In the dynamic landscape of modern business, and as entrepreneurs and startups continue to multiply, the avenue for companies to raise funds from the public have emerged as a prominent strategy. One of the avenues for companies to raise fund is by offering the company's shares to the public. In this article, we will be discussing on whether a private company limited by shares1 can offer its shares to the public and the methods of public fundraising.
A. Can a private company limited by shares offer shares to the public?
In Malaysia, section 43(1) of the Companies Act 2016 ("CA 2016") provides that a private company limited by shares cannot offer to the public any shares or debentures, allot or agree to allot any shares or debenture with the intention to offer them to the public or invite the public to deposit money with the company. Further, if an offer of shares or debentures is made to the public within (6) six months after allotment or agreement to allot; or before the receipt by the company of the full payment of the shares or debenture, it is presumed to be an offer to the public which violates the general rule unless the contrary is proved2. The company and every officer who contravene such general rule (section 43(1) CA 2016) is liable to imprisonment for a term not exceeding 5 years or to a fine not exceeding RM3million or to both3.
Section 596(1) CA 2016 restricts a person from going place to place offering shares for subscription or purchase to the public, or seeking or receiving offers to subscribe for or to purchase shares from the public. However, the aforementioned restrictions are not applicable to an offer for subscription or purchase or invitation to subscribe for or purchase or recommendation to which the Capital Markets and Services Act 2007 ("CMSA 2007") applies (section 596(2) CA 2016). Anyone who contravenes this section or incites, causes or procures any person to contravene the same, will be liable to imprisonment for a term not exceeding 5 years or a fine not exceeding RM3million or both4.
B. What is not an offer to the public?
According to section 44(2) CA 2016, an offer of shares or debentures is not considered an offer to the public if it meets one of the two criteria as follows:
- The offer is not calculated to result, directly or indirectly, in the shares or debentures becoming available to persons other than those receiving the offer; or
- The offer is a private concern between the offeror and the offeree5.
An offer is regarded as a private concern between the offeror and the offeree if it is extended to an individual who is already "connected with the company" or if it is an offer to subscribe for securities under an employees' share scheme6. An individual who is "connected with the company" refers to7:
- An existing member or employee;
- A family member of an employee/shareholder or former employee/shareholder;
- An existing debenture holder; or
- A trustee of a trust, where the principal beneficiary of the trust is a person within any category of the above (i to iii).
C. How does a private company limited by shares make an offer to the public?
Pursuant to section 43(3) CA 2016, a company does not contravene the general prohibition against private companies offering shares or debentures to the public if:
- The company acts in good faith based on the arrangements under which it is to convert to a public company before allotting shares or debenture;
- The company undertakes to convert to a public company within a specified period, and that undertaking is complied with; or
The offer adheres to arrangements specified by the Securities Commission Malaysia ("SC") to any person on a stock market, derivatives market, exempt stock market, or exempt derivatives market that is approved, registered, or regulated under CMSA 2007.
For the context of paragraph ii above, the term "specified period" denotes a timeframe that concludes within six (6) months from the date of the offer or date of first offer (if offers are made on different days).8
As such, the first alternative available to a private company limited by shares to raise fund from the public is to convert its company to a public company. The second alternative involves offering made in accordance with the arrangements prescribed by SC such as via platforms that are licensed by the SC, namely equity crowdfunding ("ECF") platform or peer-to-peer ("P2P") platform. In this article, we will focus our discussion on ECF and P2P platform.
D. What is equity crowdfunding (ECF) and peer-to-peer financing (P2P) platform?
Both ECF and P2P are online platforms utilised for public fundraising, regulated by the SC under the Guidelines on Recognized Markets ("Guidelines9"). Companies must ensure adherence to the requirements outlined in the Guidelines to facilitate a successful fundraising of capital via ECF and/or P2P platforms. The table below sets out the comparative features and requirements of ECF and P2P based on the Guidelines:
| ECF Platform | P2P Platform | |
|---|---|---|
| Eligible Companies | Only Malaysia incorporated companies and limited liability partnerships are allowed to be hosted on ECF platforms. | A wider range of entities are allowed to be hosted on P2P platforms – including sole proprietorships, partnerships, limited liability partnerships, private companies, unlisted public companies, public-listed companies, subsidiaries of public-listed companies, and any other entity permitted by the SC. |
| Prohibited Companies | Certain entities are prohibited to raise funds via ECF platforms – such as exempt private companies, complex structures, public-listed companies and their subsidiaries, companies without specific business plans or planning to merge/acquire unidentified entities, and entities intending to use raised funds to provide loans or invest in other entities to raise funds through an ECF platform. | Entities that are prohibited to raise funds
via P2P platforms includes those with commercially or financially
complex structure, companies with no specific business plan or
planning to merge/acquire an unidentified entity, companies that
propose to use the funds raised to provide loans to make investment
in other entities and any other entity that is specified by the
SC. |
| Securities offered by the issuers | Ordinary shares or preference shares. | Investment notes or islamic investment notes. |
| Funding Limits and Investment Limits on issuers | ECF issuers can raise a maximum of RM20
million collectively through ECF platforms, excluding their own
capital contributions or private placements. Investors on ECF platforms must adhere to the following investment limits: 1. no restrictions on investment amount for sophisticated investors; 2. up to RM500,000 per year for angel investors; and 3. up to RM5,000 per issuer (not exceeding RM50,000 per year) for retail investors. |
P2P issuers are allowed to retain the raised
amount as long as they meet 80% of the target amount. P2P issuers are not allowed to keep any amount which exceeds the target amount. Investors on P2P platforms must adhere to the following investment limits: 1. no restrictions on investment amount for sophisticated and angel investors; and 2. retail investors are encouraged to limit investment to a maximum of RM50,000 at any period of time. |
| Disclosure Requirements | Disclosure requirements for both
ECF and P2P platforms are similar, including key characteristics of
the business and the business plan. However, ECF issuers are subjected to additional disclosure requirements such as details about offered shares, use of proceeds, and information on management and directors. On the other hand, P2P issuers are obligated to disclose their intention to seek funding from multiple P2P platforms concurrently. |
|
| Hosting Restrictions | ECF issuers are restricted from being hosted concurrently on multiple ECF platforms or the stock market of Bursa Malaysia Securities Berhad. But they are allowed to be hosted on ECF and P2P platforms simultaneously, provided that they adhere to the disclosure requirements. | P2P issuers are prohibited from being hosted for the same purpose on multiple P2P platforms concurrently. Nonetheless, they have the option to be hosted simultaneously on both ECF and P2P platforms, provided that they adhere to the disclosure requirements. |
| List of recognized market operators in Malaysia | Please visit this link to access the relevant information on the list of recognised market operators in Malaysia: https://www.sc.com.my/development/digital/digital-initiatives | |
In essence, a private company limited by shares (such as startups) intending to raise funds from the public may do so by either converting its company to a public company or by utilising the ECF and/or P2P platforms (while adhering to the Guidelines elaborated above). In both alternatives, legal and financial advices would be imperative to ensure strict compliance with the relevant requirements which will increase the chances of a successful public fund raising.
Footnotes
1. Private company limited by shares as defined under the Companies Act 2016. See sections 11(1) and 42 of the Companies Act 2016.
2. Section 43(2) Companies Act 2016.
3. Section 43(5) Companies Act 2016
4. Section 596(7) Companies Act 2016
5. Section 44(2)(a) and 44(2)(b) Companies Act 2016
6. Section 44(3) Companies Act 2016
7. Section 44(4) Companies Act 2016
8. Section 43(4) Companies Act 2016, Act 777.
9. Guidelines on Recognizes Markets [SC-GL/6-2015(R10-2023)], https://www.sc.com.my/api/documentms/download.ashx?id=942594d3-df78-42af-b2ee-186763fe4ea8
10. ECF issuer is defined under Chapter 13 of the Guidelines on Recognizes Markets as "a person who is hosted on an ECF platform to offer its shares on the ECP platform".
11. P2P issuer is defined under Chapter 14 of the Guidelines on Recognizes Markets as "a person that is seeking funding on or through P2P platform and shall include seeking funding via invoice financing".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
