Adressing The Principal-Agent Problem in Equity Crowdfunding in Malaysia

Abstract

SMEs are the highest establishment across sectors in Malaysia. They contributed significantly towards economic growth by providing business opportunities and employment. However, limited access to finance remains as the main constraint for SMEs to grow. Recently non-formal financing intermediaries, i.e. equity crowdfunding platforms, emerges globally in providing alternative source of funds for the SMEs. It is expected that this healthy development could not be sustained due to “the principal-agent problem” between the investors and the SMEs. Therefore, this study will further explains this particular issue. This qualitative study is based on library search, document analysis, as well as interviews with representatives from equity crowdfunding platform operators. It is observed that information asymmetry is the key element where the issue heat up; where both investors and SMEs have to be more transparent. The notable conflicts are the investors do not see equity investment is a long-term investment, and the SMEs do not have proper business plan. The study recommends some suggestions based on classical and modern compensation structures of principal-agent problem to minimize the conflict between the investors and SMEs involved in equity crowdfunding.