FIN 7207

CORPORATE FINANCE

Crowdfunding in Malaysia

Lecture: Dr. Norhanim Binti Mat Sari

Name: Lee Boon Foong PBS18212251

Submission Date : 11th April 2020

Table of Contents
1.0 Introduction..................................................................................................................... 1
2.1 Definition of Crowdfunding ......................................................................................... 2
2.2 Type of Crowdfunding................................................................................................. 3
2.3 Role of Crowdfunding Platform in Malaysia ................................................................ 5
2.4 Issue and challenges of Crowdfunding ......................................................................... 6
2.5 Advantages of crowdfunding ....................................................................................... 6
2.6 Factor determinate project crowdfunding ..................................................................... 8
2.7 Determinant successful of crowdfunding ..................................................................... 8
2.8 Example of crowdfunding project in Malaysia ............................................................. 9
3.0 Conclusion .................................................................................................................... 13
ABSTRACT

The aim of research paper is to study the crowdfunding in Malaysia. Compare with
traditional mode of financing, crowdfunding is a new way of capital raising method.
The paper will study the definition and types of the crowdfunding in Malaysia. In
addition, the paper also discusses challenges of crowdfunding, advantages and
disadvantages of crowdfunding in Malaysia. Moreover, the paper will also evaluate the
case of successful crowdfunding project in Malaysia. At the end, the paper is expected
to create an awareness about the importance of crowdfunding and encouraged
Malaysian especially start-up company raised their funds through crowdfunding.

1.0 Introduction

Crowdfunding, through the internet platform, raised money from the public in order to
start up a project or new business. The openness of crowdfunding in Malaysia is limited
due to the most of the companies still prefer traditional mode of financing such as
overdraft, bank loan and leasing. Most of them not aware and fear about the
crowdfunding. In fact, crowdfunding can grow the business become larger and more
advanced by having the sufficient fund.

The Star (2015) states that Malaysian is the first ASEAN country that come out the
legal framework about crowdfunding. Even though the trends of crowdfunding
activities increased, however the number of registered companies to carry out
crowdfunding activities still less and least. The crowdfunding in Malaysia faces the
challenges because the awareness to the crowdfunding is consider low.

However, the crowdfunding playing an important role in capital raising market. The
world is putting attention to the crowdfunding due to the fact that it supports the new
business idea whereby the traditional financing mode cannot be funded. In addition,
with the digitalization, not only the banks can provide financing service but the fintech
too. Crowdfunding is another best alternative of raise fund for individual that are ready
to be entrepreneurs.

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2.0 Literature Review

2.1 Definition of Crowdfunding

Elizabeth M. Gerber, Julie S. Hui and Pei-Yi Kuo (2012) defined crowdfunding is an
open call over the internet to solicits financial resource from other person to exchange
future product and service or realize projects.

Ingram and Teigland (2013) states that crowdfunding is a accumulation of small

investments in individual projects by a large number of individuals via the help of the
internet and social networks, allows an entrepreneur to pitch idea or business plan to
more than just family and friends.

According to David Colgren (2014), crowdfunding is convergence of social media, big

data and cloud technologies to revolutionize the small and medium enterprise and start-
ups to access capital in cost effective manner.

Eleanor Kirby and Shane Worner (2014) states that crowdfunding is the use of small
amounts of money obtained from large number of individual or organizations aims to
fund project and business through an online web-based platform.

According to Ethan Mollick (2014), crowdfunding is a novel method for funding

variety of new ventures, allowing individual founders of for-profit, cultural or social
projects to request funding from many individuals, often in return for future products
or equity.

According to Mokter Hossain and Gospel Onyema Oparaocha (2017), crowdfunding is

an internet-based funding method for realization of an initiative through online
distributed contributions and micro-sponsorships in the form of pledges small monetary
amounts by a large pool of people within a limited timeframe.

Hannah Forbes and Dirk Schaefer (2017), crowdfunding is defined as the process of
taking a project or business, in need of investment and asking large group of people to
supply the investment.

Air funding blog (2019) defines that crowdfunding merging the words “crowd” and
“funding” which means that it is a platform where through the connection of internet,

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individual or company can get the operating fund from contribution of another
individual.

According to Investopedia (2019), crowdfunding finance the business venture through

small portion of capital from large number of people. Crowdfunding aims to gather the
investors in order to increase entrepreneurship by expanding the pool of investors.

Wan Amir Azlan Wan Haniff, Asma Hakimah AB Halimz and Rahmah Ismaila (2019)
comments that equity crowdfunding is a novel method for small and medium
enterprises to raise fund from public through an internet platform operated by a third-
party intermediary or platform operator.

From the definition, the crowdfunding has a positive relationship with the development
of internet. It can say that crowdfunding is a method looking for financial assistance
from the public through the internet platform.

2.2 Type of Crowdfunding

In Malaysia, there are currently two form of crowdfunding, equity crowdfunding (ECF)
and non-equity crowdfunding. The differences between equity crowdfunding and non-
equity crowdfunding is the investment purpose.

The investment equity crowdfunding is referred to reward-based, equity-based and

peer-to-peer lending based. Whereby, the non-equity crowdfunding is referred to the
donation based. According to Massolution (2012), he had classified model of
crowdfunding according to its similarities and differences. Besides, Securities
Commission Malaysia (SC) also distinguished the differences and similarities of
crowdfunding. The similarities and differences are combining and summary as per
below table:

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 Type Donation-based Reward-based Equity-based Lending-based
crowdfunding crowdfunding funding
crowdfunding

Objective No expected Gain non- Received Received periodic

compensation financial reward investment income and expect
return in form of repayment of
equity original principal
investment

Target Investors prefer Investors who to Investors who Investors who

audience do a good deed eventually buy look beyond the want to earn a
by using other or own the traditional stock profit by providing
alternative product by trust market when a loan with interest
money. that in the investing in a
development of a private
company’s company.
product.

Operations Funder gives Funder receives Funder has the Funder provides a
money, which is a tangible object opportunity to loan and earns
then channelled or item after own a interest when the
to a good cause agreeing to pay percentage of loan is repaid
or for financing for it. the company,
a charity same as
purchase the
company
shares.

Example Indiegogo (Out pitchIN Eureeca Peer-to-peer

from Malaysia) lending in Property

Source: Invest Smart, comprehensive investment awareness and literacy campaigns

under Securities Commissions Malaysia

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2.3 Role of Crowdfunding Platform in Malaysia

In Malaysia, small and medium enterprises (SMEs) and start-ups is the backbone of the
economy in Malaysia. According to Statistics Department Malaysia, 98.5 percent of the
business in Malaysia is small and medium enterprise. Thus, they play a significant role
for economic growth and job creation.

However, small and medium enterprise in Malaysia face the changelings in order to
expand their business. Most and foremost, they face insufficient cash to grow their
business. Therefore, crowdfunding is a new capital raising method that should be used
by the enterprises in order to sustain their business. It is very important to know more
details about the crowdfunding platforms in Malaysia.

Under the crowdfunding projects, three participants will be comprised. The three
participants are fundraiser (project issuer), funder (project investor) and crowdfunding
platforms. Three participants playing their own rules in the process of crowdfunding.
Crowdfunding process is show and discuss as below:

Fundraiser Crowdfunding Funder (Project

(Project issuer) platforms Investor)
(intermediary)

Let take an example in Company ABC recently option to purchase machinery to

increase the output quantity. Therefore, company ABC made a decision to raise the
fund through crowdfunding. In this scenario, ABC company is the fundraiser and it will
go through the crowdfunding platforms to raise funds. As an intermediary,
crowdfunding platforms takes the two forms of responsibility: (i) Facilities trust in
project issuers from project investor (ii) Protect the investors by ensure projects issuer
to deliver the promises. The funder is the project investor whereby they will invest their
money and expected their return after fundraiser delivery their project. The return
received by the investors is based on the model of crowdfunding selected by fundraiser.
Upon successful of the project, the fundraiser needs to pay fees imposed to
crowdfunding platforms operator. According to Baber Hasnan (2019), the fees, hence
described as profit of the crowdfunding, is positively correlated with the success of

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projects. High fees are charged by crowdfunding platforms operator after increase in
the number of successful campaigns.

2.4 Issue and challenges of Crowdfunding

Although crowdfunding trends shows an upward trend but crowdfunding still face issue
and challenges. One of the challenges of crowdfunding is administrative and accounting
challenges faced when entrepreneurs crowdfund their business. When a company
crowdfund their business, they will face bigger administrative and accounting
challenges as the method require meticulous and laborious bookkeeping of all
investment and share of profits to identify the profit belong to which each investor.

The other challenge is the entrepreneurs may face the risk of business idea being stolen.
In order to obtain fund, the presenting idea and business models in public is a must.
Therefore, the good business idea maybe stolen by better funded investors or large
corporations. The incident happens because lack of knowledge of entrepreneurs to
protect the business idea rights. Some more, entrepreneurs would hard to fight in court
case even their business idea being stolen due to lack resource.

Besides, the crowdfunding can have the fraud issue. The fraud issue happen is because
the loosen of regulatory requirement for small business. Some business tries to conceal
true financial status as a result of reduced requirement for public disclosures. The other
example of fraud is companies may start to fund their companies by crowdfunding,
however it can be shut down after paying it all salary and as a result, the investor may
lose their fund for such kind of fraud.

In addition, the other issue of crowdfunding is choosing trustworthy crowdfunding

platform. Due to the huge internet information, it is a changeling of entrepreneurs to
decide the good and right crowdfunding platforms. There are no advise be given
because there is no broker in the process of crowdfunding.

2.5 Advantages of crowdfunding

Crowdfunding is successfully turn out some of the people dream. Today, with
innovative idea, someone can become a successful entrepreneur. However, some of
them limit from make their dream come because they don’t have the started capital.

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Through crowdfunding, the world changed. There are new entrepreneurs create more
job in the world. The advantages of crowdfunding had been discussing through the
research paper and journal from some of the academic people.

According to Loreta Valanciene & Sima Jegeleviviute (2013), one of the advantages of
crowdfunding is benefit to the fund project raiser. Compare with venture capital and
angel investor, owner of company will lose their rights to control the company if they
raise the fund through venture capital and angel investor. Therefore, crowdfunding is
benefit to entrepreneurs because they still have the power to use the raised fund to grow
their company or project whatever they want. They have the right to make their own
business decision. Entrepreneurs do not need to getting permission from the investor,
but the entrepreneurs need to provide the return to the crowdfunding investor.

According to Zorica Golic (2013), the other advantages of crowdfunding is the investor
may have low risk. Crowd funders do not have special knowledge about the industry as
the business angel investor or venture capitalist did. The risk faced by crowd funder is
less due to the amount of invest is relatively low. In addition, if the project raiser
chooses reward-type crowdfunding, the investor can be the consumer at the moment
the product is launched in the market.

Besides, the other advantage is the removal of geographic investment barriers.

According to Valanciene and Jegeleviciute (2013), the crowdfunding funds can raise
globally, but the business will concentrate on the project within their geographical area.
It is meaning that although local project been carried out, but global investor come to
invest. With the big size of fund, the crowdfunding can contribute to sustainable
development of the business.

Through the crowdfunding, it is mention that the investor can become the consumer.
Crowdfunding can achieve the marketing purposes. According to Gaida and Walton
(2013), the main advantages of crowdfunding is reflected in fact the financiers is
potential customer and ambassadors of project that will assist in promotion the product
through their own network. The investor willing to help to ensure social confirmation
of the concept.

According to Schwienbacher and Larralde (2010), one of the advantages of

crowdfunding is cost reduction. As mentioned earlier, investor is also act as a consumer.

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Thus, they can participate into the project that created the new item by contributing
their idea of design and improving. Once the time spend for development of product
become shorter, the cost spend for the product will be cheaper. Some more, the market
may have better acceptation to the product.

According to Mohd Firdaus Rusdin, Masitah Ghazali and Shukor Abd Razak (2017),
one of the advantages of crowdfunding is time of raising capital may be shorter compare
with traditional methods. Under the traditional method, project creator needs full fill
the form and pass it to bank to obtain the loan. While, all the applications under the
crowdfunding is through the online platform, therefore it can save the time-consuming.
Less time consuming can motivates business owner especially the start-up company as
they no need worry about the slow process from bank to obtain business capital.

2.6 Factor determinate project crowdfunding

According to Jascha-Alexander Koch and Qian Cheng (2016), they had determined the
factor that contributed the successful of crowdfunding. According to them, one of the
factors that contributed to the successful of crowdfunding is the related information
about the crowdfunding. According to Belleflamme, Lambert & Schwienbacher (2014),
they agree that the funding decision is affected by information asymmetry. The
provision related information is including written text, pictures and presenting video.
All the source from project issuer should attract the funder’s attention to provide the
fund to their company or project.

2.7 Determinant successful of crowdfunding

According to Jascha-Alexander Koch and Qian Cheng (2016), both opinion that the
successful of crowdfunding is depend on the determinant as listed as below, funding
goals & period. As mentioned as earlier of the section, there are two kinds models of
crowdfunding. Under keep-it-all type of crowdfunding mode, the fund is providing to
project issuer before the funding goal has been reached within the funding period or
not. However, under the all-or-nothing type crowdfunding, the collected fund provides
to project issuer only after they reach the funding goals.

According to Paul Belleflamme, Nessrine Omrani and Martin Peitz (2016), the
successful rate of project also depends on the number of potential funders in

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crowdfunding. The relationship between the number of potential funders and the
success rate has a positive relationship. The more the crowdfunding funders, the high
rate of its successful rate of crowdfunding. Besides, under the reward-based
crowdfunding, the fund issuer always the crowdfunding platforms as a market channel
to test the market demand of the product. The more the crowd of investors, the more
efficient the marketing testing, yet the more successful rate of the projects.

2.8 Example of crowdfunding project in Malaysia

One of the examples of the company that go for crowdfunding is Logistics Worldwide
Express (M) Sdn Bhd. LWE is a company that specialized in cross border logistics. In
the view of the growing of E-commerce market, the company owner had gone through
the crowdfunding platforms, mystartr, in aims to raised RM3 million fund to grow the
company. The summary of raising fund and investment deal is show as below:

Project Issuer Logistics Worldwide Express (M) Sdn Bhd

Crowdfunding Platforms myStarts

Crowdfunding Option Equity Crowdfunding and Reward-Based Crowdfunding

Minimum Target Amount RM500,000

Total Target Amount RM3,000,000

Funding Period 10/02/2020 - 09/04/2020

Price per share RM10.00

Source: https://www.mystartr.com/projects/lwe

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 Ordinary Share Invest Amount (RM) Reward- Shipping Credits
(RM)*

100 RM1000 100

300 RM3000 300

500 RM5000 500

1000 RM10,000 1000

2000 RM20,000 2000

4000 RM40,000 4000

7500 RM75,000 7500

12,500 RM125,000 12,500

Source: https://www.mystartr.com/projects/lwe

*Credits issue have expiry date of 18 month from date of issuance

*Maximum applicable value per invoice RM 2000 or 50% of invoice value,

whichever is lower

Ordinary Invest Amount Raise Amount Reward- Investors

Share (RM) (RM) Shipping Credits
(RM)*

100 RM1000 RM1,000 100 1

300 RM3000 RM30,000 300 10

500 RM5000 RM160,000 500 32

1000 RM10,000 RM640,000 1000 64

2000 RM20,000 RM80,000 2000 4

10
 4000 RM40,000 RM80,000 4000 2

7500 RM75,000 RM0 7500 0

12,500 RM125,000 RM0 12,500 0

Source: https://www.mystartr.com/projects/lwe

Based on the investment deal as above, the company funding amount is equal to
RM3,000,000. There are total 113 investors invest into LWE. At this moment, the
company had only successfully raised only 30% of the targeted fund, which is equal to
RM991,000. The company achieved minimum fund-raised amount, which is
RM500,000. Utilisation of fund had been divided into four purpose and it had been
shown in the pie chart as below:

Chart Title

1,080,000.00 , 1,020,000.00 ,
36% 34%

270,000.00 , 630,000.00 ,
9% 21%
Working capital Marketing Hiring Malaysia network expansion

Source: https://www.mystartr.com/projects/lwe

Based on the pie chart information, LWE is aimed to expand their company because he
utilises the fund for Malaysia network expansion and working capital. The company
may less cash to expand their business.

In the logistics industry, the delivery lead time is the main concern of the industry
player. Thus, LWE utilise the fund to develop an LWE own system that can
automatically translate and verify the delivery address and other information to comply
the custom clearance requirement in each country. In addition, LWE will sort the
parcels according their price, categories and delivery zip code.

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With the allocated fund through crowdfunding, LWE also utilise the fund to build
warehouse and rent to the foreign ecommerce seller. Foreign e-commerce seller can
ship and store their good in LWE warehouse and sold it later. All the new
implementation can improve the efficiency and the reduce the delivery lead time.

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3.0 Conclusion
As a conclusion, seems the internet is growing, the crowdfunding should be encouraged
to be funded by the companies especially start-up company. Small and medium
enterprise is a backbone economic in Malaysia, but the small and medium company
lack fund to grow. Small and medium enterprise face financial distress in order to grow
their company.

Compare with the traditional method, the term loan can be considering only the
company able to pay back the higher interest. Currently, equity crowdfunding should
encourage because under this method, the fund issue new share to the funder to
purchase and the funder can be one of the shareholders of the companies.

Even that the investor become shareholder of the company, but it does not influence
the business decision making of owner. The owner still has the authority to make free
decision. It is one of advantages of crowdfunding. Therefore, in my opinion, the
crowdfunding should be encouraged to recommended as new capital raising method
but with new law and regulation to avoid fraud happen that give bad effect to the
country.

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