Equity Crowdfunding is a viable investment tool. It gives you the opportunity to access early stage investments in Malaysian companies which, prior to the introduction of equity crowdfunding legislations, were only accessible to venture capital companies and sophisticated investors.
Like all investments, this new marketplace has risks you should be aware of. Please take the time to thoroughly understand the characteristics of equity crowdfunding.
Companies seeking to raise funds will typically be early stage or startup companies. Some may be at idea stage while others may have just become profitable. Investing in companies at such early stages may potentially result in significant gains. But new companies are also likely to fail and you could lose your entire investment. In other cases, companies may not grow as expected and end up not hitting their projected targets.
Equity crowdfunding investments should be done with a long term view. You are investing for the time when the company becomes big and perhaps make an exit when there is an IPO or trade sale. Until then, it may be difficult to find buyers for your shares quickly. And you may have to find buyers yourself. We believe that eventually there will be a secondary market to trade these shares but until then be prepared to hang on to your investment for the long term.
Startups and early stage companies are focused on growth not returns. They are unlikely to pay out dividends. Profits, if any, are usually reinvested into the business.
Growing companies are likely to raise multiple funding rounds. When new shares are issued, your stake is likely to be diluted unless you take your proportion of the new funding requirements. Dilution is not necessarily a bad thing as the value of your stake may be higher than your initial investment if the company’s valuation increases in that funding round. But in some cases, that may not happen and your stake will be diluted in both percentage and value.
Spread Your Risks; Research Well
You should therefore only invest as part of a diversified portfolio. Invest money you are prepared to lose. Read all documents, do your own research and seek advice when unsure.