As per the simplest definition, crowdfunding is an alternative financing method for funding projects and entrepreneurs. The Draft Law on Amendments to the Capital Market Law ("Draft Law") regarding crowdfunding prepared by the government has been submitted to the Grand National Assembly of Turkey on 26 December 2016. By the enactment of the aforementioned Draft Law, it is aimed to achieve to keep the crowdfunding platforms in a free market, and simultaneously to bring protection mechanisms.
What is Crowdfunding?
Crowdfunding provides financing or support through electronic platforms to project owners and entrepreneurs by the general populace consisting of, depending on the model of the crowdfunding, investors who have expectations in return, or supporters without any expectations in return. An Entrepreneur may be a legal entity or a natural person, or even a non-governmental organization1. In other words, crowdfunding is a new generation of financing instrument enabling the general populace to fund or donate through internet websites small amounts, which would not have the same effect if it were a solo investment2. As per the Draft Law, crowdfunding is defined as fund-raising from the public by means of crowdfunding platforms in order for funding that is necessary for an entrepreneur or a project within the scope of the rules to be determined by the Capital Market Board.
Crowdfunding Platforms are digital platforms where the entrepreneur and the project owner would meet with the investors and supporters in an electronic platform. The crowdfunding platforms would mediate all of the phases, from the application, including the payment mechanisms. Such platforms would not have any responsibility regarding the realization of the projects and business opinions and applications thereof3. As per the Draft Law, fund-raising through a crowdfunding platform is defined as the intermediary to the crowdfunding, and an entity serving in an electronic platform. Once the Draft Law is enacted, the respective enterprises will be obliged to obtain official authorizations from the Capital Market Board in order to operate.
The Capital Market Board will additionally regulate secondary legislation regarding the establishment of the crowdfunding platforms, their shareholders, share ledgers, employees, upper limits to the funds to be collected from the public and from individual investors, the time period for a project to be announced for funding, and other required rules and principles.
A New Alternative Funding for Entrepreneurs and the Importance of the Regulation
Particularly following the global economic crisis in 2008, new entrepreneurs or the owners of projects in their preliminary stages have problems in terms of finding financing. Such innovative projects and business ideas, which are not implemented due to lack of financing, would not be able to substantially support the economic development. In addition to being an alternative financing method, crowdfunding provides many advantages to entrepreneurs. Principally, crowdfunding would test the market in terms of the project or the investment of the entrepreneur or the project owner and would determine the demand. As such, the risk undertaken by the entrepreneur or the project owner would decrease. Crowdfunding would check the salability and rate the investable level of the respective projects or the investments, and would further provide feedback, accordingly. Moreover, it would help in the marketing of the business opinion of the project, and would provide loyal investors. Considering the said advantages of crowdfunding, it becomes more of an issue for the Capital Market Board to regulate crowdfunding.
Crowdfunding platforms commenced to be established in Turkey since 2010. The existing crowdfunding platforms operate through donation-based or reward-based models. As per the donation-based crowdfunding model, the supporters provide funding and do not have a return for their contributions. It is difficult to raise funds through this model. With respect to the reward-based crowdfunding model, the project owner or the entrepreneur would aim to achieve an amount with the funding, and if such amount would not be achieved within the specified timeline, then the contributed amounts would be returned to the investors. However, once the targeted amount is achieved, the reward, which was previously undertaken, would be shared amongst the investors. Another model is the investment-based crowdfunding model. By way of this model, the entrepreneur would collect the monies from the investors in a lending sphere, or in return for the sale of its assets or shares4. Within the current structure, such platforms operate as those platforms that serve between the entrepreneur and project owners and their supporters and investors. Collection of monies from the public falls within the regulatory scope of the Capital Market Board; however, currently there is no legislation regulating the operation of the crowdfunding system. Therefore, such legislative arrangement is urgently required5.
Due to the lack of legislative background regarding crowdfunding and application of only reward-based and donation-based models to crowdfunding, crowdfunding has yet to be developed in Turkey. With the enactment of the Draft Law, the hesitation of the investors and supporters would be relieved, and crowdfunding would become actively used. Thus, in order to encourage investors, a flexible and free market approach is envisaged, while protecting the system.
Flexibility under the Draft Law
With the Draft Law, it is the intention of the legislator to create a free market for crowdfunding, while avoiding the pressure over the companies to be established. Pursuant to Article 1 of the Draft Law, the fund-raising persons through crowdfunding platforms are excluded from the definitions of the "publicly held companies" and "issuer" as stated under the Capital Market Law6. As per Article 3 of the respective Draft Law, even if the number of the shareholders of the fund-raising joint stock companies through crowdfunding from the public exceed five hundred shareholders, such companies will not be deemed to be publicly held. As such, crowdfunding is free from the restrictions applicable to publicly held companies under the capital market legislation. In line with the above, it is stated under Article 2 of the Draft Law that the provisions under the Capital Market Law regarding the responsibilities to prepare a prospectus or export document would not be applicable to crowdfunding.
Within the context of the Draft Law, crowdfunding platforms, the crowdfunding, and any other related transactions would not be considered as investment services and activities or ancillary services to be conducted by the investment companies and portfolio management companies regulated under the Capital Market Law. Likewise, crowdfunding would not be subject to the provisions of the stock exchanges, market operators, other organized markets, and the legislation applicable thereto.
The Draft Law does not regulate the provisions applicable to the relationship between the crowdfunding platforms and the persons collecting monies from the public through crowdfunding, and the supporter and investors who have contributed the funds. It is stated under the Draft Law that the general provisions of Turkish law would apply to the referred relationship.
Following the enactment of the Draft Law, upon determination of any violation of the aforementioned terms, the Capital Market Board is granted with the power to take any kind of measures including, but not limited to, requesting the remedy of the contradiction within the specified period, limiting or canceling the activities.
Regulating the crowdfunding as an alternative financing instrument has become essential in order to support the entrepreneurs and projects that would assist in the development of the national economy. It is intended that the Draft Law, which includes flexible provisions, to incorporate crowdfunding into the scope of the capital market legislation. The Draft Law excludes crowdfunding platforms from the definitions of publicly held companies and issuers, and keeps crowdfunding out of the scope of the responsibilities to prepare a prospectus and export documents. With the enactment of the Draft Law, the existing crowdfunding platforms will be obliged to obtain official authorizations from the Capital Market Board.
1 Crowdfunding Association, Opinions and Suggestions on the Draft Law on Crowdfunding and Secondary Regulations, Workshop Report, 11 February 2017, pg. 8.
2 Draft Law on Amendments to the Capital Market Law dated 26 December 2016, the General Preamble, para. 2.
3 Workshop Report, Ibid, pg. 8.
4 Mediha Nur Onur, Öznur Değirmenci, Crowdfunding, Prime Ministry Undersecretariat of Treasury of the Republic of Turkey Working Report, Number 2015-7/June 2015, pg. 2.
5 Workshop Report, Ibid, pg. 10.6 Capital Market Law under law no. 6362 published in Official Gazette dated 30 December 2012 and numbered 28513.