Startup Fundraising in Malaysia: Legal and Strategic Insights for 2025

 Authored by Kevin Wu

Credit: Scott Graham

Fundraising has always been a defining challenge for entrepreneurs. For Malaysian founders, this challenge is not just about convincing investors of a grand vision, but also about navigating an evolving legal and regulatory environment. With increasing government scrutiny, new investor sophistication, and a maturing venture capital ecosystem in Southeast Asia, the playbook for fundraising in 2025 is both more technical and more nuanced than in 2022 when we first published our beginner’s guide.

This article serves as a follow-up for founders ready to dig deeper into the legal structuring, compliance obligations, and deal mechanics that can make—or break—a fundraising round in Malaysia.

The Shifting Landscape of Fundraising in Malaysia

Over the past three years, Malaysia’s startup ecosystem has seen exponential growth. Venture capital investment in Southeast Asia surpassed USD 20 billion in 2023, with Malaysia capturing a larger slice thanks to its thriving fintech, e-commerce, and greentech sectors. Regulatory support, such as tax incentives for angel investors under the Angel Tax Incentive Programme (ATIP), and government funds like Dana Penjana Nasional, have further accelerated this growth.

But with increased capital inflows comes increased complexity. Investors today demand more robust governance, cleaner structures, and enforceable protections. For founders, this means fundraising is not merely about a pitch deck—it is about preparing your company legally and structurally to withstand rigorous due diligence.

Equity vs. Debt: Structuring Considerations

One of the first questions founders face is whether to raise via equity or debt instruments.

●         Equity Financing remains the most common route for Malaysian startups, especially at pre-seed to Series A stages. Founders issue ordinary or preference shares in exchange for capital. The challenge is balancing dilution against long-term control.

●         Convertible Instruments, such as Convertible Notes or SAFE (Simple Agreement for Future Equity), are increasingly popular. They allow investors to fund the company today while deferring valuation negotiations until a priced round. However, in Malaysia, SAFEs are not explicitly codified in law, and enforceability may depend on careful drafting under the Companies Act 2016 (CA 2016).

●         Debt Financing, while less common for early-stage startups, is occasionally used where revenue streams are predictable. Venture debt providers now operate in Southeast Asia, but they often require warrants or conversion rights, blurring the line between debt and equity.

Legal takeaway: Always consult legal counsel when drafting these instruments. Under CA 2016, share issuances must comply with company constitution and require shareholder approval, while debt instruments may trigger restrictions under financial services laws if structured improperly.

Preference Shares: The Investor’s Favourite Tool

Preference shares dominate later-stage fundraising in Malaysia. They provide investors with rights superior to ordinary shareholders, such as:

●         Liquidation Preference: Ensures investors recover their investment (often 1x or 2x) before common shareholders in a liquidation or exit.

●         Anti-Dilution Protection: Adjusts conversion price if shares are later issued at a lower valuation (full ratchet vs. weighted average).

●         Board Rights and Veto Powers: Gives investors influence over key business decisions, from hiring C-level executives to selling significant assets.

Founders must understand that while these terms can unlock capital, they also shift control dynamics. Overly onerous terms can deter future investors. Market practice in Malaysia generally mirrors international standards, but negotiation remains key.

Due Diligence: Preparing for the Investor Microscope

Once a term sheet is signed, investors begin due diligence. This is where many fundraising processes stall. Malaysian startups often underestimate the scrutiny applied. Typical investor due diligence covers:

●         Corporate Structure: Ensuring the company is duly incorporated, with clean shareholding records under CA 2016. Any irregularities in share issuances or missing shareholder approvals can derail a deal.

●         Regulatory Compliance: Startups in fintech, healthtech, or e-commerce may require licenses from regulators like Bank Negara Malaysia or the Securities Commission Malaysia. Operating without proper licenses exposes investors to regulatory risk.

●         Intellectual Property (IP): Verifying that trademarks, patents, and software codes are properly owned or assigned to the company—not to founders personally.

●         Tax Liabilities: Reviewing tax filings under the Income Tax Act 1967. Outstanding tax or failure to comply with transfer pricing rules can deter foreign investors.

●         Employment and ESOPs: Ensuring employment contracts are enforceable and employee stock option plans (ESOPs) are properly documented.

Practical advice: Founders should run a “mock due diligence” with their lawyers before fundraising, identifying red flags early.

Key Legal Documents in a Fundraising Round

After due diligence, lawyers draft and negotiate the definitive agreements. In Malaysia, the following documents are standard:

1. Share Subscription Agreement (SSA): Outlines the terms of investment, subscription price, and conditions precedent (e.g., regulatory approvals).

2. Shareholders’ Agreement (SHA): Governs ongoing rights between investors and founders—covering board composition, voting rights, transfer restrictions, and dispute resolution.

3. Disclosure Letter: Where founders disclose any exceptions to warranties. Failure to disclose material issues may expose founders to liability.

4. Constitution Amendments: To create new classes of shares or embed investor rights as required under CA 2016.

Negotiations around these documents can be protracted, but clarity here prevents disputes later.

Risk Allocation: Protecting Both Sides

Fundraising is ultimately about balancing risk between founders and investors. Key clauses that allocate risk include:

1. Warranties and Indemnities: Founders warrant the accuracy of company information. Breach may trigger personal liability unless carefully limited.

2. Drag-Along and Tag-Along Rights: Protect minority investors during an exit while enabling majority shareholders to drive transactions.

3. Exit Rights: Investors may negotiate IPO, trade sale, or buyback rights to secure liquidity.

The law does not impose standard clauses; everything is contractual. Founders must understand not just the legal language but the practical consequences of each clause.

Cross-Border Investment Considerations

Many Malaysian startups raise from Singapore-based funds. While advantageous in terms of capital access, this creates additional legal considerations:

●         Jurisdictional Law: Most Singaporean funds insist on Singapore law governing the agreements, even if the company is incorporated in Malaysia.

●         Foreign Exchange Rules: While Malaysia has largely liberalised foreign exchange, certain restrictions under Bank Negara Malaysia rules may still apply for remittances and guarantees.

●         Holding Structures: Some startups establish a Singapore holding company (“flip” structure) to attract global capital. However, flipping has tax, compliance, and repatriation implications that must be carefully evaluated.

Future Trends in Malaysian Fundraising

Looking ahead, several trends are reshaping the legal landscape for startup fundraising in Malaysia:

1. ESG Compliance: Investors increasingly require environmental, social, and governance (ESG) disclosures. Startups may need sustainability reporting frameworks even before profitability.

2. Digital Securities: The Securities Commission Malaysia has issued guidelines on digital assets and token offerings. Security token offerings (STOs) may emerge as alternatives to traditional fundraising.

3. Stricter AML/KYC Requirements: Anti-money laundering obligations are tightening, with investors expecting startups to adopt compliance standards even in early rounds.

4. Greater Founder Education: With legal complexities rising, investors now favour founders who demonstrate legal and regulatory fluency alongside business acumen.

Key Takeaways

1. Fundraising in Malaysia has evolved from informal angel rounds into a sophisticated process requiring legal precision.

2. The Companies Act 2016 underpins most corporate and fundraising structures, but sector-specific laws add complexity.

3. Founders should anticipate and address investor due diligence demands before entering negotiations.

4. Legal documents—SSA, SHA, and Constitutions—are not boilerplate; they shape future control and risk allocation.

5. Cross-border investment brings opportunity but also regulatory, tax, and legal challenges.

Conclusion

Fundraising remains the lifeblood of startups. In Malaysia, the process is now more complex than ever, requiring founders to combine storytelling with technical and legal discipline. Investors are no longer content with vision alone—they want assurance that the company is built on sound governance, regulatory compliance, and contractual clarity.

For founders, this means fundraising is not just a sales job—it is a legal and strategic exercise that demands professional guidance, meticulous preparation, and a deep understanding of the law. Those who master both sides—the pitch and the paperwork—will stand the best chance of building companies that attract capital, scale globally, and endure.

Kindly note that this legal article does not, and is not intended to, constitute formal legal advice by the Firm, instead all information, content and materials available on this site are for general informational purposes only. If readers require further clarification or legal advice, please email office@kevinwuassociates.com