KhaiLing Yau Chambers

KLYC Alert: Does An Extra Day of Holiday Await Us This Chinese New Year 2024?

Legal Alert / By / January 30, 2024

Welcome to the thrilling tale of the Lunar New Year, where the Year of the Dragon is set to unleash a frenzy of festivities, prosperity, luck, and a dash of the extraordinary!

In 2024, Chor 1 (Day 1) and Chor 2 (Day 2) of the Lunar New Year or more commonly referred to as Chinese New Year, fall on Saturday (10th February 2024) and Sunday (11st February 2024) respectively. Save for our fellow friends living in the states of Kedah, Kelantan, Terengganu and Johor, the luck of public holidays has favoured us, bestowing an extended celebration with a paid replacement holiday on Monday (12th February 2024)![1]

Now, the burning question on everyone’s mind (because that’s the same question the KLYC team has in mind too): What happens to Saturday? Will we be getting an additional day off as a replacement holiday for Chor 1 of CNY which falls on Saturday, turning this year’s Lunar New Year celebration into a delightful 4-day extravaganza? Can I ask my employer for an additional day off?

Let’s take a dive into the Holidays Act 1951 of Malaysia (“Holidays Act”). The Holidays Act prescribes that “weekly holiday” means Sunday[2], except for the states of Kedah, Johor, Terengganu and Kelantan (the “Relevant States”), which observe Friday as their weekly holiday. The Employment Act 1955 of Malaysia (“Malaysia EA”) is aligned in this regard, providing that every employee shall be allowed in each week a rest day of one whole day as may be determined by the employer, and where an employee is allowed more than one rest day in a week, the last of such rest days shall be the rest day.

What does this mean for us?

In Mandarin, the number 4 is pronounced as “sì” which sounds similar to the word for death, “死” (sǐ). We’re already in the year 2024 (or 2023A for some), how can we also have a 4-day holiday for Chinese New Year!

Jokes aside, this has nothing to do with superstition, rather under the Malaysia EA (read together with the Holidays Act), if a public holiday falls on a rest day (i.e., Sunday, except for the Relevant States), Monday shall be considered a paid holiday[3]. There is (unfortunately) no replacement holiday for public holidays falling on Saturday, although it is a non-working day for most of us.

Now, let’s cross the Straits of Johor and look at the holiday scene in Singapore. Are employees in Singapore getting a 4-day holiday? Based on the Employment Act 1968 of Singapore (“Singapore EA”), it appears that certain employees may be entitled to an additional day off in substitution for the public holiday falling on Saturday!

How? Why?

Similarly, the Singapore EA provides that if a public holiday falls on a rest day[4], the next working day is a paid holiday[5]. Interestingly however, the Singapore EA goes on to stipulate that if a public holiday falls on a non-working day (e.g. if an employee is on a 5 day work week, Saturday would be considered as the employee’s non-working day), the employer may either pay the employee for that holiday at his or her gross rate of pay or give the employee a day off in substitution for that holiday[6], a provision which did not find its way to our Malaysia EA.

Fellow Malaysians, let’s not allow this to dampen our holiday spirits shall we! As the Lunar New Year’s true essence lies in cherished moments with families and loved ones, may the upcoming festivities not only bring luck but also warmth of familial bonds, making this Lunar New Year a celebration which is truly extraordinary.

[1] As published on the official State Government portal of the states of Kelantan, Kedah, Johor and Terengganu, 10th February 2024 and 11th February 2024 will be observed as public holidays in each of these states.

[2] Section 2 of the Holidays Act 1951 of Malaysia

[3] Section 3 of the Holidays Act 1951 of Malaysia, read together with Section 60D of the Employment Act 1955 of Malaysia

[4] Section 36(1) of the Employment Act 1968 of Singapore provides that “every employee must be allowed in each week a rest day without pay of one whole day which must be Sunday or such other day as the employer may determine from time to time.”

[5] Section 88(1)(b) of the Employment Act 1968 of Singapore

[6] Section 88(1)(c) of the Employment Act 1968 of Singapore

This legal alert is for general information only and is not a substitute for legal advice.

Published on: 30 January 2024

Should you have any queries as to employment law and corporate commercial matters in Malaysia, please do not hesitate to contact us.

Yau Khai Ling 
Principal Partner
E: ykl@khailinglaw.com

Elaine Chin Ee Lin
Partner
E: cel@khailinglaw.com

Charissa Chan 
Associate
E: csk@khailinglaw.com

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Financial Assistance for Acquisition of Shares

Legal Insights / By / September 21, 2023

1. Introduction

The business landscape in Malaysia is governed by a set of laws and regulations designed to ensure transparency, fairness and accountability. Among such regulations is the prohibition of providing financial assistance by a company for the acquisition of its own shares or the shares of its holding company, a legal position with rich historical background that has seen substantial changes over the past decades in the region. Due to the intricacies of the legal concept, there may be certain instances where business owners or stakeholders overlook such prohibition in undertaking their business or corporate transactions.

2. The Prohibition 

Section 123(1) of the Companies Act 2016 (“CA 2016”) prohibits a company from providing any financial assistance, whether directly or indirectly and whether by means of a loan, guarantee or provision of security or otherwise, to any person for the purpose of or in connection with a purchase or subscription of any shares in the company or its holding company, or for the purpose of reducing or discharging a liability incurred for such an acquisition.

The underlying principle governing this prohibition is that the assets of a target company should not be used directly or indirectly to finance the purchase of its own shares or the shares of its holding company. This prohibition aims to shield the company’s creditors and shareholders from unwarranted financial exposure and prevent the abuse or misapplication of the company’s capital by its directors or controlling shareholders.

3. What constitutes “financial assistance”? 

It is apparent that the term “financial assistance” is couched in broad terms in our CA 2016. Essentially, there are two key components to the meaning of financial assistance within the scope of Section 123 of the CA 2016:

  • Firstly, there must be some financial assistance given by the company.

  • Secondly, such financial assistance has been given ‘for the purpose of or in connection with’ the purchase of the company’s shares or the shares of its holding company.

As financial assistance is broadly defined, the interpretations offered by judicial decisions are crucial in understanding the relevant legal parameters.

  • Chung Khiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd [1990] 1 MLJ 356 – a company bought shares in a hotel using a loan from a bank secured by the hotel’s land. The Supreme Court held that there was financial assistance which was prohibited under section 67 of the then Companies Act 1965.

  • Kidurong Land Sdn Bhd & Anor v Lim Gaik Hua & Ors [1990] 1 MLJ 485 – shareholders in a company owning land transferred their shares to a developer. It was agreed that the developer would build houses on the land and transfer some of the houses to the shareholders. The developer financed the development by charging the company’s land to a finance company. The Supreme Court held that the arrangement to fund the building and transfer of the houses amounted to financial assistance.

  • Belmont Finance Corporation v Williams Furniture Ltd and others (No 2) [1980] 1 All ER 393 – the Court of Appeal held that there was financial assistance where a company purchased property from a person at an inflated price with the sole purpose of enabling that person to purchase the company’s shares.

Interestingly, in Wallersteiner v Moir; Moir v Wallersteiner and others [1974] 3 All ER 217; [1974] 1 WLR 991 (CA) at p 1014, Lord Denning described financial assistance in the following words:

 “You look to the company’s money and see what had become of it. You look to the company’s shares and see into whose hands they have got. You will then see if the company’s money has been used to finance the purchase”.

While the terms ‘for the purpose of’ and ‘in connection with’ are not explicitly defined within the CA 2016, guidance may be sought from Singapore’s Companies Act 1967 which provides persuasive guidance on the intended meanings of these terms:

  • “A company is taken to have given financial assistance for the purpose of an acquisition if (i) the company gave the financial assistance for purposes that included the relevant purpose; and (ii) the relevant purpose was a substantial purpose of the giving of the financial assistance.”

  • “A company is taken to have given financial assistance in connection with an acquisition when the financial assistance was given to a person, the company was aware that the financial assistance would financially assist the acquisition by a person of shares or units of shares in the company.”
4. Exceptions to the Prohibition
 
Notwithstanding, there are exceptions to the prohibition within the legal framework, as provided for under sections 125 and 126 of the CA 2016 which carve out legitimate avenues for financial assistance:
 
  • where the lending of money is part of the company’s ordinary course of business;
  • where it is for a trust scheme for employees of the company or its subsidiary;
  • where the financial assistance is given to employees of the company or its subsidiary (other than directors) with a view to enable those persons to purchase fully-paid shares in the company or its holding company;
  • where the company is regulated by written laws relating to a bank, insurance or takaful or which are subject to the supervision of the Securities Commission Malaysia; or
  • where the company is not a public listed company and it has complied with the ‘whitewash’ procedure stipulated in Section 126 of the CA 2016.

The ‘whitewash’ procedure introduced under Section 126 of the CA 2016 allows a company whose shares are not quoted on Bursa Malaysia to provide financial assistance for the acquisition of its own shares or shares in its holding company, or for the purpose of reducing or discharging a liability incurred for such an acquisition. This ‘whitewash’ procedure requires the following to be observed: 

  • a special resolution is passed by the shareholders to approve the financial assistance;
  • a majority of the directors of the company resolve, before the assistance is given, that the company may provide financial assistance, that the provision of financial assistance is in the best interest of the company and that the terms and conditions pursuant to the financial assistance are just and reasonable to the company;
  • each director who voted in favour of the financial assistance makes a solvency statement that complies with the provisions of the CA 2016;
  • the aggregate amount of the financial assistance (including financial assistance previously given that has not been repaid) does not exceed 10% of the aggregate amount received by the company in respect of the issue of shares and reserves of the company, as disclosed in the most recent audited financial statements of the company (“10% Cap”);
  • the company receives fair value in connection with the giving of the financial assistance; and
  • the financial assistance is given not more than 12 months after the day the solvency statement was made by the directors.

5. Penalties 

The penalty that may be imposed on an officer of the company contravening the prohibition under Section 123 of the CA 2016 is a fine not exceeding RM3 million or a term of imprisonment not exceeding 5 years, or both. Additionally, the court may order the convicted person to pay compensation to the company or the person who has suffered loss or damage as a result of the contravention.

It is important to note that Section 124 of the CA 2016 provides that a transaction conducted in contravention of the financial assistance prohibition does not render the transaction invalid by reason of the contravention. This implies that the counterparty engaged in the transaction typically does not bear the regulatory risks. Instead, the onus of legal repercussions for non-compliance rests on the director or officer responsible for ensuring the company’s adherence to the law.

6. Perspective

While it safeguards stakeholders and promotes transparent practices, the prohibition on financial assistance may bring a double-edged impact constraining the competitiveness and financial agility of companies across various facets of corporate operations.

  • Growth constraints: It adds complexity to transactions involving share acquisitions or related financing arrangements which can hinder business growth and expansion plans.

  • Restriction on business flexibility: It limits a company’s flexibility in utilising its own resources for strategic purposes.

  • Market competitiveness: It puts Malaysian companies at a disadvantage in the international market where similar financial assistance restrictions may not apply or have been substantially relaxed.

It cannot be denied that the introduction of the 10% Cap (as described above) is a significant milestone. However, it is crucial to note that the prohibition has seen a very different path in various parts of the world. It is interesting to note that the United Kingdom abolished this prohibition in relation to private companies in 2008, followed suit by Singapore in 2015. Guided by the experiences of the United Kingdom and Singapore, to invigorate the competitiveness of Malaysia-incorporated companies, it is perhaps worthwhile for the financial assistance prohibition under the existing Malaysian laws to be reevaluated in order to assess whether global approaches may be tailored accordingly to suit Malaysia’s custom, economic and social requirements.

This legal update is for general information only and is not a substitute for legal and tax advice.

Published on: 21 September 2023

Should you have any queries as to how these developments affect your business, please do not hesitate to contact us. 

This article was co-authored by Yau Khai Ling, Lau Yuet Sian and Chan Yi Ling.

Yau Khai Ling 
Principal Partner
E: ykl@khailinglaw.com

Lau Yuet Sian
Partner
E: lys@khailinglaw.com

Chan Yi Ling
Associate
E: cyl@khailinglaw.com

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Dual-Class Shares Listing on Bursa Malaysia – An Entry into a New Era

Legal Updates / By / January 29, 2024

The Prime Minister and Finance Minister of Malaysia, Datuk Seri Anwar Ibrahim has in the highly anticipated revised Budget 2023 tabled on 24 February 2023 revealed the Malaysian Government’s plan to allow the issuance and listing of dual-class shares on Bursa Malaysia. This is part of the Malaysian Government’s effort to encourage the listing of local high growth technology on Bursa Malaysia.

The Securities Commission Malaysia (SC) welcomes this measure announced by the Malaysian Government. SC’s Chairman, Dato’ Seri Dr. Awang Adek Hussin has stated that “allowing dual-class share structures will also help high-growth, innovative companies to the Malaysian capital market, allowing investors access to more diversified investment opportunities”.

Our Asian neighbours, Hong Kong, Shanghai, Singapore and most recently Indonesia have permitted companies to list with a DCS structure. At last, with this latest announcement, Malaysia will soon be joining the ranks.

Dual-class share structure (“DCS structure”) may or may not be a foreign term to many. The fundamentals of the dual-class share structure does indeed offend the “one-vote, one-share” principal. Under a DCS structure, certain shareholders are given voting shares that are disproportionate to their shareholding, i.e. shares in one class will carry one vote (“OV shares”), while shares in another class will carry multiple votes (“MV shares”). Holders of MV shares are typically the company’s founders and their families, or other key executives. An example close to home is the debut of Grab Holdings on Nasdaq. Filing reports revealed that as a result of Grab’s DCS structure, co-founder Anthony Tan will have 60.4% voting rights even though he owns just 2.2% of Grab Holdings. Meanwhile, SoftBank Vision Fund, which owned 18.6% of ordinary shares in Grab Holdings, commanded just 7.6% of the voting power.

Singapore’s decision back in 2017 to allow the listing of dual-class shares on its stock exchange sparked a debate – whether or not Malaysia should follow suit. There were even misleading reports which has caused confusion on Bursa Malaysia’s position. In August 2017, Bursa Malaysia had issued a statement that the listing of dual-class shares on the local bourse will not be taking place anytime soon and this has caused Malaysia’s Minority Shareholder Watchdog Group (MSWG) to be “hugely relieved”.

The DCS structure have their proponents and opponents. As Financial Times columnist Andrew Hill puts it, “the advantage of a dual-class share structure is that it protects entrepreneurial management from the demands of shareholders”. Whilst those sitting on the other side of the fence will say otherwise. There is also the risk that the management of companies with their disproportionate voting rights under the DCS structure may not act in the best interest of all shareholders, resulting in corporate governance concerns and inadequate investor protection.

Regulators of exchanges with the DCS structure has put in place frameworks and guidelines which offers safeguards and restrictions to protect minority shareholders. Amongst the safeguards that put in place is to limit the voting rights of MV shares to a maximum of 10 votes per share – this has been adopted by both the Hong Kong Stock Exchange (“HKEx”) and the Singapore Exchange Securities Trading Limited (“SGX-ST”) and issuers must set out the voting rights of its MV shares clearly in its constitution. SGX-ST also prohibits issuers from undertaking equity fundraising by issuing MV shares post-listing, except in certain permitted corporate exercises. Over in Hong Kong, the HKEx has prescribed that certain key matters, including the appointment or removal of an independent non-executive director, will still be decided on a one share, one vote basis.

The announcement on the DCS structure is a welcome development and hopefully the vision that the Malaysian Government has in mind with the adoption of this DCS structure will come to fruition.

As at the date of publication of this update, neither Bursa Malaysia nor SC has made further announcements regarding its approach on the implementation of the DCS structure in Malaysia. We will continue to monitor developments and provide updates.

This legal update is for general information only and is not a substitute for legal and tax advice.

Published on: 21 March 2023

Should you have any queries as to dual-class shares, please do not hesitate to contact us. 

Elaine Chin Ee Lin
Partner
E: cel@khailinglaw.com

Esther Chang Yee Man 
Paralegal
E: cym@khailinglaw.com

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SC Invites Applications for Digital Innovation Fund (DIGID)

Legal Updates / By / September 21, 2023

1.   Introduction of DIGID 

The Securities Commission Malaysia (“SC”) had in October last year announced several digital-related initiatives to bolster Malaysia’s capital market, including the establishment of a RM30 million Digital Innovative Fund (“DIGID”) to co-fund innovative projects that demonstrate the use of technology to allow new and competitive propositions in Malaysia’s capital market.  

The objectives of DIGID are to:

(a) assist and catalyse smaller capital market players in their digital transformation journey; 

(b) spur further innovation in capital market products and services; 

(c) drive further efficiency and productivity in capital raising and investment activities; and

(d) spur greater inclusion to serve markets or segments which are underserved.

2.    Application for DIGID

SC-regulated capital market players with a headcount of up to 75 staff or revenue up to RM20 million are eligible to submit applications for DIGID from 1 January 2023 to 30 November 2023, or until funds are fully utilised (whichever is earlier).

3. Eligible projects

Only projects which intend to adopt technology and digital solutions that: 

(a) contribute towards novel or improved capital market products and services in Malaysia; and/or

(b) address inefficiencies and pain points faced in any of the following capital market focus areas:

  • trading or post-trade;
  • portfolio development and management;
  • financial planning / investment advisory;
  • customer profiling and analysis;
  • valuation and onboarding;
  • due diligence and credit scoring;
  • other supporting capital market activities approved by the SC

are eligible to be funded by DIGID.

4. Funding granted to successful DIGID applicant

DIGID will be administered on a co-funding basis, up to 70% of the approved qualifying expenses per project. The total amount of disbursements per project will be capped at RM500,000.

The funds will be disbursed on a reimbursement basis in accordance with the following:

Percentage of Total Approved Fund DisbursementsMilestones
30%Upon 50% completion of the project
40%Upon 100% completion of the project
30%After demonstrating actual outcomes (as per approved project proposal), within 1 year of the project’s completion

DIGID recipients are required to submit three (3) agreed project milestones reports and relevant supporting documents prior to each respective tranche disbursement (in such form and manner as specified by the SC).

For more details on DIGID and to access a copy of the relevant application form, please visit:

https://www.sc.com.my/development/digital/digid. 

This legal update is for general information only and is not a substitute for legal and tax advice.

Published on: 2 February 2023

Should you have any queries as to DIGID, please do not hesitate to contact us. 

Lau Yuet Sian
Partner
E: lys@khailinglaw.com

Chan Yi Ling
Associate
E: cyl@khailinglaw.com

Esther Chang Yee Man 
Paralegal
E: cym@khailinglaw.com

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SC announces 4 new Digital-Related Initiatives to Boost Capital Market and Support Economic Recovery

Legal Updates / By / November 1, 2022

In a move to further liberalise Malaysia’s capital market and to address the funding needs of Small and Medium Enterprises (“MSMEs”) and Mid-Tier Companies (“MTCs”), the Securities Commission Malaysia (“SC”) had on 31 October 2022 announced four (4) new digital-related initiatives, briefly summarised as follows:

1. Registration of new ECF and P2P market operators with Shariah solutions and value propositions

The SC will open the applications window to register new equity crowdfunding (“ECF”) and peer-to-peer financing (“P2P”) market operators which will further facilitate fundraising by MSMEs via Shariah offerings on a digital platform. This initiative will enhance the Islamic fintech ecosystem and aims to foster the growth of MSMEs in the halal economy while allowing greater access to investments for all capital market participants.

There are currently 10 ECF operators and 11 P2P operators registered with the SC.

2. Registration of new P2P operators focusing on the offering of debt-based financing instruments by MTCs and other larger companies

In addition to the above, the SC plans to register new P2P market operators which will allow MTCs to seek debt-based financing directly from investors on a digital platform, while reducing the number of intermediaries involved in the process. This initiative also aims to bridge the financing gap wherein most MTCs have outgrown existing financing avenues for MSMEs but are still too small for traditional public markets.

3. Registration of new Recognised Market Operators-Digital Asset Exchange (RMO-DAX) to facilitate regulated digital asset investments

The SC recognises that investment in alternative assets is becoming more prevalent and will also open new applications for prospective digital asset exchanges (DAX) with differentiated value propositions. There are currently only four (4) DAX operators registered with the SC. This initiative will increase capital market vibrancy by widening the number and types of DAX platforms available for investors to invest in, that is also safe and secure.

4. Establishment of a RM30 million Digital Innovation Fund to encourage digitalisation of the capital market

The SC will establish a Digital Innovation Fund (DIGID) to co-fund innovative projects that utilise technology to enable new and competitive propositions for the Malaysian capital market. Applications for DIGID funding can be submitted to the SC beginning 1 January 2023. Successful candidates will receive funding on a reimbursement basis after meeting agreed-upon milestone deliverables, and such funding will cover up to 70% of approved qualifying expenses, capped at RM500,000 per project.

MSMEs and MTCs collectively contribute more than half of the country’s Gross Domestic Product (GDP) and are integral to Malaysia’s future growth and economic sustainability. The above initiatives are thus seen as essential to support the post-pandemic recovery journey of MSMEs and MTCs in terms of their financing needs, as well as their continued innovation and growth potential.

It is interesting to note that a majority of the initiatives announced by SC concern the re-opening of the application window for prospective recognised market operators, namely ECF, P2P and DAX. The SC has also divulged in its announcement that the updated guidelines and forms in respect of ECF, P2P and DAX operator applications will be made available on its website from 15 November 2022. Be that as it may, interested parties may engage with the SC on such applications from 1 November 2022.

For more details, please refer to the full media release by the SC here: SC Unveils Digital-related Initiatives to Bolster Capital Market – Media Releases | Securities Commission Malaysia

This legal update is for general information only and is not a substitute for legal and tax advice.

Published on: 1 November 2022

Should you have any queries as to how these developments affect your business, please do not hesitate to contact us. 

Yau Khai Ling 
Principal Partner
E: ykl@khailinglaw.com

Lau Yuet Sian
Partner
E: lys@khailinglaw.com

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Private Funds: A Perspective from Malaysia

Legal Insights / By / November 1, 2022

1.   Introduction

According to the 2021 Annual Report of Securities Commission Malaysia (“SC”), despite the challenging environment faced by the Malaysian economy due to Covid-19, the wholesale funds industry recorded a total net asset value of RM79.45 billion at end-2021, an increase of 17.44% from RM67.65 billion in 2020. 

A “wholesale fund” is defined under the Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework (“LOLA Guidelines”) as a unit trust scheme established where the units are to be issued, offered for subscription or purchase, or for which invitations to subscribe for or purchase the units are to be made, exclusively to sophisticated investors and any other person as may be determined by SC. As of 31 May 2022, there are 430 wholesale funds lodged with the SC.[1] “Sophisticated investors” means accredited investors, high-net worth entities or high-net worth individuals as defined under the Capital Markets and Services Act 2007 (“CMSA”). A fund of such nature may be generally known as private funds in other jurisdictions.

There are different types of wholesale funds in Malaysia, namely local wholesale funds, foreign wholesale funds, Islamic local wholesale funds and Islamic foreign wholesale funds. We will focus our discussion on local wholesale funds in this article. 

2.    Fund Management Company

As prescribed under Sections 288(2) and 289(1) of the CMSA, only a management company approved by the SC can act as a fund management company. A fund management company must comply with, amongst others, the following criteria:

  • be an entity incorporated in Malaysia; and
  • always have at least RM10 million of shareholders’ funds.

3.    Establishment of a Wholesale Fund

The LOLA Guidelines set out the requirements to be complied with by any person intending to establish a wholesale fund in Malaysia. A local wholesale fund can only be established by a fund management company holding a Capital Markets Services Licence for the regulated activity of fund management in relation to portfolio management.

A wholesale fund can be formed either under a trust structure or a custodial structure.

When establishing a wholesale fund, the fund management company or the operator of the fund must, amongst others:

  •  ascertain the size of the wholesale fund, investment objectives, financial situation and particular needs of its investors;
  • take into account its resources, expertise, experience and its overall capability to carry out its duties in accordance with the acceptable and efficacious business practices within the fund management industry;
  • ensure that the name given to the wholesale fund is not inappropriate, misleading or in conflict with the name of another collective investment scheme (“CIS”);
  • determine the investment objective of the wholesale fund;
  • define the investment strategy of the wholesale fund including the investment parameters and types of investments to be made by the wholesale fund; and
  • ensure that the liabilities of investors are limited to their investments in the wholesale fund.

The fund management company or the operator is permitted to allocate capital into one or more collective investment schemes (referred to as “target fund”), provided that the selection of the target fund is consistent with the investment objective and chosen strategy of the wholesale fund.

The fund management company or the operator must also ensure that the investments of the wholesale fund must not be detrimental to the interest of the investors or contrary to public interests. Further, the nature and structure of the wholesale fund’s investments must not result in the circumvention of any regulatory provisions or requirements that must be complied with. For instance, where a fund management company pools in clients’ monies and invest through a special purpose vehicle in assets other than (a) conventional and Shariah-compliant securities; (b) derivatives; (c) money market instruments; (d) deposits in conventional and Islamic deposit accounts; and (e) real estate located outside Malaysia, this is considered as circumvention.

Further to the above, there are additional requirements to be complied with when determining the types of investments to be made by the wholesale fund. Key examples are as set out below:

Investment strategies Requirements
Where a wholesale fund invests 85% or more of its net asset value (“NAV”)[2] in a CIS The fund manager of that CIS must be suitably authorised, regulated and supervised by a securities regulator which (i) is a signatory to the International Organization of Securities Commission (“IOSCO”) Multilateral Memorandum of Understanding as listed in its Appendix A; or (ii) has a bilateral agreement or arrangement with the SC, in particular, with regard to co-operation on supervision, investigation, enforcement and information sharing.
Where the fund management company or the operator intends to use derivatives The fund management company or the operator must possess the necessary expertise and experience including understanding the different implications of derivatives positions on the overall investment strategy and ensure that derivatives positions are fairly priced on a consistent basis while bearing in mind the market liquidity of such positions.
Where the financing of the wholesale fund involves extension of credit and other forms of lending or utilises leverage The fund management company or the operator must (i) determine the borrowing parameters for the wholesale fund (including the maximum amount of leverage, duration, and whether secured or unsecured), the basis of leverage and risks involved; (ii) have the necessary expertise and experience in managing a wholesale fund which employs any leverage strategy; and (iii) understand the impact of such leverage on the overall risk of a portfolio and having the ability to monitor the use of such leverage.
Where the fund management company or the operator invests in real estate outside Malaysia The fund management company or the operator must ensure that the real estate outside Malaysia is managed by a manager that is licensed, registered, approved or authorised to manage the foreign real estate in its home jurisdiction.

The LOLA Guidelines also provide that a trustee or a custodian must be appointed for a wholesale fund and the trustee or the custodian must be registered with the SC. The obligations and rights of the trustee or the custodian shall be specified in a trust deed or a custodial agreement, and such document shall be in force at all times.

4.    Lodgement of a Wholesale Fund

To lodge a wholesale fund with SC, the lodgement must be made by the fund management company. All information and documents as set out in the Lodgement Kit must be lodged. Information and documents required to be lodged include, among others, the fund name, structure of the fund, investment objective of the fund, asset allocation and the fund’s launch date in Malaysia. Thereafter, a wholesale fund can be offered to sophisticated investors in Malaysia as soon as the required information and documents are lodged online, and as long as the fund is launched within 60 business days from the date of lodgement.

5.    Key Obligations of a Fund Management Company[3]

Valuation and pricing obligations

  • Except for investments in real estate outside Malaysia, a fund management company must ensure that the investments of the wholesale fund are fairly valued on a regular basis and in any event, at least once a month. Where a wholesale fund invests in real estate located outside Malaysia, valuation must be conducted at least once every 3 years.
  • Further, a fund management company must take all reasonable steps to ensure that the wholesale fund and the units in the wholesale fund are correctly valued and priced. In any event of an incorrect valuation or pricing of the wholesale fund or the units in the wholesale fund, immediate remedial actions must be taken to rectify the same.

Liquidity and dealing obligations

  • A fund management company must determine the frequency of and any limitation on subscriptions and redemptions having regard to the investment objectives, financial situation and particular needs of investors.

Registration obligations

  • A fund management company must keep a register of investors and enter into the register the details of the investors. For instance, where the investor is an individual, the name, address, and the number of the identity card issued under the National Registration Act 1959 or passport number (for foreigners).
  • In addition to the above, the fund management company must enter into such register (i) the number of units held by each investor; (ii) the date on which the name of each investor was entered in the register; (iii) the date on which any person ceased to be an investor in the wholesale fund; and (iv) any other relevant information or particulars of the investor.
  • As prescribed under the LOLA Guidelines, all information entered into the register must be kept for a minimum of 7 years.

Reporting obligations

  • A fund management company must inform its investors of significant and material changes to the investment objective, investment strategy as well as any changes to the material information previously provided to the investors.
  • A fund management company must also ensure that prices, fees and charges be made available to investors periodically.

6.   Perspective

Private investment funds have become increasingly popular as a means to raise and deploy capital. According to the McKinsey’s Global Private Markets Review 2022, after a year of pandemic-driven turbulence that suppressed fundraising activities, private markets rebounded across the board. Global private markets assets under management (“AUM”) reached an all-time high of US$9.8 trillion in the first half of 2021, 33% higher than the year before.

According to the report issued by the Institute for Capital Market Research Malaysia in December 2021, AUM for the Malaysia private equity industry has been growing at a sluggish pace of 6.7% annually from US$3.7 billion in 2010 to US$6.8 billion in December 2020, compared to Singapore (18.6%), Japan (14.9%), South Korea (29.6%), and even ASEAN region as a whole that has recorded growth of over 14.8% over the same period.

The report highlighted that Malaysia faces a unique set of challenges in the private equity industry. One of the key challenges is the absence of alternative fund structure with greater flexibility in capital contributions and profit distributions. Measures adopted in neighbouring jurisdictions in addressing such issue include variable capital companies under the Singapore’s Variable Capital Companies Act 2018 and limited partnerships under the Hong Kong’s Limited Partnership Fund Ordinance. In comparison, Malaysia permits only relatively rigid fund vehicle structure, which would have hampered the attractiveness of Malaysia in the setting up of private funds. As highlighted above, a wholesale fund can only be set up in Malaysia under a trust structure or a custodial structure.

It may be timely for the policymakers to review the regulatory regime in Malaysia to push ahead a friendlier and more attractive regime for private funds. Given its strategic location within the ASEAN region, Malaysia will be well-positioned to benefit from the growth in private capital AUM in Asia, if a modern and transparent legal framework is put in place, supported by attractive tax incentives and robust business environment.

[1] SC’s Wholesale Fund Summary of Statistics as at 30 June 2022

[2] Part 1, Chapter 4, Paragraph 4.03 of the LOLA Guidelines provide that for the purpose of determining the wholesale fund’s NAV, the valuation of the assets and liabilities must be based on a process which is consistently applied; and objective and capable of being verified by investors.

[3] Part 1, Chapter 4 of the LOLA Guideline

This legal update is for general information only and is not a substitute for legal and tax advice.

Published on: 30 August 2022

Should you have any queries as to how these developments affect your business, please do not hesitate to contact us. 

Yau Khai Ling 
Principal Partner
E: ykl@khailinglaw.com

Chan Yi Ling
Associate
E: cyl@khailinglaw.com

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Practical Considerations for IEO Exchanges

Legal Insights / By / August 29, 2022

 1.         Introduction: What is an IEO?

An initial exchange offering (“IEO”) is a digital fundraising mechanism where an issuer offers digital assets to investors through an IEO platform in exchange for funds.

In regulating IEOs, the Securities Commission Malaysia (“SC”) has issued the Guidelines on Digital Assets (“DA Guidelines”). Under the DA Guidelines, an IEO platform can only be operated by IEO platform operators who are registered with the SC[1].

We offer our thoughts on practical considerations of an IEO.

2.          Practical Considerations of an IEO

2.1     Asset tokenization

Asset tokenization denotes “loading” a physical asset or contractual right into a token run on a blockchain. There are many compelling reasons to do so, including ease of transacting and settlement and transparent proof of ownership.

However, without legislation which integrates and synchronizes the physical and digital world, asset tokenization may be challenging. For example, if a piece of land in Malaysia were tokenized, who would the law recognize as the legal proprietor of the said piece of land – the person in the register document of title retained by the government pursuant to the National Land Code or the holder of the token?

In the absence of such legal framework, it is possible to construct a legal “bridge” between the token and its underlying assets via use of custodians/trustees. In such a structure, the custodian/trustee will be the legal owner of the underlying physical asset, and will recognize the token holder as the beneficial owner of such asset. However, use of custodians/trustees may nullify the promise and features of blockchain technology particularly immutability and decentralization.

2.2     Secondary trading market 

The success of IEO as a bona fide fundraising avenue in Malaysia may be heavily dependent on the vibrancy of a secondary market for digital assets issued pursuant to IEOs. One may deduce that an investor will be reluctant to invest in an IEO unless the exit path of his/her investment is clear.  

Putting aside whether there will be sufficient natural liquidity of the digital assets (this will be dependent on government policies and private sector initiatives to co-create a vibrant IEO ecosystem), two other issues bear mentioning.

First, the DA Guidelines provide that the trading of digital assets in the secondary market is not absolute – it would be subject to the approval of the SC.  

Second, SC-registered digital asset exchanges must be willing to facilitate secondary trading in a manner which satisfies SC’s requirements, without subjecting digital asset holders and/or issuers to restrictive/stringent/onerous requirements.

2.3  Accounting treatments for digital assets

Digital assets challenge traditional accounting standards. 

Currently there appears to be no agreed accounting standard in Malaysia on how to account for digital assets.

Without clarity in how to account for digital assets, entities/corporations may find it challenging to participate in any investment in IEO. The universe of subscribers/investors of digital assets issued pursuant to an IEO will thereby be unnecessarily limited to individuals.

For completeness, there are some who may have argued that digital assets meet the definition of intangible assets under the Malaysian Financial Reporting Standards (MFRS), and should be treated as such. We suspect this offers limited help to expand the universe of subscribers/investors to include entities/corporations as volatility in the price of digital assets (particularly if market depth of secondary trading is poor) could result in impairments, which in turn affects such entities/corporations’ profit and loss statements.

3.       Conclusion

IEO is no doubt an innovative fundraising mechanism which balances the need to embrace innovation and the importance of safeguarding of investors’ interests. However, in order to grow the IEO ecosystem, a coherent and comprehensive regulatory framework/standard must be put in place to address, amongst other things, the practical considerations highlighted above.

[1]        To learn more about the regulatory regime for IEO in Malaysia, please refer to Chapter 2 of our Digital Assets Series at https://khailinglaw.com/digital-assets-series-chapter-2/.

This legal update is for general information only and is not a substitute for legal and tax advice.

Published on: 29 August 2022

Should you have any queries as to how these developments affect your business, please do not hesitate to contact us. 

This article was co-authored by Yau Khai Ling, Lee Chongshen and Chan Yi Ling. 

Lee Chongshen is a Director of Insights Law LLC, an award-winning full service Singapore law firm specialising in the areas of corporate and commercial law, tax and dispute resolution. For more information, please visit http://www.insightslaw.sg.

Yau Khai Ling 
Principal Partner
E: ykl@khailinglaw.com

Lee Chongshen 
Director of Insights Law LLC 
E: chongshen.lee@insightslaw.sg

Chan Yi Ling
Associate
E: cyl@khailinglaw.com

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Multimedia Super Corridor (MSC) to Malaysia Digital (MD): A Revamp of Malaysia’s Digital Economy Initiative

Legal Updates / By / August 22, 2022

            1.            Introduction

In 1996, Malaysia launched the Multimedia Super Corridor (“MSC”) initiative, aimed to promote and boost Malaysia’s digital economy by offering a range of incentives, including tax exemptions to companies who are eligible to attain MSC status.  

This initiative was recently revamped on 4 July 2022, when the Government of Malaysia, through Malaysia Digital Economy Corporation (“MDEC”), introduced Malaysia Digital (“MD”) to replace MSC as the new national strategic initiative to encourage and attract companies, talents and investment to Malaysia’s digital economy.

Under the MD initiative, companies awarded with Malaysia Digital status (“MD Status”) shall be entitled to a set of incentives, rights and privileges more particularly set out in the Malaysia Digital Bill of Guarantees (the “BoGs”). To apply for MD Status, a company is required to complete an application process on the MDEC website here.

This article will discuss certain key aspects of the MD Status.  

            2.            Key Aspects

The Guidelines on Malaysia Digital Status (“MD Status Guidelines”) is the main document setting out the guidelines relating to MD Status, including eligibility criteria, applicable conditions, benefits and incentives as well as post approval matters.

2.1       Eligibility Criteria

A company is required to meet the following criteria to be eligible for MD status[1]:

  • be incorporated under the Companies Act 2016 and resident in Malaysia;
  • proposes to carry out or is currently carrying out one or more of the prescribed activities (each a “MD Approved Activity”), as more particularly set out in Paragraph 2.2 below. 

2.2       MD Approved Activities

Activities which constitute MD Approved Activities[2] are the research, development and commercialization of solution and/or provision of services in relation to any of the following technologies or areas:

  • big data analytics (BDA);
  • artificial intelligence (AI);
  • financial technology (Fintech);
  • internet of things (IoT);
  • cybersecurity (technology/software/design and support);
  • data centre and cloud;
  • blockchain;
  • creative media technology;
  • sharing economy platform;
  • user interface and user experience (UI/UX);
  • integrated circuit (IC) design and embedded software;
  • 3D printing (technology/software/design and support);
  • robotics (technology/software/design);
  • autonomous technologies;
  • systems/network architecture design and support;
  • global business services or knowledge process outsourcing;
  • virtual, augmented and/or extended reality;
  • drone technology;
  • advance telecommunication technology; or
  • other emerging technologies deemed significant for the digital ecosystem subject to approval by a committee made up of representatives from the Government of Malaysia (“Approval Committee”).

2.3       Conditions of MD Status

2.3.1  Following the award of MD Status, a company is required to adhere to the following conditions within 12 months from the date of award[3]:

  •  Activity. Commence operating or undertaking its MD Approved Activity(ies) in Malaysia.
  • Knowledge Workers[4]. Employ at least 2 employees (comprising knowledge workers) on a full-time basis for its MD Approved Activity(ies), each paid a minimum average monthly base salary of RM5,000.
  • Operating Expenditure. Incur a minimum annual operating expenditure of RM50,000 for its MD Approved Activity(ies).
  • Paid-up Capital. Have a minimum paid-up capital of RM1,000.  

2.3.2  Further to the above, MD Status company must also comply with such other applicable laws and regulations, including obtaining all required permits/licences from the relevant regulatory authority and adhering to the requirements thereunder.

2.4      Benefits of MD Status

2.4.1    BoGs

          The BoGs reflects the Government of Malaysia’s intention to provide the following incentives, rights and privileges to a MD Status company:

  • BoG 1: To provide a world-class physical and information infrastructure[5].
  • BoG 2: To allow employment of local and foreign knowledge workers.
  • BoG 3: To ensure freedom of ownership by exempting companies with MD Status from local ownership requirements.
  • BoG 4: To give freedom to source capital globally for MD infrastructure and the right to borrow funds globally.
  • BoG 5: To provide competitive financial incentives, namely income tax exemption or investment tax allowance and no duties on importation of multimedia equipment.
  • BoG 6: To become a regional leader in intellectual property protection and cyber laws.
  • BoG 7: To ensure no censorship of the Internet.
  • BoG 8: To provide globally competitive telecommunications tariffs.
  • BoG 9: To tender key MD infrastructure contracts to leading companies willing to use Malaysia as their regional hub.
  • BoG 10: To provide a high-powered implementation agency to act as an effective one-stop super shop.

For more details on the above, please refer to the full document of the BoGs at the following link.

2.4.2    Other benefits

A MD Status company may also be eligible for other benefits, namely (a) access to local and international market and ecosystem, (b) business matching and partnership, (c) grant and funding facilitation, and/or (d) participation in MD catalytic (PEMANGKIN) programmes.

2.5      Post Approval Compliance

The MD Status company shall be subject to continuing obligations under the MD Status Guidelines, including:

  • making the necessary notifications to MDEC for any change in information such as change in the paid-up capital, equity or shareholding structure of the company, name and/or business operating address etc.[6];
  • obtaining approval from the Approval Committee for any variation to the conditions of MD Status as specified in the approval letter[7];
  • submitting to MDEC such information and/or documents as may be requested by MDEC for the purpose of reporting on the progress of its MD Approved Activity(ies) and/or determining compliance of the applicable conditions[8].

3.         Conclusion

3.1     The MD initiative appears to offer greater flexibility than the previous MSC regime. For instance, MD Status companies are now allowed to operate and undertake their MD Approved Activities anywhere in Malaysia and will no longer be required to operate in designated premises and/or be subject to minimum office space requirements in order to enjoy certain benefits, as was the case for MSC status companies.

3.2     With the implementation of the MD initiative, existing MSC status companies need not reapply and will be automatically accorded with MD Status to continue to enjoy the benefits and incentives under the BoGs, subject to compliance with the existing applicable conditions.

3.3    Advances in technology and shifts in consumer behaviour in recent years have resulted in an increasing number of companies tapping into fintech, blockchain or IT-related business models. Given the various benefits, privileges and support programmes provided by the Government of Malaysia under the MD initiative, it may be worthwhile for such companies to attain MD Status, where eligible.

 

[1] Paragraph 2.0 of the MD Status Guidelines.

[2] Appendix 1 of the MD Status Guidelines.

[3] Paragraph 3.0 of the MD Status Guidelines.

[4] Please refer to Appendix 2 of the MD Status Guidelines for the definition of a “knowledge worker”.

[5] Only available to MD Status companies operating in “Designated Premises” or other commercial premises within “MD Cybercities” or “MD Cybercentres”.

[6] Paragraph 8.2 of the MD Status Guidelines.

[7] Ibid.

[8] Paragraph 9.0 of the MD Status Guideline

This legal update is for general information only and is not a substitute for legal and tax advice.

Published on: 22 August 2022

Should you have any queries as to the Malaysia Digital Status in Malaysia, please do not hesitate to contact us. 

This article was co-authored by Lau Yuet Sian and Charissa Chan Shi Kai. 

Lau Yuet Sian
Partner
E: lys@khailinglaw.com

Charissa Chan 
Associate
E: csk@khailinglaw.com

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Can our laws keep up with innovative business models arising from cryptocurrency?

Legal Insights / By / July 29, 2022

Introduction

Laws and regulations tend to always trail innovation. The rise of cryptocurrencies is no different. Compared to traditional fiat currencies, cryptocurrencies are virtual, encrypted and decentralized mediums of exchange with no control by any central authority.

This article explores the potential gaps in the existing laws of Malaysia in regulating or facilitating certain new business models adopted or emerging in the western countries which use cryptocurrencies.

Cryptocurrency Lending

Under the Moneylenders Act 1951 (“Moneylenders Act”), “moneylending” refers to the lending of money at interest, with or without security, to a borrower.

Consider a business which lends bitcoin, also known as BTC, against security/collateral in BTC. Principal and interest are payable in BTC. The lender disburses the loan in BTC, which is thereafter immediately converted into fiat currency upon receipt by the borrower – this process takes a fraction of a second. Is this moneylending?

As it stands, cryptocurrencies like BTC are neither recognized as legal tender in Malaysia nor statutorily defined as money. As such, one may argue that a literal reading of the Moneylenders Act suggests that BTC lending may not be “moneylending” and therefore would not be regulated under the Moneylenders Act.

Money Remittance using Cryptocurrency Payment Rails

Under the Malaysia Money Services Business Act 2011 (“MSBA”), “remittance business” refers to the transferring or facilitating the transfer of “funds”, which in turn is defined as “any unit of account or unit of value that facilitates the purchase of goods or services”. 

Consider a business which uses the BTC protocol (instead of legacy telegraphic transfers using SWIFT) as a payment rail to remit money anywhere in the world instantly. Conceptually, to transfer RM100 equivalent to Tanzania – the transferor deposits RM100 with the remitter, it is converted into BTC, then transferred via the Lightning Network (a secondary layer on the BTC protocol), then converted into Tanzanian Shillings and finally deposited into the recipient’s Tanzania bank account – all within a fraction of a second and a fraction of telegraphic transfer costs which banks now charge. Is this money remittance?

The applicability of the MSBA to such business in Malaysia depends on whether BTC constitutes “funds” or “money” within the meaning of MSBA. Whilst BTC may be regarded as a unit of account or unit of value, it is arguable that it does not facilitate the purchase of goods or services considering it is not recognized as legal tender in Malaysia. Until these points are clarified, the applicability of the MSBA to such business in Malaysia may remain unclear.

Bitcoin Mining

Bitcoin mining refers to the process where a global network of computers compete to solve complex math puzzles in order to validate new transactions in a distributed ledger (blockchain) and be rewarded with BTC. The system is designed to make the math puzzles increasingly difficult as demand for BTC grows whilst the supply of BTC remains fixed based on predetermined milestones. Solving the calculations requires hardware and energy, which are generally paid for by selling the BTC for fiat.

Uncertainties abound vis a vis the taxability of BTC proceeds under the Income Tax Act 1967. For example, if a company receives 1 BTC today (worth RM100,000/BTC) from its mining activities but only sells the said BTC one year later (at RM200,000/BTC), how is its revenue recorded on its profit and loss statement? Furthermore, the Malaysian Financial Reporting Standards does not currently provide for any standards to record BTC (and other cryptocurrencies) held on a company’s balance sheet.

Conclusion

To date, Malaysia has relied on subsidiary legislation such as the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 and Securities Commission Guidelines on Digital Assets to plug the gaps in law in this space. Whilst these are applaudable efforts to govern, inter alia, the trading of cryptocurrencies or issuance of digital assets in Malaysia, we look forward to the enactment of other primary laws for more holistic governance of innovative businesses using cryptocurrencies, including those discussed above. Until then, it is for us to rely on first principles in law in navigating the cryptocurrency landscape in Malaysia. 

This legal update is for general information only and is not a substitute for legal advice.

Published on: 29 July 2022

Should you have any queries as to how these developments affect your business, please do not hesitate to contact us. 

This article was co-authored by Yau Khai Ling, Lee Chongshen and Charissa Chan Shi Kai. 

Lee Chongshen is a Director of Insights Law LLC, an award-winning full service Singapore law firm specialising in the areas of corporate and commercial law, tax and dispute resolution. For more information, please visit http://www.insightslaw.sg.

Yau Khai Ling 
Principal Partner
E: ykl@khailinglaw.com

Lee Chongshen 
Director of Insights Law LLC 
E: chongshen.lee@insightslaw.sg

Charissa Chan 
Associate
E: csk@khailinglaw.com

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A Regulatory Overview on Fintech Fundraising Platforms in Malaysia

Legal Insights / By / July 28, 2022
network, technology, connection

1.     Rise of Fintech

1.1   In this digital age, financial technology (“fintech”) has been increasingly embraced as businesses and consumers alike shift towards digital solutions, including e-commerce, contactless payments and digital financial services.

1.2   In Malaysia, it was recently entrenched in the Twelfth Malaysia Plan 2021-2025 that the Government of Malaysia will undertake efforts to position Malaysia as a regional centre for fintech, offering both conventional and Islamic fintech services[1]. Further, Bank Negara Malaysia (“BNM”) had also indicated its commitment in its Financial Sector Blueprint 2022-2026 to, among others, facilitate greater digitalisation of business models in financial services and to advocate and support the growth potential of Malaysia’s broader fintech ecosystem[2].

1.3  In tandem with its developments, fintech has also transformed the platforms through which businesses or entities may undertake alternative fundraising activities for their business in Malaysia. This article will focus on the regulatory overview on fintech fundraising platforms in Malaysia.

2.     Fintech Regulatory Regime in Malaysia – In General

2.1   Activity-Based Regulation

Malaysia does not have a specific regulatory regime applicable to fintech businesses. Generally, the nature or type of business activities carried out by a fintech business will dictate how it is to be regulated under the existing laws and regulations. The regulatory framework generally applicable to traditional financial services remains relevant, and would include laws such as the Financial Services Act 2013, the Islamic Financial Services Act 2013, the Money Services Business Act 2011, the Capital Markets and Services Act 2007 as well as various standards and guidelines issued by BNM and the Securities Commission Malaysia (“SC”).

2.2   Main Regulatory Bodies 

(a) BNM and the SC are the main regulatory bodies that regulate fintech in Malaysia. Broadly speaking, fintech businesses which relate to:

(i) financial markets such as banking, money and payment services would be regulated by BNM; and

(ii) capital markets such as dealing in securities or derivatives, fundraising, fund management and investment advice would be regulated by the SC. 

(b) Notwithstanding the above, certain fintech business activities may fall under the purview of both regulators. This is illustrated in the case of digital assets, wherein BNM and the SC clarified in a joint statement[3] in 2018 that the issuance and trading of digital assets will be regulated by the SC, and where the digital assets involve a payment function, players dealing in such digital assets will be regulated by BNM. 

(c) Both regulators have taken an active role in the preceding years to encourage the development of the fintech space in Malaysia:

(i) SC

In September 2015, the SC launched the Alliance of FinTech Community (aFINity) to catalyse and nurture fintech development in the Malaysian capital market and is intended to serve as a platform for continuous interactions between the SC as a capital market regulator and all relevant fintech stakeholders such as innovators, financial institutions, government agencies, ecosystem players and investors[4].

Since then, the frameworks for alternative forms of fundraising namely equity crowdfunding (“ECF”), peer-to-peer financing (“P2P Financing”) and initial exchange offering (“IEO”) have been introduced by the SC. In addition to the licensing of ECF and P2P Financing operators in Malaysia, the SC had recently in March 2022 registered a total of two (2) IEO operators to provide an alternative avenue for eligible businesses to raise funds via the issuance of digital tokens in Malaysia[5].

(ii) BNM

In October 2016, a Financial Technology Regulatory Sandbox Framework was introduced by BNM in 2016 to facilitate the deployment and testing of fintech solutions in a live environment[6]. BNM also introduced a licensing framework for digital banks in December 2020, with an aim to enable the innovative application of technology to uplift the financial well-being of individuals and businesses and foster sustainable growth[7]. Pursuant thereto, BNM had in April 2022 announced a total of five (5) successful applicants for the digital bank licences as approved by the Minister of Finance[8].

Further, BNM announced in November 2021 that it is driving inter-agency efforts to enact the Consumer Credit Act with an aim to strengthen the regulatory arrangements to govern all consumer credit activities including “Buy Now Pay Later (BNPL)” schemes which are on the rise within the fintech space of Malaysia.

BNM’s commitment in updating its regulatory approach for fintech can also be seen in the issuance of the exposure draft of a policy document for electronic money (“e-money”) issuers in June 2021 (“Draft E-Money Policy”). E-money is a payment instrument that stores monetary value that is paid in advance by the user to the issuer of e-money, and is quickly becoming one of the main payment methods in Malaysia. The Draft E-Money Policy, when finalised, will replace the Guideline on Electronic Money (E-money) issued in 2008 and be applicable to approved issuers of e-money under the Financial Services Act 2013.

3.     Fintech Regulation of Fundraising Platforms

3.1 Within the Malaysian regulatory context, fintech fundraising platforms are generally classified as recognised market operators (“RMO(s)”) and governed by the SC. For these purposes, the Capital Markets and Services Acts 2007 (“CMSA”), administered primarily by the SC, is the main governing legislation. To operate a recognised market, a person is required to apply to the SC under Section 34 of the CMSA to be registered as a RMO.

3.2   Subject to fulfilling the prescribed registration requirements, the following fintech fundraising platforms are deemed to be RMOs:

(a) ECF platform – an online fundraising platform for start-ups or micro, small and medium enterprises to obtain capital through small equity investments from a group of investors;

(b) P2P Financing platform – an online fundraising platform which facilitates a debt-based fundraising method that is akin to a loan wherein investors provide financing to a business by subscribing to investment notes or Islamic investment notes; 

(c) Property crowdfunding (“PCF”) platform – an online fundraising platform for homebuyers to obtain financing for the purchase of property from a group of investors who subscribe for investment notes or Islamic investment notes;

(d) E-services platform – an online fundraising platform which arranges or facilitates the sale, purchase or subscription of a capital market product offered by a holder of a Capital Market Services Licence (“CMSL”) granted under Section 61 of the CMSA to investors; and

(e) IEO platform – an online fundraising platform for businesses to raise funds through IEO i.e. the offering of digital tokens to investors.

3.3   To supplement Section 34 the CMSA in relation to the registration of a RMO, the SC has issued specific guidelines to prescribe the relevant registration and ongoing operating requirements for RMOs. In particular, the SC has issued:

(a) Guidelines on Recognized Markets (“RM Guidelines”) to regulate, among others, ECF, P2P Financing, PCF and E-services platforms; and

(b) Guidelines on Digital Assets (“DA Guidelines”) to regulate IEO platform. 

3.4   Apart from the RM Guidelines and DA Guidelines, fintech fundraising platforms would also be governed by other applicable guidelines or practice notes issued by the SC from time to time. For instance, in view that the technical infrastructure of fintech fundraising platforms is heavily reliant on information technology (IT) systems which collect and process critical data, fintech fundraising platforms must also observe the requirements under the Guidelines on Management of Cyber Risk to manage cyber risks and mitigate cyber threats to protect investors’ confidential data.

3.5    That being said, the regulatory frameworks as set out above in relation to fintech fundraising platforms are by no means exhaustive, and a fintech fundraising platform must also comply with such other Malaysian laws and regulations as may be applicable to it, including but not limited to the following:

(a) Anti-Money Laundering / Countering Financing of Terrorism (“AML/CFT”)

Fintech fundraising platforms are generally required to observe AML/CFT laws and to establish adequate AML/CFT frameworks in its operations. The Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (“AMLA”) was amended on 24 December 2021 to, among others, extend the application of Part IV of the AMLA (concerning the reporting obligations of reporting institutions) to RMOs[9].

(b) Personal data protection and privacy

The Personal Data Protection Act 2010 (“PDPA”) and the regulations or guidelines issued thereunder apply to any person who processes and has control over or authorises the processing of any personal data in respect of commercial transactions.  

(c) Anti-corruption and whistleblowing

Fintech fundraising platforms are also generally required to impart anti-corruption and whistleblowing measures within their organisations that are appropriate to the nature, scale and complexity of their businesses, in accordance with the Malaysian Anti-Corruption Commission Act 2009 and the Whistleblower Protection Act 2010, as well as the guidelines or regulations made thereunder.

4.     Perspective

4.1   The SC reported a growth of 149.2% in alternative financing for 2021 from 2020, with RM1.4 billion raised from ECF and P2P Financing platforms[10]. It is beyond doubt that the SC’s efforts in recognising fintech forms of fundraising and in implementing the relevant frameworks has benefitted businesses in Malaysia, especially small and medium enterprises which traditionally have limited means of financing their businesses.

4.2   At the same time, fintech fundraising platforms have also served to democratise access to investment opportunities for a broader spectrum of investors, and investors may take comfort in the fact that such platforms are under the purview of a robust regulatory regime overseen by the SC. To boot, it is worth mentioning that the recent registration of two (2) new IEO operators will open new doors to businesses and investors alike, and we eagerly anticipate for the fintech fundraising space in Malaysia to be further stimulated in the near future.

 

[1] Twelfth Malaysia Plan, 2021-2025 (epu.gov.my)

This legal update is for general information only and is not a substitute for legal advice.

Published on: 28 July 2022

Should you have any queries as to how these developments affect your business, please do not hesitate to contact us. 

Yau Khai Ling 
Principal Partner
E: ykl@khailinglaw.com

Lau Yuet Sian
Partner
E: lys@khailinglaw.com

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