Shearn Delamore & Co. Newsletter June 2019
Click here to download the PDF version: Regulatory Framework for Property Crowdfunding in Malaysia.
FINANCIAL SERVICES
IN THIS ARTICLE, TANG JIA YI HIGHLIGHTS THE REGULATORY FRAMEWORK FOR PROPERTY CROWDFUNDING IN MALAYSIA.
In recent years, crowdfunding has emerged and is steadily gaining popularity as an alternative source of financing for various ventures. What in the beginning may seem like a trend embraced only by start-ups desperate for cash has gained traction in a number of countries, especially among the European countries, in less than a decade.
In line with this global phenomenon, the Securities Commission Malaysia (“SC”) had on 19 and 20 September 2014 organised the first equity crowdfunding forum in Malaysia — bringing together over 600 entrepreneurs and investors to create public awareness on the potential of equity crowdfunding as an alternative channel to raise capital[efn_note]See more at www.sc.com.my/news/media-releases-and-announcements/first-equity-crowdfunding-forum-in-malaysia-to-build-awareness-on-alternative-fund-raising-channel.[/efn_note].
Subsequently, the SC released the Guidelines on Regulation of Markets under section 34 of the Capital Markets and Services Act 2007 to introduce new requirements for the registration of equity crowdfunding (“ECF”) platforms and provide governance arrangement for the operators of such platforms[efn_note]See more at www.sc.com.my/news/media-releases-and-announcements/sc-releases-new-guidelines-to-facilitate-equity-crowdfunding.[/efn_note].
Since its inception, ECF has raised RM48.87 million capital through 51 successful campaigns by 50 issuers, with a 93% campaign success rate. In 2018, RM15.06 million was raised by 14 issuers[efn_note]Annual report 2018, Securities Commission Malaysia.[/efn_note].
The Malaysian Government has now taken a further step by applying the concept of crowdfunding to the real estate sector. In the Budget 2019, it was announced that the Government will be approving private sector driven “property crowdfunding” platforms as a demonstration of the Government’s willingness to explore new, technology-enabled and innovative mechanisms to solve housing problems.
The aim is to provide an alternative avenue of financing for first-time homebuyers[efn_note]Budget 2019, Ministry of Finance Malaysia.[/efn_note]. Following that, the SC has on 17 May 2019 released a new property crowdfunding (“PCF”) framework by introducing a new Chapter 16 to the Guidelines on Recognized Markets (“Guidelines”).
Under Chapter 16 of the Guidelines, a PCF platform is defined as an electronic platform that facilitates:
- crowdfunding for residential property; and
- secondary trading of the investment note or Islamic investment note.
To become a PCF operator, the operator must be locally incorporated and have minimum shareholders’ funds of RM10 million, of which RM5 million must be set aside and maintained in a separate bank account at all times throughout the operation of the PCF platform. Such funds can only be utilised for the purposes of ensuring and facilitating the exit certainty of the investment notes or Islamic investment notes hosted on its PCF platform[efn_note]Paragraphs 16.03 and 16.04, Chapter 16 of the Guidelines.[/efn_note].
Chapter 16 of the Guidelines prescribes rules governing PCF platforms and sets out additional requirements applicable to PCF operators with the intention to protect the interests of homebuyers and investors. For instance, the PCF operators must establish a robust operational risk management framework, have an internal audit function, have in place rules and procedures for the hosting of a residential property and the issuance, trading, clearing and settlement of investment note or Islamic investment note on its platform, as well as policies and procedures on exit certainty and management of conflicts of interest[efn_note]Paragraphs 16.07, 16.09, 16.10, 16.11 and 16.12, Chapter 16 of the Guidelines.[/efn_note].
Furthermore, this new Chapter has also stipulated, among others, eligibility and obligations of homebuyers and the criteria of an eligible property. A homebuyer must be a first-time homebuyer who is a Malaysian citizen and at least 21 years old[efn_note]Paragraph 16.14, Chapter 16 of the Guidelines.[/efn_note]. During the tenor of the investment note or Islamic investment note, a homebuyer must ensure he occupies the residential property, uses his best endeavours to maintain the property in good condition and is not allowed to sell or transfer the residential property[efn_note]Paragraph 16.15, Chapter 16 of the Guidelines.[/efn_note].
Only a property which satisfies the following criteria is eligible to be hosted on a PCF platform:
- it is a completed residential property located in Malaysia;
- it has a valid and effective legal title with no encumbrances attached;
- it has been issued a certificate of completion and compliance by the relevant authority; and
- it is valued at RM500,000 or below[efn_note]Paragraph 16.17, Chapter 16 of the Guidelines.[/efn_note].
A homebuyer may seek residential property financing of up to a maximum of 90% of the value of the residential property. Nonetheless, it should be noted that the homebuyer is not allowed to retain any amount raised during the tenor of the property crowdfunding scheme which exceeds the target financing amount[efn_note]Paragraphs 16.19 and 16.20, Chapter 16 of the Guidelines.[/efn_note].
Conclusion
With the implementation of this new framework, it is interesting to see how this would spur the property market in Malaysia and, moving forward, hopefully more initiatives will be introduced to facilitate the evolution of the capital market and enhance economic growth in Malaysia.
TANG JIA YI
FINANCIAL SERVICES PRACTICE GROUP
For further information regarding financial services matters, please contact our Financial Services Practice Group.
This Alert is issued for the information of the clients of the Firm and covers legal issues in a general way. The contents are not intended to constitute any advice on any specific matter and should not be relied upon as a substitute for detailed legal advice on specific matters or transactions.