Recent Development
The Capital Markets Board (“CMB“) previously issued the Communiqué on Share-Based Crowdfunding No. III-35/A.1. (“Share-Based Crowdfunding Communiqué“) as reviewed in our Client Alert dated October 14, 2019 to regulate share-based crowdfunding activities. The CMB now shared the Draft Communiqué on Crowdfunding No. III.-35/A.2. (“Draft Communiqué“), which regulates both share-based and debt-based crowdfunding and intends to abolish the Share-Based Crowdfunding Communiqué, to public opinion.
What Does the Communiqué Say?
• Crowdfunding Platforms: The crowdfunding activities will be conducted via crowdfunding platforms to be licensed by the CMB. These platforms will need to meet certain criteria:
- Have paid-in capital (ödenmiş sermaye) of at least TRY 1,000,000 and maintain this amount of paid-in capital and shareholders’ equity (özsermaye) (this condition will be applied as TRY 500,000 for the first two years following the licensing of the platform),
- Establish an investment committee in accordance with the requirements set out in the Draft Communiqué,
- Establish IT systems that meet the requirements set out in CMB regulations for narrowly authorized intermediary institutions (dar yetkili aracı kurum),
- Sign a contract with the Central Securities Depository (“CSD“) and the custodian institution,
- In respect of the platforms to engage in debt-based crowdfunding, establish the infrastructure that will allow mutual data flow with the Risk Centre in order to evaluate credibility.
- The Draft Communiqué also sets forth that certain share transfers concerning these platform will require the CMB’s approval.
- Principles Regarding the Activities of the Platforms:
- As a general rule, platforms will be able to carry out solely share-based and/or debt-based crowdfunding activities.
- The principles to be followed during crowdfunding activities will be set out in a written crowdfunding agreement to be executed between the fundraisers and the platform. The Draft Communiqué also sets out the minimum items that must be included in these agreements.
- An information memorandum will be prepared for each campaign, which will have to be disclosed on the campaign page during the campaign term, along with all other information that may affect investors’ judgment. Share-based crowdfunding platforms will need to continue to disclose the same during the five years following the calendar year in which the campaign takes place. For debt-based crowdfunding activities, platforms will need to disclose the same during the five years following the redemption date of the debt instruments issued within the scope of the campaign.
- The funds collected from the investors will be blocked on behalf of the platform with the custodian until the campaign is completed. İstanbul Takas ve Saklama Bankası A.Ş. and other CMB licensed portfolio custodians will be authorized to operate as custodians.
- Platforms will provide information on an ongoing basis regarding the targeted and collected funds, the number of investors providing funds, and the remaining campaign period. In addition, the funding results for each campaign will be disclosed to the public on the business day following the end of the campaign period.
- Prohibited Activities:
- Platforms that engage only in share-based crowdfunding activities will be prohibited from lending activities in return for interest or any other revenue or by taking security interests, and they will be prohibited from carrying out crowdfunding activities in return for any capital market instrument other than shares.
- Platforms will be prohibited from carrying out crowdfunding activities to collect funds from persons residing in Turkey for persons residing abroad.
- Platforms will be prohibited from making evaluations, analyses and comments that are in the nature of investment advice for investors.
- Investment Limits:
- Real persons who are not qualified investors will be able to invest a maximum of TRY 20,000 in a calendar year through share-based crowdfunding activities. However, this limit may be applied as 10% of the annual net income of such person, provided that the investment does not exceed TRY 100,000.
- Real persons who are not qualified investors will be able to invest a maximum of TRY 50,000 in a calendar year through debt-based crowdfunding activities. However, this limit may be applied as 10% of the annual net income of such person, provided that the investment does not exceed TRY 200,000. Moreover, real persons that are not qualified investors may only invest a maximum of TRY 10,000 to a single project.
- Principles Regarding Fundraising and Use of Fund Proceeds:
- i) Share-Based Crowdfunding:
- For share-based crowdfunding, the funds may only be transferred to the venture capital company in return for new shares to be issued through a capital increase, and funds cannot be collected through the sale of existing shares of the company.
- Entrepreneurs will be able to collect funds with a maximum of two share-based crowdfunding campaigns in any 12-month period.
- For fund collection targets that exceed TRY 1,000,000, the amount corresponding to at least 10% of the target must be met by qualified investors during the campaign period.
- The campaign period may not exceed 60 days.
- Investors may exercise their right of withdrawal within 48 hours following their payment order.
- For share-based crowdfunding activities, a use of proceeds report will be prepared and disclosed on the campaign page as of the start date of the campaign.
- The control and supervision of the use of collected funds will be carried out by independent audit firms that will prepare a special independent audit report.
- ii) Debt-Based Crowdfunding:
- Funds will be collected by issuing a debt instrument only.
- The interest rate cannot exceed the weighted average interest rates of two government bonds with closest maturity dates to the relevant debt instrument, one with a maturity shorter than the relevant debt instrument, and the other with a maturity longer than the relevant debt instrument for a margin greater than 50%. The maturity may not exceed three years.
- The campaign period may not exceed 60 days.
- Investors may exercise their right of withdrawal within 48 hours following their payment order.
- The revenues of the funded project will be used primarily for the payments to be made to the investors.
- The funds may not be used for the payment of debts that are not related to the funded project.
- The investment committee will verify whether the collected funds are used in accordance with the use of proceeds.
- Rules Regarding Fund Collecting Companies:
- Companies that intend to raise funds via crowdfunding activities will need to meet, among others, the following criteria:
- (i) Engage in technology activities and/or production activities; (ii) be established within the last five years as of the date of publication of the information memorandum; (iii) have certain financial items in their latest annual and/or most current interim financial statements that do not exceed the thresholds set out for exclusion from the scope of the law. In addition, companies that will raise funds through share-based crowdfunding activities will need to be established as a joint stock company or converted to a joint stock company before the transfer of the collected funds.
- (i) Public companies, (ii) companies whose management control belongs to another legal entity, and (iii) companies in which a public company or a capital market institution is a shareholder with a material impact will be prohibited from conducting share-based and debt-based crowdfunding activities.
- (i) Issuers that have issued debt instruments that are not redeemed as of the date of application to the platform and (ii) companies in which an issuer with unredeemed debt instruments is a shareholder with a material impact as of the date of application to the platform will be prohibited from conducting debt-based crowdfunding activities.
Conclusion
With the entry into force of the Draft Communiqué, the CMB will consolidate the long-awaited principles of debt-based crowdfunding with those relating to share-based crowdfunding in a single regulation.
