Malaysia is catching up as a “sexy” place to set up a VC shop in the past year with a series of back to back funding commitments via the fund of funds by the government. To recap, the Malaysian government announced the “fund of funds” programme in April, which will focus on VC fund managers investing in local startups, with a funding commitment of at least RM5 million (approximately US$1,149,393.88) per VC fund.
Fast forward to October, Khazanah Nasional Bhd, Malaysia’s sovereign wealth fund announced that the “fund of funds” programme will be open to all local Malaysian VC fund managers, focusing on VC fund managers who are raising their first, second, or third fund based in Malaysia or overseas, as well as regional or international VC fund managers seeking to leverage their portfolio companies to add value by expanding into Malaysia.
Regulatory framework for VC fund management in Malaysia
A person seeking to raise and manage a VC fund in Malaysia needs to be registered as a VC fund manager by the Securities Commission Malaysia (SC).
Key regulations to be aware of include the Capital Markets and Services Act 2007 (CMSA), the Securities Commission Guidelines on Venture Capital and Private Equity (Guidelines) together with other applicable guidelines that may apply to a VC fund operations. The Frequently Asked Questions should also address common questions based on SC’s past queries.
Additionally, this year the Practical Guide on Venture Capital and Private Equity in Malaysia was published by the SC with contributions by the Central Bank of Malaysia, Ernst & Young, and the members of Malaysian Venture Capital and Private Equity Association (MVCA) (I co-contributed to the publication under my role at Izwan & Partners). The guide covers common topics from regulatory framework, fund structuring, to fund management and operations.
Note that existing global VCs with strong track records and at least US$100 million in assets under management may apply to the SC for an expedited approval process via the “VC Golden Pass” programme.
At least one “responsible person”
As an applicant applying to become a VC fund manager, you need to have at least one full-time person designated as a “responsible person.” A “responsible person” must be “fit and proper” (i.e., no past conviction involving any financial crime) and have the necessary relevant work experience (e.g., fund management, corporate finance, management consulting, corporate law) for at least the past five years. The SC may also assess a startup founder as a potential applicant.
Paid up capital requirements
As an applicant, you need to maintain at least RM100,000.00 (approximately US$23,250.00) of net assets at all times.
Choosing a fund structure
A VC fund may be formed in Malaysia either as an onshore fund by forming a private company or as an offshore private fund as a limited partnership under the Labuan private fund structure.
If a VC fund is formed onshore as a company, the investors will subscribe to new shares on a “capital call” basis based on the total capital commitments.
Alternatively, a VC fund may be formed as a Labuan private fund under the limited partnership structure, which is consistent with international practices by having the legal distinctions of limited partners and the general partner. Note that additional rules apply under the Labuan Financial Services Authority (LFSA), as it is considered an offshore domicile.
In our experience, a VC fund may also be formed offshore in other jurisdictions under a “master-feeder” structure or a “fund of funds” structure.
Raising capital from “sophisticated investors”
Like other VC funds overseas, the fund’s information memorandum may only be circulated to “sophisticated investors”. A “sophisticated investor” in Malaysia is defined as a person with a total net assets of RM3 million (approximately US$689,642.68) or a gross annual income of RM300,000.00 (approximately US$68,964.00) or an entity with at least RM10 million (approximately US$2,298,808.94) in assets and other accredited investors (eg, other approved entities like institutional funds).
Earlier this year, the scope of a “sophisticated investor” was expanded to include professionals in the capital market or in the financial services industry (eg, chartered accountants, licensed financial planners). This includes accredited angel investors (i.e. members of the Malaysian Business Angels Network).
Tax consideration
As a VC fund manager, you may be eligible for tax exemption on the carry interest and the management fee so long as the fund has been certified by the SC, while LPs that invest in a VC fund may also be eligible for tax deduction subject to SC’s prior certification.
Engaging service providers and professionals
When deciding on the fund structure, you may also wish to consult a tax adviser, legal counsel, fund accountant, and corporate secretarial firm to assist with fund structuring matters, from fund documents to agreements (e.g., information memorandum to subscription agreement).
Final thoughts
The new funding programmes will hopefully benefit the local VC landscape and contribute to the growth of both the VC sector and the startup ecosystem in Malaysia.
As a venture lawyer, we have advised VCs in the past on both onshore and offshore funds. In our experience, VCs may need to consider carefully the appropriate fund structure and adhere to compliance obligations. For instance, a VC fund formed outside Malaysia may have different considerations, and other bodies of law may apply to it and its fundraising efforts. Working closely with a venture lawyer helps ensure that your VC fund is set up smoothly.
—
Editor’s note: e27 aims to foster thought leadership by publishing views from the community. Share your opinion by submitting an article, video, podcast, or infographic.
Join us on Instagram, Facebook, X, and LinkedIn to stay connected.
Image credit: Canva Pro
The post Launching a VC fund in Malaysia: A venture lawyer’s guide appeared first on e27.