Convertible Note (Malaysia)

A Convertible Note in Malaysia sets out the terms on which the lender advances funds and the borrower agrees to repay them.

A Convertible Note in Malaysia is structured as a loan agreement under the Contracts Act 1950 (Act 136), with an embedded right of conversion under Section 72 of the Companies Act 2016 (Act 777), which permits the allotment of shares on conversion of the note. The note is not a debenture in the traditional sense unless it creates a charge over the company's assets under Section 2 of the Companies Act 2016, which defines a debenture as a document that creates or acknowledges an indebtedness. If the Convertible Note is issued to more than 50 persons or is offered to the public, it may constitute a capital market product under the Capital Markets and Services Act 2007 (Act 671) requiring SC licensing or exemption.

Convertible Notes in Malaysia typically include two investor protection mechanisms: a discount rate (usually 15-25%) applied to the qualifying round share price, rewarding early investors for the risk they took before the priced round; and a valuation cap, which sets a maximum pre-money valuation at which the note converts, regardless of the actual priced round valuation. Both mechanisms are computed at conversion in Malaysian Ringgit (RM).

Stamp duty on a Convertible Note issued as a loan instrument is assessed under Item 27 of the First Schedule to the Stamp Act 1949 (Act 378) at RM5 per RM1,000 or part thereof on the principal amount. Upon conversion to equity, additional stamp duty at 0.3% of the subscription consideration applies under Item 32(b). Securities Commission Malaysia (SC) guidelines and Bursa Malaysia requirements become relevant if the converting company later seeks a public listing.

The legal framework governing the Convertible Note (Malaysia) in Malaysia draws on several key statutes and regulatory bodies. Under Malaysian law, the Contracts Act 1950 (Act 136) governs contractual obligations. The Companies Act 2016 (Act 777) regulates corporate entities through the Companies Commission of Malaysia (SSM). The Employment Act 1955 (Act 265) and the Department of Labour govern employment matters. The Personal Data Protection Act 2010 (Act 709) and the Personal Data Protection Department protect personal data. The Inland Revenue Board of Malaysia (LHDN) administers tax obligations. The Industrial Court adjudicates employment disputes under the Industrial Relations Act 1967 (Act 177). Parties executing a Convertible Note (Malaysia) in Malaysia should confirm the document reflects current law, including any amendments enacted since the original drafting date. The Financial Services Act 2013 (Act 758) sets the foundational requirements.

A Convertible Note in Malaysia is used when a startup or early-stage company needs bridge financing before a priced equity round.

A Convertible Note is needed when a Malaysian tech startup completing an accelerator programme (such as MaGIC, Cradle Fund, or MDEC's Global Accelerator Programme) requires seed capital of RM200,000 to RM2,000,000 from angel investors without agreeing on a company valuation at the very early stage. The note converts into equity at a discount when Series A investors set the valuation.

A Convertible Note is required when an existing investor provides bridge financing to a portfolio company to extend its runway while it prepares for a larger funding round, structured as a note to avoid immediate dilution and defer the valuation conversation.

A Convertible Note is needed when a group of sophisticated investors participates in a syndicated seed round through a single Convertible Note structure, allowing multiple investors to participate at the same economic terms without requiring the company to negotiate individual Investment Agreements with each investor.

A Convertible Note is required when a Malaysian company seeks grant co-investment from Cradle Fund Sdn Bhd under the Cradle Investment Programme (CIP) matching scheme, where Cradle's investment takes the form of a convertible instrument aligned with the lead investor's terms.

A Convertible Note is needed when a foreign angel investor or family office based in Singapore, Hong Kong, or the UAE wants to invest in a Malaysian startup using a simple, internationally recognised instrument before the company is ready for a priced round, subject to any Foreign Investment Committee (FIC) or sector regulatory requirements that may apply to foreign ownership.

Parties in Malaysia should prepare a Convertible Note (Malaysia) proactively rather than waiting for a dispute to arise. Courts interpret agreements based on the written terms rather than oral representations. Under Malaysian law, the Contracts Act 1950 (Act 136) governs contractual obligations. The Companies Act 2016 (Act 777) regulates corporate entities through the Companies Commission of Malaysia (SSM). The Employment Act 1955 (Act 265) and the Department of Labour govern employment matters. The Personal Data Protection Act 2010 (Act 709) and the Personal Data Protection Department protect personal data. The Inland Revenue Board of Malaysia (LHDN) administers tax obligations. The Industrial Court adjudicates employment disputes under the Industrial Relations Act 1967 (Act 177). Where the transaction involves regulated activities, prior approval from the relevant authority may be required before execution.

A Malaysia Convertible Note must include the following essential components.

Parties: Identify the company (issuer) with SSM registration number and the investor (noteholder). Include representations that the company has valid board authority to issue the note under the Companies Act 2016 (Act 777) and its Constitution.

Principal Amount and Interest: State the principal amount in Malaysian Ringgit (RM). Convertible Notes typically accrue simple interest at 5-8% per annum, which accrues until conversion or repayment. Interest-free notes are possible but may raise deemed interest income issues under the Income Tax Act 1967 (Act 53).

Maturity Date: Specify the maturity date — typically 12-24 months from issuance. If no qualifying financing event occurs before maturity, the note may be extended, converted at the cap valuation, or repaid.

Qualifying Financing Event: Define the triggering event for automatic conversion — usually a priced equity financing round raising a minimum threshold (e.g., RM3,000,000) from institutional or lead investors. Specify whether conversion is automatic or at the noteholder's election.

Discount Rate: State the discount rate (e.g., 20%) applied to the per-share price of the qualifying round. A noteholder converting at a 20% discount receives shares at 80% of the price paid by new investors in the qualifying round.

Valuation Cap: Set the maximum pre-money valuation at which the note converts. If the qualifying round values the company above the cap, the noteholder converts at the cap valuation, receiving more shares per RM of note principal than new round investors.

Conversion Mechanics: Specify the computation formula for the number of shares to be allotted on conversion, the class of shares (ordinary or preference), and the procedure for the company to allot the shares under Section 72 of the Companies Act 2016.

Change of Control: Address conversion mechanics on a company sale or deemed liquidation event before the qualifying round — typically the noteholder receives the greater of the principal plus accrued interest, or the amount they would have received if the note had converted at the cap.

Stamp Duty: Acknowledge stamp duty at RM5 per RM1,000 on the principal under the Stamp Act 1949 (Act 378).

Additional compliance elements for a Convertible Note (Malaysia) used in Malaysia include: Under Malaysian law, the Contracts Act 1950 (Act 136) governs contractual obligations. The Companies Act 2016 (Act 777) regulates corporate entities through the Companies Commission of Malaysia (SSM). The Employment Act 1955 (Act 265) and the Department of Labour govern employment matters. The Personal Data Protection Act 2010 (Act 709) and the Personal Data Protection Department protect personal data. The Inland Revenue Board of Malaysia (LHDN) administers tax obligations. The Industrial Court adjudicates employment disputes under the Industrial Relations Act 1967 (Act 177). Forms-legal.com provides this template as a starting point for Malaysia-compliant documentation.