EXECUTIVE SUMMARY 5. SMALL IS BEAUTIFUL 7 The growing backlash against gigantism 7 Rise of the sharing economy 7 Empowering with FinTech 8

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2 This report is published by the Asian Institute of Finance (AIF). AIF cannot accept responsibility for any errors or omissions or any liability resulting from the use or misuse of any such information. The views and opinions in this report may be used for information purposes only. Acknowledgement AIF would like to convey its deep appreciation to Dato Ahmad Fairuz Zainol Abidin, Deputy CEO of the Securities Commission Malaysia for facilitating the review of the draft report. The authors are indebted to Puan Shamsul Bahriah Shamsudin and Ms Joanna Chin of the Commission s Market & Corporate Supervision, and Mr Chin Wei Min and Mr Chan Zhong Yang of Innovation and Digital Strategy, for their insightful comments and suggestions. A special note of thanks to Puan Shamsul Bahriah Shamsudin for coordinating the review and feedback, and to Ms Joanna Chin for furnishing additional information Asian Institute of Finance. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of AIF. For more information, please contact: Asian Institute of Finance Unit 1B-5, Level 5, Block 1B Plaza Sentral Jalan Stesen Sentral 5 KL Sentral Kuala Lumpur Malaysia Phone: Fax: research@aif.org.my Web:

3 TABLE OF CONTENTS FOREWORD 4 EXECUTIVE SUMMARY 5 SMALL IS BEAUTIFUL 7 The growing backlash against gigantism 7 Rise of the sharing economy 7 Empowering with FinTech 8 THE CROWDFUNDING PHENOMENON 9 What is crowdfunding? 9 Global and regional trends 10 Associated risks 13 CROWDFUNDING POTENTIAL IN MALAYSIA 14 The market for crowdfunding 14 Financing opportunities 15 MALAYSIAN CROWDFUNDING LANDSCAPE 16 Origins and evolution 16 Awareness of crowdfunding 18 Public investing behaviour and expectations 22 Promotional efforts 23 Achievements so far 24 Future outlook 30 DEVELOPING THE ECOSYSTEM 32 Grooming the entrepreneurs 32 Growing an engaged investors community 33 Elevating the profile of platform operators 34 Increasing project pipeline flows 35 Enhancing digital outreach and data protection 35 Calibrating the regulatory framework 36 Improving operational efficiencies 37 Collaborating with related agencies and entities 38 CONCLUSION 39 PROFILE OF RESPONDENTS 40 APPENDIX 42 3

4 FOREWORD Although a relatively new phenomenon in Malaysia, crowdfunding has been greeted by the government and market alike as a part of disruptive financial technologies (FinTech) that add impetus to Malaysia s move towards a 21 st century digital economy. With the government s policy commitment, financial assistance, regulatory supervision and other supportive measures, crowdfunding is expected to accelerate in the near future as a critical source of alternative financing for SMEs to create new employment, enhance social participation and help Malaysia adjust to the fast-shifting dynamics of the global economic and social landscape. In spite of its promising prospects, there are gaps in awareness of what crowdfunding is and the opportunities and risks it presents. There is a shortage of actionable information on: the role of crowdfunding in the policy, business and financing environment for SMEs; the level of understanding of crowdfunding among the public and small entrepreneurs; their interest and willingness to participate in crowdfunded projects/activities; and the effectiveness of the national ecosystem for crowdfunding. This report addresses these gaps to help realise the full potential of crowdfunding in Malaysia. It is based on a two-phase research study. The first consisted of a quantitative survey of the public and small entrepreneurs within the Klang Valley, and the second involved desk research and consultations with crowdfunding platform operators, national agencies/institutions, sophisticated investors and start-up entrepreneurs. The report describes a vibrant crowdfunding environment emerging in Malaysia following Bank Negara Malaysia s policy support for alternative financing, and the Securities Commission Malaysia s introduction of regulatory frameworks for equity crowdfunding (ECF) in 2015 and peer-to-peer crowdfunding (P2P) in Since crowdfunding continues to evolve rapidly around the world and is still at an early stage in the country, the insights offered by this report are an initial but comprehensive snapshot of the local crowdfunding environment and its future growth potential. Dr Raymond Madden Chief Executive Officer, Asian Institute of Finance Kee Gek Choo General Manager, Market Research Strategy, Policy Development and Research Asian Institute of Finance 4

5 EXECUTIVE SUMMARY Crowdfunding is a promising means of alternative financing for small businesses and individual enterprises which have found access to funds from the corporate banking system increasingly difficult after the 2008 global financial crisis. Its growth around the world in less than a decade has been astounding at an average annual rate of 391% from 2012 to The Malaysian government and market players have welcomed it as an important new means to promote SMEs which are experiencing challenging financing conditions. The banking system is not well-equipped to support new SME ventures in untested areas, especially those involving digital technology. Bank Negara Malaysia (BNM) believes the current SME financing gap of RM25 billion can be met by alternative financing with an estimated potential of RM70 billion. The SC has established new regulatory frameworks for equity crowdfunding (ECF) in 2015 and for peer-to-peer (P2P) financing in Six crowdfunding platform operators have been registered under each. Since these are recent developments, market-based crowdfunding is still at an early stage in the country. Nonetheless, the SC s initiatives have been a turning point for crowdfunding in Malaysia by transforming perceptions and triggering a new growth momentum. The key findings of the AIF study are: Prior to 2015, the potential of crowdfunding was appreciated by only a fifth of the public and one in ten small entrepreneurs The public was motivated by philanthropic rather than commercial reasons, its contributions limited to RM100 per project and its support for young businesses carrying unrealistic expectations of near-term dividend payouts rather than longer term capital gains While most entrepreneurs saw crowdfunding as a quick and reliable financing alternative to banks, they did not expect to raise funds of more than RM25,000 per project These perceptions have improved post-2015, with crowdfunding volumes having picked up and most stakeholders now upbeat about its future, especially ECF and P2P By end-june 2017, RM15.8 million has been raised via ECF over 18 months and RM2.5 million via P2P over four months, the combined volume 12 times the RM1.54 million raised through reward crowdfunding in the past five years The number of successfully funded projects as of date is 267 for reward crowdfunding, 24 for ECF and 8 for P2P. The project count is higher for reward crowdfunding due to its smaller project values and the ability to utilise funds raised even if they fall below the targeted amount, unlike the all or nothing arrangement for ECF and the minimum 80% rule for P2P The current average project value is highest for ECF (RM660,000), more than double that for P2P (RM312,000), with project values for both expected to grow in the future Successful ECF projects span different industries and include brick and mortar businesses, with more than half using digital platforms; P2P projects are more established businesses operating in the wholesale and retail sector; and reward projects are concentrated on community initiatives, technology and the arts 5

6 Consistent with international trends, ECF and P2P are expected to dominate the future, with P2P the market leader by virtue of its low minimum investment requirement (RM100), short funding durations and clear exit plans These encouraging early stage developments can be built upon by enhancing the current crowdfunding ecosystem in the country. The following measures would be beneficial: Stakeholders/Key Players Business owners need to improve their marketing, pitching and presentational skills to better attract potential investors Local incubators and accelerators could support platform operators to guide project owners on these The current investors pool, limited to the networks of platform operators, project owners, and a segment of sophisticated investors, can be enlarged by combining the education and outreach initiatives of operators with those of others in the ecosystem, for example, the Malaysian Business Angels Network (MBAN) Platform operators could do more to build up their brand equity and market presence. Mechanisms Operators could host mobile web versions of platforms to extend their reach Vernacular translations are needed to cover small business owners and the public not proficient in English Current paperwork requirements following the completion of successful ECF campaigns could be streamlined to speed up the disbursement of funds Lead times for due diligence and credit reference checks on project owners could be shortened by allowing operators access to the Central Credit Reference Information System (CCRIS) at the Credit Bureau of BNM Certain operators could adopt more stringent data protection and fraud prevention safeguards for project information and details of project owners and investors stored on the platforms The current regulatory framework needs periodic recalibration as crowdfunding evolves, for example, on the maximum amount of funds per ECF project or investor The limited ad hoc collaboration between platform operators, government agencies, government investment companies and banks could be strategised more systematically. Crowdfunding has got off to a good start in Malaysia. It has made impressive gains within a very short time despite relatively low levels of knowledge and awareness. Its early stage challenges and shortcomings will get resolved once the concept is more widely accepted. Global and regional trends suggest the steepest growth in crowdfunding occurs during the initial three to five years in most countries. The best years for Malaysian crowdfunding are still ahead of it. Keywords: Alternative financing, Bank Negara Malaysia, Crowdfunding, Crowdfunding regulatory framework, Equity crowdfunding, FinTech, Malaysia, Peer-to-peer financing, Securities Commission Malaysia, Sharing economy, Small business financing, SMEs 6

7 SMALL IS BEAUTIFUL Following the 2008 global financial crisis, policy-makers around the world have called for a more inclusive, people-centred approach to development. Their concerns reflect the failure of corporate-led globalisation to benefit all people equitably, especially its neglect of those in the bottom half of the income pyramid. The digital revolution offers new opportunities to address these concerns by bypassing entrenched institutions and reaching out directly to individual consumers. The growing backlash against gigantism In 1973, British economist E F Schumacher challenged the wisdom of conventional economic models fixated on perpetual growth with the idea that bigger is better. 1 He spoke about the dangers of gigantism the quest for ever larger economies and production systems that diminish the importance of the individual by fostering a culture of excessive centralisation and materialistic consumption. Schumacher s warning has been borne out by the results of globalisation. While its economies of scale have yielded a range of material benefits and generated extraordinary wealth, the main beneficiaries have been the top 1% who today own more wealth than the bottom half of the world s population. 2 Around the world, there has been a growing discontent over this disproportionate distribution of wealth. The backlash against the virtues of bigness has given rise to the twin phenomena of the sharing economy and FinTech that are challenging the entrenched global financial architecture with hugely popular innovations like crowdfunding. Rise of the sharing economy The sharing economy is a people s mutual-help movement made possible by digital technology to cope with the fall in incomes from economic recession triggered by the 2008 crisis. The concept refers to an emergent ecosystem that is upending mature business models across the world. One of its most distinguishing features is to bring into play unused or underutilised resources in an economy through direct interaction with and among individual consumers. It is also known by other names, such as trust economy, gig economy, peer-to-peer economy 1 E F Schumacher, Small is Beautiful: A Study of Economics as if People Mattered (London, Blond and Briggs, 1973). 2 Oxfam International, An Economy for the 99% (Oxford, Oxfam GB, 2017). 7

8 and collaborative consumption. It typically consists of individuals and small businesses armed with creative ideas catering for a huge latent public demand overlooked by established corporations. The enthusiastic popular response to the concept has far-reaching economic and social implications. Empowering with FinTech In tandem with the sharing economy, a new breed of technologies, aimed directly at the retail consumer, has taken the world of finance by storm over the past decade, challenging the hold of traditional players over financial markets. These new technologies, known as FinTech, have sprung from outside the established financial system. They are driven by innovative, technology savvy individuals who capitalise on digital technology to deliver financial products and services at a significantly lower cost. FinTech is increasingly converging with the sharing economy concept as they both stress inclusion and democratisation, with consumers as the driving force 3. Crowdfunding platforms for financing small businesses and entrepreneurs, and cryptocurrencies like Bitcoin and Ethereum, are closely aligned with the idea of a sharing economy. Crowdfunding, in particular, has received a rousing welcome as a consumer-centric alternative to fill financing gaps long overlooked by traditional financial service providers. The sharing economy and FinTech revolutions are supported by governments as important vehicles for their inclusive development agendas. The Chairman of the Securities Commission Malaysia (SC) has hailed the Digital Revolution as an engine of growth for the capital market; in embracing this revolution, the SC has formulated a digital agenda that, among other key objectives, is geared towards enhancing access to financing 4. 3 Adit Vaddi, FinTech Meets the Sharing Economy: Convenience, Efficiency and Accessibility, Crowd Valley, 25 April Tan Sri Ranjit Ajit Singh, Chairman of Securities Commission Malaysia, Opening Address at the SCxSC Digital Finance Conference 2016, Kuala Lumpur, 3 November

9 THE CROWDFUNDING PHENOMENON What is crowdfunding? The principle of crowdfunding is not new. Before the arrival of the Internet, individuals have reached out to families, friends or acquaintances for financial assistance with a personal project or a small business venture. The technological advances behind the Internet and the rapid growth of social networks have propelled crowdfunding to an altogether new level. They have allowed it to operate on a far larger scale across geographical, economic and social boundaries, and helped unleash its potential as a market-based vehicle for income generation. While there are many definitions of crowdfunding, the general agreement is it is about funding a project or business venture through small contributions of money from a large number of individuals using an Internet and/or mobile web-based platform to facilitate the process. Crowdfunding typically involves (a) an intermediary who operates the web-based platform (crowdfunding platform operator), (b) the individual or entity who needs funding (issuer or project owner) and (c) the investors/funders who could range from the general public to professional investors and institutions. The general mechanics of how crowdfunding works are illustrated in Figure 1. Figure 1: Crowdfunding mechanics Project owner (Entrepreneur) CF Platform operator (SC registered for ECF, P2P) Investors/Funders (The Crowd) PITCH CAMPAIGN FUNDING Discloses detailed information about project/business, offering, team, purpose, plus: Business and financial plan/projections Business valuation and risks (ECF) Loan interest & repayment terms (P2P) Conducts due diligence and credit reference checks, screens & curates projects to: Agree on valuation (ECF) Assess & price risks (P2P) and... Holds in escrow funds from investors/funders Disburses them to project owner if campaign succeeds under agreed terms Returns them to investors/funders if campaign fails Invests/finances project in return for: Equity (shares) in company (ECF) Interest & repayment of principal (P2P) Token gift (Reward) 9

10 Several variations of crowdfunding have emerged over the years as the concept continues to evolve, but four main types dominate the market (Table 1). All operate via an online portal serving as the platform to publicise projects or business ventures seeking funds from crowd investors. In principle, crowdfunding allows ordinary people to participate in social or community projects they believe in or to finance small business ventures they deem promising. Table 1: Definition and characteristics of main crowdfunding modes 5 Donation Reward Equity P2P Description Funders offer financial support for a project or cause purely in the spirit of goodwill without any expectation of any return Funders provide funding in return for some form of rewards such as gifts, vouchers, services or the opportunity to try out a product prototype A token gift or pre-purchase of a product or service Capital for a business is raised by issuing equity (share of the business) to those who invest in the business A relatively large number of funders lend small portions of money to a business Return to funders/ investors A simple thanks Equity or share of business Interest at fixed rate and return of principal on agreed schedule Types and/or qualifications of project owner Best for Non-profit business, philanthropic cause Interesting goods or services to offer as perks Pre-sale items, projects involving a large crowd Must be a business Business must be generating regular cash flow More mature, established businesses with cash flows and collateral, seeking fast approval short term financing Non-profits, philanthropic projects Businesses seeking seed, early stage or growth financing Global and regional trends Crowdfunding s growth in less than a decade has been spectacular. Between 2009 and 2012, it grew at an average compound annual growth rate of 63% across the world s regions to acquire a global market size USD2.7 billion in By 2013, the market more than doubled to USD6.1 billion worldwide and continued accelerating to USD16.2 billion in 2014 and USD34.4 billion in (Figure 2). 73% of the estimated funds raised in 2015 were under P2P crowdfunding. 5 CrowdsUnite, What is crowdfunding?. Available at 6 Cision PR Newswire, Crowdfunding Market Grows 81% in 2012: Crowdfunding Platforms Raise USD2.7 Billion and Fund More Than One Million Campaigns, Finds Research Firm Massolution, 8 April Massolution. 2015CF Crowdfunding Industry Report (Los Angeles, 2016). 10

11 Figure 2: Global growth in crowdfunding Total Funding Volume USD2.7bn USD6.1bn USD16.2bn Total Funding Volume: 2015 USD34.44bn USD34.4bn Donation Reward Lending/P2P Equity Royalty Hybrid USD2.85bn USD2.68bn USD25.1bn USD2.56bn USD405m USD811m Source: Massolutions, 2015 While North America led the market share in 2014 with USD9.46 billion of funds raised, Asia grew at the fastest rate of 320% with a funding volume of USD3.4 billion, largely in China. In 2013, the World Bank had projected the global crowdfunding market to reach USD96 billion by 2025, with China accounting for more than 50% of the volume (USD50.06 billion) 8. A more recent report indicates China is already the largest market in the world, with an average annual growth rate of 328% from 2013 to The rest of the Asia Pacific region also grew at an impressive 206% during this period, generating USD1.12 billion in Information for Development Program (infodev)/the World Bank, Crowdfunding s Potential for the Developing World, Finance and Private Sector Development Department, Washington, D.C., Cambridge Judge Business School, Harnessing Potential: The Asia-Pacific Alternative Financing Benchmarking Report, Cambridge,

12 Figure 3: Market share and average growth rate (Asia Pacific excluding China) % % P2P ECF +285% % Reward Donation Note: +% refers to CAGR from Source: Cambridge Judge Business School, 2016 Globally, P2P crowdfunding experienced the fastest growth of 223% in 2014, followed by equity crowdfunding (ECF) at 182% 10. P2P dominated the market with a market share of 68%, and ECF with10%. Although donation and reward crowdfunding accounted for about 20%, this is likely to shrink in view of their much slower growth rate. A similar pattern is observed in Asia Pacific with P2P crowdfunding dominating the market from 2013 to 2015 (Figure 3) 11. The phenomenal growth of the crowdfunding market shows it has captured the imagination of investors and investees alike by filling a felt need for such innovative financing. These broad trends must, however, be read with a note of caution. The success of raising funds through crowdfunding is not guaranteed at the project level. Kickstarter, the largest crowdfunding platform for creative arts projects, had a success rate of only 31% in Marketwired, Crowdfunding Market Grows 167% in 2014: Crowdfunding Platforms Raise USD16.2 Billion, Finds Research Firm Massolution, News Room, 31 Mar Cambridge Judge Business School, Harnessing Potential: The Asia-Pacific Alternative Financing Benchmarking Report (Cambridge, 2016). 12 Catherine Clifford, Less than a Third of Crowdfunding Campaigns Reach Their Goals, Entrepreneur. 18 Jan

13 Associated risks Crowdfunding is not free of risks, particularly for investors (Table 2). Risks to funders/investors can originate from the project/business owner and/or the crowdfunding platform operator. Funders/Investors shoulder significantly greater risks than project owners. Since this imbalance can undermine the sustainability of crowdfunding, there has been a growing trend towards regulatory measures of varying scope to safeguard the interests of funders/investors. Their general thrust is to place the onus on project owners to ensure the deals and terms of their campaigns are sufficiently reassuring for funders/investors to justify the risks associated with financing. More important, project owners are expected to deliver their end of the deal. Table 2: Risks and pitfalls of crowdfunding 13 Funder/Investor Risk of failure or closure of the business or platform operator Illiquidity in the case of equity crowdfunding (inability to sell off one s equity in the business) Project owner Lack of intellectual property protection for a new idea or service Risk of fraud committed by platform operator or funder/investor Risk of fraud committed by the business or platform operator Non-fulfilment of project by project owner Failure and fraud risks have been key challenges for P2P crowdfunding in China, where financing volumes both business and personal surged nearly ten-fold in just three years from 2013 to The number of P2P platforms with serious problems also rose during this period. By 2015, 1,263 platforms had problems ranging from operators absconding with investor money to investors having difficulty in withdrawing their funds, and operators shutting down due to mismanagement and fraudulent activities 14. The closure of 286 P2P platforms in 2014, including the largest at the time, Ezubao, in 2015 due to possible illegal activities finally led the Chinese government to introduce new guidelines on P2P crowdfunding 15. Although P2P crowdfunding in Malaysia provides business financing alone, it has followed suit in introducing its guidelines for market-based financing to prevent fraud associated with it. 13 E Kirby and S Worner, Crowd-funding: An Infant Industry Growing Fast, Staff Working Paper of the IOSCO Research Department, SWP3/2014 (Madrid, 2014). 14 Liu Mingkang, Online Lending in China: Some Perspectives on Its Conduct, Safety and Sustainable Development in The Business of Ethics, Raymond Madden, ed. (Kuala Lumpur, IBFIM, 2016). 15 Wong Sue-Lin, China introduces new guidelines for P2P lending, cracks down on online financing in bid to protect investors, Deal Street Asia, 29 Dec

14 CROWDFUNDING POTENTIAL IN MALAYSIA The market for crowdfunding Crowdfunding in Malaysia is targeted mainly at micro, small and medium enterprises (SMEs), which are often the test bed for new ideas and innovations, and the market entry points for aspiring entrepreneurs. SMEs are the largest employers in Malaysia and the fastest growing segment of the national economy. The government views their accelerated development as a game changer under its National Transformation Programme 16. According to the Economic Census 2016, there were 907,065 SMEs in the country in 2016, representing 98.5% of all business establishments. Micro and small enterprises represented 76% and 21%, respectively. 89% of the SMEs were in the services sector. In 2016, SMEs contributed 36.6% of the national GDP and 65.3% of the employment (6.6 million workers) 17. From 2011 to 2015, they grew at a consistently faster rate of 6.7% than the country s overall economic growth rate of 5.3%. The SME Masterplan aims to raise the contribution of SMEs to 41% of national GDP, 62% of national employment and 25% of national exports by The ambitious scope of these targets indicates the scale of the potential for market-based crowdfunding in Malaysia. Given its nature as a broad spectrum financing option, the actual market potential would be larger if financing needs in other sectors of the economy and those of non-market based initiatives are taken into account. 16 National SME Development Council, SME Masterplan (Kuala Lumpur, SME Corporation Malaysia, 2012). 17 SME Corporation Malaysia. SME Annual Report (Kuala Lumpur, 2016); Department of Statistics Malaysia, Economic Census 2016: Profile of Small and Medium Enterprise (Kuala Lumpur, 2016). 18 National SME Development Council, SME Masterplan (Kuala Lumpur, SME Corporation Malaysia, 2012). 14

15 Financing opportunities Some 80-90% of the financing for SMEs in Malaysia comes from the banking system, with SME loans amounting to 41% of all bank business lending in While loan approval rates are high, the volume of rejections is a matter of concern against a challenging business environment. Nearly 45% of SMEs are experiencing cash flow or liquidity problems due to rising operating costs in recent years. Much of their new growth depends on technologyintensive ventures with a high reliance on electronic commerce and digitalisation. Bank lending for such emerging and untested areas of business is constrained by a lack of expertise and aversion to perceived high risk loans. According to BNM 20, the top three reasons restraining bank financing for innovative and growth areas are the lack of: (a) understanding of technology and proper ways to manage risks, (b) information on innovative and new growth products and services, and (c) practical and technical training. SME loan applications are often turned down by banks on the grounds of inexperience in new or unstable industry sectors, businesses being relatively young, insufficient management experience, and insufficient sales and cash flow. BNM is working closely with various agencies, such as the SC and SME Corporation Malaysia to develop alternative financing for SMEs in these new growth areas. Based on loan rejections by banks, BNM estimated the SME financing gap at RM25.1 billion for Of this, it felt RM21.8 billion could be met by alternative financing, including market-based crowdfunding. Drawing from developed country average ratios for leasing and factoring to GDP, BNM estimated a further RM48 billion could be raised for SMEs, translating into a total potential of RM69.8 billion for alternative financing. The Governor of BNM, in his keynote address at the inaugural Future Finance Conference acknowledged the importance of facilitating the development of alternative financing options to cater for the increasing and expanding needs of the economy of the future 21. Crowdfunding, as a significant component of this landscape, is likely to enjoy encouraging growths as elaborated in the next section. 19 National SME Development Council, SME Annual Report (Kuala Lumpur, SME Corporation Malaysia, 2016). 20 Bank Negara Malaysia, The Financial Stability and Payment Systems Report 2016 (Kuala Lumpur, 2016). 21 Tan Sri Muhammad bin Ibrahim, Governor of Bank Negara Malaysia, Keynote Address at BNM Inaugural Future Finance Conference, Kuala Lumpur, 23 September

16 MALAYSIAN CROWDFUNDING LANDSCAPE This section presents the key findings of the AIF research study on crowdfunding developments in the country to date and the perceptions of key players, in particular the sentiments of the crowd. Phase 1 of the study consisted of a quantitative survey in August 2015 involving interviews with 1,332 members of the public aged 25 years or older and 300 entrepreneurs based in the Klang Valley. Phase 2 comprised an analysis of updated data from published sources and 18 in-depth interviews with key industry stakeholders crowdfunding platform operators, venture capitalists, angel investors, government agencies, public financial institutions and entrepreneurs during April-June Phase 1 represents a baseline assessment of the initial state of play, while Phase 2 is an assessment of early progress achieved. Origins and evolution Malaysians have been involved in community-based crowdfunding projects since the early 1980s. Contemporary crowdfunding using digital technology, however, only came to Malaysia in For the first three years, it was limited to reward-based crowdfunding focusing on community, social causes and the arts. Commercial investment-based crowdfunding also known as crowdfund investing (CFI) covering ECF and P2P was introduced to the Malaysian scene in 2015 when the SC announced a regulatory framework for ECF, followed by a second one for P2P in 2016 (Figure 7). Six operators were registered under each and given nine Figure 7: Malaysian crowdfunding milestones Arrival of digital crowdfunding Reward-based, unregulated Feb: SC regulatory guidelines on ECF Jun: Registered 6 ECF operators May: SC regulatory guidelines on P2P Nov: Registered 6 P2P operators Jun: 6 ECF, 2 P2P & 2 Reward platforms operational 16

17 months to launch their platforms. With this development, Malaysia became the first country in ASEAN to formally regulate CFI. Only ECF and P2P crowdfunding are regulated since they involve the sale of equity and debt to investors. The approved crowdfunding operators (Table 3) were selected, among other considerations, for their capacity to offer differentiated services, track record of success elsewhere and other credentials, such as foreign investor bases, tie-ups with angel investor networks, local presence within the startups ecosystem, venture capital linkages and ancillary digital media competencies. Table 3: Registered platform operators Equity crowdfunding (registered June 2015) P2P crowdfunding (registered November 2016) Ata Plus AlixCo powered by FundedByMe Crowdo FinPal CrowdPlus.Asia Fundaztic Eureeca Funding Societies Malaysia FundedByMe Malaysia Nusa Kapital pitchin QuicKash 17

18 According to the SC, ECF is targeted at SMEs seeking seed and early-stage financing, while P2P is aimed at helping SMEs raise working or growth capital. Both are complementary alternative financing avenues for SMEs to escape the valley of death 22 (Figure 8), which occurs during the early stages of the business development journey when financing options are scarce, and there is a clash of culture and operation between start-ups/new businesses and conventional financing channels. Figure 8: Providers of capital along the Valley of Death Net Negative Cash Flow Net Positive Cash Flow You Friends, Family & other Fools Idea and people focused Should be investment profit focused Valley of Death Angel Investors Venture Capital start of growth Investment profit focused Public highest growth slowing growth Shareholder focused Startup micro company, highest risk for failure Source: Sameer Massis, 2016 Growth potential: SME company; high risk Mature stage, large company; low risk Awareness of crowdfunding In 2015, when investment-based crowdfunding had just arrived on the national scene, only one in ten small business owners and one in five members of the public knew about it (Figure 9). Among the general public, the more educated those with a bachelor s degree or higher were more aware. Age was not a significant driver of awareness for the general public, but it had an influence on business owners. New businesses less than five years old and younger business owners aged years old were more familiar with crowdfunding (16%). This was encouraging as the SME surveys show young businesses are the leaders of growth and new jobs creation. A related finding was that formalised SMEs, registered as partnerships or private limited companies, were more aware of crowdfunding (18%) compared to less formal sole proprietorships. Again, this was a positive finding since it coincided with the SME Masterplan s goal of higher business formalisation for integration into the national supply chain. 22 Sameer Massis, Capital Providers and the Valley of Death, SME Toolkit Jordan,

19 Figure 9: Awareness of crowdfunding in 2015 Degree holder/higher 26% 21% years old: 16% Partnership/PLC: 18% 11% Public Business owners Crowdfunding platform operators and small business owners consulted in 2017 feel the picture has improved over the past two years, due mainly to the SC s regulatory guidelines, its appointment of platform operators and the showcasing of several successful ECF campaigns by mainstream media. Although the SC s attention has been on ECF and P2P, reward-based crowdfunding has also experienced a surge in interest post These findings are supported by the rising number of Google searches on crowdfunding in Malaysia since July 2012 (Figure 10). Aside from the general uptrend in searches, spikes in interest appear to coincide with key ECF and P2P events. Figure 10: Google searches on crowdfunding in Malaysia Jul Dec Jun Dec 2016 Source: Google Trends 19

20 From 2012 until about 2015, we hardly got any requests it was very quiet, but from mid last year, suddenly we get so many enquiries, requests I think it is the SC announcement it (crowdfunding) became popular because of that we now get requests a month, before this we get only 3 a month CEO, Reward platform operator Understanding of crowdfunding mechanics is, however, poor among both segments of the community. An overwhelming majority indicated little to no knowledge of how it works (Figure 11) in The two active operators at the time were for reward-based crowdfunding and at an early stage in developing their outreach programmes. Latest feedback from platform operators indicates knowledge levels are improving but may not have strengthened substantially. Many operators still encounter doubts about crowdfunding s legality as a financing or investment option. Figure 11: Understanding of crowdfunding mechanics in 2015 High Low No idea 1% 12% 2% 20% 86% 78% Public Business owners Notwithstanding the above, business owners do have a broad sense of the general principles of crowdfunding and express positive sentiments about its usefulness: 69% believe it can be used to expand their business 65% believe they need to have IT skills for crowdfunding. 20

21 Those aware of how crowdfunding works are better able to appreciate its reliability and speed in raising funds (Figure 12). This is echoed by entrepreneurs who have raised funds via ECF, and have had experience approaching other channels for financing. Figure 12: Perceptions of crowdfunding in 2015 It provides a reliable and quick source for raising funds 76% 58% Not aware of crowdfunding Aware of crowdfunding ECF is very valuable to start-ups the terms are all very transparent it helps start-ups to close the deal unlike with corporate investors who can drag out the process the longer they drag it out, the worse it is for the start-up time is a friend of the investor Start-up founder, successfully raised funds via ECF 21

22 In 2015, only 9% of the business owners interviewed had sought financing via crowdfunding. Their expectations of the amount of funds that could be raised varied widely (Figure 13). The average expectation was about RM46,500, with most hoping to raise only RM10,000-25,000. These are low numbers for ECF and P2P, and more typical of reward-based crowdfunding, which was the only type available then. Figure 13: Perceived fund-raising potential of crowdfunding in 2015 Less than RM10,000 10% Average: RM46,500 RM10,000-25,000 39% RM26,000-50,000 10% RM50, ,000 29% More than RM100,000 12% Public investing behaviour and expectations Among the public, only one in ten (11%) had invested in a crowdfunding project in With reward-based crowdfunding the only model in place, their motivations were mainly philanthropic: 77% wanted to make a meaningful impact with their contribution 65% derived greater satisfaction from contributing to community-based projects. Considering crowdfunding investment as another asset class within one s investment portfolio a core objective of the SC in introducing market-based financing was almost non-existent as a motivator in The majority of the public (70%) was not willing to invest more than RM100 per project, a reasonable amount for reward and P2P crowdfunding but not for ECF (Figure 14). Figure 14: Willingness to invest in crowdfunding in 2015 Average: RM166 Less than RM50 26% RM % RM % More than RM500 13% 22

23 While public perceptions have sharpened over the past two years, they have yet to reach the desired level of maturity. For example, due to poor knowledge of ECF, 6 out of 10 (63%) prefer dividends to capital gains as a return on investment. This is a recurring issue for business owners, and it is not limited to retail investors. I had an investor who after investing asked me about dividends I had to explain to him there is no dividend, he gets (equity) share and this is a seasoned investor. But he is ok after I explained to him they don t read the info on the (operator s) website, they don t have the time they don t bother sometimes we have to keep educating them Start-up founder, successfully raised funds via ECF Promotional efforts Crowdfunding promotion activities in Malaysia are largely the responsibility of platform operators. Education is an ongoing priority for all operators and the key focus of their current activities. All platform websites feature frequently asked questions (FAQs) for potential issuers (businesses) and investors. Operators conduct face-to-face awareness building via roadshows and events, both on their own and jointly with business partners and government agencies, such as the Malaysian Digital Economy Corporation (MDEC) and the Cradle Fund. While these measures are essential, platform operators tend to specialise in one or two types of crowdfunding. Hence, their independent outreach efforts might be insufficient to develop a holistic understanding of crowdfunding among those new to the concept. A more comprehensive approach providing an overview of the different types of crowdfunding available in Malaysia, their core differences, and their implications for investors and business owners is currently missing. we have a press release for our successful deals on The Edge, Focus, TV channels mainstream media still the best to reach the public, to spread the news on crowdfunding ECF platform operator 23

24 Several operators believe offering vernacular versions of their platform websites can improve knowledge levels. Some have also made an effort to have bilingual staff converse in the language preferred by the audience during roadshows and events, with Mandarin a priority due to greater demand and current audience profile. Affiliated business partners conduct their own roadshows and events to educate their members and the general business and investor communities. For instance, the Malaysian Business Angel Network (MBAN), highlights ECF and P2P crowdfunding as a viable mainstream investment option. It organises a monthly forum for entrepreneurs whose projects/ campaigns are about to go live on ECF platforms to pitch to their members and non-members. These pitching sessions offer opportunities for project owners to book investments even before their campaigns go live. To facilitate greater synergy between such initiatives, the SC has asked the 12 licensed CFP operators to set up an association. This would help the SC to officially collaborate with the operators as a collective entity on roadshows and various education-related initiatives. The mainstream media have been a critical factor in raising awareness levels by giving coverage to the ECF and P2P regulatory frameworks, licensed operators and success stories of crowdfunding. Media coverage of success stories has been especially useful to demonstrate the viability and benefits of crowdfunding, and its relevance to the local market. At the current stage of development, the benefits are associated mostly with business or project owners. As businesses/projects mature to the stage of payback, the media should be in a position to highlight the benefits to investors. Achievements so far Although web-based crowdfunding first appeared in Malaysia in 2012, it started gaining traction only after the introduction of ECF into the market in Almost all stakeholders consulted under Phase 2 of the study acknowledge it has been gaining momentum over the past year and a half, and has had a positive impact. 24

25 Business owners value crowdfunding not only for meeting their financing needs but also for: speed and transparency of the process in raising funds unlike other channels ( it helps to close the deal ) access to sophisticated investors who can add value to the business through advice or tangible assistance in the form of networks/contacts or sources of business ( my investors will make sure to use my platform ) expanded network of advocates and supporters for the business ( it triggers the right behaviour as a co-owner of the company, the I care attitude sets in there is greater commitment to the business they only want what is good for the business ) The investor community has clearly taken note of the positives of crowdfunding, especially ECF. Sophisticated investors feel it offers an avenue to diversify their investment portfolios through a new asset class. A major attraction for them is crowdfunding projects are curated by platform operators who perform the due diligence checks that investors may have to do on their own for other types of investment. crowdfunding helps angels invest, diversify portfolio new angels prefer to start with ECF projects the deals are curated, due diligence done by (platform) operator Sophisticated investor Venture capitalists take a longer term view of crowdfunding. They deal with investments of a higher value than the RM3 million ceiling on ECF projects under the SC regulatory framework. However, they are on the lookout for businesses with unique ideas and reputable business teams capable of advancing to the next stage of growth. They feel ECF helps build a pipeline of viable businesses for future investment during their growth/expansion stage. we of course want these companies to succeed we want them to get funded it is in our interest these companies grow because they will be future opportunities for VCs to invest in Venture capitalist 25

26 Although appreciation of crowdfunding among retail investors is more tentative, they nevertheless acknowledge the following benefits: bragging rights to claim ownership, however small, of an emerging business or company ( for those who have dreams of becoming an entrepreneur, they can now say they own a start-up or new company ) an opportunity to invest in a start-up or fast-growing business which was only accessible to high net worth individuals a potentially higher yield compared to other investment options ( they are definitely drawn to the higher yield offered by P2P ) For the SC, the overarching purpose of crowdfunding is to provide SMEs with an alternative channel of financing to bridge their existing funding gap. Progress so far is reflected by the number of projects successfully funded via ECF and P2P and corresponding funding volumes (Table 4). Additionally, investment-based crowdfunding appears to have helped drive certain desired investor dynamics: encouraging the younger generation to participate in the capital market to create a pool of new and younger investors via ECF recapturing older investors who may have lapsed from investing in the capital market via P2P attracting inflow of foreign investors and funds (FundedByMe, an approved ECF operator, recorded the highest number of foreign investors for one of its projects owing to its Swedish association). Table 4: Key crowdfunding achievements (as of June ) Reward ECF P2P Commencement year Number of operators Total estimated funds raised (RM) million 15.8 million 2.5 million Number of projects funded Per project value (RM) 5, , , Statistics for ECF and P2P are aggregated based on information given on each operator s website. Information for Reward/Donation crowdfunding is based on earlier estimates gathered. 24 As of September 2017, total funds raised via ECF was RM18.3 million, and RM8.7 million for P2P. 25 Number of projects funded refers to successfully funded projects for ECF, P2P but includes partially funded ones for reward & donation crowdfunding. 26

27 Reward crowdfunding Reward crowdfunding had a sluggish start when it was introduced in The number of projects has picked up following the SC s announcement to introduce ECF (Figure 15). Of the 267 projects funded via the two platform operators, 60% are community-based projects with a philanthropic slant. Others relate to technology and the arts (Figure 16). Figure 15: Number of reward projects Figure 16: Breakdown of reward projects Community 18% Technology Arts Publishing Games 60% Photography F&B 4% 2% 1% 1% 14% While the average number of supporters per project is about 30, the range is very wide, from one to 345. Operators believe this depends on a project owner s social media network and ability to engage and appeal to that network. For most projects, the crowd, in essence, is the owner s network of contacts. Demographic profiling of supporters is limited since they are only required to provide basic information name, address, contact number when registering on the platform to support a project. 26 Based on statistics given by one operator 27

28 A wide variation is also observed in the amount of funds raised. The lowest amount is RM6 for a technology project and the highest so far is about RM110,000 for a community project. There are differences in practice between the operators on the minimum value of support. For one, it is standardised at RM10, while for another, it is determined on a per project basis. The minimum amount per project is much lower for reward crowdfunding, which also explains the lower aggregate funds raised under this mode. The average value of reward projects is modest at RM5,800, but is typical of this type of crowdfunding. One of its key advantages is a flexible arrangement that allows any amount of funds collected to be disbursed to the project owner even if it missed the funding target. This differs from the all or nothing arrangement for ECF which considers a project successful only if it meets 100% of its funding target. P2P has a lower threshold of 80%. In both cases, all funds collected are returned to the investors if these thresholds are not reached. The number of reward projects can, therefore, be quite high even if the transaction volumes are small. Figure 17: Breakdown of ECF projects by sector Number of projects E-commerce - 1 Services - 7 Finance - 1 Education - 5 Retail - 1 F&B - 2 Real estate digitally enabled Industrial - 2 HR - 2 Social projects Equity crowdfunding (ECF) The 24 successful ECF projects since the beginning of 2016 cover a diverse range of industries and are not limited to ICT/technology (Figure 17). However, 15 of the projects use a digitally enabled interface software platform, mobile application as a part of their business delivery frameworks. The more common sectors using ECF at this stage are businesses associated with services and education. Services include despatch/delivery, travel booking and planning, assistance with personal errands or tasks, event venue booking and live auction. 28

29 The average number of investors in successfully funded ECF projects is about 26. To date, the largest crowd of investors recorded for a project is 131. Only two projects crossed the 50-shareholder threshold for a private limited company which required the owners to adopt a nominee structure. The crowd size for an ECF project is, therefore, still quite small. This can be attributed to the limited investor pool and low public awareness at this early stage. Feedback from platform operators indicates most projects attract a mix of sophisticated and retail investors. There is a general consensus among platform operators that retail investors tend to be mostly younger and well-educated people in their thirties. This corresponds to SC statistics showing one-third of investors are below 35 years of age. As noted in Table 4, the average value of funds raised per ECF project is slightly below RM660,000. The highest amount raised for a project was RM2,636,900, interestingly, for a brick and mortar business. The smallest project was worth RM130,118 with only two investors. Most projects stipulate a minimum investment amount determined on the basis of the agreed valuation of the business and the proportion of equity to be offered for the financing exercise. Although this is the prevalent practice with most operators and project owners, a minority of stakeholders feels retail investors should be allowed to invest any amount they are comfortable with since this is the underlying spirit of crowdfunding. The majority, however, believes a minimum amount will attract genuine committed investors with a stronger sense of ownership to serve as staunch advocates of the business and its brand. Peer-to-peer crowdfunding (P2P) The eight businesses that successfully raised funds via P2P crowdfunding are more established traditional brick and mortar set-ups. Most operate in the wholesale/retail sector. P2P projects show a higher average number of investors than ECF, partly due to the lower minimum investment threshold of only RM100 per project. Four of the successful P2P projects attracted more than 50 investors, and no project had less than 15 investors. As observed with ECF, the low investor base per project is due to the limited investor pool at present. Demographically, retail P2P investors lean towards working professionals in the older age group of years. Four of the projects raised more than RM150,000, delivering an average value raised per project of about RM300,000. The loan tenure for most projects is 7-12 months, with 18 months the longest. These numbers suggest Malaysian SMEs seeking P2P are likely to be established businesses in need of fast, short-term financing of relatively modest amounts for working capital and liquidity. P2P can, therefore, complement financing from the banking system involving higher value loans for longer tenures, with corresponding longer processing times. 29