Crowdfunding is a new generation funding and investment system which allows different individuals to invest in a project in exchange for shares or interest. Crowdfunding offers an alternative funding market that creates a win-win situation for entrepreneurs and investors.
The biggest challenge with crowdfunding is fraud risk. Another challenge is the potential for misleading information about projects. In order to ensure trust in the crowdfunding ecosystem and make it a popular funding method, certain regulations must be in place and scrutinized by competent authorities to prevent the potential risks associated with this funding method and to ensure its reliability for market players, for investors in particular.
Legislation on Crowdfunding in Turkey
The first legislation on crowdfunding in Turkey came into force on November 28, 2017, with an additional article in the Capital Markets Law requiring the approval of the Capital Markets Board of Turkey (CMB) for crowdfunding platforms. At later stages, the CMB published the equity-based crowdfunding Communique on October 3, 2019, while lending-based crowdfunding is regulated by the Crowdfunding Communique (Communique) from October 27, 2021.
The Communique regulates (1) platforms, (2) investors and investment limitations, and (3) entrepreneurs and venture companies.
Platforms: The platform is defined in the Communique as an institution that acts as an intermediary in lending-based and/or equity-based crowdfunding services in the electronic environment. To operate as a crowdfunding platform in Turkey, the CMB’s approval must be obtained. There are several qualifications that platforms need to comply with to obtain the CMB’s approval. Such qualifications – including the type of companies, capital requirements, founders’ and board members’ requirements, and funding limits – are regulated under the Communique. Platforms cannot carry out crowdfunding activities for foreign start-ups with the purpose of collecting funds from a person residing in Turkey. Crowdfunding activities such as opening accounts for crowdfunding and fund transfer to these accounts of persons resident in Turkey on foreign platforms are outside of the Communique’s scope, provided that these platforms are not carrying out any promotion, advertising, and marketing activities towards residents of Turkey. The CMB is authorized to set the criteria if the activities are aimed at a Turkish resident.
There are five different platforms established by the CMB. Several projects have been successfully funded via these platforms. Even though there is no specific regulation on donation-based crowdfunding, there are also donation-based crowdfunding platforms in Turkey. There is no lending-based crowdfunding platform yet, as the Communique came into force quite recently.
Entrepreneurs and Venture Companies: Venture companies or entrepreneurs that will receive funds via lending-based and/or equity-based crowdfunding must engage only in technology and/or production activities. There are also detailed requirements as to financial statements, mandatory provisions in the articles of association, the type of venture company, etc. Some companies, such as public companies, cannot raise funds through lending-based crowdfunding. At the same time, some requirements set out in the relevant article do not apply to venture companies that will receive funds via lending-based crowdfunding.
Investors: The Communique regulates specific investment thresholds for investors that are not qualified. Qualified investors are determined by the CMB. Venture capital trusts and investment trusts are qualified investors. The thresholds are: (1) for equity-based crowdfunding, an investor who is not qualified can make investments up to TRY 50,000 in a year – however, this threshold can go up to TRY 200,000, as 10% of the investor’s declared income; (2) for lending-based crowdfunding, the same yearly investment thresholds apply – additionally, an investor who is not qualified can make investments up to TRY 20,000 for each project.
It would seem that, if the legislation on crowdfunding is too rigid, this funding method can lose its attraction. On the other hand, if the legislation is not protective enough, crowdfunding can be used as a means for fraud, which would cause investors to lose trust in the ecosystem and result in entrepreneurs losing potential funding alternatives. Therefore, there has to be balanced legislation that addresses the needs of the ecosystem. As there is a growing interest in crowdfunding in Turkey, we are of the opinion that such a new set of regulations introduced by the CMB will have a positive effect on the crowdfunding ecosystem.
By Nilay Duran, Partner, and Kubilay Cetin, Associate, Nazali