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Equity Crowdfunding (ECF)
- Fundraising with Equity
- ECF 101
- Who can raise
- Shariah Compliant ECF
- Incentives for ECF Issuers
- What is the process?
- Building Your Campaign Page
- Legal Documents for ECF
- Company Valuation
- Campaign Marketing and Promotion
- Planning Your Investor Strategy
- Marketing Do's and Dont's
- Crowd-Funded Venture Capital
- Type of shares
- Fee structure
- Nominee Structure
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Choosing the Right Type of Share For Your Business
Companies may issue different types of shares to raise capital, namely Ordinary Shares and Preference Shares. Within these two types of shares, there are features and rights that you may decide on when choosing the right type for your business and ECF campaign.
| Type of Shares | Ordinary Shares | Preference Shares |
|---|---|---|
| Brief Description | The most common type of shares issued, representing ownership in a company with voting rights and participation in profits. | A type of share that typically does not grant voting rights but provides priority in dividend distribution and capital repayment. Preference Shares can have both equity and debt-like characteristics, making them attractive to investors with different priorities. |
| Voting Rights | Ordinary shareholders usually have voting rights in company decisions, including the election of directors. | Preference shareholders typically do not have voting rights, unless specified in the company’s Constitution. Some classes of Preference Shares may carry limited voting rights under certain conditions (e.g., unpaid dividends). |
| Payment of Dividend | - Dividends for Ordinary Shares are not fixed and are determined by the Board of Directors based on company profits. The Board decides whether to declare dividends at a general meeting, but there is no obligation to do so. | Preference Shareholders may be entitled to fixed or priority dividends, as outlined in the company’s Constitution or dividend policy. Preference Shareholders receive dividends before ordinary shareholders. |
| Repayment of capital upon winding up of company | Upon the winding up of a company, the company must pay costs, wages, statutory contributions and taxes first followed by its creditors. Any capital that remains after paying the creditors, is then allocated to the shareholders. Ordinary Shareholders receive their share of the capital after Preference Shareholders are paid. | Preference Shareholders are entitled to receive repayment of capital after creditors of the company have been paid, and in priority to Ordinary Shareholders. |
| Participation in surplus profits upon winding up of company | Lower Priority than Preference Shareholders. | Priority over Ordinary Shareholders for capital repayment, but only after creditors have been paid. |
| Redemption | Cannot be redeemed or repurchased by the company, except under limited conditions permitted by the Companies Act 2016. | Redeemable Preference Shares ("RPS") are a type of Preference Shares that are issued on terms that they may be redeemed in the future at the company’s option or subject to the terms of issue. The issuance of RPS must be authorised by the Constitution of the company and the redemption can be effected only on the terms and in such manner as provided by the Constitution. |
| Convertibility | Ordinary Shares are non-convertible to other classes of shares. | Convertible Preference Shares allow conversion into Ordinary Shares at a predetermined time and rate, offering flexibility for investors. |
Companies may want to issue different types of shares or attach different rights to the same types of shares for various purposes, such as:
- to distinguish investors from different fundraising rounds;
- to distinguish voting rights in a company;
- to prioritize distribution of dividends and assets of a company;
- to issue shares to raise funds with debt features;
- to cater to investors who only want to invest for a specific term by issuing shares which can be redeemed in the future, allowing the investor to exit.
How Issuers Normally Issue Shares As Part of Their Offer
- Ordinary Shares ("OS"): Ordinary Shares are usually held by the founders of the companies/early shareholders and are the most common type of shares. Ordinary Shares generally gives the Ordinary Shareholder the right to one vote at a company shareholders' meeting, so founders or early shareholders who want to retain control over the management of the company will usually opt for this.
Tech companies on pitchIN commonly issue Ordinary Shares. Tech companies tend to make losses for the first few years of operation to capture a substantial amount of market share. Their goals are more focused on being the next start-up unicorn. To achieve that, there will be multiple fundraising rounds for regional/global expansion and market share, hence their cash flow and goals might not align with the issuance of dividends. - Preference Shares ("PS"): Preference Shares are shares of a company’s stock with dividends that are paid out to shareholders before Ordinary Shareholders’ dividends are issued. If the company enters bankruptcy, Preference Shareholders are entitled to be paid from company assets before Ordinary Shareholders. Most Preference Shares have a fixed dividend, while Ordinary Shares generally do not. Preference Shareholders also typically do not hold any voting rights, but Ordinary Shareholders usually do.
There are different variations of Preference Shares that you can choose as an issuer. Here are some of the variations: - Redeemable Preference Shares ("RPS"): Redeemable Preference Shares gives the issuer the right to redeem the shares within a specific number years from the date of issuance at a predetermined price mentioned in the offer. The predetermined price would usually be a multiple or fixed percentage increase from the subscription price. Before redeeming the shares, the issuer shall ensure that RPS are paid up in full and all the conditions specified at the time of issuance are fulfilled. This class of shares generally exhibit more debt-like characteristics, while being classified as equity by the Securities Commissions of Malaysia.
Businesses who originally plan to take a loan but might not meet the criteria that creditors are looking for may opt for this class of shares. RPS are popular as they provide flexibility to issuers as well as certainty to the shareholders. It is also a common choice by venture capitalists as they provide a predetermined exit route for their investments. Issuers may receive required funding for their business origination/expansion and redeem the shares when the business is generating stable cash flow. - Redeemable Convertible Preference Shares ("RCPS"): Redeemable Convertible Preference Shares have similar features to Redeemable Preference Shares, with an option to convert to Ordinary Shareholders after a specific number of years at a specific conversion rate.
This class of shares is generally suitable for agriculture/plantation companies. For the first couple of years, the crops may not yield any return/ generate sales (depending on the type of crops). Property development and mining companies also exhibit similar characteristics to plantation companies and may benefit from RCPS. - Irredeemable Convertible Preference Shares ("ICPS"): The key point of difference between Redeemable Convertible Preference Shares and Irredeemable Convertible Preference Shares is their ability to be redeemed by the issuer.
- Redeemable Cumulative Convertible Preference Shares ("RCCPS"): Redeemable Cumulative Convertible Preference Shares are similar to RCPS, with an additional ability to cumulate the dividend payouts should the company fail to pay out the previous years. This class of shares is also suitable for similar companies noted under RCPS.