KUALA LUMPUR (Sept 21): The Securities Commission Malaysia (SC) has said that it may explore establishing a framework for Angel Funds and Angel Syndication Lists for early-stage financing.

In the Third Capital Market Masterplan (CMM3) revealed today, the SC explained that given the high risks involved in early-stage financing, the presence of a credible cornerstone or lead investor that is willing to put up the initial share of capital in early-stage deals would increase the confidence of other investors to also put in funds, which would also increase the chances of success in fundraising.

"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," it said.

The masterplan further explained that these lead investors may act like a general partner in a venture capital (VC) fund and take the lead in vetting deals and nurturing investee businesses in exchange for a larger share of returns.

This would give investors that are interested in this segment an avenue to participate by leveraging the expertise of a credible lead, it said.

For this early-stage investment, where a common issue is for investors and issuers to come estimate and come to a mutually agreed valuation, the SC said it will continue to work with the early-stage fundraising community to provide greater regulatory clarity for instruments like simple agreement for future equity (SAFE) notes, on top of deriving standards for the local market, which aims to protect both issuers and investors.

Meanwhile, the SC also noted that the lack of market depth and appetite for riskier investments among local corporates and institutional investors has put growth-stage companies at a disadvantage in terms of financing, or worse still, resulted in deals being done at depressed valuations.

"As such, Malaysia sees reduced ownership of such businesses as they grow into regional and global champions," it said.

Its statistics show that of the top 20 Malaysian start-ups that have reached the growth stage in the last 10 years, most have sought funding from foreign funds, due to the lack of scale, fund size and risk appetite of most domestic VC and private equity (PE) management firms.

The SC said that participation from institutional investors is key to strengthen the growth-stage financing in Malaysia. It suggested co-investments as a means to help bridge the gap, where risk is shared between institutional investors and could also crowd in further market participation.

It said that the SC will continue to work with relevant agencies and investment entities in Malaysia to develop VC and PE talent onshore and to shape the growth of domestic VC and PE players.

The masterplan also highlighted that the number of late-stage growth companies listed on the LEAP and ACE Markets have more than doubled in the last decade and constituted 80% to 90% of the total initial public offerings (IPOs). It added that there is a potential for a much larger pipeline of late-stage growth companies that may seek to tap into the public market as the private market grows.

"To cater for this, there will be a need to increase the efficiency of the listing process and enable more listing options beyond IPOs," it said.

The SC added that to enable greater listing efficiency moving forward, companies listing on the ACE Market will see a more streamlined regulatory framework. It said that efforts are underway to migrate the ACE Market regulatory framework, including registration of prospectuses, to Bursa Malaysia.

Beyond the IPO space, the SC added that it is reviewing the current special-purpose acquisition company (SPAC) framework for greater efficiency. SPACs, it said, provide target companies with a cheaper and faster route to the public market compared to IPO.

Read more stories about the Securities Commission's Capital Market Masterplan 3 (CMP3) here.