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Equity Crowdfunding (ECF)
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Choosing the Right Type of Share For Your Business
Companies may issue different types of shares to raise capital, namely Ordinary Shares and Preference Shares. Within these two types of shares, there are features and rights that you may decide on when choosing the right type for your business and ECF campaign.
| Type of Shares | Ordinary Shares | Preference Shares |
|---|---|---|
| Brief Description | The most common type of shares issued. | A type of share which does not entitle the holder to a right to vote or to participate beyond a specific amount in distribution of dividend, redemption or winding up. Preference Shares can have both equity and debt-like characteristics, favoured by investors who have different priorities and interests to safeguard. |
| Voting Rights | Does not require a Shariah advisory board or compliance with Islamic finance principles | May have a smaller pool of potential investors due to the specific requirements for Shariah compliance |
| Payment of Dividend | Dividends for Ordinary Shares are not fixed. The rate of the dividend is determined by the board of directors. The board will resolve whether or not there are available profits to enable dividends to be paid to the shareholders. There is no obligation on the directors to recommend a declaration of dividends at a general meeting. Ordinary Shareholders receive their dividends after Preference Shareholders are paid. | The Constitution of the company may confer on Preference Shareholders the right to a fixed amount or rate of dividend, subject to the availability of profits of the company. Alternatively, the Constitution may confer on Preference Shareholders the right to receive the same rate of dividends as Ordinary Shares but in priority to the Ordinary Shares. Preference Shareholders receive their dividends first in priority to Ordinary Shareholders. |
| Rate of Dividend | Dividends for Ordinary Shares are not fixed. The rate of the dividend is determined by the board of directors. The board will resolve whether or not there are available profits to enable dividends to be paid to the shareholders. There is no obligation on the directors to recommend a declaration of dividends at a general meeting. However, for distribution of dividends out of profits, the Companies Act 2016 now requires the board of directors to satisfy a solvency test (i.e. able to pay its debt as and when it is due within 12 months immediately after distribution). | The Constitution of the company may confer on Preference Shareholders the right to a fixed amount or rate of dividend, subject to the availability of profits of the company. Alternatively, the Constitution may confer on Preference Shareholders the right to receive the same rate of dividends as Ordinary Shares but in priority to the Ordinary Shares. However, similar to Ordinary Shares, where dividends are to be distributed out of profits, the directors must be able to satisfy that the company will be solvent within 12 months immediately after distribution is made. |
| Repayment of capital upon winding up of company | Upon the winding up of a company, the company must pay costs, wages, statutory contributions and taxes first followed by its creditors. Any capital that remains after paying the creditors, is then allocated to the shareholders. Ordinary Shareholders receive their share of the capital after Preference Shareholders are paid. | Preference Shareholders are entitled to receive repayment of capital after creditors of the company have been paid, and in priority to Ordinary Shareholders. |
| Participation in surplus profits upon winding up of company | Ordinary Shareholders are entitled to participate in the surplus profits or assets of the company which remain after repayment of capital. | Preference Shareholders have no right to participate in surplus profits unless the right to participate in surplus profits is expressly set out in the Constitution. |
| Redemption | Ordinary Shares cannot be redeemed by the company. Ordinary Shares also cannot be repurchased by the company, save for the exceptions allowed under the Companies Act 2016. | Redeemable Preference Shares ("RPS") are a type of Preference Shares that are issued on terms that they may be redeemed in the future at the company’s option or subject to the terms of issue. It is considered to a hybrid of debt and equity depending on its exact terms and can be issued for short term access to capital from investors. The issuance of RPS must be authorised by the Constitution of the company and the redemption can be effected only on the terms and in such manner as provided by the Constitution. |
| Convertibility | Ordinary Shares are non-convertible to a different class of shares. | Convertible Preference Shares are Preference Shares which are issued with the right or option to convert to Ordinary Shares in the future, often at a predetermined time frame and rate. |
Companies may want to issue different types of shares or attach different rights to the same types of shares for various purposes, such as:
- to distinguish investors from different fundraising rounds;
- to distinguish voting rights in a company;
- to prioritize distribution of dividends and assets of a company;
- to issue shares to raise funds with debt features;
- to cater to investors who only want to invest for a specific term by issuing shares which can be redeemed in the future, allowing the investor to exit.
How Issuers Normally Issue Shares As Part of Their Offer
- Ordinary Shares ("OS"): Ordinary Shares are usually held by the founders of the companies/early shareholders and are the most common type of shares. Ordinary Shares generally gives the Ordinary Shareholder the right to one vote at a company shareholders' meeting, so founders or early shareholders who want to retain control over the management of the company will usually opt for this.
Tech companies on pitchIN commonly issue Ordinary Shares. Tech companies tend to make losses for the first few years of operation to capture a substantial amount of market share. Their goals are more focused on being the next start-up unicorn. To achieve that, there will be multiple fundraising rounds for regional/global expansion and market share, hence their cash flow and goals might not align with the issuance of dividends. - Preference Shares ("PS"): Preference Shares are shares of a company’s stock with dividends that are paid out to shareholders before Ordinary Shareholders’ dividends are issued. If the company enters bankruptcy, Preference Shareholders are entitled to be paid from company assets before Ordinary Shareholders. Most Preference Shares have a fixed dividend, while Ordinary Shares generally do not. Preference Shareholders also typically do not hold any voting rights, but Ordinary Shareholders usually do.
There are different variations of Preference Shares that you can choose as an issuer. Here are some of the variations: - Redeemable Preference Shares ("RPS"): Redeemable Preference Shares gives the issuer the right to redeem the shares within a specific number years from the date of issuance at a predetermined price mentioned in the offer. The predetermined price would usually be a multiple or fixed percentage increase from the subscription price. Before redeeming the shares, the issuer shall ensure that RPS are paid up in full and all the conditions specified at the time of issuance are fulfilled. This class of shares generally exhibit more debt-like characteristics, while being classified as equity by the Securities Commissions of Malaysia.
Businesses who originally plan to take a loan but might not meet the criteria that creditors are looking for may opt for this class of shares. RPS are popular as they provide flexibility to issuers as well as certainty to the shareholders. It is also a common choice by venture capitalists as they provide a predetermined exit route for their investments. Issuers may receive required funding for their business origination/expansion and redeem the shares when the business is generating stable cash flow. - Redeemable Convertible Preference Shares ("RCPS"): Redeemable Convertible Preference Shares have similar features to Redeemable Preference Shares, with an option to convert to Ordinary Shareholders after a specific number of years at a specific conversion rate.
This class of shares is generally suitable for agriculture/plantation companies. For the first couple of years, the crops may not yield any return/ generate sales (depending on the type of crops). Property development and mining companies also exhibit similar characteristics to plantation companies and may benefit from RCPS. - Irredeemable Convertible Preference Shares ("ICPS"): The key point of difference between Redeemable Convertible Preference Shares and Irredeemable Convertible Preference Shares is their ability to be redeemed by the issuer.
- Redeemable Cumulative Convertible Preference Shares ("RCCPS"): Redeemable Cumulative Convertible Preference Shares are similar to RCPS, with an additional ability to cumulate the dividend payouts should the company fail to pay out the previous years. This class of shares is also suitable for similar companies noted under RCPS.