The Communiqué on Equity-Based Crowdfunding (III – 35/A.1) (“Communiqué”) entered into force upon its publication in the Official Gazette dated 03 October 2019 and numbered 30907. This article covers the legal regulations introduced by the Communiqué and the procedures and principles regarding equity-based crowdfunding.
I. INTRODUCTION
With the entry into force of the Communiqué, the expected legal infrastructure has been prepared for the implementation of crowdfunding in Turkey, which is widely practised throughout the world.
Although the first legal regulation on the subject in Turkey was made with the amendment (“Amendment”) on crowdfunding introduced to the Capital Markets Law No. 6362 by the Law No. 7061 on the Amendment of Certain Tax Laws and Certain Other Laws published in the Official Gazette dated 05 December 2017 and numbered 30261, the types of crowdfunding and the related procedures and principles were not determined by this Amendment. With the publication of the Communiqué, the need for a secondary legal regulation on these issues has been fulfilled. However, we would like to point out that the regulations determining the relationship between decentralised cryptocurrency and the Communiqué, which has been heard by many people today and is expected to find a more effective application area in the future, have not yet been introduced.
The Amendment introduced Article 3/z to the Capital Markets Law No. 6362 (“CMB”) and defined “crowdfunding” . Accordingly, crowdfunding platforms are established in order to provide the funds required by a project or a venture company, within the principles determined by the Capital Markets Board (“Board”) and without being subject to the provisions of the CMB regarding investor indemnification. In this respect, the share-based crowdfunding introduced by the Communiqué as a type of crowdfunding refers to the collection of money from the public through crowdfunding platforms in exchange for shares. The main headings regarding the regulations introduced by the Communiqué are given below and the important points regarding equity crowdfunding are mentioned.
II. PURPOSE AND SCOPE OF THE COMMUNIQUÉ
The Communiqué sets forth the principles and procedures regarding equity-based crowdfunding, and in this respect, the inclusion of crowdfunding platforms in the Board List (pursuant to Article 4/m of the Communiqué, this is the list of platforms deemed appropriate by the Board to intermediate equity-based crowdfunding)and their activities, the collection of money from the public through equity-based crowdfunding, and the control and supervision of the use of the collected funds in accordance with their declared purpose are stipulated.
We would like to point out that Article 2 of the Communiqué titled “Scope” explicitly excludes fund raising activities in return for rewards or donations from the scope of the Communiqué.
III. PRINCIPLES REGARDING CROWDFUNDING PLATFORMS
Articles 5 and following in the Second Section of the Communiqué set forth the principles regarding the platforms. Article 5 of the Communiqué introduces an obligation for crowdfunding platforms, which are essentially joint stock companies, to be included in the List, and conditions such as the minimum capital of TL 1,000,000.00 must be fully paid in cash and the paid-in capital and shareholders’ equity must not be less than this, all of the shares must be registered, the trade name must include the phrase “Crowdfunding Platform”; and the principles regarding the articles of association, board of directors, etc. have been determined. Annex-1 to the Communiqué sets forth the information and documents required for the applications of platforms to be included in the list.
The conditions to be sought for platform partners and members of the Board of Directors are set forth in Article 6 of the Communiqué, and the principles regarding the Investment Committee to be established by the Board of Directors are set forth in Article 9 of the Communiqué. We would like to point out that, pursuant to Article 4/aa of the Communiqué, the Investment Committee refers to “the committee that evaluates the feasibility report prepared for the project of the venture company or the entrepreneur, approves the crowdfunding information form prepared for the campaigns and is determined by the platform board of directors”, and in line with this definition and in accordance with Annex-2 annexed to the Communiqué, the evaluation policy regarding the examination of the feasibility report of the projects of the entrepreneurs will be established by the Investment Committee and will be decided by the Board of Directors and announced to the public through the platform.
IV. PRINCIPLES REGARDING THE ACTIVITIES OF CROWDFUNDING PLATFORMS
Pursuant to Article 11 of the Communiqué titled “General Principles”, platforms may exclusively carry out crowdfunding activities, and providing consultancy services to entrepreneurs in the meantime shall not be contrary to this exclusivity. In addition, it should be noted that the principles to be complied with during the crowdfunding activity should be determined by the crowdfunding agreement to be concluded between the venture company or entrepreneur and the platform, the minimum elements of which are specified in Annex-3annexed to the Communiqué. Paragraph 3 of Article 11 of the Communiqué lists the obligations of platforms to create a campaign page, to publish the information form therein, and to keep the information form and the information that is important for the investors regarding the campaign open to the review of the investors, etc.
Again, Article 11, paragraph 4 and following paragraphs of the Communiqué stipulate that platforms may reject campaign applications before submitting them to the investment committee, that the publication of campaign applications submitted to the investment committee on the platform shall be subject to the approval of the investment committee, and that this approval shall be linked to a report containing the evaluations made by the investment committee in terms of each criterion included in the valuation policy. In addition, the obligations of platforms such as information, custody, disclosure and public announcement are specified.
The activities that platforms may not perform are set forth in Article 12 of the Communiqué, and these are as follows
- Without prejudice to the special provisions of the legislation to which participation banks are subject, no intermediation in lending or lending money in return for interest or any consideration under any name or by taking a pledge, and no crowdfunding activity can be carried out in return for any capital market instrument other than share-based crowdfunding,
- No crowdfunding activities can be carried out for the purchase and sale of real estate and real estate based rights, development of real estate projects and participation in venture companies,
- Crowdfunding activities cannot be carried out for the purpose of collecting funds from Turkish residents for real and legal persons resident abroad,
- Evaluations, analyses and comments in the nature of investment advice may not be made for investors regarding venture companies or projects,
- Except for introductory information shared in printed or electronic media to promote the venture company or projects whose campaign process has not been completed, and promotions directing to the platform or campaign page, it cannot publish advertisements of commercial products and / or services belonging to the venture companies or projects whose campaigns are carried out,
- Intermediation in secondary market transactions regarding shares, except for broadly authorised intermediary institutions, shall not be allowed, provided that the platforms’ enabling the members to communicate among themselves through their websites does not contradict the provision.
in the following order.
Finally, Article 13 of the Communiqué stipulates that crowdfunding transactions in which Turkish residents participate through platforms established abroad, accounts opened abroad for this purpose, cash and other assets transferred to such accounts, and transactions carried out through such accounts are outside the scope of this Communiqué, provided that no activities such as promotion, advertisement and marketing are carried out for Turkish residents. However, the existence of any of the following situations: opening a place of business in Turkey, creating a Turkish website, and carrying out promotional and marketing activities directly and/or through persons or institutions resident in Turkey in relation to the crowdfunding activities offered by platforms resident abroad are covered by the Communiqué.
V. PRINCIPLES REGARDING PLATFORM MEMBERSHIP AND CAMPAIGN PROCESS
Pursuant to Article 14 of the Communiqué, in order to engage in crowdfunding transactions, investors must become a member of the relevant platform electronically. It is important to note that, within the scope of paragraph 2 of the article, the principles regarding membership to the platform have been determined and it is of utmost importance to comply with the LawNo. 6698 on the Protection of Personal Datain sharing the information collected within this framework with third parties, including public legal entities.
Pursuant to Article 15 of the Communiqué, real persons who are not qualified investors may invest a maximum of 20,000.00-TL through equity-based crowdfunding within a calendar year. However, pursuant to the regulation, this limit may be applied as 10% of the annual net income declared by the investor to the platform, provided that it does not exceed 100.000,00-TL.
At this point, the definition of qualified investor should also be given. It is stated in Article 4/o of the Communiqué that qualified investor refers to the qualified investors defined in the regulations of the Board regarding venture capital investment trusts; accordingly, in accordance with the legal regulations, domestic and foreign mutual funds, pension funds, investment trusts, intermediary institutions, banks, insurance companies, portfolio management companies, mortgage financing institutions, pension and welfare funds, foundations, funds established pursuant to the provisional article 20 of the Social Insurance LawNo. 506, public benefit associations, and other investors to be determined by the Board to be similar to these institutions in terms of their qualifications, as well as other investors whose qualifications are similar to these institutions as of the date of issuance of capital market instruments. It is possible to specify as qualified investors the funds established pursuant to the article of the Capital Market Law, public benefit associations and other investors to be determined by the Board to be similar to these institutions in terms of their qualifications, and real persons or legal entities holding Turkish and/or foreign money and capital market instruments amounting to at least TL 1,000,000 as of the issue date of the capital market instruments.
On the other hand, Article 16 of the Communiqué sets forth the fund raising principles, which are of utmost importance for the implementation of equity crowdfunding. Accordingly, the important principles listed in the article are given below.
- Prior to the transfer of the collected funds, the establishment procedures of the venture company must be completed and the funds must be transferred to the venture company only in return for the shares to be issued through capital increase, and venture companies will not be able to collect funds through the sale of their existing shares. Shares to be issued through capital increase may be non-voting.
- It is mandatory that all of the funds obtained from investors in return for venture company shares must be paid in cash.
- All partnership rights and conditions of the shares to be given to investors and privileges, if any, regarding these shares will be clearly stated in the information form, and no privilege difference will be created between the shares to be given to investors, except for qualified investors.
- In order to run a campaign on the platform, the crowdfunding information form must be approved by the investment committee and this form must be published on the campaign page.
- Funds may be raised by a venture company or entrepreneur through crowdfunding platforms with a maximum of two campaigns in any 12-month period, and the amount of funds that may be raised, as detailed in the regulation, may not exceed the amount determined by the Board.
- For fund requests exceeding TL 000,000.00-TL, it is obligatory that the amount corresponding to at least 10% of the targeted fund must be covered by qualified investors within the campaign period. This obligation will not be applied in terms of additional funds collected, and the allocation rate to qualified investors can be determined by the venture company or entrepreneur, provided that it is not below the specified limits, provided that it is specified in the information form.
- Entrepreneurs or partners of the venture company will not be able to transfer their shares within three years following the start of the campaign period, except for transfers to be made due to inheritance, inheritance sharing, property regime provisions between spouses or forced execution, and transfers to be made by entrepreneurs or venture company partners to qualified investors or among themselves.
Article 17 of the Communiqué titled “Campaign Process” stipulates that the campaign process will start as soon as a venture company or entrepreneur applies to any crowdfunding platform with a request to raise funds. The same venture company or entrepreneur will not be able to start another campaign process before this campaign process is completed. The campaign period will start on the date the information form approved by the investment committee is published on the campaign page and this period cannot exceed 60 days.
In addition, the article sets out the principles regarding the right of withdrawal of the investors, early termination of the campaign period, collection of funds above the targeted fund amount, capital increase to be made in case the targeted fund amount is collected, determination of the shares and transfer of the shares to the accounts of the right holders, deposit of the funds blocked on behalf of the venture company to the venture company and return of the amounts to the investors in case the targeted fund amount is not collected.
It should also be noted that, in the event that it is necessary to make changes in the crowdfunding information form prepared for the campaigns due to circumstances that may affect the decisions of the investors, pursuant to Article 18 of the Communiqué, the venture company or entrepreneur must immediately notify the platform, this must be approved by the investment committee in due time and immediately published on the campaign page, and the persons who have submitted the funding request must be notified.
VI. PRINCIPLES REGARDING FUND UTILISATION LOCATIONS AND VENTURE CAPITAL COMPANIES
Article 20 of the Communiqué sets forth the principles regarding fund utilisation locations. Accordingly, a report must be prepared by the venture company or entrepreneur on the purposes for which the funds to be collected will be used and this report must be published on the campaign page as of the start date of the campaign period.
Pursuant to the regulation, the funds collected cannot be used directly or indirectly for the purchase or financing of real estate, real estate based rights and real estate projects. In addition, the control and audit of the use of the collected funds in accordance with the purpose declared in the information form will be carried out by an independent audit firm listed in accordance with the Law and by preparing a special purpose independent audit report.
Pursuant to Article 21 of the Communiqué, the qualifications of venture capital companies have been determined and these companies are required to be engaged in technology and/or production activities, to have been established within the last five years as of the date of announcement of the information form, not to exceed the thresholds stipulated in the legislation in their latest annual and, if any, latest current interim financial statements (This condition must be met during the registration of the establishment process), and to have a registered website that is regularly monitored and controlled.
In addition, it is stated in the Article that the companies listed below cannot raise funds through equity-based crowdfunding.
- Publicly traded companies,
- Companies whose management is controlled by another legal entity,
- Publicly traded companies and companies in which capital market institutions are shareholders with significant influence.
Pursuant to Article 22 of the Communiqué titled“Public Disclosure”;
- The filing of a dissolution lawsuit against the venture company, the conclusion of this lawsuit, the realisation of a reason for dissolution determined in the articles of association, if any, or the decision to dissolve the venture company in the general assembly,
- The venture company applies for concordat and this application is finalised,
- The initiation of a bankruptcy proceeding against the venture capital company, the conclusion of such proceeding or the realisation of one of the termination reasons that may result in the liquidation of the venture capital company,
- Change of control of the management of the venture company
in such cases, public disclosure is required.
VII. OTHER MATTERS
According to Article 23 of the Communiqué, the members of the board of directors of the platform will be responsible for the fulfilment of the obligations stipulated for platforms; the members of the investment committee and the members of the board of directors of the platform will be responsible for the fulfilment of the obligations stipulated for the investment committee; and the members of the board of directors of the venture company will be responsible for the fulfilment of the obligations stipulated for venture companies.
Pursuant to Article 24 of the Communiqué, the Board may request all kinds of information and documents from the platform, platform founders, entrepreneurs and venture companies regarding crowdfunding activities. Accordingly, persons from whom information is requested cannot refrain from providing information.
Finally, the amounts stated in the Communiqué may be re-determined each year by taking into account the revaluation rate announced by the Ministry of Treasury and Finance for the previous year.
VIII. CONCLUSION
With the entry into force of the Communiqué, crowdfunding, which is widely practiced, has been included in the Turkish legislation as an exception to the prohibition of collecting money by making an appeal to the public by any means for the purpose of establishing a company or increasing the capital of a company or with the promise of doing so. As detailed above, only equity-based crowdfunding is regulated in the Communiqué, and the activity of collecting funds in return for rewards or donations is excluded from the scope. This method of crowdfunding can be briefly defined as collecting money from the public through crowdfunding platforms in exchange for shares. The Communiqué will facilitate the access of entrepreneurs and investors to each other through the websites operated by the crowdfunding platforms to be authorised by the Communiqué, and this new generation financing model will facilitate the realisation of a project or an initiative. In this way, although the way has been paved for providing financing to entrepreneurs by converting low savings into investment, the regulations regarding cryptocurrencies, which are expected to be extremely effective in economic life in the future, have not yet been included and the way for offering cryptocurrencies in return for the collected fund has not been paved.
