Commission (SC) has since awarded licenses to six crowdfunding platforms – providing start-ups and small businesses with new avenues to turn to for their funding purposes.
The Mechanics of Equity Crowd Funding in Malaysia
There are four different kinds of crowdfunding, namely rewards, donation, lending and equity-based. Equity-based crowdfunding allows the issuers (start-ups/companies) to raise money publicly to investors in exchange for a stake in the company.
One such equity crowdfunding (ECF) platform is CrowdPlus.asia which provides eligible issuers with the opportunity to raise up to RM3 million within a 12-month period. Its COO, Bryan Chung says that issuers will be able to tap on investments from retail, angel and sophisticated investors, subject to the investment limits as provided in the SC’s guidelines:
1) RETAIL INVESTORS (INDIVIDUALS OF THE GENERAL PUBLIC)
• There are no requirements to register as aretail investor.
• The maximum investment amount is at RM5,000 per issuer.
• Maximum investment amount of RM50,000 within a 12-month period.
2) ANGEL INVESTORS
• A member of the Malaysian Business Angels Network (MBAN).
• Gross annual income > RM180,000 and Total Net Assets > RM3 million.
• Total gross annual income of RM250,000 (with spouse).
• Maximum investment amount of RM500,000 within a 12-month period.
3) SOPHISTICATED INVESTORS
High Net Worth Individual
• Total Gross Annual Income > RM300,000.
• Total gross annual income of RM400,000 (with spouse).
• Total net joint assets > RM3 million (with spouse).
• Total net assets exceeding RM10 Million or its equivalent in foreign currencies on the last audited accounts.
• Unlimited investment amount.
Getting A Project Financed Via ECF
The basic end-to-end process for getting a project financed via ECF is pretty simple. At CrowdPlus, issuers will first have to submit an online application via their website, www.crowdplus.asia. A meeting will then be arranged with the issuer to obtain a more in-depth understanding of the business and its potential. As an ECF platform operator, CrowdPlus has the responsibility of educating retail investors and ensuring due diligence on part of the issuer before listings.
“The CrowdPlus team will filter all the companies via our proprietary Venture Capital methodology. If the assessment is positive, only then will we proceed with the legal and financial due diligence – where we will look at the details provided as well as documents related to the company’s incorporation, shareholders’ and directors’ information, etc. This will be followed by the preparation of pitch pages and video as well as the legal documentation before being finally ‘published’ on the platform,” explains Bryan.
Rest assured, checks and balances are carried out on the investors’ end as well – they will have to fill up forms pertaining to the Anti-Money Laundering and Anti-Terrorism Financing Act (AMLATFA).
Added Edge for Start-ups
As CrowdPlus has an established regional presence, it provides its issuers with the added plus of having access to investors from multiple countries – namely China, Hong Kong and Vietnam. One of their success stories is Edugat, an online education consultancy firm surpassed its minimum funding target at 150% 9 days before the investment deadline. On top of that, the company is now in the midst of extending its presence to Thailand and Philippines.
Another plus point is CrowdPlus’s Qualified Matching Investor (QMI) feature. QMIs are successful investors and entrepreneurs who possess valuable industry knowledge and experience and serve as mentors for the companies funded through CrowdPlus.asia. The guidance and handholding provided go a long way in shaping a start-up for the investor market.
Ironing Out the Misconceptions Over ECF
It would appear that ECF has taken off slowly in Malaysia. However, it is only expected that the introduction of something new will be met with some resistance and ambiguity. According to Bryan, it took the UK several years of trial and error for ECF platforms to reach the maturity stage and become the trusted go-to avenue it is today for funding up-and-coming companies and diversifying one’s private equity investment holdings.
In addition, there is the common misconception that the use of ECF platforms is only restricted to ‘reject’ companies that have been unable to receive funding from elsewhere. Bryan revealed that they came across numerous worthy companies who did not manage to get funding from VCs, government grants or bank loans due to various reasons. This is where ECF comes in premised on the wisdom of crowd versus a committee or a board – it works to convince the crowd of a start-up’s unique business proposition via a single, streamlined online platform.
ECFs should not be seen as a competitor to the conventional financial market, but as an alternative and a complement, especially with regards to small businesses. It could foster more collaboration between different existing initiatives for early stage financing such as venture capital (VC) and private equity firms. Given the guidelines provided by SC, especially considering the amounts that can be raised, companies who would be suitable for raising money via ECF will likely be in seed or pre-Series A stages. Investment amounts raised in later stages will likely exceed what is allowed under the ECF guidelines.
Bryan stresses that it is a good idea for a VC to come together with an ECF round as a lead investor, as it serves as a great form of validation by a relevant third party. This gives the issuer (or a company in the midst of raising funding) more credence as experienced VCs would also have conducted stringent due diligence and assessment of the company-raising the chances of the company’s success to complete its funding round.
Crowdfunding: Now Everyone Can Be A Real Estate Investor
Andrew Tan, Partner at TinkBig Venture Limited shares his insights on how crowd funding could reshape real estate investing and development in Malaysia. TinkBig is a newly founded venture capital (VC) firm based in Kuala Lumpur.
So far, have there been any real estate ventures under a crowdfunding platform in Malaysia? How will crowdfunding transform the real estate landscape in Malaysia?
Most of the 6 local ECF operators are currently focusing on technology-based start-ups as crowdfunding in Malaysia is still in its infancy stage. However, a few operators are mulling to venture into real estate in the near future.
There are two players in the market who are in operation; Co Asset and Shared Worth. Their project selection is interesting however the investment options are very limited as for now.
The rise of real estate crowdfunding (RECF) in Malaysia might come sooner than later. Industry researcher, Massolution’s 2015 RECF Report detailed that RECF is one of the fastest-growing segments of the global crowdfunding industry.
The amount invested through RECF platforms has grown from a modest $19 million in 2012 to more than $2.57 billion in 2015. This figure is forecasted to grow to 250 billion by $2020.
The extremely low entry point of ECF allows people of almost all means to benefit from real estate investments. Anyone can have a piece of the pie in high-entry property investments, especially for commercial properties where prices often range a few million Ringgit per unit.
Once the local ECF industry matures, I believe it will generate more demand for commercial and high-value residential properties in prime areas. An RECF platform will change the way real estate investment is done – it is currently limited to institutional investors or investors who have the capital, energy, and time to acquire and manage the property themselves.
RECF will provide the ownership angle to less well-off investors and allow for group purchasing power, where a group of this investors could stake a claim in owning a property that was out of their reach before this.
In terms of value per square ft, I strongly believe that real estate investing is always about LOCATION. Also, commercial properties tend to have a higher potential for rental yield and capital appreciation over the years as compared to residential projects that might not be in prime locations.
Moreover, the relatively little outlay enables investors to diversify their portfolio over dozens of investments across different geographic markets and asset classes.
This practice of ‘do not place all your eggs in one basket’ thus hedges against the possible few bad properties as well as against market shocks. Not only is RECF safer for investors, but it provides steady returns with low risks.
Why should developers choose to use a crowdfunding portal over a traditional way of funding my real estate projects?
RECF enables developers to turn their development project into crowd ventures to supplement their current sources of capital.
By leveraging on the reach of the Internet, developers are able to pitch their project to a large and diverse pool of investors, which will significantly increase their capacity and facilitate business growth.
Most importantly, the elimination or reduction of the need for middlemen such as realtors and bankers as well as marketing expenditure for road shows, banners, etc would reduce operating cost and increase investors’ returns.
Small and boutique developers would benefit too – many face restrictions in terms of development size or the number of projects that could be undertaken at one one time due to the high cost of conventional capital.
Developers could even obtain community support for projects that may have otherwise faced rejection by banks due to fear of low market acceptance.
What are some of the things that investors must consider before investing in a real estate venture through a crowdfunding platform?
ECF operators will carry out their due diligence prior to listing a project on their platform – they would provide as much information as they can about the people behind each project and the property’s details to help the investors in their decision-making.
However, it goes without saying that investing in early stage businesses involves considerable risks, even with the initial due diligence carried out by the operators.
I would advise investors to carry out their own due diligence – research the developer’s background, prior projects, experience and the reason for embarking into ECF.
Also, make sure to pay a visit to the show house or gallery, if available, to understand more about the project, its valuation and unique selling points.
Disclaimer: The views expressed here are solely of Andrew Tan and do not represent that of any ECF platform. Readers are encouraged to seek independent advice prior to making any investments
This article was first published in the iProperty.com Malaysia October 2016 Magazine. Get your copy from selected news stands or view the magazine online for free at www.iproperty.com.my/magazine. Better yet, order a discounted subscription by putting in your details in the form below!