The first legislation concerning crowdfunding came into force with an amendment dated December 5 2017 to Capital Markets Law numbered 6362 and dated 30 December 2012 (“Capital Markets Law”). With this amendment, equity crowdfunding made its debut in the legislation in Turkey. Thanks to this amendment in Capital Markets Law, an additional new method of crowdfunding became available other than the ones that are currently being used.
With the amendments to the Capital Markets Law: (i) a definition of crowdfunding has been made; and (ii) general principles of crowdfunding platforms and establishment of such platforms have been stipulated. Crowdfunding platforms must seek an authorization from the Capital Markets Board of Turkey (“CMB”) and as per CMB, crowdfunding platforms would not be regarded as an investment or a portfolio management company. For that matter, supervision of the crowdfunding platforms will be conducted by CMB in accordance with the relevant legislation. However, rules prescribed in Capital Markets Law with regards to crowdfunding is limited and therefore, necessity for a secondary legislation raised.
To meet such necessity, CMB has published Draft Communique on Equity Crowdfunding (“Draft Equity Crowdfunding”) for the consideration of the public. Draft Communique stipulates the rules and procedures regarding crowdfunding platforms, operations of such platforms, membership to the crowdfunding platforms, crowdfunding campaign period, utilization of the funds and startup companies. Draft Communique does not establish rules regarding other crowdfunding methods and the legal status of crowdfunding platforms adopting other methods of crowdfunding would not be affected. Nevertheless, whether or not the crowdfunding platforms may adopt other crowdfunding methods together with the equity crowdfunding is ambiguous. It can be said that, as long as the crowdfunding platforms are in compliance with the Draft Communique, they may act as equity crowdfunding platform along with other crowdfunding methods.
Provisions of the Draft Communique
Important Provisions Regarding Crowdfunding Platforms
- Crowdfunding Platforms shall have a share capital of at least TRY 1,000,000.00 all paid-up, be established as a joint stock company and the type of shares of the crowdfunding platform shall be registered shares;
- Trade name of the company must include the phrase “Crowdfunding Platform” and it must be stated in the articles of association of the platform that the company shall exclusively conduct crowdfunding activities;
- Shareholders and members of the board of directors must meet the requirements stipulated in the Draft Communique;
- Crowdfunding platform shall establish an investment committee in compliance with the Draft Communique; and
- Crowdfunding platform and the start-ups who seeks funding shall enter into a written agreement.
In accordance with the Draft Communique, crowdfunding platforms shall not act as intermediary for loan and lending for a consideration or based on a pledge, shall not conduct crowdfunding activities related with capital market instruments or real estate. As stipulated in the Draft Communique, debt based crowdfunding is also prohibited.
Important Provisions Regarding Startups
- Startups shall enter into a written membership agreement stipulated by crowdfunding platforms in compliance with the Draft Communique;
- Startups should conduct activities related with technology and/or manufacturing;
- Startups should be established within 2 years of the publish date of the crowdfunding information form; and
- Startups should meet other requirements prescribed in the Draft Communique.
As per the Draft Communique, crowdfunding information form is published on the crowdfunding campaign website and consists of information regarding the shares that are going to be issued through crowdfunding and rights and privileges attached thereto.
In accordance with the Draft Communique, (i) publicly traded companies; (ii) companies whose management is controlled by another legal entity; and (iii) companies who have capital markets entities as shareholders that have a profound influence shall not collect funds through crowdfunding.
Platform Membership and Fund Collection
- Persons who want to take part in the fund collection process through crowdfunding should obtain a membership to a crowdfunding platform. Accordingly, crowdfunding platforms shall stipulate a membership agreement. Such requirement is also applied to the qualified investors;
- Maximum investment amount can be made by the non-qualified investors is TRY 20,000.00. There is no investment limit for qualified investors. Supervision of the investment limits shall be conducted by Central Securities Depository of Turkey;
- Fully paid-up funds collected from the investors shall be transferred to the startup company through increasing the share capital of the company in the amounts of the funds collected through crowdfunding and issuing new shares. Startup are prohibited from collecting funds through the transfer of the existing shares. In addition, new shares may be issued without voting rights attached thereto;
- Funds collected through crowdfunding throughout the crowdfunding campaign shall be blocked in a bank account of an escrow officer authorized by CMB. In the event of an unsuccessful campaign period where target fund amount could not be reached, funds collected shall be returned to the investors and the campaign period will come to an end. Crowdfunding who were taken out of the list by CMB shall also terminate the crowdfunding campaigns and funds collected shall be returned to investors;
- An audit company in compliance with the Capital Markets Law shall supervise the usage of the funds collected through crowdfunding to ensure a use that in line with the purpose of the crowdfunding; and
- Amount of funds to be collected shall be determined by CMB.
In addition to the provisions mentioned above, Draft Communique also regulates, in details, activities of the crowdfunding platforms, activities of the crowdfunding platforms based overseas, membership to the crowdfunding platforms, crowdfunding campaign run by the startups, principles regarding the usage of collected funds and announcement requirements regarding substantial changes occurred in the startup company.
Published Draft Communique based on equity crowdfunding has a profound importance for entrepreneurs who have innovative ideas and especially startups. Equity crowdfunding may be seen as important way to raise funds especially when financing through debt is difficult due to high interest rates. Successful application and implementation of equity crowdfunding would help the development of capital markets in Turkey. Moreover, equity crowdfunding would be an alternative and a unique way compared to capital markets instruments when connecting investors and entrepreneurs. Nevertheless, Draft Communique is not finalized and CMB still takes public opinion and suggestions about the draft.
Author: Batuhan Ecin, LL.M