Interest Schemes in Malaysia: An Introduction

Growth-stage businesses and small and medium enterprises (SMEs) often reach a point where growth outpaces cash flow, and external funding becomes essential to scale further. Yet traditional financing is frequently out of reach, whether due to insufficient collateral, a high gearing ratio, an unproven or emerging industry, or a limited financial track record. Equity financing offers an alternative, but many business owners are reluctant to give up ownership, and with it control over how their business is run.

This is where an interest scheme can offer a compelling middle path. As an alternative fundraising method, it allows businesses to pool financial contributions from the public in exchange for an interest in a particular scheme, without issuing shares or debentures. Its structure is notably flexible and can be tailored to a wide range of business models to support growth on the business’s own terms.

An interest scheme is worth considering for businesses that want funding without the collateral requirements of a loan, want to retain full control over their operations and ownership, or operate in an emerging space with an innovative business model.

Background of the Legal Framework

Interest schemes were previously governed by Division 5 of Part IV of the now repealed Companies Act 1965. Those provisions aimed to protect investors in publicly offered schemes whose interests are neither shares nor debentures. As interest schemes became increasingly recognised as an alternative fundraising method, and to ensure the relevant provisions kept pace with the evolving needs of both businesses and public investors, a standalone piece of legislation was introduced in 2016 to properly regulate this method of fundraising.

Interest schemes are now governed by the Interest Schemes Act 2016 (“ISA 2016”), which came into force on 31 January 2017. The ISA 2016 introduced several key changes. It clarified the legal framework governing interest schemes, enhanced protection mechanisms for interest holders, and extended the availability of interest schemes to private companies and foreign companies.

Definition of an “Interest Scheme”

The previous definition under the now repealed Companies Act 1965 was widely regarded as too restrictive and confusing. As a result, the categories of interest schemes established over the past few decades remained limited, with the majority falling under golf and recreational club schemes, timeshare schemes, and memorial park schemes.

The new definition under the ISA 2016 is comparatively broader and captures a wider range of scheme categories. This allows the interest scheme to serve more effectively as an alternative fundraising method open to public investors. The definition of “Interest Scheme” is set out in section 2 of the ISA 2016, as follows:

Meaning of “Interest”

“Interest” is defined as any interest or right to participate, whether enforceable or not and whether actual, prospective or contingent whether in Malaysia or elsewhere:

1. in any investment scheme;
2. in any time-sharing scheme; or
3. in any recreational membership scheme, whether or not the interest or right is evidenced by a formal document or relates to a physical asset.

However, the meaning of “Interest” excludes:

1. any shares in or debenture of a corporation;
2. a capital market product as defined in section 2 of the Capital Markets and Services Act 2007;
3. any interest in a partnership agreement; or
4. any participatory interest in any product offered by the licensees regulated under the Financial Services Act 2013 and the Islamic Financial Services Act 2013, approved issuers of a designated payment instrument regulated under the Financial Services Act 2013 and the Islamic Financial Services Act 2013 and development financial institutions prescribed under the Development Financial Institutions Act 2002.

Meaning of “Scheme”

“Scheme”, in relation to an interest, is defined under section 2 of the ISA 2016 to include any contract, arrangement, undertaking, enterprise, programmes or plans of action relating to an investment scheme, a time-sharing scheme or a recreational membership scheme.

Nature of Schemes

Section 4(1) of the ISA 2016 provides that a scheme shall either be (a) an investment scheme; (b) a recreational membership scheme; (c) a time-sharing scheme; or (d) a combination of such schemes. Section 4(5) of the ISA 2016 further provides that each of these schemes may take the form of a Shariah-compliant scheme. A more detailed discussion of the nature of the scheme can be accessed here.

Types of Schemes

Under section 5 of the ISA 2016, there are three types of schemes that may be registered: small schemes, premium schemes, and foreign schemes. A small scheme caters to fund sizes from RM1 million to RM10 million, while a premium scheme applies to fund sizes above RM10 million. A foreign scheme, on the other hand, is not subject to a maximum fund size. Each type of scheme is subject to different registration criteria and requirements. A more detailed discussion on the requirements for small and premium schemes can be accessed here.

Registration of Interest Schemes

If a company issues or offers a scheme to the public for subscription or purchase, and the scheme falls within the definition of an interest scheme under the ISA 2016, the company must register the scheme and obtain the required authorisation. Failure to register an interest scheme in accordance with the ISA 2016 is an offence. On conviction, it is punishable by imprisonment for a term not exceeding 10 years, a fine not exceeding RM50 million, or both.

Anyone intending to offer an interest scheme to the public must therefore ensure that the scheme is properly registered and authorised under the ISA 2016. A discussion on how to apply to register an interest scheme can be found here.

Key Distinctive Features of an Interest Scheme

Key features of interest schemes as an alternative fundraising method include:

• It does not involve giving up any ownership of the company to the public;
• It may offer non-financial benefits to investors and is not confined to a “debt financing” funding structure;
• It has no limit on fund size (subject to certain conditions);
• Business owners retain full control over operations, as investors have no right to interfere with day-to-day management;
• It is not subject to the pressure of achieving high growth;
• No collateral is required; and
• There is no minimum fundraising target to be met.

Final Remarks

Interest schemes can offer growth-stage businesses and SMEs a flexible alternative to conventional bank financing and equity fundraising. They may enable businesses to raise funds from the public without providing collateral, diluting ownership or surrendering control over their day-to-day operations.

The ISA 2016 has broadened the scope of interest schemes and extended the regulatory framework to private and foreign companies, allowing a wider range of business models to be structured within it. However, that flexibility comes with regulatory obligations. Any interest scheme offered to the public must be duly registered and authorised, and non-compliance may constitute an offence attracting significant penalties.

Businesses considering this fundraising route should therefore seek legal advice at an early stage to determine whether the proposed arrangement falls within the definition of an interest scheme, identify the category of scheme most appropriate to the intended fund size and business model, and structure the offering in compliance with the ISA 2016.