Corporate Finance Series : 02 - Crowdfunding
What is Crowdfunding? How is Crowdfunding Regulated by the Capital Markets Board?
The biggest obstacle to the commercialization of innovative ideas through early-stage startups is the inability to meet capital and financing needs.
Especially nowadays, it has become very challenging for startups to start and even sustain their commercial life by securing financing from internal sources. This situation has led early-stage startups in particular to seek external sources of capital and funding.
The concept of crowdfunding is a funding method to meet exactly this need, especially for early-stage startups.
In its simplest definition, crowdfunding refers to the collection of money from the public through crowdfunding platforms without being subject to the provisions of the Capital Markets Law ("Law") regarding investor indemnification within the rules determined by the Capital Markets Board ("Board") to provide the funds needed by a project[1].
Since crowdfunding is exempted from various provisions and obligations of the Law, it provides an advantage for startups in some cases. For example, in the case of collecting money from the public through crowdfunding, there is no obligation to prepare an offering circular or issue document[2].
Similarly, the provision of the Law stipulating that joint stock companies with more than 500 shareholders shall be deemed to have made a public offering shall not apply to companies that raise money from the public through crowdfunding.[3]
Moreover, crowdfunding activities are not considered within the scope of investment services and subsidiary services under the Law[4]. Therefore, crowdfunding activities are not subject to the provisions of the Law on market operators and other organized marketplaces.
It should be noted that the most important actors of crowdfunding are crowdfunding platforms ("Platforms"). Platforms are organizations that mediate crowdfunding and provide online services in an electronic environment and are listed and permitted to be established and operated by the Board[5]. These organizations organize campaigns on their websites for startup companies to reach their targeted funding amount and carry out the campaign process and the operational and technical processes that need to be carried out afterwards.
Regulation and supervision of crowdfunding activities by the Board provides an extra assurance for investors and has a positive impact on making more accurate investment choices.
Indeed, the procedures and principles under which crowdfunding activities should be conducted, and the authorities and responsibilities of platforms and startup companies within the scope of crowdfunding are regulated under the Communiqué on Crowdfunding III-35/A.2 ("Communiqué").
Basically, crowdfunding activities can be carried out as equity-based, debt-based, donation-based, and reward-based. In Turkey, equity-based crowdfunding is predominantly used to meet the financing needs of early-stage startup company firms. According to the Board's website, as of January 2024, a total of 14 platforms were conducting equity-based crowdfunding activities[6]
Equity-based crowdfunding refers to the provision of shares in the startup company to investors in exchange for the funds provided, whereby investors can exercise their shareholding rights and benefit from various financial rights such as dividends[7].
In this article, the characteristics of startup companies that can be funded through equity crowdfunding will be explained within the framework of the Communiqué regulations.
Which Startups Can Provide Funding via Equity-Based Crowdfunding?
The qualifications required for startup companies to raise funds through equity-based crowdfunding are regulated in Article 23 of the Communiqué. In this context, platforms in particular have obligations not to fund companies that do not meet the qualifications required by the Communiqué through equity crowdfunding.
For a startup company to be funded through equity-based crowdfunding, it must be engaged in a technology activity or a production activity. In other words, the project for which funding is requested by the startup must be related to technology or production activities. When this condition is evaluated together with the requirement that the startup company should not have any activities other than the project for which funding is requested, it is concluded that the financing provided by crowdfunding is intended to be exclusively dedicated to technology or production.
It should be emphasized that the structure requesting funds does not have to be a joint stock company as per the Communiqué regulations. Indeed, an entrepreneur or a startup company established as a limited liability company may request funds through equity crowdfunding. However, after the end of the funding campaign period, the entrepreneur must establish a joint stock company or the limited liability company must be transformed into a joint stock company through a change of type to access the funding amount.
However, within the scope of the Communiqué regulations, it is assessed that companies established as collective or limited partnership companies cannot provide financing through equity-based crowdfunding[8]
Companies to be funded by equity-based crowdfunding must meet the following conditions in their latest annual and, if applicable, latest current interim financial statements:
For 2022, total assets should not exceed TL 450,000,000 and for 2023, total assets should not exceed TL 1,500,000,000.
Total other income other than net sales revenue and net sales revenue should not exceed TL 270,000,000 for 2022 and TL 750,000,000 for 2023.
The total registered capital and legal reserves should not be completely uncovered.
The above-mentioned limits on financial statements reveal that crowdfunding tends to be preferred especially for early-stage startups with high development potential.
Furthermore, companies to be funded through equity crowdfunding should have a registered website that is regularly monitored and controlled.
For the startup company to conduct an equity crowdfunding campaign, the shareholding structure that will be formed at the end of the campaign period, i.e. as a result of the funding, should be clearly stated in the information form[9].
This obligation has been introduced to enable investors to foresee the proportion of shares they will hold and the characteristics of these shares, and to make their investment decisions accordingly. This is because the information on how many shares the investors will have in the venture company after the funding, which group this share will belong to, whether any privileges are granted to the relevant share group, and if so, what kind of privileges it has, are important factors that may affect the investment decision of the investors during the campaign process.
In addition, for a startup company to raise financing through equity crowdfunding, there must be a provision in its articles of association stipulating that the company can engage in activities other than the project for which funding is requested with a higher quorum of the General Assembly.
In other words, if the company wishes to start operations in a field of activity other than the project for which the funds are requested after the campaign, a General Assembly resolution with the affirmative vote of at least 75% of the shareholders will be required for this to be possible.
This requirement has been introduced to ensure that investors who have invested in a company engaged in technology or production activities can have a major say in this decision in the event that the company's field of activity is to be completely differentiated.
However, the ratio of non-trade receivables from related parties as defined in the relevant regulations of the Board to total receivables should not exceed 20% or the ratio of non-trade receivables from related parties as defined in the relevant regulations of the Board to total assets should not exceed 10% in the most recent financial statements of the startup company included in the information form.
Finally, in order for a startup company to be funded through equity crowdfunding, the ratio of non-trade payables to related parties as defined in the relevant regulations of the Board to total payables must not exceed 20%, and the amount of financial debts not arising from technology and/or production activities must not exceed 10% of total assets in the most recent financial statements included in the information form.
Conclusion
Crowdfunding brings a breath of fresh air to the investment ecosystem, enabling individual investors to come together with startup companies that are in need of and seeking funding through platforms.
Although the investments made in this way sometimes correspond to very small amounts in terms of individual investors, they enable the startup to reach a large number of investors at the same time, contributing to faster and easier access to the targeted funding amount.
Particularly when the conditions we have examined in this article are considered together, it is seen that the Communiqué draws a framework for which companies can obtain financing through crowdfunding.
We believe that this framework encourages investors to respond to the financing needs of promising startup companies with development potential.
Atty. Deniz Karaduman
[1] Article 4 of the Communiqué on Crowdfunding III-35/A.2 states that the concept of crowdfunding refers to "collecting money from the public through platforms without being subject to the provisions of the Law on investor indemnification within the principles determined by the Board to provide the funds needed by the project".
[2] According to the first paragraph of Article 4 of the Capital Markets Law, "For capital market instruments to be offered to the public or traded on the stock exchange, an offering circular must be prepared and this circular must be approved by the Board. Without prejudice to the provisions of other laws regarding the collection of aid and donations, the collection of money from the public through crowdfunding is realized through crowdfunding platforms authorized by the Board and is not subject to the provisions of this Law regarding the obligation to prepare an offering circular or issue document."
[3] The first paragraph of Article 16 of the Capital Markets Law stipulates that "Except for corporations whose shares are traded on the stock exchange and corporations that collect money from the public through crowdfunding, the shares of joint stock companies whose number of shareholders exceeds five hundred shall be deemed to be publicly offered. These corporations shall also be subject to the provisions of publicly traded corporations."
[4] According to the fourth paragraph of Article 35/A of the Capital Markets Law, "Crowdfunding and related transactions and crowdfunding platforms are not considered within the scope of Articles 37 and 38 of this Law. These activities are not subject to the provisions of this Law regarding exchanges, market operators, and other organized marketplaces."
[5] Article 4 of the Communiqué on Crowdfunding III-35/A.2 states that the term "platform" refers to "an organization that mediates equity and/or debt-based crowdfunding and provides services in an electronic environment".
[6] You can access the list of platforms listed by the Board to engage in crowdfunding activities from this link.
[7] Kahveci, Defne. Crowdfunding Platforms in Capital Markets Law. Istanbul: On İki Levha Publishing, 2023.
[8] Özer, Şerif. Crowdfunding According to the Capital Markets Law. Ankara: Seçkin Publishing, 2022.
[9] Article 4 of the Communiqué on Crowdfunding III-35/A.2 defines the information form as "the form prepared by the entrepreneur or startup company, announced on the campaign page to raise the funds required by the project and the standards of which are determined by the Board".