This article first appeared in Forum, The Edge Malaysia Weekly on July 24, 2017 - July 30, 2017

So, in the wake of Lotte Chemical’s tepid debut (did anyone expect anything but?), Malaysia has presented its brand-new, all-singing, all-dancing market for small business funding to the world, suggestively called “LEAP”.

More formally known as the Leading Entrepreneur Accelerator Platform Market, it fits a snug niche one notch below Bursa Malaysia’s junior ACE Market and one notch above the Equity Crowdfunding (ECF) market.

LEAP is the capital market equivalent of the automotive industry’s crossover SUV. A model niche that satisfies one’s cravings before one is able to attain full membership of a more senior class.

It’s kind of like stumping up for a Mercedes-Benz GLA before one saves up enough money for a grown-up SUV like a GLC. Or in horological terms, a bit like buying an Omega Speedmaster before graduating to a Rolex Daytona.

There are more stratospheric ambitions, but these niches will have to do. For now.

LEAP is an exchange that caters for small businesses unable to meet more formal public company requirements.

It aims to fund a sector that comprises 97% of all business in the country, contributes 36% of national GDP, employs 65% of the country’s workers and accounts for 18% of national exports. But taps conventional — analogue!! — bank funding for 96% of its capital needs.

Which — in the current tightfisted, highly regulated environment ever so fearful of systemically threatening risks to the broader system — isn’t quite meeting the needs of high-growth companies starved of funds to expand.

So, just like a good businessman sniffing out a market need, Bursa correctly identifies SME fundraising as a niche to fill.

With LEAP, Malaysia now boasts an orderly and structured path for companies to raise public capital in a regulated and predictable way that should meet all their capital needs from small to large, 

infancy to adulthood.

But timing-wise, LEAP’s public debut hasn’t come at a perfect time.

Its arrival comes hot on the heels of a plunging Chi-Next market in China and mere weeks after Hong Kong’s GEM exchange suffered precipitous drops and billions in lost value because of a raft of fiscal and governance transgressions.

While Chi-Next and GEM are also small exchanges, LEAP’s formulators will say they are not directly comparable.

What this means, however, is that they are taking all steps to ensure LEAP won’t suffer the same fate, positioning the new exchange in ways that differentiate it from the so-called “Enigma” companies that brought GEM down.

From a regulatory standpoint, Bursa’s mantra is “light touch”, which is probably the correct thing to do, given the sheer minuteness of local qualifying firms.

How, for example, would you enforce audit committees and profit histories on a Chinaman whose wife is probably the general manager and goodwill is ensured through generous credit terms?

But there are the necessary strictures to its operation.

To mitigate all-out losses and to ensure that shareholders are of the knowledgeable variety, only wealthy folks (annual income in excess of RM300,000 or assets over RM3 million) will be allowed to participate.

To ensure that LEAP companies know what they are doing, they will be professionally advised (with a starting lineup of six registered advisers).

To ensure that enough information is available to current and future investors, LEAP companies will be required to disclose semi-annual and annual financial statements as well as announce material developments.

And to control conflicts of interest, LEAP companies will need to prove they are not connected to each other or linked to an already listed entity on the larger Main Market.

Will LEAP be sufficiently vibrant and attractive for the SME businessman, yet offer enough protection for the investor?

A lot will depend on the initial listings. As with most things in life, a proper start and a solid reputation for being dependable will help. Or hurt, naturally.

The regulators will be under intense scrutiny operating the exchanges. Too cumbersome or too expensive and companies might shun it. Too lax and too “cowboy” and the syndicates might take over. Too much regulation and penalties and there won’t be enough “fizz” to be interesting.

But if, hey presto!, a balance is achieved and investors get early dibs into fundamentally sound companies that merely need smart funding to catch fire, then Malaysia might well have something on its hands.

LEAP could spark a revolutionary new funding avenue that is mutually beneficial to all the parties in its ecosystem. A rave party could well ensue, one that was maybe only the preserve of private equity or venture capital players in the past, with the eye-popping returns to boot.

But, equally, it could well take years to catch fire.

The early order of things will probably be one of extreme volatility, restrictive listing practices and illiquidity. Probably not a lot of active trade either with extreme intra-day swings in certain stocks favoured by thematically driven money.

Mistakes, too, for sure, since no exchange exists in this world without a few dud stocks in its ranks.

But I guess this is how track records and sound reputations are built. One quality listing after another. Brick by brick. Wall by wall, until a fortress comes up in its place.

LEAP could spark the next Wellcall, Prestariang, Magnitech, Top Glove or MYEG.

After all, no billion-dollar company was born a behemoth. Whether in a basement or warehouse, or at a kitchen table, they were all born small, before an amalgam of hard work, good fortune and timing conspired to their eventually achieving global recognition many, many moons later.

And so, one chapter of the Malaysian capital market plan might read a little like this:

Good idea, tiny company: Equity Crowdfunding.

Small but not tiny anymore: LEAP Market.

Bigger but still small: ACE Market.

Large and hopefully getting larger: Main Market.

And from there on to global domination. Or so the playbook reads.

Let the games begin!

Khoo Hsu Chuang is contributing editor at The Edge Malaysia

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