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SC has proposed a regulatory framework for property crowdfunding in Malaysia

SC has proposed a regulatory framework for property crowdfunding in Malaysia

The SC has to date embarked on various efforts to enable businesses to benefit
from wider accessibility to market-based financing avenues to meet their financing
needs, as well as utilising technology to enable greater investor participation.

In this regard, the SC has introduced the equity crowdfunding (ECF) and peer-topeer (P2P) financing frameworks in the capital market to allow for alternative market-based financing avenues for micro, small and medium enterprises (MSMEs) to raise funds. Since the launch of ECF and P2P financing frameworks in February 2015 and April 2016 respectively, both avenues have shown good progress in
meeting the financing needs of our MSMEs.

Currently, the SC has registered seven ECF platform operators and six P2P financing
platform operators as recognised market operators. As at December 2018, a total of
RM261.52 million has been raised by issuers via both market-based financing
avenues.

The Government, in the recent Budget announcement, stated that it would leverage
on the use of technology-enabled and innovative mechanisms to provide an
alternative funding source for first-time homebuyers 1 , through a property
crowdfunding scheme.

The SC is supportive of innovative ideas that tap on the transformative power of
technology to democratise investments and which allows greater breadth of
financing options for Malaysians.

Property crowdfunding offers the same potential as that of ECF and P2P platforms
in providing an alternative source of financing for businesses but which is
specifically tailored for first-time homebuyers. Property crowdfunding will enable
investors, collectively as a crowd, to finance first-time homebuyers to purchase their
first property. At the same time, it will enable investors to access a new type of
investment product.

Nevertheless, the SC is of the view that there is a need to balance promoting
innovation with ensuring proper safeguards to protect the integrity of the scheme
and investors’ interest. In this regard, the current P2P financing framework may
apply, with necessary amendments made.

The SC is issuing this consultation paper (CP) to obtain feedback on the proposed
guidelines that will facilitate property crowdfunding under the P2P financing
framework.

The proposals discussed in this CP have taken into account feedback received from
the Ministry of Finance and other relevant stakeholders including potential
operators, valuers, banks and lawyers.

So what is a property crowdfunding scheme in Malaysia?

There is no legal definition for property crowdfunding but, as a concept, it refers to
a form of fundraising that envisages a homebuyer obtaining funds to pay for the
purchase price of a property through investments from relatively large numbers of
investors, with an online platform publicising and facilitating such transactions.

Investors who are platform members can browse through a list of properties offered
on the platform to find opportunities that meet their investment criteria (for
example, the location, property type, entry level, estimated returns and the
background of the proposed homebuyer). They put in their investment sum, which
is then held by the platform operator until the fundraising target is achieved.

Some of the benefits available to investors are that investors can take advantage of
the low entry level and easy investment process to achieve a high level of
investment diversification and minimise their risks. At the same time, they retain
control of their investment without incurring the charges associated with fund-based
investing and would be able to exit their investment by disposing their investment
note in a secondary market.

For homebuyers, whilst they may have the initial capital for payment of the deposit
or down payment for the purchase of a property, they typically would need to
secure further funding for the balance of the purchase price. Property crowdfunding
has the potential to act as an alternative source of funding for first-time
homebuyers.

As mentioned earlier, the SC is of the view that the current P2P financing framework
under RMO Guidelines may apply, with necessary amendments, to the proposed
property crowdfunding scheme. As such, similar to the current P2P financing
framework, a property crowdfunding platform operator (platform operator) will be
registered as a recognised market operator.

It is envisaged that, in general, a property crowdfunding scheme would be platform
operator-driven. The SC does not prescribe a specific model that should be adopted
to encourage ongoing innovation within the RMO framework. However, the SC
proposes to set out several requirements that must be fulfilled by a platform
operator and participants of the scheme.

Why is there the need for regulation?
As with any other investment, property crowdfunding poses risks, which include–
(a) the platform operator not being fit and proper;
(b) the platform does not have sufficient resources to carry out the scheme;
(c) a homebuyer failing to purchase the property or investors unable to recoup
their investments;
(d) property price fluctuations; and
(e) a lack of understanding in the property scheme’s features and associated
costs.

To mitigate the risks as mentioned above, the SC proposes that several regulatory
requirements be imposed on the property crowdfunding scheme and its participants,
such as–
(a) imposing requirements in relation to a platform operator, such as criteria to
qualify as a platform operator, obligations of a platform operator and
permissible and non-permissible activities of a platform operator;
(b) imposing requirements in relation to a homebuyer, such as criteria for a
homebuyer who can seek funding through the platform, funding limit and
obligations of a homebuyer; and
(c) specifying the criteria on the type of properties that can be hosted on the
platform.

For more information please visit: https://www.sc.com.my

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