Crowdfunding offers projects and start-up companies an alternative to conventional financing methods to raise capital. Simply put, crowdfunding is the collection of small amounts of capital from a large number of people to fund a project. Following a set of legislative amendments, equity-based crowdfunding (where investors receive shares of the funded entity in return for their investment) is now possible under Turkish law. Reward-based crowdfunding (where investors receive a minor reward in return for their investment) and donation-based crowdfunding (where investors provide funds as a donation) predate equity-based crowdfunding and are still in use.
Equity-based crowdfunding was initially introduced into legislation in Turkey in 2017. However, the actual implementation of equity-based crowdfunding required further legislation to be adopted by the Capital Markets Board (the “CMB”). On October 3, 2019, the Communiqué on Equity-Based Crowdfunding (the “Communiqué”) which regulates the terms and conditions of raising capital in return for equity through CMB-accredited crowdfunding platforms entered into force in Turkey. A few months later, on February 25, 2020, Law No. 7222 on the Amendment of Banking Law and Certain Laws introduced some changes to the Capital Markets Law no. 6362 (the “Amended Capital Markets Law”), among others, on crowdfunding.
What are crowdfunding platforms?
Crowdfunding platforms, which must be listed by the CMB to start operations, act as an intermediary between investors and entrepreneurs or start-up companies.
Establishment criteria for crowdfunding platforms are set out in the Communiqué. Among others, crowdfunding platforms must:
- incorporated in the form of a joint stock company (anonim şirket) with a minimum share capital of TL 1 million (approx. US$ 155,000);
- have internal audit and risk management systems in place; and
- enter into an agreement with the Central Registration Agency (the “CRA”) (Merkezi Kayıt Kuruluşu), the central securities depository, and an authorized escrow agent, which may be the Clearing, Settlement and Custody Bank (Takasbank) or other banks/intermediaries authorized by the CMB as portfolio custodians to handle the operational side of crowdfunding activities.
Shares issued following a successful crowdfunding campaign must be dematerialized and kept before the CRA in electronic form. The authorized escrow agent will keep the collected funds during the campaign and release them as necessary (please see below for further details).
The Communiqué and the Amended Capital Markets Law set out eligibility criteria for shareholders and directors, and rules for share transfers, corporate governance and the scope of activities of crowdfunding platforms, which include, without limitation, the following:
- Crowdfunding platforms may not raise capital for non-resident persons/entities.
- No crowdfunding activity may be undertaken for the purposes of acquiring real estate, rights in real estate or development of real estate projects.
- The CMB must be informed of changes in the shareholding structure of such platforms.
- At least one board director must be an “angel investor” licensed by the Ministry of Treasury and Finance.
- Crowdfunding platforms are not allowed to provide investment advice to investors.
- Start-up companies whose shares are dematerialized can hold general assembly electronically.
A campaign may only be launched upon approval of the platform's investment committee, which is required to be established so that the platform can be listed with the CMB. The investment committee reviews the entrepreneur/start-up company’s feasibility study and approves the information document relating to the crowdfunding campaign. No campaign may be launched before approval and posting of the campaign information document on the platform’s campaign website. Pursuant to the Amended Capital Markets Law, individuals or entities executing the information document will be jointly liable for damages arising from wrong, misleading or inaccurate information included therein.
Activities of foreign crowdfunding platforms are not subject to the Communiqué. Turkish resident investors may carry out crowdfunding activities through foreign crowdfunding platforms. However, participation should not be the result of solicitation, marketing or publication of information in Turkey by the foreign platform. Foreign platforms may not carry out any publicity, advertisement or marketing activities targeting persons/entities resident in Turkey. Starting a business in Turkey, launching a Turkish website or carrying out publicity and marketing activities indirectly through persons/entities resident in Turkey would subject the foreign platform to the application of the Communiqué.
Crowdfunding platforms have a statutory obligation to publicly disclose, among others, the occurrence of following in relation to start-up companies:
- change of control;
- bankruptcy; or
- voluntary or involuntary liquidation.
Crowdfunding platforms can outsource all services other than the management of the platform or duties which must be exclusively fulfilled by the platform’s board of directors and investment committee.
Who can raise capital through crowdfunding platforms?
Use of crowdfunding platforms is limited to resident entrepreneurs looking to raise capital for projects and start-up companies, which are incorporated as joint stock companies and are developing new technology/technological products and/or undertaking production activities. Technological activities and production activities are broadly defined to cover any highly competitive product or service with a potential to create high added-value and employment.
Publicly held corporations or companies controlled by other legal entities may not apply to crowdfunding platforms.
Entrepreneurs or start-up companies may run a maximum of two campaigns within any twelve-month period. Running two campaigns concurrently is not allowed at any time. Supplementary funds, up to 20% of the original campaign amount, can be raised provided that it is disclosed in the information document approved by the platform’s investment committee and that applicable issuance limits are not exceeded. Issuance limits are announced annually by the CMB and the issuance limit for 2020 is TL 10,000,000 (approx. USD 1,460,024).
Who can invest through crowdfunding platforms?
Persons or entities, either resident or non-resident in Turkey, may invest in equity-based crowdfunding. All investors must electronically register with the crowdfunding platform and enter into an agreement with the platform. They also must review a standard risk notification form and acknowledge in writing that they are aware of the risks that may arise from their investment.
The Communiqué limits the total amount of investment per “non-qualified” investor but does not limit qualified investor investments. Qualified investors are, among others, banks, insurance companies, pension funds, venture capital investment companies and other individual or corporate investors holding cash or capital markets instruments in the amount of at least TL 1 million (approx. USD 150,000). In principle, a non-qualified investor may invest a maximum of TL 20,000 (approx. USD 3,000) per calendar year.
If the target funding amount exceeds TL 1 million, at least 10% must be funded by qualified investors within the campaign term.
How does equity-based crowdfunding work?
- Entrepreneurs/start-up companies apply to crowdfunding platforms to launch a campaign.
- If the application is approved by the platform’s investment committee, the platform and the entrepreneur/start-up company enter into an agreement, the statutory minimum content of which is set out in the Communiqué.
- Crowdfunding platforms can run a campaign for a maximum period of 60 days. Investors communicate their funding requests to the platform over the course of this period.
- Investors may withdraw their investment without cause within 48 hours of giving a payment order by notifying the crowdfunding platform.
- Funds are collected and held by the escrow agent in a blocked account on behalf of the crowdfunding platform.
- If the targeted amount cannot be collected within the campaign period, the escrow agent returns the collected amount to the investors. If the amount of funds collected exceeds the targeted amount, the excess is returned to investors following the distribution rules announced in the information document.
- If the targeted amount is collected, the escrow transfers the funds to the blocked account of the:
- entrepreneur, provided that the entrepreneur sets up a start-up company within 90 days upon of expiry of the campaign period and upon increase of the initial share capital in an amount equal to the raised funds within 30 days upon setting up the company, or
- start-up company, upon increase of the existing share capital in an amount equal to the raised funds within 30 days upon expiry of the campaign period.
- Following completion of the capital increase, the crowdfunding platform immediately notifies the CRA of the amount of funds provided by each investor and the total nominal value of shares to be issued against such funds. Newly issued shares may be non-voting. No funds can be raised in exchange for the start-up company’s existing shares.
- Following issuance and delivery of shares to the investors, the escrow agent releases the funds to the start-up company.
The CMB monitors the use of funds by the start-up company. Start-up companies must have their activities audited by independent audit companies with reports published on the campaign’s and start-up company’s websites.
The Communiqué prohibits the transfer of shares of entrepreneurs/start-up companies for a period of three years following the initiation of campaign period. Exceptions to this prohibition include, without limitation, transfers from entrepreneurs/shareholders of start-up companies to qualified investors and transfers between entrepreneurs or shareholders of start-up companies.
Once fully functional, equity-based crowdfunding will help entrepreneurs materialize their value-added and innovative products and services. Investors, whether small or large, novice or qualified, now have a new channel to direct their funds under the supervision of the capital markets authority and other authorized entities and institutions.