A typical question from foreign clients wishing to raise funds from certain Malaysian institutions is whether there exists a safe harbour for private offerings of interests in offshore entities to sophisticated investors, which are exempted from Malaysian regulatory approvals.
The short answer is 'No.'
Interests in offshore entities (typically shares or limited partnership interests) are considered securities under Malaysian law. Approval of the Securities Commission (SC) is required under section 212 of the Capital Markets & Services Act 2007 for making available, offering or issuing an invitation to subscribe for securities in Malaysia.
There are certain exemptions from this approval requirement, such as offerings of listed foreign securities to sophisticated investors, and offerings of unlisted foreign securities to its existing shareholders (by means of an employee share option scheme, bonus issue, share dividend or non-renounceable rights issue). However there is no investors' exemption for offerings of unlisted foreign securities to potential new investors.
While the ambit of section 212 appears wide, current SC policy limits the type of foreign funds which the SC may consider approving for offerings in Malaysia. These are certain Islamic funds based in Dubai or Hong Kong. From past experience, other offshore funds seeking approval for onshore offerings to investors have been asked to structure an onshore wholesale fund (which is regulated by the SC), which would then invest into the offshore funds.
Only SC-licensed fund managers can form such onshore wholesale funds. It appears that, after the last global financial crisis and the advent of a number of rogue funds, the SC is taking a more stringent approach to foreign funds seeking to fund raise in Malaysia.
The investors' exemption is an exemption from prospectus requirements, and if an information memorandum is issued describing the business and affairs of the offshore entity, this memorandum need not conform with prospectus requirements. Notwithstanding, the memorandum would attract prospectus liability, and must be deposited with the SC within seven days of its issuance.
In Malaysia, the marketing and distribution of foreign securities is a regulated activity of dealing in securities which requires the appointment of a licensed intermediary.
The SC has reviewed the existing categories of sophisticated investors and is proposing to widen and streamline the categories, but there is presently no move to create a safe harbour from the approval requirement.
If SC approval is not sought and obtained, the offering should take place outside Malaysia. In general, there is no restriction on sophisticated investors (subject to their internal policies and exchange control regulations) from investing offshore.
In order to ensure that the offering does not fall within Malaysian regulatory jurisdiction, it is important to:
- maintain an adequate paper trail of a reverse enquiry – that the investor has contacted the client and expressed its interest in the offshore securities;
- furnish information on the offshore securities and the offering documents to the investor outside Malaysia (for example to an address it provides outside Malaysia, or at a physical meeting outside Malaysia);
- ensure that, if the internet is used as a medium of communication, the client's secure website should be hosted from a server outside Malaysia with adequate security protocols in place so that the offering is not accessible in Malaysia (such as an auto-rejection feature when data indicate the subscriptions are coming from Malaysia) or targeted to persons in Malaysia (perhaps through prices represented in Malaysian ringgit); and
- incorporate a clear jurisdictional disclaimer on all offer documents stating that the offer is not intended to be available in Malaysia or to any person in Malaysia.