The risks and dangers of ECF Equity Crowd Funding in Malaysia - high risk but could be potentially lucrative
ECF (Equity Crowd Funding) is a form of fundraising that allows a start-up or other smaller companies to obtain capital through small equity investments using online portals to publicize and facilitate such offers to crowd investors. ECF is legalized in Malaysia through a few companies (called organizers) at the moment.
While I've participated in ECF campaigns in Malaysia. I've always maintained that each of these ECF investments needs to be carefully vetted through even if it is approved by Malaysia's security commissions ECF organizers (eg CrowdPlus, Pitchin, Ata-Plus). ECF organizers are only in charge of doing a very simple background check and then organize the fund raising and marketing activities for interested investors.
Signature Fei Fei Crab Restaurant is a famous restaurant specializing in serving crab and seafood dishes in the klang valley. Signature Fei Fei Crab Restaurant seemed to be raising cash from investors just a few months ago and yesterday they abruptly announced they will be closing down due to the effects of MCO (Movement Control Order) on their business in Malaysia.
Each block of investment raised by Signature Fei Fei Crab then was RM5,000 per block. During investment raising time, Signature Fei Fei Crab projected 12% returns on investment and investors would have special privileges when dining in with dining vouchers. I believe there were other previous ECF campaigns also but I didn't really go through in detail as the point of this article was to highlight the risks of ECF.
With the recent announcement I believe most of the investors might not be able to recoup back even their capital anymore, but perhaps if the money raised has not been disbursed to Signature Fei Fei Crab by the ECF organizer then there is a chance investors might be able to get back their capital/principle. T
Signature Fei Fei Crab ECF isn't the only ECF business that has issues, there was an ECF which was suppose to be a subscription based financial education company hit issues when there was business disagreement between founders and subsequently failed. Restaurant ECF and franchises also are very difficult even before the Covid-19 situation, think Cosans Coffee, Bone and Pot , these food ECF and franchises all have failed.
And there goes the moral of the story and the point of this article, ECF are very risky ventures, these are areas where even the boldest banks are scared to tread. You are basically risking 100% of your capital for maybe a 30%-50% return. So far in Malaysia there's only 1 ECF that gave investors that return (30%) after it was acquired by another group. This is assuming the company's exit plan is to go for stock market listing or being acquired by a bigger group. In general, companies that raise capital via ECF do not pay dividends at all.
When deciding to do ECF you need to think like a venture capitalist (also fondly known as vulture capitalists), they also do not simply give out their money. The business should not only be able to generate cash flow but needs to be able to scale very big if not the risk taken is not worth it at all. Just earning money is not enough, scaling big is much more important for a startup venture to work. Unicorn startup companies like Uber, Grab, Airbnb all didn't make any money initially for many many years but was able to scale big and wide due to its business model.
One of my ECF venture (non FnB) reported that it will have trouble sustaining until August 2020. This is the reality in investing in ECF ventures, they are all very early state investing with gargantuan risks.
Note : I got to know Signature Fei Fei Crab an Fei Fei Crab restaurants are different business entities, the announcement only affect Signature Fei Fei Crab, which is the one which used ECF for fundraising. The original Fei Fei Crab restaurants however will be still operating as usual. I have never eaten at any Signature Fei Fei crab restaurant also so I cannot comment much on the food and its business potential.
🔗Links
https://www.orientaldaily.com.my/news/central/2020/09/01/361124
https://www.crowdplus.asia/CapitalProfile.php?cid=6677
https://www.theedgemarkets.com/article/investing-ecf-growth-story
https://www.facebook.com/SignatureFeiFeiCrab/