New Tax Incentives…Make Crowdfunding More Inclusive!

Ata Plus’ very own Co-Founder and Director, Aimi Aizal, shares insights on the 50% tax break – now available to all investors, and its impact on the Malaysian Equity Crowdfunding (ECF) Landscape.

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Malaysia has always been home to entrepreneurs. 

Over 98.5% of registered businesses in the country fall under the Small and Medium Enterprise (SME) category, and whether you ask a streetside hawker, or the latest Malaysian tech startup – one common experience connects them all: The uphill battle of raising capital. 

The Malaysian Government has made incredible strides in filling this gap, especially their move to make Malaysia the first ASEAN country to recognise Equity Crowdfunding (ECF) as a financial instrument.

In yet another landmark decision through Budget 2021, the Government has announced a 50% tax break on investments made into ECF campaigns.

 

How Social Media Put the ‘Crowd’ in Crowdfunding

A mere two decades ago, most entrepreneurs were faced with limited fundraising options. The most common avenue involved pitching to friends and family, banking on the goodwill of their personal network. Some turned to maxing out one credit card after another, and a lucky few were able to secure bank loans or meetings with a VC. These options came to a sudden stop during the 2008 financial crisis. Banks tightened their credit terms, individuals were more wary of giving out loans and startups were left in a lurch.

However, this moment in history coincided with the rise of social media – and thousands of entrepreneurs flocked to the online community, pitching to new audiences who were previously impossible to reach. Among the implications of this move was the start of Equity Crowdfunding (ECF). ECF is a process whereby the general public (the ‘crowd’) invests in early-stage, unlisted companies in exchange for shares in that company.

 

Equity Crowdfunding in Malaysia

In Malaysia, ECF was recognised as a financial instrument in 2015 and remains regulated by the Securities Commission. Between 2018 and September 2020, the amount fundraised within the Malaysian ECF sector has tripled, going from RM48.85 mil in 2018 to RM129.64 in September 2020 – indicating an increased appetite for ECF campaigns within both startup and investor circles!

While the amount of funds raised have drastically increased, there has been little to no change to the investor demographics over the years. Retail investors make up 59% of all ECF investors in the country, followed by Angel Investors (20%), Sophisticated Investors (19%) and Institutional Investors (2%). 

Institutional investors, otherwise known as organisations that invest on behalf of its members such as mutual funds and pensions remain the smallest percentage of investors. While these investor types have greater ability to invest large amounts at a regular cadence, their stringent due diligence processes often take months before an investment is approved – usually outlasting the general lifespan of an ECF campaign.

To make up for this, and in the spirit of ECF, the Malaysian government has made efforts to encourage a larger number of people to invest, instead of relying on larger investment amounts from institutional investors. Among these efforts were the establishment of the Malaysian Co-Investment Fund (MyCIF), and most recently – their move to increase the funding limit for each campaign to RM20 million and the introduction of a 50% tax break for Malaysian investors. 

 

In A Nutshell: ECF Tax Incentives in Malaysia

While ECF revolves around the power of the ‘Crowd,’ Malaysia’s initial tax incentives for the sectors’ Investors did not fully embody the spirit of ECF. Historically, tax incentives were only available to investors through the Malaysian Business Angel Network (MBAN). The MBAN network was made up of high net worth individuals capable of investing anywhere upwards from RM500,000 (which was the income tax relief rate offered to Angel Investors for their investment into a single company). 

Budget 2021 widens the tax exemptions to include retail investors as well, offering up to a 50% income tax break in hopes of encouraging Malaysia’s largest segment of ECF investors to continue funding high-potential startups. The tax exemption is available for all investments made from 1 January 2021 to 31 December 2023 and is subject to the following conditions: 

• The exemption is limited to RM50,000 for each year of assessment 
• The deduction is limited to 10% of the aggregate income for that year of assessment
• The investor, investee company and amount of investment must be verified by SC
• The investor must not have any family relationship with the investee company
• The investment must not be disposed of, in full or in part, within 2 years from the date of investment

 

Emulating U.K. – The Most Successful ECF Market 

In countries with significant ECF presence, tax incentives have been recorded to have a positive correlation with the amount of funding raised. A study done by the European Commission shows that the supply for funding will increase as tax incentives are introduced. 

The UK, the world’s most successful ECF market, has raised nearly half a billion dollars through ECF, and supplies more than 15% of the UK’s early stage finance. Among the biggest contributing factors to its success includes its sympathetic tax systems – the Enterprise Investment Scheme (EIS), which helps entrepreneurs raise finance by offering tax relief to investors, as well as the Seed Enterprise Investment Scheme (S-EIS), which offers tax relief to individual investors who purchase new shares in companies. In a very recent study, Estrin found that on the investors’ side, tax breaks represent one of the ‘first-order’ reasons for investing in equity crowdfunding. 

With the Budget 2021 Tax Break, it is exciting to see how much the pool of Malaysian investors will grow by. Similar tax schemes such as the EIS in the UK have resulted in not only an influx of investors, but also an uptick in the number of companies who successfully received funding. 

As we navigate through another difficult period of restricted movement orders and COVID-19 restrictions, the increase in funding from the public will surely make a difference in ensuring the financial stability and health of Malaysia’s many SMEs.