(Primary keyword: Difference between equity fundraising and equity financing | Secondary keywords: equity fundraising, equity financing, types of equity, equity funding Malaysia)
Introduction
When it comes to securing capital for your business, you may come across terms like equity fundraising and equity financing. At first glance, these terms may seem interchangeable, but they refer to different aspects of obtaining capital. Understanding these distinctions is essential for making informed decisions about your business’s growth strategy, especially in Malaysia’s dynamic corporate landscape.
In this blog, we’ll break down the differences between equity fundraising and equity financing, explore the types of shares issued, the impact on governance structures, and the prerequisites regarding your company’s constitution.
What Is Equity Fundraising?
Equity fundraising refers to the process of raising capital from investors by offering shares in your business. This process typically involves attracting external investors who contribute funds in exchange for ownership equity.
Key Features of Equity Fundraising
1. Involves External Investors:
• Venture capitalists (VCs), angel investors, private equity firms, or the public through Initial Public Offerings (IPOs).
2. Types of Shares Issued:
• Ordinary Shares: Most common, providing voting rights and dividends.
• Preference Shares: Prioritise dividends but may not carry voting rights.
• Convertible Preference Shares: Can be converted into ordinary shares under specific conditions.
3. Impact on Governance Structure:
• Equity fundraising typically involves adding new shareholders, which may dilute the decision-making power of founders or existing shareholders.
• Depending on the share class issued, new investors may gain voting rights, influencing key business decisions, such as appointing directors or approving major corporate actions.
4. Prerequisites – Company Constitution Status:
• Before fundraising, your company’s constitution must allow for the issuance of new shares and cater to specific classes like preference or convertible shares.
• If your constitution is silent on these matters, amendments are required under the Companies Act 2016 to accommodate fundraising activities.
Example of Equity Fundraising
A Malaysian tech startup raising RM5 million through an equity crowdfunding (ECF) platform by issuing 20% preference shares to investors while retaining majority control.
What Is Equity Financing?
Equity financing is a broader term that encompasses all methods of raising capital by selling equity shares in a business. It is not limited to a particular process or stage of the business lifecycle.
Key Features of Equity Financing
1. Ongoing Capital-Raising Process:
• Unlike equity fundraising, equity financing can occur multiple times throughout a company’s lifecycle, from seed funding to Series A, B, and beyond.
2. Types of Shares Issued:
• Ordinary Shares: Commonly used to maintain long-term shareholder value.
• Redeemable Shares: Issued with terms to buy back at a future date.
3. Impact on Governance Structure:
• As equity financing involves ongoing issuance of shares, the company’s governance structure may shift over time.
• Key changes include dilution of voting rights, potential introduction of investor veto powers, and changes in board composition based on shareholder agreements.
4. Prerequisites – Company Constitution Status:
• Your company’s constitution must clearly outline provisions for share allotment, shareholder rights, and capital structures.
• Specific provisions such as restrictions on transferability of shares, pre-emptive rights, or shareholder approval thresholds must align with the intended equity financing strategy.
Example of Equity Financing (H3)
An established manufacturing company in Malaysia raising RM50 million by issuing redeemable preference shares to private equity investors for capital-intensive upgrades.
Key Differences Between Equity Fundraising and Equity Financing
Aspect Equity Fundraising Equity Financing
Definition Raising funds for specific growth projects. General term for raising capital by selling shares.
Stage of Business Common for startups and growing companies. Used at any stage of a company’s lifecycle.
Purpose Typically for expansion or high-growth strategies. Can include general operational needs.
Types of Shares Often preference or convertible shares. Includes ordinary, redeemable, or ESOPs.
Governance Impact Potentially significant, depending on voting rights. Evolving, with ongoing dilution or shareholder shifts.
Prerequisites Requires alignment with the company’s constitution. Must be compatible with long-term share allotment.
Advantages and Disadvantages of Each
Equity Fundraising
Advantages:
• Provides substantial funds for growth.
• Brings in experienced investors who may offer strategic guidance.
Disadvantages:
• Ownership dilution.
• May involve lengthy negotiations and due diligence processes.
Equity Financing
Advantages:
• Flexibility in securing funds at different stages.
• Diversified funding sources reduce dependency on loans.
Disadvantages:
• Compliance with legal and regulatory frameworks is essential.
• May involve recurring dilution of ownership over time.
FAQs About Equity Fundraising and Equity Financing
1. Can equity fundraising be part of equity financing?
Yes. Equity fundraising is a subset of equity financing, focused on raising funds during a specific phase of business growth.
2. What role does the company constitution play in these activities?
Your company’s constitution dictates what types of shares can be issued, voting rights, and other shareholder terms. Amendments may be needed to enable specific fundraising or financing methods.
3. Do I need legal assistance for equity fundraising or financing?
Absolutely. A corporate lawyer ensures your fundraising or financing complies with Malaysian laws, aligns with your company constitution, and protects your interests.
4. How much does it cost to hire a lawyer for equity-related activities in Malaysia?
Legal fees usually start at 2% of the funds raised. However, the structure can vary depending on the complexity of the transaction. Contact ASCO LAW for more details.
5. What is the impact of share issuance on company governance?
Issuing new shares often dilutes existing shareholders’ voting rights. Investors may also negotiate board representation or veto powers.
Internal Links
• Explore our Corporate Legal Services
• Learn More About Fundraising Compliance in Malaysia
External Links
Conclusion: Make the Right Choice for Your Business
Choosing between equity fundraising and equity financing depends on your business stage, funding requirements, and long-term goals. Both approaches have their merits, but having the right legal guidance is crucial to navigate Malaysia’s regulatory landscape, align with your company constitution, and secure the best outcomes.
Contact ASCO LAW today to discuss how we can support your equity fundraising or financing needs and help you achieve your business goals.
Comentários