Earlier this month Malaysia’s parliament approved a bill that will make the country one of the first emerging economies in the world to have equity crowdfunding laws.
The Malaysian law allows individuals to invest only small amounts – between RM500 ($117) and RM5,000 ($1,170) in funds held by peer-to-peer lenders. A crowdfund can raise up to RM3 million within a 12-month period and thereafter, up to RM2 million.
So far six crowdfunding funds registered with the Malaysia's securities commission have received permission to carry out crowdfunding activities.
Few emerging economies
While donation-based crowdfunding (made famous by Kickstarter and Indiegogo) is common across the world, most governments - even in developed countries - still do not allow online platforms to make equity investments in start-ups.
There is still justified concern that rules need to be carefully crafted to avoid investors falling prey to fraud.
Just last week came the announcement that a Danish investment firm, MyC4, that crowd-funds from investors in European countries and lent to small businesses in Africa, had closed its operations in Kenya after an internal fraud was discovered. The Danish firm wants to recover the over $1 million it lent to two Kenyan partners.
But leglising equity crowdfunding could help provide thousands of small firms with another way to source finance.
A 2013 World Bank report projected that crowdfunding could grow to $96 billion by 2025, while a 2015 report estimates that the sector last year grew to over $16 billion worldwide, up from $6 billion in 2013 and that it will come it at over $34 billion this year.
Allow more equity-funding
In the US equity crowdfunding for unaccredited investors was signed into law in 2012, but there has been criticism of the Securities and Exchange Commission for over-regulation and compliance costs.
In the UK authorities went for more light-touch regulations, after regulators allowed the market first evolve. As a result, 2014 saw the biggest year for crowdfunding in the UK, with £111 million invested via equity-based crowdfunding platforms (up 300% from 2013), according to a report this year.
In Malaysia regulators engaged with stakeholders and held events with global experts to share best practices and lessons learned.
One way to overcome the risk of fraud is to put in place a strong due diligence phase, as UK-based crowdfunding site Emerging Crowd does, reports Virgin's entrepreneur site.
Emerging Crowd connects investors with deals in emerging markets (it’s investments include a chain of coffee shops in Nigeria and a South African web streaming service).
The site's checks and balances include an eight-week due diligence process designed to uncover information likely to interest investors. In addition analysts only consider those companies based in investment-stable countries.
The site also partners with a third-party website, CrowdCheck, which provides due diligence. This means just one in 40 potential investments are listed on the site.
These kinds of checks and balances, together with a growing entrepreneurial ecosystem, will perhaps go some way to encouraging investors that their money is secure.
A greater challenge will be to build trust among investors and start-ups. Without this it's unlikely that equity crowdfunding will have any great impact in emerging economies.
Timm is a South African who writes on small business. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a