By Vijayasekar A/L Paramasivam, Senior Lecturer cum Programme Leader, School of Business
Equity crowdfunding (ECF) is a new and smart way to raise funds. Critics used to say that these platforms were considered as “flop”, failed techniques or “exclusive” only for technology and high-end companies. They are wrong, of course, for its advantages are quite extensive.
Based on SC’s latest annual report (2019), alternative financing markets have raised over RM706 million for 1,943 Malaysian companies. Although the bulk came from other financing modes for small companies in the retail and trading sectors, crowdfunding is able to penetrate the market at a faster rate.
Strong and supportive regulatory framework
The Securities Commission (SC) is at the forefront of the digital agenda while safeguarding the investors’ rights. We were the first country in ASEAN to regulate crowdfunding in 2015 and now, we have ten ECF.
The SC imposes strict compliance and disclosure rules so that investors can make informed decisions. Companies can raise funds only after audits and satisfactory due diligence on the companies’ businesses, directors, shareholders and related disclosures. Platforms also need to display various disclosures on their websites like its charges.
In October 2019, the government launched Malaysia Co-Investment Fund (MyCIF). Every RM1 will be matched on a 1:4 ratio up to a cap of RM500,000. The matching ratio is now lowered to 1:2 instead, which is indeed attractive to many. The scheme will continue until 30 September.
The SC made two substantial updates recently.
First, a company can now raise up to RM10 mil in an ECF platform from the earlier RM5 mil cap.
Malaysia Digital Economy Corporation (MDEC), an agency pushing for digital adoption, has extended its campaign to get more companies to raise funds on these platforms, especially those affected by the Covid-19 crisis.
These are some of the trends which will stimulate and encourage more companies to do crowdfunding.
Tax incentive for investment in equity crowdfunding
The government has proposed that individual investors be given an income tax exemption on the aggregate income which is equivalent to 50% of the investment amount made through equity crowdfunding platforms approved by the Security Commission Malaysia (SC).
The eligible amount for this tax exemption is limited to RM50,000 for each year of assessment and the deductible amount is capped at 10% of the aggregate income for that year of assessment with other conditions to be fulfilled.
This exemption is applicable for investments made from 1 January 2021 to 31 December 2023.
The Malaysian government is extending angel tax incentives given to venture capital (VC) and angel investors until 2023 to further spur startup investments.
The Angel Tax Incentive is designed to help technology-based start-ups in Malaysia to raise funds by offering tax incentive to angel investors who have invested in these companies.
The Angel Tax Incentive is administered by the Angel Tax Incentive Office (ATIO), a unit under Cradle Fund Sdn Bhd (Cradle). ATIO’s role is to ensure that start-ups in the technology sector who are seeking investments from accredited angel investors are eligible and that investments made into these companies are genuine.
To qualify for the tax exemption, a Malaysia angel investor would have to fulfil the following criteria:
(i) must be a resident in Malaysia;
(ii) sources of income are not derived solely from business;
(iii) investment is solely to finance activities of the investee company and the amount shall not be more than 30% of the total paid-up share capital of the investee company; and
(iv) must not have any family relationship with the investee company i.e. none of the paid-up capital of the investee company is owned by a parent, including a parent-in-law, a child including a stepchild, or child adopted in accordance with any law, a brother or sister, or grandparent or grandchild, or a spouse of the investor.
The amount of tax exemption allowed per annum for a qualified Malaysia Angel Investor is the
amount of investment made in qualified companies or RM500,000, whichever amount is lower.
Where the amount of investment exceeds the aggregate income of an angel investor for the basis period for a YA, the excess amount of investment is disregarded. In other words, the excess amount of investment will not be refunded or be available as a credit to set off his tax liability for subsequent years of assessment.
The exemption is granted subject to the following conditions:
- the investment must not be disposed of (fully or in part) within two (2) years from the date the investment is made; and
- the conditions specified by the Minister of Finance in the approval letter for the investment have been complied with.
If you plan to invest, please read more on crowdfunding and understand the risks involved.
The digital economy is developing at a fast pace and it will change how we run our daily life, businesses, and society. Conventional banking will need to do more to catch up with these agile fintech companies.
Crowdfunding is part of taxation topics for BA (Hons) Accounting and Finance (Collaboration with the University of Greenwich) at SEGi College Kuala Lumpur.
Head over here to have a look at the rest of our programs.
*Vijayasekar Parmasivam is a Senior Taxation Lecturer at SEGi College Kuala Lumpur. He has 6 years of tax and audit industrial experiences. He also has 17 years of teaching and research experiences in individual tax.