What to Know About Angel Investors?
WHAT IS ANGEL INVESTORS?
Angel investors are the people who provide funding, industrial knowledge, as well as business experience to early stage startups or entrepreneurs. Angel Investors in Malaysia are usually found in Angel Investment Groups or Networks. They usually provide mentoring and guidance to startups. Some of the best angel investors are known to help Startups during tough times.
WHAT IS THE DIFFERENCE BETWEEN ANGEL INVESTORS AND VENTURE CAPITAL ("VC")?
A VC is a person or a firm that invests in small companies, generally using money pooled from investment companies, large corporations, and pension funds. Typically, VCs do not use their own money to invest in companies.
An angel investor is an accredited investor who uses their own money to invest in small businesses. They are required to have a minimum net worth of RM3 million or its equivalent in foreign currencies (excluding the value of the individual’s primary residence) to be considered an accredited investor; or has a gross annual income exceeding RM300,000 or its equivalent in foreign currencies per annum in the preceding 12 months; or an individual who, jointly with his or her spouse, has a gross annual income of RM400,000 or its equivalent in foreign currencies. Many angel investors are small business owners’ family and friends.
Generally, angel investors in Malaysia could invest collectively between RM50,000 to RM2 million or more, where early stage VC investments could start at RM500,000 to RM1 million.
MUST ANGEL INVESTORS BE ACCREDITED BEFORE THEY INVEST?
There is no specific requirement under the law that requires a person to be registered or accredited before he/she could invest in a company.
In Malaysia, there are two (2) types of angel investors:
High Income Earner (an individual who has a gross annual income exceeding RM300,000 in the preceding 12 months; or an individual who, jointly with his or her spouse, has a gross annual income of RM400,000); and
High Net Worth Individual (an individual whose total net personal assets, or total net joint assets with his or her spouse, exceeds RM3 million, excluding the value of the individual’s primary residence).
However, for an angel investor to qualify to claim for a tax incentive ("Angel Tax Incentive"), the angel investor must first obtain accreditation before making any sort of investments to the investee companies. If the investors did not obtain the accreditation, the investors will not enjoy the tax exemption for any investment that he/she has made.
HOW AN ANGEL INVESTOR SHOULD BE ACCREDITED?
An angel investor who wants to invest would have to go through the Malaysian Business Angel Network ("MBAN") to get accredited. The accreditation will be valid for two (2) years and is renewable.
MBAN is responsible for the accreditation of individual angel investors and angel investor clubs, creating awareness and training for angel investors, as well as monitoring angel investment statistics in Malaysia.
WHAT IS ANGEL TAX INCENTIVE?
Angel Tax Incentive is governed under the Angel Tax Incentive Office ("ATIO"), a unit under Cradle Fund Sdn Bhd ("Cradle").
The investment to be made by an angel investor must be approved and endorsed by the Ministry of Finance ("MoF"), Malaysia. After two (2) years from the point of investment, the angel investor may file their personal income tax through the Lembaga Hasil Dalam Negeri ("LHDN"), which then will process their income tax filing for tax exemption. The angel investor, however, needs to keep the MoF’s tax incentive approval as proof of investment in the certified investee companies as required by the LHDN.
The investments made by the angel investors must only to the investee companies (as defined below)
The investee companies will first have to apply with ATIO to receive qualification for investment under Angel Tax Incentive where they can then obtain a letter to present it to the accredited angel investors. ATIO will then submit all investment related documentations to MoF for approval and endorsement after the investment takes place.
The investors must hold shares in the invested company for a period of two (2) years prior to claiming the exemption. If the shares are disposed before the two (2) years, the investment will be considered void for the tax incentive purposes.
The investment is qualified for tax exemption on the third year of the investor's shareholding. For example, if an investment is made in the year 2017, the investor will be able to claim for tax exemption when he or she files for their tax returns in the year 2019.
And, all investment must be made in cash in order to be able to claim for the tax incentive.
WHAT ARE THE APPROVED AND ENDORSED INVESTMENTS BY THE MoF?
Angel Tax Incentive’s investment focus is in diverse areas of high growth technology industries with innovation including the following:
Advanced electronics and information technology;
Equipment/instrumentation, automation and flexible manufacturing systems;
Electro-optics, non-linear optics and optoelectronics;
Value-add services; and
WHAT IS AN INVESTEE COMPANY
Investee Company refers to technology-based start-up that is looking for investment/funding from the private sector, and must be registered and certified by Cradle.
The following is the eligibility criteria to be regarded as an investee company:
minimum 51% Malaysian owned;
must be a private limited company (Sendirian Berhad) and incorporated in Malaysia and residing in Malaysia;
the company’s core business must be in qualifying activities as approved by the MoF under the focus areas of investment;
the cumulative revenue is less than RM5 million and has been in operation for three (3) years or less (based on the latest financial year result upon application); and
the company must not be wind-up and/or in liquidation.
The validity period of an investee company’s certification by Cradle is only one (1) year and renewable annually. Cradle has the rights to review the qualifying criteria for the said investee company and when required during the period.
Our upcoming article: Foreign Angel Investors in Malaysia
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