The New Communiqué on Crowdfunding
Introduction
The Capital Markets Board’s (“Board”) long-awaited Communiqué on Crowdfunding No. III - 35/A.2 (“Communiqué”) entered into force through its publication in the Official Gazette numbered 31641 and dated 27 October 2021. Following its implementation, the Communiqué on Share-Based Crowdfunding, which was published in the Official Gazette numbered 30907 and dated 3 October 2019, was repealed. The Communiqué broadens the scope of its predecessor, as it regulates both debt-based crowdfunding and share-based crowdfunding with the aim of eliminating the issues that have arisen in the market. The following sections outline new provisions introduced by the Communiqué.
New Developments
Debt-based crowdfunding
Perhaps the most important development introduced by the Communiqué is the addition of provisions relating to debt-based crowdfunding. The scope of the crowdfunding method in question is defined as “…raising funds from the public through platforms in exchange for debt instruments.” As per the principles relating to fundraising under this method, debt-based crowdfunding activities other than the sale of debt instruments, through debt or loan agreements or any other contract giving rise to a debt relationship, or in exchange for any capital market instrument other than debt instruments, cannot be conducted. With regard to investment limits, real persons who are not qualified investors will be able to invest a maximum of 50,000 Turkish Liras through debt-based crowdfunding within a single calendar year, but this limit may be applied as 10% of the annual net income the investor declares to the platform, provided that it does not exceed 200,000 Turkish Liras. Real persons who are not qualified investors may invest a maximum of 20,000 Turkish Liras in a project through debt-based crowdfunding.
Under the Communiqué, funds cannot be raised at a rate that is lower than the interest or other rate of return indicated in the information memorandum prepared by the entrepreneur or the fund raiser and announced on the campaign page for the purpose of raising the fund required by the project. The standards for these memoranda are defined by the Board. The interest and other rate of return may not exceed 50% of the weighted average of the interest rates identified one day before the start date of the campaign. These are determined with reference to two Government Bonds closest to the maturity of the debt instrument in question, the maturity of one of which is shorter than that of the debt instrument and the other longer, the terms of which shall not exceed 5 years.
Article 22 of the Communiqué (Use of fund proceeds raised through debt-based crowdfunding) requires that the entrepreneur or the fund raiser prepare a report stating the purposes for which fund proceeds be used, which will be published on the campaign page at the beginning date of the campaign term. The fund proceeds of a project whose funding is requested during the term shall first be used to pay the investors who have invested through crowdfunding, and the funds raised through this method shall not be used in the repayment of debts arising from projects other than the project for which funding is requested. An exception to this rule exists for debts arising within the scope of the project as indicated in the information memorandum.
An investment committee, which is defined as the committee that evaluates the feasibility and/or credibility report prepared by the entrepreneur or the fund raiser, approves the information memorandum prepared in connection with the campaigns. This committee shall prepare a report for the purpose of reviewing whether the raised funds are being used in line with the purpose announced in the information memorandum. The platform is obligated to inform the Board on the matter in the event that such report finds that the raised funds were not being used as announced in the information memorandum, or in the event that activities preventing the performance of the necessary inspections are being carried out.
In line with the provision introduced under article 19 of the Communiqué (Principles governing the raising of funds through debt-based crowdfunding), provided that this is expressly indicated in the information memorandum, it is also possible that repayment obligations relating to the debt instruments are performed by granting shares of the funded company or in another manner indicated in the information memorandum, rather than with cash. However, doing so requires that the investors’ consents have been obtained through a means of communication indicated in the information memorandum, including through printed or electronic media.
According to article 24 of the Communiqué (Principles governing the evaluation of risk in funding through debt-based crowdfunding), in addition to various obligations relating to their own activities, platforms carrying out debt-based crowdfunding activities must form an effective and transparent credit rating system and policy in order to evaluate the risk status of the project. This policy must be announced to the public on the platform’s website.
Other changes
Under the change made in parallel to the debt-based crowdfunding provisions, the concept of “entrepreneur” in the Communiqué was updated to cover real person residents of Turkey seeking funding for their projects through equity-based or debt-based crowdfunding, or legal entities in the form of limited liability or joint stock companies. In addition, the definition of “fund raiser” now includes limited liability companies that are required to be converted into joint stock companies.
According to article 16 of the Communiqué (Principles governing fund-raising through equity-based crowdfunding), fund raisers or entrepreneurs may raise funds based on equity through platforms through a maximum of two campaigns within any twelve-month period. The amount of the funds to be raised during such period may not exceed the issue limit that is exempted by the Board from the obligation to prepare a letter of explanation, and that is announced annually in the Board Bulletin. The fund raiser or the entrepreneur shall be subject to the same obligation as under the principles governing the raising of funds through debt-based crowdfunding.
In another change, the concept of “funded company” was added to article 4 of the Communiqué (Definitions and abbreviations). This refers to joint stock companies incorporated by entrepreneurs or fund raisers, where the blocked fund amount is transferred to the account held by the fiduciary.
Article 5 of the Communiqué (Incorporation and listing) introduces provisions relating to the requirements sought for the incorporation of the platforms. These are defined as corporations that act as intermediaries to the equity-based or debt-based crowdfunding, and that provide services over electronic media. In this scope, the platforms must be incorporated as joint stock companies, must hold the minimum capital specified in the Communiqué, all of their shares must be registered shares, and their boards of directors must consist of a minimum of three persons. Article 9 of the Communiqué (Investment Committee) allows the formation of multiple investment committees provided that they meet the applicable requirements. In addition, a platform failing to start operations within six months following its listing shall be unlisted by the Board ex officio.
Conclusion
The Communiqué has served to gather provisions applying to both debt-based and share-based crowdfunding under a single arrangement. Various definitions were added to the Communiqué, provisions applying to the incorporation and operation of the platforms were added, principles governing debt-based crowdfunding were regulated, and the limits of investment were set. How effective the provisions of the Communiqué will prove in providing entrepreneurs with an alternative financial resource remains to be seen.
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