Why Food Logistics Companies are Better Left Public

That’s the premise of ECF—an alternative financing option allowing private companies such as small-and-medium enterprises (SMEs) and startups to raise capital. ECF can be channeled via retail investors or the customer base through platforms regulated by the Malaysian capital market regulator Securities Commission (SC) Malaysia.

Malaysia is the first country across Southeast Asia to regulate ECF when the regulator approved the first six ECF platform operators to set up shop in June 2015. SC Malaysia has registered four more new ECF platform operators since then, one in 2018 and three in June 2019.

Think IndieGogo or Kickstarter, which are reward-based crowdfunding platforms. With ECF, instead of getting a product prototype in exchange for money, you become a shareholder of the company that you just backed. And that too without a broker.

In theory, ECF is ideal for companies and investors as entrepreneurs get the chance to interact with their customers to help shape their product offerings. Besides, for young companies which are not qualified for bank loans because they have little to zero collateral or business track record, ECF platforms provide them an alternative to raise capital in order to scale their businesses.

ECF may not be for everyone

ECF may not be for everyone

Unlike publicly-traded companies where you can just sell your shares at any time you want, the exit option for ECF investments is complicated. Investors need to wait until someone else—a secondary investor—offers to acquire shares.

So exits remain scarce. With only three exits out of 80 successful fundraising campaigns, ECF platform operators have noted that a secondary trading platform that allows investors to sell their equity to other interested investors is a necessity to spur liquidity.

While ECF may be good news to companies that seek alternative financing, it raises a question: are the rights of retail investors, that include mom-and-pop stores, protected?

A source within the ECF industry has pointed out that there is a lack of oversight in the regulatory aspect for existing ECF platforms. Lowering the minimum fundraising target is a common practice. Another concern is valuation. For instance, Luxtag, a blockchain startup which has zero revenue, was valuing itself at RM41 million (US$9.4 million) before it lowered the pre-money valuation to RM16 million (US$3.6 million). Should platform operators curate and filter listing applications?

After all, these are early-stage businesses that might not be in the business in the next few years. Retail investors, thus, face a very real risk of poor returns, if at all.

The power of a crowd

According to SC Malaysia, ECF is a component of the regulator’s strategy to democratise finance. It is said to complement existing avenues for early-stage financing such as private equity, venture capital among private companies.

Much like how public markets are run by stock exchanges, ECF platforms are run by the platform operators. Companies that are seeking to fundraise are known as issuers. But beyond fundraising, as mentioned earlier, ECF gives investors the opportunity to interact with entrepreneurs or companies that they perhaps, have longed to work with.