Legal Insights

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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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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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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