Peer-to-peer (P2P) financing is another innovative form of financing that allows entrepreneurs and small businesses to unlock capital in small amounts from a pool of individual lenders. P2P enables businesses to borrow and investors to lend capital through online platforms registered with the Securities Commission Malaysia (SC). The SC launched the P2P Framework in May 2016. As at end-December 2022, about RM3.87 billion of P2P financing had been raised through 54,791 successful campaigns and 6,913 issuers. On a related note, almost half (49%) of the investors were aged below 35 years, with 89% of the invested funds stemming from retail investors.
The P2P segment notably flourished in 2022, boasting 3,732 issuers that raised RM1.58 billion via 24,455 campaigns (2021: 1,998 issuers, RM1.14 billion raised and 14,301 campaigns). That said, campaign sizes stayed small, with 70% of the issuers raising RM50,000 or less – almost all (99%) of which was targeted as working capital.
Any person or entity that seeks to operate a P2P financing platform must apply to be registered as a P2P operator under the SC’s Guidelines on Recognised Markets (or RMO Guidelines). All P2P operators must be locally incorporated and have a minimum paid-up capital of RM5 million. A P2P operator must also adhere to the following:
- Ensure there is an efficient and transparent risk-scoring system in place relating to the investment note or Islamic investment note.
- Conduct a risk assessment on prospective issuers intending to use its platform.
- Ensure the issuer’s disclosure document lodged with the P2P operator is verified for accuracy and made accessible to investors through the P2P platform.
- Inform investors of any material adverse change to the issuer’s proposal.
- Have in place processes or policies to manage any default by issuers, including using its best endeavours to recover outstanding amounts owed to investors.
- Ensure that its rules set out a rate of financing that is not more than 18% per annum. A P2P operator must consult the SC if it wishes to impose a rate of financing that is more this stated rate.
Notably, only locally registered companies can raise funds through P2P platforms. The crowdfunding exercise is only considered successful if it reaches at least 80% of its target, and can only accept up to the targeted amount. P2P is slightly different from equity crowdfunding (ECF) in that an issuer can be hosted concurrently for different purposes on multiple P2P platforms. That said, the issuer is must disclose to the P2P operator its intention of seek concurrent funding from other P2P operators.
Only the following issuers can be hosted on a P2P platform:
Locally incorporated or registered entities:
- Sole proprietorship
- Partnership
- Limited-liability partnership
- Private company
- Unlisted public company
- Any other type of entity as may be permitted by the SC.
The entities below are prohibited from raising funds through a P2P platform:
- Commercially or financially complex structures (i.e. investment fund companies or financial institutions).
- Public listed companies and their subsidiaries
- Companies with no specific business plan or its business plan is to merge or acquire an unidentified entity (i.e. blind pool).
- Companies that propose to use the funds raised to extend loans or invest in other entities.
- Any other type of entity as may be permitted by the SC.
Investment in P2P is open to all investors, subject to the following limits:
Retail Investors
A maximum of RM50,000 per platform at any time.
Angel Investors
No restriction on investment amount.
Sophisticated Investors
No restriction on investment amount.
In 2020, the SC launched a secondary trading framework for ECF and P2P, to provide an exit mechanism to investors. This permits early investors to exit from deals they have invested in and also offers new investors the chance to participate in the ones they may have missed earlier.
The Government of Malaysia (GoM) had initiated the Malaysia Co-Investment Fund (MyCIF) for ECF and P2P financing under Budget 2019 – to improve access to financing for micro as well as small and medium-sized enterprises (SMEs). Such businesses usually find it a challenge to obtain financing for growth. The SC administers this fund, which was first announced in 2018 with RM50 million. The success of this fund prompted the GoM increase it by another RM50 million in 2020.
MyCIF invests in ECF and P2P campaigns on a 1:4 ratio – for every RM4 invested by others, it will pump in RM1. Its co-investment scheme is open to micro enterprises and SMEs but limited to a maximum of RM1 million per campaign. In addition, RM10 million has been earmarked for the cofunding of social enterprises, with a maximum of RM500,000 per campaign.
