A new omnibus code that amends, amongst others, the Capital Markets Code (“CMC”) has been enacted by the Turkish parliament and published in the Official Gazette on 5 December 2017. With this amendment, Turkey joined the likes of the USA, UK, Italy, Canada, Sweden and several others who have been regulating crowdfunding for the past couple of years. The CMC amendment expands and somewhat clarifies crowdfunding in Turkey. While the amendment is regarded as an auspicious step towards growing and strengthening the crowdfunding market in the region, it still may not be time for start-ups, those looking for investment and investors to celebrate just yet.
The CMC amendment primarily refers to reward-based crowdfunding (i.e. receipt of goods, reward or pre-sales in return or investment-based or loan-based crowdfunding) while donation-based crowdfunding where the investor donates the money with no return is still subject to aid and donations legislation. The said amendment limits crowdfunding to project or venture financing and only through crowdfunding platforms that are prior-recognised by the Capital Markets Board (“Board”).
Under the legislation, crowdfunding platforms are limited to those operating electronically (note that no distinction is made between internet-based or otherwise platforms) that function as an intermediary between the investor and investee. Crowdfunding platforms can only operate in Turkey once they obtain the necessary permission from the Board. The Board will also issue its own set of by-laws which will regulate the constitution, shareholders, share transfers and employment matters of these platforms. One issue to highlight is that the Board will also regulate the maximum amount of investment each investor can make and each project or venture owner can collect. In addition, the Board will audit and control whether the fund collected is being utilised in accordance with the purpose of the project/venture as previously announced. In this regard, the Board’s sanctionary powers are quite comprehensive as they range from issuing mere warnings to cancelling licences, filing criminal or civil complaints or “taking any precautions it may deem necessary”. However, the wording of the amendment indicates that the primary precaution that the Board will take against those who receive funding without a licence is to restrict access to the relevant website.
Global Crowdfunding Market
An analysis prepared by Technavio predicts the global crowdfunding market to grow at a compound annual growth rate of approximately 27% by 2020. Other publicly available analysis agree that crowdfunding will continue to grow not only in the USA and UK but also significantly in EMEA and APAC regions and reach the volume of billions of American dollars by 2020. Crowdfunding has attracted the attention of not only start-ups but also other projects/ventures, of larger sizes and higher costs, following the global financial crisis. As banks and financial institutions has tightened their requirements on security and collateral and private investment became subject to increased bureaucracy, crowdfunding offered an alternative to many companies of different sizes. Today, real estate crowdfunding (including commercial and industrial properties) is a method used and growing in North America. Crowdfunding can also be used for large scale project financing, venture capital or ship financing as long as the applicable legislation does not inhibit its potential.
This potential is not only due to the current popularity of crowdfunding (which, in theory, can turn out to be a hype) but can also be partially attributed to the flexibility of the relationship between the investor and investee. The investor or investee can choose how the investors will be associated with or interact with the project or venture. However, the CMC amendment states that the relationship between the crowdfunding platforms, investors and investees will be subject to general provisions such as those under the Turkish Commercial Code or Turkish Civil Code. Although the application of this may seem practical as these pieces of legislation are well established and familiar for those within the legal industry, they may prove to be inadequate in addressing the intricacies of such a modern and liberal method of funding. In this regard, either the legislation (both existing and the new amendment) will prove to be inadequate or crowdfunding will be crippled by those who apply the law.
Room for Improvement
As mentioned above, the Board takes on the task to regulate almost every aspect of crowdfunding platforms and their operations. This is why the CMC amendment is not yet a reason to celebrate for those who prefer alternative investment methods. The said amendment raises eyebrows with the limitation it places on the amount of money that can be invested as well as the potential restrictions on the structure and mechanism for the transactions and potential disclosure obligations imposed on the crowdfunding platforms.
For instance, the CMC amendment distinguishes investment-based crowdfunding from open joint stock companies which are regulated heavily. However, although the amendment indicates that the crowdfunding platforms will not be subject to the same and heavy regulations as open joint stock companies, the regulations which they will be subject to are still unknown. As mentioned above, while reference to regulations/by-laws regarding employment, operational matters etc. is made, the amendment is silent regarding possible cross-overs with, for instance, securitisation/collateralisation in loan-based crowdfunding, taxation, fraud or money laundering, or data protection. The primary problem with crowdfunding in Turkey and the CMC amendment seems to stem from the legal framework that is lacking rather than existing.
Please do not hesitate to contact us if you have any questions regarding the new amendment.