Crowdfunding - Some thoughts

Crowdfunding has morphed into many forms. Many crowdfunding initiatives have charitable or socio-political objectives. Such types of crowdfunding are not the focus here. It is the "investment-based crowdfunding" exercises that I wish to examine. 

Malaysia is one of the jurisdictions that has established investment guidelines on crowdfunding. As such, the current swirls of discussion on the matter of crowdfunding is highly relevant. 

On 21.12.2015 the International Organization of Securities Commissions (IOSCO) published a survey update on crowdfunding some key observations that I set out further down in this post. Disclosure-Based Regulations (DBR) versus Merit-Based Regulations (MBR). 

We have always maintained that Malaysia still needs a large degree of Merit-Based Regulations (MBR) largely due to the rustic mindset of many investors. The retail investor is still indolent and very susceptible to market noise. 

That is why Malaysia's regulators need to maintain guidelines and regulations that require regulatory scrutiny and some degree of regulatory prescription. 

HKex has an excellent paper that critically examines DBR versus MBR and there is, therefore, no need for me to delve too much into it. Read the paper here if you are interested to understand these policy principles in greater detail. 

In the past decade we have witnessed the Securities Commission (SC) make attempts to institute the Disclosure-Based Regime (DBR). Officially, the SC has shifted from the MBR to the DBR as stated in a guidance note here. 

But, with everything said and done, we have IOSCO reminding regulators and investors alike that while DBR still holds as the prevailing principle, I would submit that there is clearly a need for some degree of MBR-type prescription especially when the IOSCO has flagged the ever-present issue of "information asymmetry" which may be loosely defined as- 

A situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well. Sourced here. 

 IOSCO's timely survey findings on Crowdfunding 

Here are excerpts of what IOSCO's report says-The goal (of the report) is to achieve a balance between promoting crowdfunding and ensuring investor protection and market integrity. Some of the regulatory measures described in the Crowdfunding Report include- 

The goal (of the report) is to achieve a balance between promoting crowdfunding and ensuring investor protection and market integrity. Some of the regulatory measures described in the Crowdfunding Report include-

• Customizing entry, registration, or licensing requirements;
• Setting disclosure requirements for issuers and funding portals;
• Limiting the services that may be provided by crowdfunding platforms;
• Requiring the appointment of a third party custodian to hold investor assets;
• Imposing measures to favour the channeling of resources into local businesses;
• Addressing crossborder issues.

The report also seeks to raise investors’ understanding of crowdfunding, e.g., that crowdfunding may differ from investing in more traditional securities products. In addition to take note of risks common in traditional finance such as conflicts of risks, data protection and fraud, it suggests that investors pay attention to certain key aspects, including-

• Information asymmetry: Risk of default or high failures is often associated with start- up businesses. The risk of fraud may be high in case of internet offers. Investors should review disclosure and education materials to further their understanding of the essential features and main risks of the crowdfunding offer and see if third party custodians are being used.

• Platform failure: There is risk of platform failure for crowdfunding portals. Portals should be evaluated based on their credibility and soundness, including if it has the proper IT systems, back-up facilities and procedures to ensure continued service.

• Investing limits: Investors should consider if the investment amount is appropriate for their net worth.

• Rescission, cancellation: Investors should be informed of and understand the investment terms including cancellation or rescission rights.

• Illiquidity: As restrictions could be put on the resale of crowdfunding securities, investors should pay attention on warnings and information regarding liquidity and the availability of secondary market.

• Suitability: Investors should consider that a crowdfunding offer may not be suitable and consistent with their investment objectives and risk profile.

SME Funding in Malaysia - Some thoughts

It is heartening to see the "renewal of vows" of sorts on the part of the Malaysian government towards small and medium enterprises (SME). There is an awareness that in most developed countries SMEs contribute 65% employment and 50% of the GDP. These are staggering numbers.

But we have found that this generic generalisation hardly does justice to SMEs in Malaysia simply because of the diversity of the economic and commercial activities undertaken by Malaysian SMEs. The official definition of an SME (circa. 2013) is an objective one that states as follows-

Manufacturing: Sales turnover not exceeding RM50 million OR having full-time employees not exceeding 200 workers; and 

Services and other sectors: Sales turnover not exceeding RM20 million OR full-time employees not exceeding 75 workers.

Within this classification is pretty much everyone that runs a business in Malaysia. It ranges from the sexiest teenage virtuoso working on the latest smartphone app in Cyberjaya to the kedai kopi operator in Kinarut. This observation is not meant to trivialise the position but, on the contrary, to highlight the sheer diversity of SME activities.

In fairness to the Malaysian government, there is a finite amount of financial resources to allocate to the fostering and development of SMEs. Specific sectors have to be picked. Those that has the highest economic impact and multiplier effect will be selected. Moreover, any assistance is, at best, in the form of mentoring, benchmarking and soft loans.

We believe there is scope for Malaysia to focus on the creation of another eco-system that will match investors with SMEs in a virtuous cycle. 

The crowdfunding platform is excellent and more needs to be done to create awareness of this funding solution beyond the tech start-ups. 

We will have more on this topic in due course.

Interest Schemes Bill 2015 Malaysia

After some gestation time, the Interest Schemes Bill 2015 has been tabled for First Reading at the last Parliamentary Session. With the First Reading, the passage of the legislation should be relatively smooth and we expect to see the enactment some time in 2016.

It is interesting that the Companies Commission of Malaysia (better known with its Bahasa Malaysia name, Suruhanjaya Syarikat Malaysia or SSM) made the determination that the interest scheme sector that has been regulated under the Companies Act 1965 deserves a separate regulatory framework. Many industry players regard this as a positive move.

The Federation of Interest Scheme Operators Malaysia (FISOM) hails this new legislation as an important first step in the SSM's big picture plan to address the crying need for funding solutions for the small and medium enterprises (SME) sector in Malaysia.

In one sense, the Interest Schemes Bill transitions the regulation of right to use public offerings such as sports and recreational clubs and timeshare as well as common enterprise investment models from the Companies Act 1965 to the new regulatory framework.

In another sense, the new Bill offers another alternative to SMEs for medium to long term funding that is quite outside of the conventional capital market and financial market models of equity and debt instruments.

Interest schemes is a medium that facilitates the matching of SMEs with funding needs to expand their enterprises and businesses with astute investors who have an appetite for a regulated exotic investment product that allows them to enjoy direct returns on their investments. Where equity investments depend upon dividend returns, common enterprise investment models offer either contractually committed annual or semi-annual payouts calculated on the percentage value of the investment or, as a percentage of gross profits or net yield.

Due to their relative ignorance of the potential of the Malaysian common enterprise interest scheme sector, the Malaysian capital market intermediaries and the financial press media tend to be reticent and outright cynical about the relative importance and role that common enterprise interest schemes can play in the development of the Malaysian economy. Their conventional wisdom is that only the Securities Commission knows best.

It should be pointed out that the precursor to the Capital Markets and Securities Act 2007 was the Securities Industry Act 1983 that was actually managed and regulated by the Registry of Companies (ROC) which is now better known by its statutory alter ego, the SSM. Within the old ROC was a body known as the Capital Issues Committee (CIC).

It was only in 1993, that the Securities Commission was created from the proverbial rib of the ROC via the Securities Commission Act 1993.

It should also be pointed out that, within the existing regulatory framework, the procedure for the prescription of securities is still at the behest of the Minister responsible for the Companies Act 1965.

It is rather unfortunate that the commonplace perception is that the SSM's statutory role is confined only to the regulation of the incorporation of companies and company secretaries. This misconception must be dispelled through greater public awareness of the important economic role played by the SSM beyond company incorporations and company secretaries.

Together with Bank Negara Malaysia, SSM is the leading regulator that protects Malaysian investors against investment scams. And, as the principal regulator that deals with ALL incorporated business entities in Malaysia, SSM is the most appropriate government agency to look into and, address the need to facilitate the SME sector's funding needs via the common enterprise interest scheme model.

Dismissal of Employees - What Employers Must Do

We have come across far too many incidents involving dismissal of employees in Malaysia where the actual conduct or misconduct of the employee does appear to justify or warrant the decision by the employer to dismiss the employee.

Yet, in many such cases, the employer had an adverse decision from the Industrial Court. 

This has left many employers in Malaysia with the perception that the Malaysian Industrial Court tends to favour the grievances of employees over the the plight of employers who had to deal with a recalcitrant employee.

Are employers correct in this perception?

Of course, that perception is incorrect.

Based on our experience in matters of employment, we find that the Malaysian employers are alarmingly ignorant of some basic principles of dealing with employees on matters of discipline.

First of all, employers must be made aware that in any complaint involving labour and industrial relations, the burden of proof lies with the employer. The employer must prove, always with documentary evidence i.e. letters, emails, memoranda, showing that the employer has conducted itself properly.

So, what is the standard or test used by the Industrial Court to measure an employer's conduct in relation to dismissal of employees?

Other than extreme cases of misconduct, usually involving criminal elements that justifies summary dismissal, the test used by Industrial Court involves 3 steps-

1. Was the employee warned about the poor performance or misconduct? Here, written warnings are 100% better than verbal warning.
2. Was the employee given an opportunity to improve?
3. Despite being given the opportunity to improve, the employee failed to do so.

As with all court matters, the employer can only discharge its burden of proof in 2 basic ways-

• Witness testimony; and
• Documentary evidence.

Documentary evidence is absolutely important. If an employer relies purely on oral evidence from witnesses, there is a high degree of risk that the Industrial Court will not be impressed at all with the employer's conduct.

Why would the Industrial Court be unimpressed?

Employers must understand that by dismissing an employee, the employer has removed the employee's livelihood or means of earning a living. The right to a livelihood is protected by the Federal Constitution.

So, employers must be made aware that the dismissal of an employee is a process. This process must always be in writing and documented.

MyCC tells Professional Bodies to dismantle Scale of Fees

The Malaysia Competition Commission (MyCC) has issued letters to four professional bodies requiring them to dismantle their scale of fees in order to uphold the spirit of competition law. MyCC was of the view that scales of fees fixed by professional bodies were contrary to the provision of Competition Act 2010 (CA 2010). It said the Malaysian Institute of Arbitrators (MIArb) had already dismantled their scale of fees.

MyCC is reported to have given each professional body up to 30 days to comply with its requirements for the dismantling of the fees.

As part of the engagement process with the professional bodies on the fixing of scale of fees, MyCC conducted a public consultation session on May 19, 2014.

MyCC conducted a study on professional bodies which can be found here.

Source: MyCC