GENERAL OVERVIEW OF VENTURE CAPITAL IN MALAYSIA

  1. INTRODUCTION

    1. Venture capital ("VC") is financial capital provided to early stage and high-potential growth companies [1] ("Venture Companies"). Venture investment is most often found in the company that involves with the development of new technology, new marketing concepts and new products.

    2. A person who invests in a business venture and provides capital for start-up companies is known as a "Venture Capitalist". A venture capitalist can be an individual or investment firm that makes venture investment.

    3. Venture Capitalists take a very high risk when investing in start up Venture Companies. Therefore, the Venture Capitalist usually have a significant influence on the decision of the Venture Companies it has invested in.

    4. The venture capital fund makes money by owning equity in the Venture Companies it invests in.

    5. There are 2 types of VC companies in Malaysia [2], namely:-

      1. Venture Capital Corporation ("VCC"): being a corporation that manages on its own behalf, investment in securities of venture companies in early business stages.

      2. Venture Capital Management Corporation ("VCMC"): being a corporation that manages on behalf of a VCC, investment in securities of venture companies in early business stages.

  2. DIFFERENCE BETWEEN VENTURE CAPITAL (VC) AND PRIVATEEQUITY (PE) FIRMS[3]

    1. VC is a broad subcategory of private equity ("PE"). Both VC and PE firms invest in companies, recruit former bankers and make money from investments.

    2. However, there are different features between VC and PE firms, as set out below:-

      Features

      PE firms

      VC

      Types of Investment

      Invest in companies across all industries.

      Invest in technology, bio-technology and clean-technology industries.

      Percentage of Shares Acquired

      Buy almost 100% of the shares in a company.

      Buy only a minority stake.

      Size of Investment

      Make large investments in large company.

      Make smaller investment in start-up Venture Companies.

      Stage of Investment

      Finances startup companies in early stages of the business.

      Finances more mature businesses, preferrably from high net worth individuals and firms.

      Involvement

      More involved with the business because they own more stake in the company.

      Less involved with th operation of the business because they on a minority stake in the business.

  3. LAWS GOVERNING VENTURE CAPITAL IN MALAYSIA

    1. The Securities Commission of Malaysia ("the SC") is the main regulatory body that governed the establishment and operations of VC in Malaysia.

    2. Under the Capital Market and Services Act 2007, [4] corporation seeking to apply as a VCC or VCMC must apply to be registered with the SC and comply with the provision of the Guidelines for Registration of Venture Capital Corporations and Venture Capital Management Corporations as prescribed by the SC ("the SC Guidelines").

    3. The expression "venture company", (i.e. the Venture Companies) is defined in the SC Guidelines to mean a company which utilises [5] seed capital, [6] start-up or [7] early-stage financing.

    4. The registration procedures were also laid down in the SC Guidelines, which are sumarised as follows:-

      Registration Procedure[8]

      1. The application for registration shall be made to the SC by completing Form 1 (application for registration of VCC and VCMC) & Form 2 (application for the Registration of [9] Designated Person of VCC and VCMC).

      2. Form 1 shall be submitted to the SC accompanied with the following documents:-

        • A copy of the Memorandum and Articles of Association, Limited Liability Partnership Agreement

        • The Business Plan which includes:

          1. A copy of the applicant’s profile and organisational structure

          2. Details of each (current and planned) funds.

          3. Demonstrate compliance to all applicable requirements of the Guidelines on the Registration of Venture Capital and Private Equity Corporations and Management Corporations

        • Certificate of incorporation under section 17 of the Companies Act 2016.

        • Form Annual Return lodged under section 68 of the Companies Act 2016.

          ** Note: If a corporation is newly incorporated and has not lodged its Annual Return, to submit the form under section 14 of the Companies Act 2016

        • A copy of the corporation’s latest audited financial statements and a copy of the company’s unaudited management accounts, if the audited financial statements are more than 6 months from the date of application.

      3. Form 2 shall be submitted to the SC accompanied with the following documents:-

        • A copy of the applicant’s NRIC (for Malaysian citizens) or passport (for non-Malaysian citizens).

        • A copy of the applicant’s recent coloured passport-sized photograph

        • Detailed curriculum vitae of the applicant

        • A copy of the applicant’s relevant academic and/or certificates

        • Bankruptcy Search Result from Malaysia Department of Insolvency

      4. The applicant shall be notified by the SC upon approval or rejection of the application.

      5. The SC Guidelines provide that the applicant shall maintain a minimum shareholder’s funds of RM100,000 to be eligible for registration as VCC. The applicant shall immediately inform the SC of any failure to comply with this requirement[10].

    5. Upon registration with the SC, the dealing in securities by any VCC or VCMC registered with the SC is limited to those actvities as prescribed by the SC prescribed in Table 1[11].

    6. A VCC or VCMC may employ expatriate staff for its operations [12].

  4. ISLAMIC VENTURE CAPITAL

    1. Under theGuidelines on the Registration Of Shariah Advisers Guidelines issued by the SC, the following requirements must be complied with for the establishment of an Islamic VCC or VCMC [13]

    2. Criterias of a Shariah Adviser:-

      1. The applicant should have at least a degree in Shariah, particularly in fiqh muamalat or Islamic jurisprudence from an institution recognised by the Malaysian government[14].

      2. The applicant must comply the following[15]:-

        1. have at least two years of relevant experience and/or exposure in Islamic finance; or

        2. have at least one year of relevant experience and/or exposure in Islamic finance and have attended at least five relevant Islamic finance courses/workshops.

      3. The applicant must not commit the following[16]:-

        1. have been convicted, whether within or outside Malaysia, of an offence involving fraud or other dishonesty or violence or the conviction of which involved a finding that he acted fraudulently or dishonestly;

        2. have been convicted of an offence under the securities law;

        3. have contravened any provision made by or under any written law appearing to the SC to be enacted for protecting members of the public against financial loss due to dishonesty, incompetence or malpractice by persons concerned in the provision of financial services or the management of companies; or

        4. have contravened any provision made by or under any written law appearing to the SC to be enacted for protecting members of the public against financial loss due to the conduct of undischarged bankrupts.

      4. If the applicant is a corporation, it should employ at least one full-time officer to be responsible for Shariah-based Products and Services Regulated by the SC[17].

      5. The applicant or any of its directors or chief executive must not[18]:–

        1. have been convicted, whether within or outside Malaysia, of an offence involving fraud or other dishonesty or violence or the conviction of which involved a finding that it or he acted fraudulently or dishonestly;

        2. have been convicted of an offence under the securities laws; or

        3. have contravened any provision made by or under any written law appearing to the SC to be enacted for protecting members of the public against financial loss due to dishonesty, incompetence or malpractice by persons concerned in the provision of financial services or the management of companies; or

        4. be an undischarged bankrupt whether within or outside Malaysia.

      6. Registration with the SC is not required, where the corporation is an Islamic bank or a financial institution approved by Bank Negara Malaysia to carry out Islamic Banking Scheme. However, the corporation must have at least one of its Shariah committee members meets the eligibility criteria set out in paragraphs 4.02 – 4.04[19].

      3. As for a foreign Shariah adviser, they are not required to satisfy the conditions in paragraphs 4.02 – 4.04 or paragraphs 4.05 – 4.07. However, the foreign Shariah adviser is required to submit to the SC, Form 3 attached to these guidelines and a copy of the letter of appointment or any other form of verification that would demonstrate his appointment as a Shariah adviser from a foreign institution[20].

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[1] Guidelines for the Registration of Venture Capital Corporations and Venture Capital Management Corporations issued by the SC.
[2] Ibid.
[3] http://www.mergersandinquisitions.com/private-equity-vs-venture-capital.
[4] 3rd Column of Part 2 of Schedule 4 of the Capital Market and Services Act 2007.
[5] Means financing or funding provided to a venture company for the purpose of research, assessment and development of an initial concept or prototype [Paragraph 2.01 of the SC Guidelines].
[6] Means financing or funding provided to a venture company for product development and initial marketing [Paragraph 2.01 of the SC Guidelines].
[7] Means financing or funding provided to a venture company as capital expenditure or working capital for initial commercialization of technology or product or to increase production capacity, marketing or product development; or for listing on Bursa Malaysia [Paragraph 2.01 of the SC Guidelines].
[8] Paragraph 6 of the Guidelines.
[9] Means a director as defined under the Companies Act 2016 and/or an officer who strategises investment decisions and leads the investment team [Paragraphs 2.01 of the SC Guidelines].
[10] Paragraph 3.03, Guidelines on the Registration of Venture Capital and Private Equity Corporations and Management Corporations, revised 16 April 2020
[11] Paragraph 8.04, Guidelines for the Establishment of Foreign Fund Management Companies, revised 16 April 2020
[12] Paragraph 4.1, Guidelines for the Establishment of Foreign Fund Management Companies, Issued 1 July 2000
[13] Paragraph 4.0, Registration Of Shariah Advisers Guidelines, Issued 10 August 2009
[14] Paragraph 4.02, Registration Of Shariah Advisers Guidelines, Issued 10 August 2009
[15] Paragraph 4.03, Registration Of Shariah Advisers Guidelines, Issued 10 August 2009
[16] Paragraph 4.04, Registration Of Shariah Advisers Guidelines, Issued 10 August 2009
[17] Paragraph 4.05, Registration Of Shariah Advisers Guidelines, Issued 10 August 2009
[18] Paragraph 4.06, Registration Of Shariah Advisers Guidelines, Issued 10 August 2009
[19] Paragraph 4.07, Registration Of Shariah Advisers Guidelines, Issued 10 August 2009
[20] Paragraph 4.08, Registration Of Shariah Advisers Guidelines, Issued 10 August 2009

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