With the new Angel Tax Incentive introduced by Cradle Fund Sdn Bhd in recent years, registered angel investors in Malaysia stand to save up to MYR 500,000 or around USD 162,000 in tax exemptions.
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What Is Angel Investing?
Angel Investing is the act of investing into a new start-up before they gain significant traction or have sufficiently proved their business model or product.
Due to the high failure rate of start-ups and the risks that come with investing at an early stage, angel investing is by default a high-risk activity.
Because of that, angel investors are usually high net worth individuals who have built highly successful ventures of their own. Most angel investments would fail, but for that handful of start-ups that turn into the next Facebook, Google or even moderately successful companies who get acquired or listed at a valuation of more than USD 10 million, the initial USD100,000 or so angel investors put in can turn into millions or even billions of dollars over 5-10 years.
One good example is how Peter Thiel’s original USD 500,000 angel investment in Facebook turned into more than USD 1 billion when Facebook finally got listed.
Angel investors usually invest in start-ups working on a cause or mission that they personally believe in, while hoping that one of them succeeds. Usually, they also view it as a way of giving back to the ecosystem which they have benefitted from.
Requirements To Qualify As An Accredited Angel Investor
Due to the risky nature of angel investing, a Malaysian individual would have to meet certain requirements to quality as an accredited angel investor.
- Be A High Net Worth Individual
To qualify, an individual would have to be a high net worth individual with a total wealth or net personal assets of MYR 3 million or more (or its equivalent in foreign currencies).
- Be A High Income Earner
Either that, or they would have be a high income earner with a gross total annual income of not less than MYR 180,000 in the preceding 12 months; or MYR 250,000 jointly with one’s spouse.
- Tax Resident In Malaysia
Finally, the individual must be a tax resident in Malaysia.
If the individual meets the above requirements, they can proceed with the process of becoming an angel investor.
- Apply For Accreditation (Renewable Every 2 Years)
First, the individual must submit an application form to the Malaysian Business Angel Network or MBAN with the required supporting documents. Once MBAN has processed and validated the supporting documents they would then proceed to provide accreditation to the individual as an angel investor.
- Make An Investment
Once the individual becomes an accredited angel investor, they can start looking out for start-ups that they would like to invest in through the various angel networks.
- Get Approval For Investment
Once they have invested in an accredited start-up (yes the start-up needs to be accredited as well), the start-up would then submit an application form with the documents for the investment made via Cradle for approval from the Ministry Of Finance.
- Hold Shares For 2 Years
Once the approval is given, angel investors would have to hold on to the shares of the start-up that they have invested in for at least 2 years.
- File For Tax Exemption After 2 Years
At which point, angel investors can then file for a tax exemption of up to MYR 500,000 (depending on how much they have invested) to the Inland Revenue Board.
Should You Be An Angel Investor?
While angel investments can bring in millions to billions of dollars should your investment turn out to be the next Facebook or Google, the reality is that 99% of your angel investments would fail entirely, effectively burning away cent that you have invested.
Hence, even if you qualify to be an accredited angel investor, you should thoroughly understand the risks of doing so before dabbling in it. Besides that, angel investors are also expected to pull their weight in connections and in offering valuable advice to help the start-up succeed. It is not as simple as investing cash into the business.
However, if you are a successful entrepreneur or high net worth individual who thoroughly understands the start-up ecosystem and the risks (99% of start-ups fail) and benefits of angel investing, or just happen to really believe in a start-up’s mission or product, then by all means, be an angel investor and give back to the start-up ecosystem.
If you’re lucky, your investment might turn out to be the next big thing.
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DollarsAndSense Malaysia is a website that aims to help people make better financial decisions, one interesting, bite-sized article at a time. Like us on Facebook to stay in touch with our latest articles.