Funding the IPO pipeline through crowdfunding, Leap Market and ICOs

THE two large initial public offerings (IPOs) slated for next year have two similarities. Not only are QSR Brands and Leong Hup International involved in the poultry business, they are also “recycled” flotations. These companies were once listed on Bursa Malaysia only to be privatised, reshaped and floated again.

Such exercises have their merits but the situation does beg the question: is Malaysia not producing any more new large companies keen to get listed?

This issue has long been a concern among policymakers.

How does the government create a fertile landscape that can sprout new companies which can grow successfully?

In the past, one plan had been about throwing money into startups by providing government venture capital. While that money did help some, the process lacked checks and balances and resulted in hundreds of millions of ringgit being spent without providing the desired returns.

A more interesting effort has been the creation of crowdfunding platforms.

Malaysia leads the region after having being the first to introduce a regulatory framework for licensed platforms to facilitate young companies raise money by selling equity or debt.

Since the beginning of this effort in 2015, a total of RM200mil has been raised by over 500 issuers. While that is still a small amount of money compared to the trillions of ringgit raised and traded in the country’s capital market, it is a necessary start.

In the recently tabled national budget, the government has allocated RM50mil to partake in investments on these platforms. Indications are it will do so by matching private sector investments but only on a ratio of one to four, meaning that the government will put in say RM100,000 into a deal, only after the said deal has attracted RM400,000 in private investor money.

This way, the government is relying on the due diligence of the private sector, which is a clever move and a step away from government funded venture capital that took unnecessary risks.

But now what? How do these young companies scale to reach the size of today’s blue chip stocks on Bursa Malaysia? That still remains a long and arduous journey.

The good news is, startups from the crowdfunding platforms can look to progress to the Leap Market which was launched last year.

However, there are just over 10 companies listed on the Leap Market today. Liquidity for secondary trading is largely absent.

The number of shares on free float are also small and trading is also limited to “sophisticated investors”.

Onerous disclosures and processes are needed to get certified as a sophisticated investor and this is another reason why there are limited participants in the Leap Market.

This is an area that needs to be addressed by the authorities, although the stock exchange says there is a healthy pipeline of small companies, some with unique business models, lining up to list on the Leap Market.

Another development that authorities are spending time examining are initial coin offerings or ICOs. ICOs are supposed to be a new means of crowdfunding for startups but operate largely in an unregulated space.

This is an area that gets a lot of media attention, both good and bad.

Its phenomenal growth however has been thwarted by the crash of cryptocurrency prices. Strangely, the space is still alive even in countries like Malaysia, where a small number of issuers and their advisers keep trying to carry out these fund raising activities.

While blockchain technology and even ICOs are notable innovations, they should not be allowed to thrive unregulated.

The Securities Commission has sought to clamp down on parties seeking to fund raise from the public under the guise of an ICO.

The problem with unregulated fundraising through ICOs is that it becomes a good fit for illegal “money game” type characters to latch on. Money launderers have also long been suspected of trying to use cryptocurrencies.

Hence all parties seeking to get involved have to wait until the government and related agencies namely the Finance Ministry, Securities Commission and Bank Negara come up with their guidelines early next year.

Until then, investors who are offered a chance to take part in yet another blockchain project claiming to be world-beating ought to keep their money in their pockets unless they are venture capitalists who have deep insights into the tech space and the risks involved.

On the part of the government and regulators, they ought to quickly learn from developments taking place abroad and find a solution for ICO guidelines that ensures that Malaysia does not lose out from embracing this innovation while at the same time ensuring that there are sufficient investor protection and mechanisms to safeguard against bad hats who might take advantage of this funding mechanism.