Crowdfunding in Turkey

There are numerous funding mechanisms available, including Venture Capital Investment Funds. However, alternatives designed for smaller-scale businesses remain limited. It is therefore necessary to unlock and expand opportunities for such enterprises. Crowdfunding in Turkey provides this opportunity for companies with strong entrepreneurial characteristics.

In Turkish legislation, crowdfunding was initially regulated as equity-based crowdfunding. If the investment-seeking company has already been incorporated, the process may be completed through a capital increase; if the company is incorporated specifically for crowdfunding purposes, it may be completed through the sale of shares to be issued at incorporation. Debt-based crowdfunding, by contrast, was introduced into Turkish legislation at a later stage. In this model, the investor is compensated by repayment during the maturity period. However, although debt-based crowdfunding has been introduced into the legislation, no crowdfunding platform operates in Türkiye under this model.

What is Crowdfunding in Turkey?

Investors’ access to financing is not limited to institutions such as public offerings regulated under the Capital Markets Law No. 6362 (“CML”); crowdfunding also provides an alternative means of funding. Start-ups and newly established ventures may need to prefer less burdensome alternatives in order to secure the financing they require. Because the requirements for conducting procedures such as a public offering are designed for larger, more institutional operations, they are not feasible for every venture. In this context, crowdfunding in Turkey is used by smaller companies and initiatives to obtain financing under comparatively easier conditions.

Although it may appear less burdensome than a public offering, crowdfunding is subject to strict criteria. These criteria aim to ensure investor protection. Indeed, crowdfunding enables “the public” to participate easily and to invest even small amounts. Therefore, crowdfunding may be compared to a public offering while being examined. In the definitions section of the CML, when defining public companies, it became necessary to explicitly exclude crowdfunding.

Types of Crowdfunding in Turkey

There are four types of crowdfunding in Turkey: debt-based, equity-based, donation-based, and reward-based. However, the Communiqué regulates only debt-based and equity-based crowdfunding. The procedures and principles governing the collection of public funds through crowdfunding in Turkey are set out in the Communiqué.

Equity-Based Crowdfunding

The legal nature of the relationship between the investor and the fundraising business varies by crowdfunding model. In equity-based crowdfunding, a conditional share purchase agreement and, subsequently, a shareholder relationship are established. There is a doctrinal view that this agreement constitutes a contract of sale. In debt-based crowdfunding, a conditional purchase agreement for a debt instrument is executed; upon completion of the transaction, a creditor–debtor relationship arises.

Debt-Based Crowdfunding

In debt-based crowdfunding, investors do not acquire shares of the company; instead, they purchase a debt instrument. Accordingly, they acquire the status of creditors rather than shareholders. The principles governing repayment of the nominal value of the security that forms the basis of the debt relationship must be stated in the information form. Platforms are obliged to establish the necessary infrastructure to ensure that payment obligations are fulfilled in accordance with the information form. In equity-based crowdfunding, the security subject to the transaction is not a debt instrument but rather a share that represents the capital of the fundraising company and confers corporate rights.

Not every crowdfunding platform authorised by the Capital Markets Board (“Board”) is permitted to intermediate both debt-based and equity-based crowdfunding. The relevant platform must specify, on its website and in its articles of association, the type(s) of crowdfunding it is authorised to provide. A platform that conducts debt-based crowdfunding must ensure that its investment committee meets additional criteria and obligations. Furthermore, for debt-based crowdfunding, the platform must continue to publish annual reports regarding the fundraising company until the debt is fully discharged.

In European Union legislation, crowdfunding is categorised as lending-based or investment-based. Lending-based crowdfunding must include an unconditional commitment to repay the lender. This model should enable investors and fundraising businesses to enter into credit agreement relationships with one another. In this context, EU legislation provides that transferable securities may be subject to crowdfunding. In investment-based crowdfunding, the transfer of shares is permitted to the extent allowed by national laws.

Crowdfunding Platforms in Turkey

The current Communiqué on crowdfunding was enacted in Turkish legislation in 2021. Before this date, three crowdfunding platforms had obtained authorisation and remain active. Subsequently, the number of platforms reached the level shown below, and platforms for debt-based crowdfunding were established.

Crowdfunding platforms in Turkey that hold an operating licence are listed on the Board’s website.

• Vakıf Yatırım Menkul Değerler A.Ş.
• Global Kitle Fonlama Platformu A.Ş.
• Halk Yatırım Menkul Değerler A.Ş.
• Dijital Kitle Fonlama Platformu A.Ş.
• İnfo Yatırım Menkul Değerler A.Ş.
• Fongogo Kitle Fonlama Platformu A.Ş.
• Girişim Kitle Fonlama Platformu A.Ş.
• Basefunder Kitle Fonlama Platformu A.Ş.
• Global Menkul Değerler A.Ş.
• Ecofolio Kitle Fonlama Platformu A.Ş.
• Nar Kitle Fonlama Platformu A.Ş.
• Startupfon Kitle Fonlama Platformu A.Ş.
• Forte Kitle Fonlama Platformu A.Ş.
• Mag Kitle Fonlama Platformu A.Ş.

In total, there are fourteen crowdfunding platforms. As stated on the Board’s website, all existing platforms are authorised only for equity-based crowdfunding. Debt-based crowdfunding has no application in Türkiye. In our view, the underlying reasons are primarily economic conditions. Crowdfunding platforms with operating licenses are listed on the Board’s website. (Click here to access.)

How to Establish a Crowdfunding Platform?

Companies seeking authorisation to operate as a crowdfunding platform must include certain provisions in their articles of association. There is no freedom in the scope of business for these companies. The Communiqué prohibits platforms from engaging in activities other than crowdfunding; otherwise, authorisation cannot be granted. The platform’s scope of activity is also limited with respect to the types of crowdfunding it will support: it must be explicitly stated whether the platform will conduct debt-based or equity-based crowdfunding.

Applications submitted to the Board by companies whose articles of association comply with the required business scope provisions may nevertheless be rejected for various reasons. In such a case, all references to crowdfunding in Turkey must be removed from the articles of association, including provisions regarding the scope of activity and corporate purpose. The term “crowdfunding” must also be removed from the company’s trade name. Furthermore, there is a doctrinal view that an existing company cannot, by merely amending its articles of association, become a crowdfunding platform, given the risks arising from prior commercial activities.

What is the Crowdfunding System in Turkey?

In addition to regulating platforms, the Communiqué includes significant provisions regarding the articles of association of venture companies. Similar to platforms, fundraising companies are also subject to restrictions on their scope of activity. It is prohibited to include business activities outside the scope of the commercial activity subject to crowdfunding. For example, if a company is active in both tourism and mobile game development, crowdfunding investments may relate only to one of these activities, and the company may not engage in the other. A company that conducts crowdfunding for game development may not engage in tourism activities.

We have previously dealt with crowdfunding transactions in which a company was involved in two distinct businesses. In such a case, a tedious demerger may be required.

There is a view that such restrictions on innovative and small-scale ventures contradict the purpose of crowdfunding—namely, facilitating financing for small and entrepreneurial companies—since they may compel such ventures to establish new companies for each activity, thereby incurring additional costs and effort. On the other hand, the Communiqué provides that, after crowdfunding is completed, the company may engage in other activities provided that the required quorums are met. Under the Communiqué, the only provision required to be included in the articles of association is that, upon meeting the quorums set out under Article 421 of the Turkish Commercial Code (“TCC”), it is possible to transition to other activities after crowdfunding.

In EU crowdfunding legislation, no specific conditions are imposed on the articles of association. The legislation does not explicitly set out requirements regarding the scope of business or other corporate elements for platforms or fundraising companies; it merely requires platforms to submit their articles of association during the authorisation application process.

Crowdfunding Provisions under the Capital Markets Law

In 2017, the definition of “public company” under the CML was amended and the phrase “excluding the collection of funds through crowdfunding” was added at the beginning of the definition. Thus, despite the similarity of crowdfunding to a public offering, it was emphasised that they are distinct. Likewise, when defining the term “issuer”, a provision was added stating that crowdfunding processes do not fall within this scope. Both processes involve collecting funds from the public. In the definition of “crowdfunding” added to the end of the “Abbreviations and Definitions” section of the Law, the expression “collecting funds from the public through crowdfunding platforms” is included.

In practice, companies that raise capital by collecting funds from the public through various activities may issue shares to investors in exchange. Therefore, even if there is no public offering as defined under capital markets legislation, a similar outcome arises, and certain measures must be taken. Accordingly, the CML provides that companies with more than five hundred shareholders shall be deemed to have made a public offering and shall be subject to public offering obligations.

In the context of crowdfunding, in equity-based crowdfunding—one of the two regulated types—shares are granted to investors and the situation of offering to the public arises. As a result of public fundraising, the fundraising company’s shares are held by a broad investor base. However, the relevant provision expressly states that, for crowdfunding in Turkey, the number of shareholders shall not render the company publicly offered, and such companies shall not be subject to public company provisions.

Processes that involve collecting funds from the public inherently carry significant risks. Since such processes may be abused and enable manipulation of large groups, they must be conducted with due diligence. For this reason, public offering requirements are highly stringent. Therefore, it is essential that measures be implemented to mitigate similar risks in Turkish crowdfunding as well. Unlike a public offering, a secondary consideration is the objective of facilitating financing for less institutional enterprises. Consequently, a balance is sought between protective measures and practical accessibility.

Under Article 4, the CML regulates the obligation to prepare a prospectus for public offerings. It is explicitly stated that crowdfunding is not subject to the prospectus requirement. Preparing a comprehensive document, such as a prospectus, is not expected in crowdfunding. However, the prospectus serves an important disclosure function. To mitigate certain risks in crowdfunding, mechanisms that perform a similar function are required. Accordingly, the preparation of an information form has been made mandatory, and Article 35/A of the Law refers to this form.

While a prospectus must be approved by the Board, no additional permission is required from the Board during the crowdfunding period. Nevertheless, only platforms authorised by the Board may conduct crowdfunding activities.

Article 35/A of the CML contains the primary regulations on crowdfunding. With respect to unlawful acts, the term refers to the measures set out in Article 96. Furthermore, it is stated that crowdfunding platforms, investors, and entrepreneurs in Turkey are subject to general provisions. In the absence of provisions under the CML or the Crowdfunding Communiqué, the provisions of the Turkish Commercial Code, Turkish Code of Obligations, and other relevant legislation shall apply. It is also stated that the crowdfunding platform, the fundraising party, and all signatories shall be jointly and severally liable for the content of the information form, which is mandatory to publish and whose elements are defined in the Communiqué.

The Crowdfunding Communiqué

The procedures and principles of equity-based crowdfunding were originally regulated underCommuniqué No. III-35/A.1 on Equity-Based Crowdfunding. This Communiqué was replaced by Communiqué No. III-35/A.2 on Crowdfunding (“Communiqué”). Under the new Communiqué, in addition to equity-based crowdfunding, the procedures and principles for debt-based crowdfunding were also regulated. However, debt-based crowdfunding has not yet been applied in Türkiye.

Information Form

As stated above, the signatories of the information form are jointly and severally liable for its content. However, pursuant to the Communiqué, the form is prepared by the fundraising company. The board of directors of the crowdfunding platform appoints an investment committee, which must approve the information form. The committee is also responsible for evaluating feasibility and credibility reports in addition to the information form. In the case of debt-based crowdfunding, the infrastructure referred to in Article 5(g) must be established to ensure fulfilment of the payment obligations set out in the information form.

Whether matters not included in the information form are binding upon investors is an issue requiring separate examination. In this regard, our discussion on restrictions regarding share transfers is provided below under the heading “Shareholding Structure of the Fundraising Company”.

Shareholding Structure of the Fundraising Company and the Escape Clause (TCC Art. 493)

Under Article 16/7 of the Communiqué, for a period of three years following the launch of a crowdfunding campaign, shareholders who have a significant influence over the fundraising company may not voluntarily transfer their shares to third parties. However, cases of universal succession, qualified investors, and transfers to other shareholders of the company are expressly excluded from the scope of the transfer restriction. This paragraph regulates the same subject matter as Article 493 of the Turkish Commercial Code No. 6102, which contains the “escape clause” mechanism.(Click here to access our article containing detailed information about the escape clause.)

The types of acquisition and transferees excluded under the Communiqué are, pursuant to the TCC escape clause, subject to that mechanism; therefore, in accordance with the hierarchy of norms, the provisions of the TCC—being superior legislation—must prevail. However, we do not agree with the view that, for the escape clause to prevent a transfer, a transfer restriction must also be provided for in the company’s articles of association that raised funds through crowdfunding. The existence of a provision in the articles of association is a requirement only for the contractual linkage (articles-based restriction) set out under paragraph 1 of the relevant TCC article.

Where an articles-based restriction applies, the “just cause” must be specified in the articles of association. To be valid vis-à-vis investors, we are of the view that such restrictions should also be stated in the information form. Nevertheless, in a concrete dispute, questions such as whether the transfer of shares may be ordered by the court despite a refusal based on a just cause not stated in the information form, and whether a corporate effect would arise, must be assessed separately. In such an evaluation, TCC Article 493 and the Communiqué provisions must be interpreted together.

The application of the Communiqué’s share transfer restriction rule to bearer shares requires a separate assessment. Since bearer shares cannot be restricted in transfer, an evaluation must be made in terms of the Central Securities Depository (Merkezi Kayıt Kuruluşu) and the company’s authority to approve.

When EU and US legislation on the transfer of shares by investors to third parties is examined, it is observed that significant restrictions exist, which have slowed the development of a secondary market for crowdfunding. In Türkiye, similar restrictions on investors’ transfer of shares are not encountered.

Legal Nature of Crowdfunding Agreements

The legal nature of the agreement between the platform and the fundraising party is compared to that of an intermediary relationship in a public offering. According to this view, the legal nature of the agreement is best characterised as a “best efforts” intermediation. On the other hand, the Communiqué imposes certain obligations upon crowdfunding platforms. However, these obligations do not mean that the platform operates independently of the fundraising company’s instructions.

Between the platform and the investors, a membership agreement is executed. There is a doctrinal view that this agreement constitutes an agency agreement intended to manage the process of concluding purchase and sale contracts.

Limited Liability Companies and Crowdfunding

One requirement of crowdfunding under Turkish law is that the target company must be a joint-stock company. Limited liability companies cannot raise funds through crowdfunding under Turkey’s capital market laws.

The rule that limits liability companies from crowdfunding is especially important when establishing your company. We often observe that, when establishing a company, clients seek to understand the differences between joint-stock companies and limited liability companies. In general, we advise choosing the more straightforward and less costly structure of a limited liability company for both local and foreign clients; however, concerns such as future crowdfunding campaigns may require the formation of a joint-stock company.

The formation of a joint-stock company is required for other enterprises, such as those seeking to list on a stock exchange. However, these are even more exceptional concerns than those related to crowdfunding, since very few companies ultimately list on stock exchanges. Another consideration is that even if a company is organised as a limited liability company, it can later convert to a joint-stock company. We have indeed in the past carried out such restructuring for a tech company that attracted both venture capital investment and engaged in a crowdfunding campaign simultaneously. Although restructuring is a straightforward process, complications may arise when a business is long-established.

A complex restructuring from a limited liability company to a joint-stock company requires a collaborative effort by lawyers and accountants to ensure a smooth process.

Please refer to our article on the difference between limited liability and joint stock companies for further information by clicking here.

CONCLUSION

In brief, crowdfunding in Turkey refers to the collection of funds from the public for investment purposes via a crowdfunding platform. This investment is not deemed a public offering. Although debt-based crowdfunding has been introduced into Turkish legislation as one of the two crowdfunding types, it has not been sufficient to ensure widespread preference. However, if economic conditions change, it may begin to be used in practice.

It is mandatory to provide detailed information in the information form regarding the shares of a company that raises funds through crowdfunding in Turkey, since there is a disclosure obligation regarding its shareholding structure. Restrictions have also been imposed on the fundraising venture’s scope of activity, which is significant under the articles of association. Moreover, the Crowdfunding Communiqué contains a provision restricting the exit of shareholders with significant influence over the company. These rules must be assessed in light of the articles-based restriction and escape clause provisions set out under Article 493 of the Turkish Commercial Code. Under the hierarchy of norms, priority should be given to Article 493.

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