Exclusive: Malaysia plans feeder market for smaller IPOs to enable early stage firms go public

Malaysia’s bourse is pushing for a feeder market for small initial public offering (IPO) exercises to bridge the public market funding gap between early-stage companies and companies ready for ACE Market listing.

The deal sizes on the feeder market would be smaller than typical ACE Market listings, as it caters to smaller businesses.

The feeder market will serve businesses that are growing but would otherwise take another three to five years before they are qualified for to raise funding on the open market, via the ACE Market, sources noted.

The motion, spearheaded by Bursa Malaysia, has been favourably received by the Securities Commission Malaysia (SC), according to sources.

DEALSTREETASIA has learned that Bursa Malaysia is pushing for the feeder market to materialise some time this year, once the regulator has worked out how to position the new market.

A source familiar with the development told DEALSTREETASIA that the SC has been positive on the move and is in the midst of ironing out regulatory requirements.

“Conceptually, (the regulator) is encouraging of it. The finer details still needs to be sorted out – whether this would be a recognised market,” the source said.

The source added that Bursa Malaysia had come up with the idea even before equity crowdfunding (ECF) and peer-to-peer (P2P) financing was legislated in Malaysia.

“This was discussed before the SC legislated ECF or P2P. It will be for small companies, can even be growth companies,” the source said.

An executive in the know concurred that the capital markets regulator has been open to the idea of having a feeder market.

“They certainly welcome it as this would be further complete the funding escalator of Malaysia’s capital markets,” the executive said.

An industry observer believed that the bourse has interest to help young companies, that have grown to the Series A stage, to raise funds on the public market.

While there is no threshold for what size a company needs to be in order to list on the ACE Market, industry experts noted that “as a rule of thumb, the SC will make it challenging for companies without track record to list”.

“That, and investors are much more comfortable with profits,” an investment banker said.

One of the key listing requirements for an ACE Market listings is that IPO applicants need to record at least one full financial year of operating profit based on latest audited financial statements.

However, the stock exchange clarified last year that companies that were loss-making or showing low profitability could still get listed on the ACE Market if they displayed certain qualitative characteristics.

Chief regulatory officer Selvarany Rasiah was quoted in local media noting that loss-making or companies with low profitability could be approved to list if they were an innovative company in IT or research and development, had taken steps to improve their financial performance, or had a strategy to revive their business.

She added that if the company’s sponsor or investment bank is able to show acceptable justifications on the prospect of the business, the companies might be accepted for a listing.

Small biz, big fees

Admittedly, the amount of work put into listing a company, whether a big listing or small one, is more or less the same, investment bankers said.

An industry observer questioned if the usual fees investment banks charge companies for advisory and placement fees may be too high for small businesses.

An investment banker noted that banks may want to charge a premium fee for working on small deals, as placement fees are expectedly lower in such deal sizes.

Another investment banker commented that while bigger deals offer better returns for the banks, banks still do not shy away from smaller deals, especially smaller banks like TA, Kenanga, KAF and M&A Securities, in the Malaysian context.

“An ACE Market listing would typically require fees of MYR1 million to MYR2 million, depending on the size of the listing. Market rates usually hover around MYR900,000 for advisory and two to three per cent of the funds raised,” the investment banker noted.

This range of fees, the industry observer noted may be too high for small businesses and would defeat the purpose of encouraging young companies to list on the feeder market.

The industry observer suggested that the regulators could open up the due diligence process to other market players, such as the ECF and P2P platform operators.

“There is a possibility this way, to cap the cost for listings for younger companies at a lower rate than normally charged for ACE Market listing by investment bankers,” the person noted.

When asked if the feeder market may compete for deals with ECF and P2P operators, the person commented that it was not likely, as the feeder market will work for companies that have graduated from raising funds through ECF or P2P.

Also read:

Malaysia to operationalise P2P financing for SMEs early 2017, first in region

Malaysia 2015: Pioneering the equity crowdfunding market, anticipating P2P

Malaysia to be the first to legislate ECF in region

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