Introduction
In recent years, Malaysia has witnessed a remarkable surge in the popularity and adoption of cryptocurrencies. Beyond being mere speculative assets, cryptocurrencies have revolutionized the way we perceive and engage with finance, offering innovative opportunities for fundraising and investment. As the nation embraces digital transformation and seeks to foster an inclusive and dynamic economic landscape, the utilization of cryptocurrencies for fundraising purposes has emerged as an exciting avenue worth exploring.
In this article we delve into the realm of cryptocurrency and its potential to reshape fundraising practices in Malaysia, from the fundraiser’s point of view. We will shed light on some of the key requirements that an issuer of cryptocurrency (“Crypto-issuer”) should take note of in kick-starting its fundraising campaign
The legal framework
The implementation of the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 ("Order") took effect on 15th January 2019. This Order designates all digital tokens and other digital assets that meet the criteria outlined within the Order as securities, falling under the scope of securities laws.
Aligned with the classification of digital tokens as securities, the Guidelines on Digital Assets ("Guidelines") published by the Securities Commission Malaysia ("SC") establish the criteria pertaining to fundraising endeavors through digital token offerings and the operational procedures of initial exchange offering (IEO) platforms, among other provisions.
What are “digital tokens” and how do these tokens work in the context of fundraising?
The Order defines “digital tokens” (or simply digital assets) as follows:
“a digital representation which is recorded on a distributed digital ledger whether cryptographically-secured or otherwise.”
With regard to the permissible list of digital tokens in Malaysia, think Bitcoin, Bitcoin Cash, Cardano, Chainlink, Ethereum, LiteCoin, Ripple, Solana and Uniswap.
Essentially, in order to raise fund for a particular undertaking or a project, an entity may issue digital tokens (“Cypto-issuer”) to potential investors in consideration of a subscription amount paid by the investors. At the close of subscription, the successful investors receive the digital tokens as security and the Crypto-issuer receives the proceeds. Thereafter, whilst the Crypto-issuer utilises the proceeds for the intended projects or undertaking, the investors receive dividends/interest/payments as returns for their digital investment.
The diagram below illustrates the typical process in the context of crypto fundraising.
I wish to raise funds as a Crypto-issuer. What are the key elements that I need to know under the Guidelines?
Form
As a Crypto-issuer, you must take the form of a Malaysian-incorporated company OR Limited Liability Partnership (LLP) and that such entity is to have its main business operations carried out in Malaysia.
The Issuer shall raise funds through an IEO platform operated by a registered IEO operator. At the time of writing, there are two (2) IEO platform operators that have been registered with the SC, namely Kapital DX Sdn. Bhd. and Pitch Platforms Sdn. Bhd.
However, currently only Kapital DX has officially launched its IEO platform, “KLDX”.
Financial requirements
In the case of a Malaysian-incorporated company, the company must have a minimum of paid-up capital of RM500,000.00 and a shareholders’ funds of RM500,000.00 maintained at all times.
Where you are to operate as an LLP, the entity must have a minimum capital of RM500,000 maintained at all times.
Management, Governance and equity interest
The Board of the Crypto-issuer should always include a minimum of two directors who reside in Malaysia as their primary or sole place of residence. The Issuer is responsible for ensuring that its directors and senior management consistently meet the requirements of being fit and proper.
On the date when digital tokens are issued, it is required that the combined ownership of equity by the Issuer's directors and senior management must be at least 50%.
Application to raise fund
The Crypto-issuer is required to submit an application to an IEO operator for approval in order to raise funds through an IEO. The application must be submitted in the specified form and manner as determined by the IEO operator.
Pertinently, in the Crypto-issuer’s application, the Issuer must also showcase to the IEO operator that the IEO project offers an inventive solution or a valuable digital proposition specifically for Malaysia. An IEO project is considered to offer an innovative solution or a digital value proposition when it fulfills certain criteria, such as:
Providing a solution or addressing an existing market need or problem; or
Enhancing the efficiency of an existing process or service carried out by the issuer or the industry.
Submission of White Paper
The Crypto-issuer is under an obligation to provide a copy of the White Paper, submitted to the IEO operator and SC in the specified manner and format determined by the SC.
The Guidelines sets out a list of information that the Crypto-issuer is required to include in its White Paper. Such information pertains to, amongst others, the following:
A concise overview of the Issuer's directors, senior management, key personnel, and advisers should be provided, including their names, positions, nationalities, addresses, professional qualifications, and relevant experience;
A comprehensive explanation of the sustainability and scalability aspects of the fundraising project should be provided in detail. This description should outline the project's long-term viability, its ability to adapt and grow over time, and its potential for achieving sustainable success;
The specific amount intended to be raised through the IEO, as well as the planned allocation and utilization of the funds, should be presented in a scheduled timeline that outlines the drawdown and utilization of proceeds (referred to as the schedule of proceeds);
All rights, conditions, or functions associated with digital tokens, including any particular rights granted to token holders, should be clearly stated and described. This includes outlining the specific privileges or entitlements that token holders possess.
Consult us
Should you wish to know more on this topic including all things crypto from a legal perspective or seek advice on FinTech regulation in Malaysia, feel free to contact us for a free consultation.
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