Turkish crowdfunding
Omer Collak
Paksoy Ortak Avukat Bürosu, Istanbul
Crowdfunding is one of the project-funding regimes available in Turkey. It aims to collect money from the public through crowdfunding platforms, without being subject to the provisions of the Capital Markets Law investor compensation rules, in order to provide funds needed by a project or a venture company, within the principles determined by the Capital Markets Board of Turkey (the ‘Board’).
On 27 October 2021, the Crowdfunding Communiqué No. III – 35/A.2 (the ‘Communiqué’) was published in the Official Gazette and the existing Communiqué on Equity-Based Crowdfunding dated 3 October 2019 was abolished. Through the new Communiqué, a ‘debt-based’ crowdfunding mechanism was introduced and the main principles for ‘equity-based’ and ‘debt-based’ fundings are regulated in detail.
Entrepreneurs/venture capital companies/platforms
Within the Communiqué, the definitions of entrepreneur and venture capital firm include real persons residing in Turkey and legal entities in the form of limited liability or joint-stock companies seeking funding for their projects through crowdfunding based on equity and/or debt. However, for limited liability companies to be considered as venture capital firms, they have to be transformed into a joint-stock company before the transfer of the collected funds to the blocked account. The fundraiser venture capital companies are required to be engaged in technology or production activities as defined under the Communiqué.
In order to engage in such activities, the establishment of the platforms which act as intermediary institutions for crowdfunding activities are subject to the approval of the Capital Markets Board of Turkey (‘CMB’) and need to fulfil certain conditions such as: establishing as a joint-stock company with registered shares, having a minimum share capital of 1m Turkish lira which is to be fully paid in cash; and having a minimum of three members on their board of directors. Additionally, platforms should perform intermediation activities exclusively for equity-based or debt-based crowdfunding and their shareholders also need to satisfy the conditions set forth under the Communiqué.
Furthermore, the Communiqué sets forth the obligations of the platforms, such as: creating a campaign page for each project; establishing the necessary infrastructure that will enable periodic disclosures to be made; publishing the information form approved by the investment committee; ensuring that the funds collected from the investors are transferred to the funded company by blocking them in the accounts opened in the name of the respective company after the campaign period is completed, or returned to the investors; fulfilling the transactions in relation to the dematerialisation process of shares or debt instruments with the Central Registry Agency (‘CRA’) or ensuring that they are carried out through an investment institution; taking preventive measures during the campaign process, ensuring the confidentiality of information regarding investors, entrepreneurs, venture companies and the funded company; and announcing the custodian's remuneration regime, fees, commissions and deductions from the collected fund amount.
Pursuant to the investment thresholds rules under the Communiqué, real persons who are not qualified investors are able to invest a maximum of 50,000 Turkish lira in a calendar year through equity-based crowdfunding. This limit can be increased to ten per cent of the annual net income declared by the investor to the platform, provided that it does not exceed 200,000 Turkish lira. Real persons who are not qualified investors, however, can invest a maximum of 20,000 Turkish lira in a project through debt-based crowdfunding.
Equity-based crowdfunding
The Communiqué restricts the sale of existing shares through a crowdfunding campaign. Accordingly, the funds cannot be collected through the sale of existing shares of venture companies, and all funds obtained from investors in exchange for the shares of the funded company must be paid in cash. The shareholding rights to be granted to the investors and the privileges, if any, related to these shares need to be clearly stated in the information form. Except for the qualified investors, no difference can be created in relation to privileges granted for shares.
Crowdfunding funds should be collected by a venture company or an entrepreneur with a maximum number of two campaigns in any twelve-month period through platforms, and the amount of funds to be collected during this period cannot exceed the issuance limit, which is exempted from the obligation of issuing a prospectus. Additional funds can be collected up to a maximum of 20 per cent of the requested fund amount, provided that it is disclosed in the information form and does not exceed the respective issuance limit.
Although the fund allocation rates for the qualified investors can be determined by the venture company or the entrepreneur, for fund requests exceeding 1m Turkish lira, it is required that the amount corresponding to at least five per cent of the targeted fund is met by the qualified investors in order for the targeted fund amount to be considered as collected. This obligation does not apply to the additional funds to be collected.
In addition to the above, the Communiqué also regulates the use of the funds: pursuant to the respective rules, funds collected through an equity-based crowdfunding campaign can only be used to pay debts arising from the funded project. For this purpose, the status of the funds and their allocations and the status of the project should be periodically announced to the public on the campaign page. Compliance of the use of funds with the disclosed principles needs to be audited by an independent audit company and the board of directors of the respective companies will be responsible for such compliance. The independent auditor needs to notify the CMB of non-compliances.
Debt-based crowdfunding
The debt-based crowdfunding method was introduced for the first time under the Communiqué in 2021 and it is explicitly regulated that debt-based crowdfunding activities cannot be conducted based on a loan or any other type of agreement other than the sale of debt instruments. Funds collected through debt-based crowdfunding can only be used for the respective project or for the working capital arising from the project. The revenues generated from the project funded through debt-based crowdfunding need to be used for the payments to be made to the investors. All funds collected from investors in exchange for those debt instruments must be paid in cash. However, instead of cash payments, share transfer is also recognised as an option for the fulfilment of repayment obligations under the respective debt instruments which will be based on the preference of the investors, provided that the consent of the investors is obtained through the communication method specified in the information form, including written or electronic media.
The entrepreneurs who will raise funds through debt-based crowdfunding are required to prepare a credibility report and submit it for the evaluation of the investment committee of the platform and the interest and similar returns, maturity and payment conditions regarding the debt instrument to be issued by the entrepreneur and/or venture company are determined by the investment committee and the entrepreneur or venture company. Such report will also be disclosed on the campaign website.
Funds cannot be collected at a rate lower than the interest and similar rate of return stated in the information form. The interest and rate of return to be determined by the investment committee, and the entrepreneur or venture company for the debt instrument to be sold to the investors, cannot exceed 50 per cent of the weighted average of the interest rates determined one day before the start of the campaign period for two Government Domestic Debt Securities closest to the maturity of the debt instrument, one with a maturity shorter than a debt instrument and one with a longer maturity than a debt instrument. The maturity cannot be more than five years.
In parallel with equity-based crowdfunding rules, a venture company or entrepreneur can raise funds with a maximum of two campaigns on debt-based crowdfunding through platform for a 12-month period.
Before the completion of the respective crowdfunding campaign, a new campaign cannot be initiated by the same venture company or entrepreneur, but it is possible to initiate a debt-based crowdfunding campaign within the continuation period of an equity-based campaign for a project. In such case, at such time the targeted threshold is not exceeded within the scope of one of the campaigns, the other campaign needs to be terminated in line with the requirements of the Communiqué. In any case, the amount of funds that the entrepreneur or venture company can collect through debt-based crowdfunding cannot exceed 50 per cent of the discounted value of the future cash flows included in the credibility report of the project for which financing is requested, at the date of signing of the credibility report.
Platforms that mediate debt-based crowdfunding are obliged to continually announce the default rates regarding debt-based crowdfunding campaigns and the interest and similar rates of return applied on borrowings on their website and in case such information is not available, they should announce the similar data belonging to two different platforms authorised by the relevant authorities established abroad.
To sum up, in parallel to international practices, crowdfunding methods have, since 2019, started to play a role in the Turkish capital markets as a funding alternative for entrepreneurs who encounter some difficulties raising funds through conventional instruments.