Recent Developments on Crowdfunding in Turkey


 The Communiqué No.III-35/A.1 on Equity Based Crowdfunding (“Communiqué”), prepared by The Capital Markets Board (“CMB”), has been published on the Official Gazette dated 3 October 2019 No.30907.

This article will primarily focus on how the Communiqué regulates crowdfunding of companies and start-ups by investors on equity basis.

What does Crowdfunding mean?

In essence crowdfunding is a method of raising capital in small amounts from a large group of people using the Internet and social media (social platforms).

In line with the above explanation, under Article 3 (z), the Capital Market Law No.6362 (“Law”) also prescribes crowdfunding as raising capital from a large group of people through crowdfunding platforms in order to meet funding needs of a project or startup within the framework of terms and conditions set by the CMB.

How does Crowdfunding work in Turkey?

 Equity based crowdfunding is a strictly regulated matter and is only allowed to be done in compliance with Law and the Communiqué.  The main applicable rule here is to perform such activity only through crowdfunding platforms licensed by the CMB.  Any equity based fund raising activity of start-up companies occurring outside of the regulatory scope shall be invalid and subject to fine.

Article 35/A of the Law defines the crowdfunding platforms and sets the requirements for such establishments.  Companies seeking funds need a licensed platform in order raise funding from investors.  In other words, all activity shall be performed on a platform where all stages of the process (fundraising campaign) will be transparent and open to public knowledge.

According to the Law, crowdfunding platforms are intermediary institutions that operate online.  As mentioned, crowdfunding platforms are required to obtain operation license from CMB in order to start their activity.  Furthermore, the relevant article sets out some details for platform companies such as how their shareholding structure should be, what the requirements for their share transfer are needed, and moreover what the maximum fundraising limit of start-ups should be.

The Communiqué on the other hand provides detailed information regarding legal requirements for the platforms and procedures for running a crowdfunding campaign.

Requirements for Crowdfunding Platforms

 The Communiqué prescribes the conditions for companies that seek to perform as a crowdfunding platform and accordingly platforms must comply with the following requirements.

 According to the Article 5 of the Communiqué, platforms must apply to the CMB in order to obtain a license and to be accepted to the list of platforms to be published by CMB.  Some of the essential conditions that companies must carry in order to be enlisted as a crowdfunding platform are:

  • to be established as a joint stock company;
  • to have a paid in share capital minimum of 1,000,000 Turkish Liras;
  • to include “crowdfunding platform” in its trade name;
  • to undertake the commitment to operate solely within the scope of crowdfunding activities in its articles of association;
  • to have a board of directors consisting of at least three members.

The Communiqué lists also further requirements for founders and board members of platform companies. For instance founders and board members of a platform cannot be (i) bankrupt; (ii) convicted of any crimes listed in the relevant article i.e. embezzlement, bribery, extortion; (iii) involved in any activities / incidents that may lead or had led to cancellation of the license of an incorporation subject to CMB regulation.

In case of losing one of the above mentioned features, the crowdfunding platform must report such lack to the CMB within two days following occurrence of the incident.  If the relevant non-compliance is not to be cured within the given time period then the platform company shall be delisted by the CMB.

What activities do Crowdfunding platforms conduct?

 According to Article 11 of the Communiqué crowdfunding platforms are solely allowed to act within the scope of crowdfunding activity.  Moreover, the same article suggests that platforms are also allowed to provide consultancy service to start-up companies and to entrepreneurs as intermediary services.  Agreement to be executed between the start-up companies and crowdfunding platforms must be executed in written and in form provided in the Annex 2 of the Communiqué.

Platforms are expected and obliged to set up a web page that is to be dedicated to each start-up company or project seeking funds during and after their fund raising campaign for the following five years.  The website shall serve as an informative platform in relation to companies’ announcements and operations.  According to the Communiqué, information form on the fund raising campaign as approved by the investment committee and any other information that may affect investors’ decision must be disclosed to investors on the relevant web page during and following the fund raising process.

Every start-up company that needs to raise fund through crowdfunding must apply to these platforms.  Applications to run such campaign must be approved by the investment committee of the crowdfunding platform.  In case of rejection, the start-up company must be informed of the disapproval reason.

Information such as the fund amount targeted and collected at each fundraising campaign, investors’ number and remaining fundraising process must be disclosed on daily basis by the platform.  Fundraising results must be announced to the public on the next day following the end of each campaign even if the outcome of the fundraising process is not successful.

What activities Crowdfunding platforms cannot perform?

 Subject to article 12 of the Communiqué, platforms are not allowed to act as an intermediary for activities involving loan or borrowing money and not allowed to conduct fundraising activities through any other capital market instruments but equity based.

It is not allowed to provide fundraising service to start-ups located abroad which are seeking funds from Turkish investors.

Moreover, platforms are prohibited from providing investment consultancy both to companies and to investors that intend to engage with crowdfunding activity.  Founders, board members and members of the investment committee of the platform are not allowed to provide investment to start-up companies and to projects running fundraising campaign.

How does Crowdfunding Process work?

 In order to raise funds through crowdfunding, as a prerequisite, start-up companies must firstly apply to licensed platforms in order to become a member to act as intermediary platforms to operate funding flow between start-ups and investors.

There is maximum limit amount for a real person investor for equity based crowdfunding activity. Real person investors who are not deemed as qualified investors cannot invest more than 20,000 TL in a year on platforms as crowdfunding activity.  Scope and definition of qualified funders are to be determined by the CMB.

Start-up companies must already be established in advance of seeking funds through equity based crowdfunding method.  Otherwise funds shall not be transferred to the respective company.  Funds can only be raised by way of capital increase and can only be transferred to the company in the form of equity that are to be subscribed by capital increase.  No funds can be raised by sale of existing company shares.  Shares that are issued by way of capital increase may be non-voting shares.  Equity based funds must be paid all in cash and if investors are to be granted any shareholding right or privilege these must be indicated explicitly in the information form.

Start-up companies or entrepreneurs are allowed to raise fund by crowdfunding maximum twice a year.  Should fund need exceeds 1,000,000 Turkish Liras, at least 10% of such amount has to be paid by qualified investors during fundraising campaign.

Fundraising activity (campaign) starts once the information form (upon its approval by the investment committee) is published on the respective website dedicated for the relevant start-up that needs funding.  Start-up companies are not allowed to start a second fundraising campaign before completing the first process. Investors who wish to provide funding to the respective start-up must be apply to crowdfunding platforms.  Platforms transfer investors’ funding request to the Central Registry Agency (CRA) at the end of each day during the time of campaign. Money collected from investors are escrowed by the CRA in a blocked account to be opened in the name of the start-up company and CRA is the sole authority to transfer the accrued funds to the start-up company that needs funding.

Once an investor decides to provide funding, investors must make the proposed payment upon receiving payment order.  Investors may use their right of withdrawal with no excuse within 48 hours following the receipt of such payment order by informing the crowdfunding platform.

If fund amount exceeds funding need of the start-up company, the exceeding amount shall be delivered among investors by considering equality principle.  Companies must have a capital increase corresponding to the amount raised during the course of campaign latest within 30 days upon completion of the fundraising campaign.  CRA is responsible to register the equities subscribed following the capital increase and these are to be transferred to investors’ accounts at the end of the whole process.

 Where the Funding can be used by Start-ups?

Start-ups companies must issue a report on where the fund will be used and this report must be published on the respective website during the course of fundraising campaign.  Companies are not allowed to use the funding on real estate related transactions such as purchase of real estate projects or real estate project financing.  An independent audit company is responsible for controlling whether the company uses its funding in accordance with the allowed purpose of use as indicated on the report issued for this purpose.

Requirements for Start-up Companies

Start-ups that are seeking equity based funding must

  • engage with technology and/or production activities,
  • be established within last two years as of the publication of information form
  • have a website that is examined and maintained regularly.

Companies that are listed below are not allowed to engage with equity based fundraising activity:

  • publicly held corporations,
  • companies which are controlled by another legal entity,
  • companies where publicly held companies and capital market institutions are shareholders with minimum of %50.1 shares.

Furthermore, in case of circumstances such as (i) if a legal action is taken against the start-up company, (ii) if any of the dissolution reasons stated in the articles of association occur for the start-up company, (iii) if a dissolution decision is taken by the General Assembly of the start-up company, (iv) if the start-up company applies for bankruptcy or (v) management of the start-up company changes, then a public disclosure must be made for each.