What is Equity Crowd Funding (ECF)
Equity crowdfunding is the act of raising capital from the ”crowd” through the sale of securities (shares, convertible note, debt, revenue share, and more).
I’ll be using pitchIN as my example here because I only have experience in using pitchIN as an ECF platform. There are many other platforms in Malaysia but right now, pitchIN is the largest and in my opinion safest.
Raising Capital from the Crowd
The ”crowd” includes individuals and institutional investors alike. Anyone can partake in the offering. There are however certain restrictions in place ie. an individual has to be of age. Also, there are limits on how much capital an individual can invest based on their income, net worth, and financial knowledge.
pitchIN groups its investors into 3 different categories.
- Angel Investor
Gross Income of more than RM180,000 per annum.
An angel investor is entitled to invest a maximum of RM500,000 per annum in total in any company.
- Sophisticated Investor
Net personal assets of more than RM3 million with experience in investing.
A sophisticated investor can invest freely on pitchIN up to any amount.
- Retail Investor
If you’re not in the aforementioned two groups, you belong here together with me.
A retail investor can invest only RM5,000 per company and a total of RM50,000 per annum.
With equity crowdfunding, companies are selling securities, giving investors skin in the game and a slice of the company.
On pitchIN, investors typically become a shareholder of the company with all the associated rights and benefits.
Pros of ECF
ECFs are a high risk high return form of investment. I’d rank it as one of the highest among all other asset classes.
Your potential return can range from 2x to 100x in a few years if you invested in a well-managed startup.
Individual investors like you and me can get access to start ups for a few thousand ringgit. The risks are high but so are the returns. As with all investing, remember to always do your own due diligence.
Risks and Cons of ECF
The Company Dictates the Terms
The terms and conditions of a deal and offering are dictated by the issuing company. It is imperative that investors especially retail investors take note of this.
Familiarize yourself with how companies raise capital. For example, if you’re in the first round of a start-up’s fundraising exercise, you’ll want to make sure you are protected as an early investor. You don’t want your shares to be diluted when the company goes for its second round of fundraising.
Exiting and Cashing Out
ECF is a long term game.
As an early investor in a private company, your avenues for cashing out and taking profit are limited. You either wait for the company to get big enough and lists on the stock exchange or you find yourself a private buyer.
In my experience on pitchIN, every company out there will tell you they’re aiming for an initial public offering (IPO) in X number of years.
And until platforms like pitchIN provide for a secondary market, those will be the only two options available to you.
Lack of Follow Ups from Management
This is one of my biggest irks with investing in a private company. Their obligation to minor shareholders isn’t much. pitchIN does try to have management engage more with their investors but from my experience, companies don’t try as hard after taking your money.
They’ll woo you with presentations, video calls and nicely done financial projections in the beginning. But after receiving your investments, be prepared to hear nothing from some companies.
At the end of the day, you’re just a minority shareholder and you basically do not have rights. You can vote, but your vote won’t matter. So make sure you do your research on a company’s management team before you invest. You want responsible people at the top that will work for the good of the company and its shareholders.
My Investments on pitchIN
I invested in two companies so far on pitchIN.
I treat my investments here as very high risk with similar potential returns and may even expect them to completely go bust. I invest in these companies with a long term (5-10 years) horizon.
My investment with MHUB was back in October 2019 which makes it a year old now. Oxwhite’s crowdfunding process ended in January 2020 which makes less than a year old. Both are relatively young and I’m excited to see how they’ll continue to develop.
One of my regrets was Kakitangan. I didn’t invest in them because I was still doing my research on the company itself as well as pitchIN as a platform.
Moving forward, pitchIN itself will be doing an ECF offering soon which I again, am mulling over. Is anyone considering investing in pitchIN?
What companies have you invested in and what are your experiences with them? Have they been good to you as shareholders?