General Overview of Venture Capital in Malaysia

  1. INTRODUCTION

    1.1 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.

    1.2 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.

    1.3 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.

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

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

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

      ii) 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 PRIVATE EQUITY (PE) FIRMS[3]

    2.1 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.

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

    Features VC PE firms
    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.
    Sizes of Investment Make large investments in large company. Make smaller investment in start-up Venture Companies.
  3. LAWS GOVERNING VENTURE CAPITAL IN MALAYSIA

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

    3.2 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 ").

    3.3 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.

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

      Registration Procedure[8]

      i) 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).

      ii) Form 1 shall be submitted to the SC accompanied with the following documents:-

      • A copy of the applicant's Memorandum and Articles of Association or other constituent document stating investment into venture companies as the core business of the company;
      • A copy of the applicant's profile and organisational structure depicting related, subsidiary, associate and holding companies with percentage of shareholding in each categories;
      • Form 8/9 (whichever is applicable), 24 and 49 of the Companies Act 1965;
      • Form 13 and/or 32A of the Companies Act 1965 if there is any change of name or transfer of shares of the applicant, where applicable.

      iii) Form 2 shall be submitted to the SC accompanied with the following documents:-

      • A curriculum vitae consisting details on the qualification and experience of the proposed designated person appointed;
      • A certified true copy of the relevant documents and certificates supporting the information of the curriculum vitae above;
      • A certified true copy of the IC/passport of the designated person named;
      • A recent passport-sized coloured photograph of the proposed designated person.

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

      v) 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.

    3.5 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[10] .

    3.6 A VCC or VCMC may employ expatriate staff for its operations[11] .

  4. ISLAMIC VENTURE CAPITAL

    4.1 Under theGuidelines and Best Practices on Islamic Venture Capital issued by the SC, the following requirements must be complied with for the establishment of an Islamic VCC or VCMC[12] :-

      i) An independent Shariah Adviser must be appointed to provide expertise and guidance on conformance to the Shariah principles.

      ii) The activities of the VCC or VCMC must be Shariah compliant. Non permitted Shariah activities include financial services based on riba, gambling, manufacture/sale of non-halal products, conventional insurance, entertainment activities that are non-permissible according to Shariah, manufacture/sale of tobacco products, stock broking in shariah non-compliant securities and hotels & resorts.

    4.2 Criteria of Shariah Adviser[13] :-

      i) The person is not an undischarged bankrupt;

      ii) The person has not been convicted for any offence arising from a criminal proceeding;

      iii) The person is of good repute and character;

      iv) The person possesses the necessary qualifications and expertise, particularly in fiqh Muamalah and Islamic jurisprudence, and has experience and/or exposure in Islamic finance; or

      v) An Islamic bank or a licensed institution approved by Bank Negara Malaysia to carry on an Islamic banking business can also act as a Shariah Adviser.

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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] 3[rd] 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 [Guideline 2.1 of the SC Guidelines] .
[6] Means financing or funding provided to a venture company for product development and initial marketing [Guideline 2.1 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 [Guideline 2.1 of the SC Guidelines].
[8] Chapter 6 of the Guidelines.
[9] Means a director as defined under the Companies Act 1965 and/or an officer who strategises investment decisions and leads the investment team [Guideline 2.1 of the SC Guidelines].
[10] Guideline 7 of the SC Guidelines.
[11] Guideline 9.3 of the SC Guidelines.
[12] Chapter 3 of the Guidelines and Best Practices on Islamic Venture Capital.
[13] Appendix 2 of the Guidelines and Best Practices on Islamic Venture Capital.

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