Legal Aspects of Crowdfunding: What Malaysian Startups Need to Know

Crowdfunding has emerged as a popular method for startups to raise capital by soliciting small amounts of money from a large number of people, typically via online platforms. While this method offers great potential, it also comes with legal responsibilities and requirements. In Malaysia, the regulatory framework governing crowdfunding ensures investor protection and compliance with legal standards. This article explores the legal framework for crowdfunding in Malaysia and provides tips for startups on compliance and safeguarding investor interests.

1. Understanding Crowdfunding

Crowdfunding involves raising small amounts of capital from a large pool of investors, typically through online platforms. There are several types of crowdfunding, including:

• Equity Crowdfunding:

  Investors receive shares in the company in exchange for their investment.

  
  

• Reward-based Crowdfunding:

  Backers receive a product or service as a reward for their contribution.

  
  

• Debt Crowdfunding (Peer-to-Peer Lending):

  Investors lend money to the startup and expect repayment with interest.

  
  

• Donation-based Crowdfunding:

  Contributions are made without expecting anything in return.

  
  

2. Regulatory Framework for Crowdfunding in Malaysia

In Malaysia, the regulatory framework for equity crowdfunding is primarily governed by the Securities Commission Malaysia (SC) under the Capital Markets and Services Act 2007 (CMSA). The Securities Commission introduced specific guidelines to regulate equity crowdfunding activities and ensure investor protection. The relevant regulations and guidelines include:

a. Capital Markets and Services Act 2007 (CMSA)

• Section 34:

  Defines and regulates the offering of securities to the public. Equity crowdfunding falls under this section as it involves offering shares to the public.

  
  

• Section 212:

  Requires that any entity wishing to operate an equity crowdfunding platform must be registered with the Securities Commission Malaysia.

  
  

• Section 354:

  Mandates the disclosure of all material information to investors to ensure transparency and informed decision-making.

  
  

b. Securities Commission Malaysia (SC) Guidelines on Recognized Markets

The SC has issued guidelines specific to equity crowdfunding platforms. Key requirements include:

• Platform Operators:

  Must be registered with the SC as a Recognized Market Operator (RMO). The guidelines set out the standards and requirements for RMOs, including capital requirements, operational standards, and compliance obligations.

  
  

• Investor Protection:

  The guidelines impose limits on how much retail investors can invest in equity crowdfunding campaigns. This helps mitigate the risk of financial loss for non-sophisticated investors.

  
  

  • Retail investors can invest up to RM5,000 per company with a maximum of RM50,000 per year.

    
    

  • Sophisticated investors, such as high-net-worth individuals and institutions, are not subject to these limits.

    
    

• Disclosure Requirements:

  Issuers must provide detailed information about their business, financials, and risks involved in the investment. This ensures transparency and helps investors make informed decisions.

  
  

3. Legal Compliance for Startups Engaging in Crowdfunding

For startups looking to raise funds through crowdfunding, adhering to legal requirements is crucial. Here are key steps to ensure compliance:

a. Choosing the Right Crowdfunding Platform

Select a platform registered with the Securities Commission Malaysia as an RMO. Ensure the platform adheres to SC guidelines and provides necessary support for compliance.

b. Preparing Disclosure Documents

Under Section 354 of the CMSA, startups must disclose all material information to potential investors. This includes:

• Business Plan:

  Clearly outline the business model, target market, revenue streams, and growth strategy.

  
  

• Financial Information:

  Provide accurate and up-to-date financial statements, including profit and loss, balance sheet, and cash flow statements.

  
  

• Risk Factors:

  Disclose potential risks, such as market competition, regulatory challenges, and financial instability.

  
  

• Use of Funds:

  Detail how the raised capital will be used to grow the business.

  
  

c. Ensuring Corporate Governance

Adopt strong corporate governance practices to build trust with investors. This includes:

• Board of Directors:

  Form a competent board to oversee the company's strategic direction and governance.

  
  

• Compliance with Companies Act 2016:

  Ensure adherence to provisions related to shareholder rights, transparency, and director duties. For instance, under Section 211 of the Companies Act 2016, directors must act in the best interests of the company and exercise reasonable care, skill, and diligence.

  
  

4. Investor Protection Measures

To maintain investor confidence and ensure legal compliance, startups should implement the following measures:

a. Transparency and Regular Reporting

Provide regular updates to investors on business progress, financial performance, and any significant developments. This ongoing communication helps maintain transparency and investor trust.

b. Use of Escrow Accounts

Utilize escrow accounts to manage investor funds. This ensures that funds are only released to the startup upon meeting certain conditions, such as achieving a minimum funding target. Escrow accounts protect investors by safeguarding their contributions until the campaign is successful.

c. Adhering to Anti-Money Laundering (AML) Regulations

Comply with AML regulations to prevent fraudulent activities. Conduct thorough due diligence on investors and ensure the crowdfunding platform has robust AML policies.

5. Legal Risks and Challenges

While crowdfunding offers numerous benefits, startups must be aware of potential legal risks:

• Misrepresentation:

  Providing false or misleading information to investors can result in legal liability under Section 591 of the Companies Act 2016, which prohibits false and misleading statements.

  
  

• Non-Compliance:

  Failure to comply with SC guidelines and CMSA requirements can lead to penalties, fines, or suspension of crowdfunding activities.

  
  

• Intellectual Property Risks:

  Disclosing business ideas on crowdfunding platforms may expose startups to the risk of intellectual property theft. Startups should consider patenting their innovations or using non-disclosure agreements (NDAs) to protect sensitive information.

  
  

Conclusion: Navigating Crowdfunding Legally

Crowdfunding presents a valuable opportunity for Malaysian startups to raise capital and engage with a broad investor base. However, adhering to legal requirements and implementing robust investor protection measures are crucial for success. By understanding the regulatory framework, preparing comprehensive disclosure documents, and maintaining transparency, startups can leverage crowdfunding to fuel their growth while ensuring compliance and investor confidence.

Engaging legal professionals for guidance on compliance and best practices can further safeguard the interests of both startups and their investors, paving the way for a successful crowdfunding campaign. Should you have any questions related to the article above, please do not hesitate to contact our managing partner, Eugene Yeong for clarification.