Page 50 - CMP3

From a broader context, the success and competitiveness of the public equity and bond markets remain a bellwether for the overall health of the capital market. On the global stage, innovation in the public markets, whether in primary fundraising or secondary market trading, has continued, particularly amid the growing trend of private companies staying private for longer. However, the public markets still possess the deepest pools of liquidity for fundraising, and when tapped effectively, can benefit a wider segment of issuers beyond just the largest corporates.
At the same time, the race for global liquidity has become increasingly competitive. Investors domestically and abroad are becoming increasingly sophisticated, with access to more asset classes and investment options, and are armed with greater insights than ever before. The advent of digital age has also changed their expectations and behaviour. Secondary market trading venues, as well as their participants, need to evolve accordingly to remain relevant. Digital technologies have also enabled renewed innovation in all aspects of the secondary market value chain from market data, research and trading to post-trade processes, across all asset classes. It is vital that domestic intermediaries also keep pace to sustain the interest of investors and remain relevant in the face of competition.
STRATEGIC CONSIDERATIONS
3.1.1 PUSHING THE FRONTIERS OF THE ECONOMY
A. SEEDING INNOVATION WITH EARLY-STAGE FINANCING
Early-stage financing is critical in providing funding for entrepreneurs to test and start their business. While traditionally these entrepreneurs would bootstrap themselves, or rely on friends, families and close contacts for funds, there are now other avenues available, such as angel investors, ECF and early-stage VC funds.
For companies seeking funding at the earliest stage, a typical challenge is the ability to estimate and mutually agree on a valuation for the company, particularly when there is little track record or the company may not be ready to commercialise its ideas. To enable deals to be completed faster and with less due diligence burden, entrepreneurs and investors may choose to use instruments such as simple agreement for future equity (SAFE) notes, which postpones the question on valuation to a future fundraising round. SAFE Notes as well as other similar instruments have become prevalent in global VC markets. The SC will continue to work with the early-stage fundraising community to provide greater regulatory clarity for such instruments as well as derive standards for the local market, which will protect the interests of both issuers and investors.
Secondly, given the high risks involved in early-stage financing, the presence of a credible cornerstone or lead investor willing to put up the initial share of capital in such deals strongly increases the confidence of other investors to also put in funds, thereby increasing the chances of success in fundraising. Investors in this segment also tend to act in groups in order to diversify their risk. To formalise such arrangements and provide incentives for more skilled angels, particularly those with an established investment track record, to act as lead investors, the SC may explore establishing a framework for Angel Funds and Angel Syndication Lists. These skilled lead investors may act akin to a General Partner in a VC fund and take the lead in vetting deals and nurturing investee businesses in exchange for a larger share of returns. Other investors can pool funds with the lead investor to build up a larger pool of capital for greater bargaining power. Through this, investors who are interested to invest in this segment, but may not have the necessary expertise or time to dedicate to research, would have an avenue to participate by leveraging the expertise of a credible lead.
48 SECURITIES COMMISSION MALAYSIA