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How Can The Private Equity Market Go So Wrong – Mismanagement Or Outright Scam?

The article discusses the negative developments surrounding the private equity and venture capital market in Malaysia, and potential red flags that the investor need to be aware of.

Article contribution by Akmal SK (Corporate Lawyer | Serial Entrepreneurs)

Throughout my years of practising laws, I have always been fascinated in private equity and venture capital market in all its glories. Through private placement investment, there are so many SMEs in Malaysia that has reaped the benefit and were assisted to soar and scale up their businesses to another level.

Lately however, there are so many negative developments shrouded the private equity and venture capital market in Malaysia. Investors are not getting what they are promised, companies fail to pay the promised dividend, money games and even cases where companies doing Ponzi scheme, where the dividend payable to their investors were taken from the investment of new investors, and not from the revenue that the company should generate in their business.

Thousands of people and investors, where most of them are just retail investors, have been “scammed” through this kind of practices from irresponsible companies.

But does these companies outrightly want to scam the public and their investors in the first place, or (to give some benefit of the doubt here) are they actually a victim of their own mismanagement?

Case Study

It has been reported by the EdgeProp ardently that a company knows as ACE Holdings (“ACE”) is now facing a suit seeking for almost RM10 million from 27 of their investors, for the grounds of failure by ACE to pay the promised dividends of 12% per annum, and also failed to pay such investors for redemption of their investments. ACE has replied to the investors saying that since its operations were severely affected by the Covid-19 pandemic, payments for the redemption by the investors would be delayed.

Both parties have been back and forth in their responses for this matter, but in the end, the investors have decided to take the necessary legal action against ACE. ACE on the other hand, also defended themselves and at the same time, has filed for judicial management petition.

Judicial management is a corporate rescue mechanism when a company is unable to pay its debts, whereby a judicial manager will be appointed to take over the company’s affairs during the period where the company is put under the judicial management. As a result of this, a stay proceeding may be ordered by the Court on other actions such as winding-up proceedings or enforcement, detention or distress levied against the company and/or its properties.

Picture credit: Getty Images

What can we learn?

I like to share two different perspectives for this case i.e. Company, and the Investors.

From the Company’s point of view, ACE, as a UPC (Unlisted Public Company), which sought to raise funds from the members of the public, shall be subjected to comply with the CMSA (Capital Market and Services Act 2007), and the relevant guidelines especially when the offer is made to retail investors.

For a company to effectively manage the public funds it secured through the fund raising, it must have a noticeably clear business plan. From this business plan, you would know how much would be needed for your project, how much are your costs (OPEX and CAPEX) for such project, how much revenue is targeted from the project. Furthermore, you should have a good SOPs and corporate governance for you to manage such project using the funds raised through the private placement.

There are many cases where a company raise a fund that is too big, and eventually, failed to effectively manage their own project using such funds. Reports of misappropriation of funds, breach of trusts etc started to go around as the company does not have a proper corporate governance, and the company falls into the trap of doing money game or Ponzi scheme. As the company needed to pay the dividend as promised, but not enough funds to cover the cost of fund (monthly or periodically), the company must opt to look for new investors, just to get the money rolling to be used for dividend payment of the former investors.

From the investors point of view, you should always know your rights under the law. I might sound like a broken record here, but the most important thing to do before you decide to invest is, due diligence. Dig out everything you can find about the company, the offer, the project etc before you decided to invest and accept such placement offer by the company.

You can always ask for the company’s secretarial documentation, audited reports, detail information of the project (i.e. if it is a plantation project, you can always ask for the location of the plantation, how big is the plantation, how much revenue has been generated through the project previously etc). Always be thorough in your line of questioning and request. Most people only looked at the ROI (Return of Investment) and just some vague information (and pictures) about the project before they decided to invest.

There are some red flags too that you may consider such as:

(i)                   The company refuse to show any detail information or documentations about the project or the company (any related documents which should not be confidential);

(ii)                 The Company refuse your request to have a site visit to your project site (plantation, office, factories etc);

(iii)                The ROI offered is “too good to be true.”

Most importantly, the CMSA requires a prospectus to be issued when shares of UPC are offered to retail investors. The said prospectus will also need to be registered with the Securities Commission (SC). UPCs are not required to issue a prospectus only when the shares are issued to sophisticated investors described or set out under Schedules 6 and 7 of the CMSA.

There are many cases I saw that the company only issued Information Memorandum (and not prospectus) to the retail investor, and declared to the investors that such Information Memorandum has been deposited to the SC. While this may be true, the practice itself is in contradiction with the CMSA and thus, this should be the biggest red flag that you should aware as an investor, especially if you are a retail investor.


The views are exclusively writer's own and do not necessarily represent the views of GC.

About Akmal SK

Meet Muhamad Akmal Arif Shamsul Kahar (Akmal SK) - The Legal Mastermind Behind Corporate Law.

As the leading partner of Messrs. Akmal Shamsul Kahar & Co., En. Akmal has made a name for himself as a legal expert in corporate practice, specializing in mergers and acquisitions, share sales, and other complex transactions.

With extensive experience in the field, En. Akmal has earned a reputation as a trusted advisor to many SMEs and big corporations, guiding them through million-dollar deals with ease.

En. Akmal's expertise extends beyond just corporate practice. He is a recognized legal expert in corporate exercise and governance, having been appointed as a legal advisor to numerous organizations, including limited companies and GLCs. His knowledge and experience have led him to acquire multiple panel ships, cementing his position as one of the top legal minds in the industry.

The legal firm led by En. Akmal boasts an impressive client list, including both local and international clients from countries such as the UK, Singapore, Dubai, China, and more.

As a leading figure in corporate law, En. Akmal continues to set the standard for excellence in the legal industry, inspiring and guiding the next generation of legal professionals.

Instagram : @akmalskii / @askco.legal.firm

Website: https://askcolaw.com/

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