2021 has seen the increase in popularity of many different investment options, such as cryptocurrencies, forex trading, equity crowdfunding (ECF) etc. Equity crowdfunding in particular is getting more and more prevalent within Malaysia. For those who are unfamiliar with ECF, it is a form of alternative financing for a start-up that needs to raise funds and offer their equity within the business to all interested investors through credible crowdfunding platforms. For investors, this is a good opportunity to gain equity stakes in high potential early stage start-ups. Find out more about ECF on Ethis here.
The establishment of more and more SMEs and start-ups within Malaysia has now made it possible for investors to choose from a variety of deals as part of an ECF investment. According to SME Corp, SMEs in Malaysia consist of 97.2% of overall business establishments in 2020.
Do you have dreams of earning passive income high enough for you to join the FIRE (Financial Independence, Retire Early) movement? Equity crowdfunding may be the right path for you, provided that you invest in the right business.
Equity Crowdfunding: Is it worth the risk?
What exactly is equity crowdfunding? ECF is an investment option for investors whereby investors provide small businesses or startups, who are seeking funding to build and expand their business, with funding in exchange for shares. Think ‘Shark Tank’ but with ECF, this investment opportunity is now available to retail investors as it was only accessible to high net worth individuals. ECF democratises the process and now makes it possible for retail investors to invest in small businesses or startups for as low as RM1,000 for example.
Though ECF may sound exciting, it is a form of high risk, high return investment. It is also a long-term investment, so it is best to think about the feasibility of ECF investing when diversifying your investment portfolio. Becoming an ECF investor means you are investing in an early stage business with high potential, but they have not reached a certain level of growth or size and may need to produce more results. Thus, the return on investment of a business running an ECF campaign varies based on its industry and business strategy.
This investment is also relatively illiquid, as you have to hold onto equity until there comes a chance for you to sell your equity share. This opportunity typically happens if the business wishes to buy back their equity shares, or when there is a buyer willing to buy the equity off your hands. Many times, the business owners will outline the possibility of buying back your shares during the ECF campaign.
The appeal of equity crowdfunding
Despite its possible downsides, ECF is still a worthwhile investment. Here are 5 reasons why:
Reason 1: Increase in popularity as a form of alternative financing in Malaysia
The interest of Malaysians in equity crowdfunding has steadily increased. According to the Securities Commission’s (SC) Annual Report 2020, the total capital raised in 2020 via ECF grew by 457% to RM127.73mil. This shows the significant impact that ECF has on the fundraising scene, giving business owners a viable and attractive alternative financing option. It also further demonstrates its growth potential as an emerging capital market.
Reason 2: High potential returns: searching for the new unicorn
Most, if not all investors, invest via ECF for the potential that the businesses possess. The biggest upside of getting early access to a company as an early-stage investor is buying its shares for a much cheaper price before it skyrockets. Well-established companies like Facebook, Telegram, LalaMove, Airtable and more have all grown in value since their early days as startups.
Before the advent of ECF, the chance to invest in early-stage start-ups were only available for venture capital firms, angel investors and sophisticated investors because of how costly it was and also due to a lack of framework that could make these businesses accessible to retail investors.
Now, with ECF, retail investors have the chance to invest in early-stage start-ups, too. ECF investing offers another alternative or an opportunity to diversify for retail investors who want to make it big by investing in future game-changing start-ups.
Reason 3: High quality issuers who are vetted through the Securities Commissions
In Malaysia, all ECF crowdfunding platforms need to satisfy the requirements in the Recognised Market Operator (RMO) Guidelines set by the Securities Commissions.
Ethis, a registered ECF operator, undertakes a strict due diligence exercise on prospective issuers (SMEs or start-ups seeking funding). Among the steps taken are to ensure that issuers have given a verified disclosure document and on the investors side, to inform them of any adverse changes in the issuer’s proposal. This is important to ensure that no fraudulent fundraising occurs on the platform.
Reason 4: The Transparency of ECF
Due to regulations in Malaysia, it is important that all ECF fundraising activities adhere to compliance and due diligence to their investors. In addition, after a successful fundraising, the issuer needs to ensure continuous communication with its investors (usually via the ECF platform) by providing updates on business development, or updates on social media and email. This would reassure the investors that the funds are implemented correctly and to show progress on their business.
In addition, shareholders must be informed of any changes to the business. For example, when there is a chance for a buyback period, all shareholders would be informed and this would allow them to plan their exit strategy.
Besides that, potential dividends may also be paid out to existing shareholders. From time to time, if the business does well, more shares will be sold following another round of fundraising and new investors may join. Shareholders must also be informed if there is a chance of acquisition or listing on the stock exchange.
Reason 5: Pool of innovative ideas
ECF investing is full of early-stage start-ups seeking funds needed to test or grow their products. Some startups or businesses seek funding to validate their business idea and for market validation.Others may seek funds for a good cause, or start-ups offering solutions to current issues faced within our society.
Hence, this creates a pool or flow of innovative ideas within that ecosystem. A successful ECF investment may also induce a sense of achievement in the investors, as they indirectly contributed to the success of startups or businesses that managed to get their ideas off the ground or helped shape the future way of living. For instance, just like how start-ups like Grab and Shopee have revolutionised how we view and use transportation services and shop for goods.
Any investment option has its pros and cons. Despite that, equity crowdfunding is a worthwhile investment as an increasingly popular investment option with high potential returns. It also serves as a vehicle for innovation as early stage start-ups get the access to funding while receiving the chance to test out their ideas to investors who have a vested interest in the success of the product. Ultimately, it is a win-win solution for both parties and it is certainly an investment type that is here to stay. Get started on diversifying your portfolio with Ethis today.