KUCHING: There have been many significant changes to Malaysia’s financial landscape but few have had as much impact on any market as the advances in financial technology.
Technology has helped to “upgrade” the modes of business and transactions in today’s world, as the emergence of disruptive technologies have literally placed the pulse of financial innovation at your fingertips – pushing investors to the forefront of changing market dynamics.
In this respect, technological growth should be geared towards aiding businesses – particularly smaller ones – to raise capital and better connect to investors as well as clients.
It is imperative for technology to play its role in providing alternative market-based platforms to lower the barriers-to-entry and create opportunities for new and exciting ventures and investments.
One such venture is crowdfunding, a trend growing worldwide since 2012 as the new culture of pooling money for capital, be it for a one-off project or to start-up a long-term plan.
Crowdfunding is said to have “taken the financing world by storm”.
Many are decidedly aware of this trend at this point, first made popular in the US.
Many projects today came to birth thanks to crowdfunding.
In Malaysia, this concept came to our shores in the forms of PitchIN.my and Mystartr.com, our local versions of crowdfunding platform, launched back in 2012.
Slowly gaining momentum
Datuk Ranjit Ajit Singh, chairman of Securities Commission Malaysia (SC) revealed that crowdfunding has gained strong momentum in recent years, fuelling innovation and collaboration in research, business, and society alike.
“It is not entirely a new phenomenon as the power of crowdfunding, as many of you are aware, was first demonstrated by the ability of the US to raise funds to build the base of the Statue of Liberty,” he said in his speech launching the SC Synergy and Crowdfunding Forum last week.
“Malaysia too has a history in this. In 1982, a local daily launched the People’s Live Telecast Fund (PLTF) to collect public contributions to enable us to enjoy a national past time – which is to watch live football matches.
“The response was overwhelming and it was certainly a proud moment for the nation to sit down and watch together the broadcasted live football World Cup matches in 1982.” Crowdfunding, he explained, was about people pooling their time, cooperation and most importantly money to support and get initiatives off the ground.
“The concept and model is simple enough, relying on small-change contributions from the masses to become the genesis of dreams and great ideas,” he added.
“The ‘power of the crowd’ influences what is produced and ultimately what is available to buy.”
As has been observed, crowdfunding can be a powerful tool in community development and energising the local economy.
As such, it is common to find most crowdfunding projects being community based and owned, decisions as well as any multiplier effects are broadly distributed and can positively impact deserving individuals and society.
The arrival of social media and increased connectivity has transformed the medium used for crowdfunding; making it more appealing to societies today.
Ranjit affirmed that the continuous rise of social technologies, especially among the youth and the ‘net’ generation, and its increasing use to consolidate support of common interests and advocacy suggest that crowdfunding will grow from strength to strength.
“In fact, the numbers speak for themselves,” he said.
“With over 600 crowdfunding platforms worldwide and total funds raised reaching US$5 billion at the end of 2013, the total market potential is estimated to grow to US$90 to US$96 billion by 2025 with China and East Asia leading the way; accounting for 57 per cent.”
Serving the needs of the economy
The Malaysian capital market continues to serve the greater needs of the economy by providing different types of funding mechanisms for large as well as small-and-medium sized enterprises (SMEs).
Globally SMEs, entrepreneurs, innovators and startups face many challenges in their quest to scale their business models and access mainstream financial services.
Limited access to credit and financial assistance have seen entrepreneurs rush to raise funds; at times sustaining ventures by tapping on credit cards, personal savings, home mortgages, as well as relying on the support of relatives and friends.
High-growth ventures typically seek support in the form of equity and expertise from angels or venture capitalists.
However, these customary sources of early funding may not always be ideal.
As such a more sustainable funding mode to bridge the capital gap is needed.
Equity crowdfunding lets investors “get in on the deal,” allowing everyone who understands the risks to have the opportunity to invest in early stage companies.
“It is a rapidly evolving financing channel that raises money through the internet; allowing for the sale of small stakes in ventures to the man-in-the-street,” SC’s Ranjit noted.
“Whilst it will remain a relatively small part of the wider equity and debt capital markets, it is still, in our view, an important channel for capital formation that will have a profound impact on the financial landscape.” The SC believes that leveraging on the power of crowdfunding will assist in the democratisation of wealth, prosperity and ideas across the entire economy; thereby strengthening the inclusiveness of finance.
Such emerging innovative products and services that respond to immediate and long-term financial needs have the capability of taking Wall Street to Web Street.
“A critical success factor will be investor confidence,” Ranjit affirmed.
“Therefore, having a strong investor education outreach programme, investors’ alerts, interactive tools and educational content to help investors make informed financial decisions will be a key component moving forward.
“We have continuously emphasised this aspect of investor awareness and in fact recently successfully concluded the inaugural InvestSmart Fest together with 37 of our industry players at the One Utama mall to similarly raise public awareness on investing in the capital market.”
Providing the necessary framework
As part of this innovative ecosystem, Ranjit said the SC will provide a regulatory framework that ensures an orderly market with adequate oversight to facilitate small businesses to raise equity capital.
Regulation for equity crowdfunding needs to be carefully and well thought-out as the main objective is to harness capital from retail investors.
In this regard, the SC released the Malaysia Equity Crowdfunding Regulatory Framework Consultation Paper for public comments with the intention to provide a regulatory safe harbour for both capital providers and issuers.
Meanwhile, the SC last week organised the first equity crowdfunding forum in Malaysia, bringing together over 600 entrepreneurs and investors to create public awareness on the potential of equity crowdfunding as an alternative channel to raise capital.
The Synergy and Crowdfunding Forum, co-organised by the SC with the Malaysian Business Angel Network (MBAN), featured notable thought leaders in crowdfunding, including Jason Best, who was instrumental in co-authoring the crowdfund investing framework to legalise equity crowdfunding in the US, as well as regional business leaders in the start-up arena, alongside their local counterparts.
How to crowdfund?
Crowdfunding is the act of funding a project or venture by raising monetary contributions from a large number of people, typically through the Internet.
The crowdfunding model is fuelled by three parties: the project initiator who proposes the idea and/or project to be funded; individuals or groups who support the idea; and a moderating organisation (the ‘platform’) that brings the parties together to launch the idea.
Types of crowdfunding
According to a report by the Crowdfunding Centre, there exists two main types of crowdfunding:
Reward-based crowdfunding: whereby entrepreneurs pre-sell a product or service to launch a business concept without incurring debt or sacrificing equity/shares.
Equity-based crowdfunding: the backer receives unlisted shares of a company, usually in its early stages, in exchange for the money pledged. The company’s success is determined by how successfully it can demonstrate its viability.
Public response on proposed equity crowdfunding framework
On Thursday, the SC released its public response on the proposed equity crowdfunding (ECF) framework.
A public consultation paper on ECF was issued by the SC on 21 August, 2014.
The SC has since received comments and feedback from, amongst others, potential crowdfunding operators, entrepreneurs, venture capital firms, financial institutions and the general public.
Having reviewed the comments and feedback received, revisions to the proposed framework have been made.
In order to create awareness on this innovative market-based financing, the SC recently organised the SC Synergy & Crowdfunding Forum which attracted over 600 participants.
Thought leaders in the global crowdfunding industry, including Jason Best, co-author of the US equity crowdfunding regulatory framework, shared with the audience insights on the development of this alternative funding channel.
The salient features of the framework include:
• All locally incorporated private companies (other than exempt private companies) are eligible to participate on the ECF by issuing ordinary and preference shares to the public.
• An issuer will be allowed to raise up to a RM3 million for a 12 month period and a total maximum of RM5 million through the platform.
• Microfunds that are registered with the SC as venture capital firms and have an identified business plan are also allowed to participate on the ECF platform. No fundraising limit is imposed on microfunds but they are only permitted to target sophisticated investors.
• Retail, sophisticated and angel investors are allowed to invest in companies hosted on the ECF platform subject to the investment limit specified by the SC.
• Issuers are required to file a standardised disclosure document with the ECF operator providing amongst others, key information on the issuer, the offering and the amount to be raised.
• Investors will be given a cooling off period of 6 days within which they may withdraw their investment. • If there is a material adverse change effecting the project or the issuer, investors are also given a period of 14 days to opt-out of the investment.
• Funds invested will be kept by the ECF operator in a trust account and will only be released to the issuer after specified conditions are met.
US real estate crowdfunding firm seeks lending revolution
The head of consumer-product marketing at Google Inc and a former general counsel for a travel website are seeking to transform the mortgage-finance industry. Michael Burry, the hedge-fund manager who foresaw the housing market’s nosedive, is betting they can.
Brett Crosby left his post at Google to join Brew Johnson, once a lawyer for a company acquired by TripAdvisor Inc, to start PeerStreet Inc, a Los Angeles-based online platform for financing real estate through a form of crowdfunding. They’re partnering with small, non-bank lenders whose short-term commercial-property loans they can fund using a throng of individual investors.
“These guys are really out to solve a market inefficiency,” Burry, an early investor in PeerStreet and a subject of Michael Lewis’s 2010 book “The Big Short,” said in a telephone interview. “A number of large markets are not adequately being served by the financial sector, so it really is time for new thinking.”
Crosby and Johnson, who met at the University of Southern California’s Sigma Alpha Epsilon fraternity chapter, aspire to create the go-to website for real estate crowdfunding, a market already teeming with companies that raise large amounts of money through small contributions for US property investments. PeerStreet also is part of a wave of businesses seeking to profit by providing alternative financing at a time when banks are reluctant to lend.
The company is focused on raising money for debt, rather than other types of crowdfunding that buy physical properties. PeerStreet is partnering with existing originators, such as Los Angeles-based Thorofare Capital Inc, which makes short-term loans of US$2 million to US$25 million each.
In most cases, the originators will hold a portion of the debt on their balance sheets, giving them an incentive to issue high-quality loans and preventing crowd investors from assuming all the risk, Crosby said.
“The goal is to get loans in front of people that are very easy to understand,” Crosby said. “We don’t want many variables. We want people to understand the terms, loan-to-value ratio and interest rate.”
Crowdfunding has been gaining steam since April 2012, when the Jumpstart Our Business Startups Act, or JOBS Act, went into effect.
When final rules related to the law are enacted, restrictions will be eased on investments in closely held companies, including those set up to own commercial property, by people making less than US$200,000 a year and with a net worth of less than US$1 million. Firms can now market only to people who exceed those levels, known as accredited investors.
Real estate crowdfunding companies, which completed their first deals last year, have raised more than US$110 million, according to Nav Athwal, co-founder and chief executive officer of San Francisco-based crowdfunding company RealtyShares Inc.
Crosby and Johnson said their experience leading the growth of technology companies will help them quickly expand their fledgling company.
Crosby, 41, co-founded Urchin Software Corp, a Web-analytics service purchased by Google in 2005. From his office at Mountain View, California-based Google, Crosby helped start the company’s mobile-advertising business and the Google+ social network. Until last week, he ran marketing for the Chrome browser, Gmail, word processor Docs and the Drive cloud storage service.
Johnson, 39, is an attorney with a background in real estate and technology. He was general counsel for the website VirtualTourist and oversaw its sale to TripAdvisor in 2008.
He said he wants to use PeerStreet to eliminate unnecessary parts of the lending chain and create a more transparent and inclusive platform for anyone who wants to put money into real estate, including residential properties bought by investors.
“Real estate is like a dinosaur,” Johnson said in a telephone interview. “It’s like the last financial market to be really transformed by technology.”
For loan originators such as Thorofare, PeerStreet offers a secondary market that helps fill the void of securitisation, which for private lenders, or non-traditional banks, dried up with the bursting of the housing bubble.
“It’s like a more efficient alternative mortgage-backed security,” Johnson said.
The businesses may provide needed liquidity to private lenders just as banks expanded their loans with the help of US-owned Ginnie Mae, which guaranteed the first mortgage-backed security in 1970 and now backs US$1.5 trillion of debt. Crowdfunding has the potential to disrupt the mortgage market, according to Burry.
He’s known for predicting disruption. Burry, at his Scion Capital LLC hedge fund, bet against bonds backed by the riskiest home loans, and investors in his hedge fund walked away from the housing crash on top, having more than quintupled their money from 2000 to 2008, according to “The Big Short.”
While crowdfunding is a relatively new method of investing in real estate, PeerStreet is entering an already crowded field, with RealtyShares, Fundrise LLC and dozens of similar companies financing deals. The firm also has to wait before it can solicit money from non-accredited investors.
Property investors can’t yet take advantage of the JOBS Act, which changed parts of the Securities Act of 1933, because proposed investor-safeguard rules are still being worked on by the Securities and Exchange Commission. — Bloomberg