Business Law

LOAN-BASED CROWDFUNDING IN TURKEY

What is Crowdfunding, Why is it Used ?

 

Crowdfunding, which is more of a virtual market, is an instrument that generally aggregates entrepreneurs and investors in a swift manner. At this present world, it should be asssumed that there is no doubt that one of the most primary elements of the economic world is to reach a capital and provide financial benefits. Within the frequent changes of the tehnologic developments in the recent years, correspondingly with the business transactions, are now on the agenda also rather than the classic finance models.  It could be said with the inner peace that crowdfunding is also one of the new alternative financing instruments that have been entered into our lives as a result of this capital and new finance model seeking.

In other words, the entrepreneurs could have a chance to meet with the investors via a newly established enterprise through “crowdfunding”, which includes either share-based or borrowing-based methods who desires to strenghten its treasury and maximize its profits, current assets and searchs for a start-up project in the mean time while they are seeking an investment source and funds, for the market they want to be involved in. 

In order the describe the “Crowdfunding “ it sincerely such an investment system created to raise financial resources needed by business ideas and venture companies which plans to manufacture technological products and serve the services with high added value and competitiveness in this field in our country.

Crowdfunding is actually a collective work process. Anyone can be an investor in this field. Firstly, an investor candidate should establish a venture story through an online platform which is established through Central Registry Agency (CRA) with Capital Markets Board terms and conditions and invite investors to invest through this platform and fund. Thus, the step involved generalises that the investor entered into the crowdfunding system! The entrepreneur has now become a part of a story of any company with potential or progressing towards becoming a company.

As a side note; aside from crowdfunding, it has been determined that one of the crowdfunding methods, borrowing-based crowdfunding constitutes almost 73% of the world market. Such an extensive investment instrument has been regulated in Turkey via the Crowdfunding Communiqué (III-35/A.2) [ Kitle Fonlaması Tebliği(III-35/A.2)] published in the Official Gazette by the Capital Markets Board on 27.10.2021. 

What is Borrowing-Based Crowdfunding?

Actually funding refers to investing in a campaign. Instead of receiving your investment cash in return from a venture which has members composed of the authorized people having licenses and various permits through an investment comittee; you can receive the funded venture subsequently as getting a share or receiving the return afterwards as it is announced with the information form by escrow agent including the credibility report. Therefore, the investor is going to receive the return as an interest or like a loan payment through the method which is choosed already via the platform he/she made the investment in an loan-based funding system.

In this method, investors with the expectation of high-interest yield, provide unsecured loans to entrepreneurs via an internet platform without an intermediary firm in order to obtain principal/capital and interest at the end of a certain due date. If all the necessary financing is provided within a period determined by the campaign which is created, the source provided by other creditors becomes available in this system. In this method, the presence of a prespecified interest rate between the creditor and the loanor and the ability of the creditors to collect their receivables in the event of bankruptcy facilitates providing funds. It should be noted in this article that such a model is a method generally used by individuals or small firms which do not have sufficient assets/warranties to get loans from banks.

Additionally, it would be beneficiary to mention that online platforms performs by charging a commission fee to above mentioned provided services in return. Such platforms are able to provide loans at a lower interest rate due to the fact that the establishment and activity costs and bureaucracy costs are less.

Who Can Be An Entrepreneur, and Who Can Be An Investor in th eLoan-Based Crowdfunding Method?

The issue that both entrepreneurs and investors may hesitate about is actually who can directly and most advantageously use the opportunities they have. By loan-based crowdfunding, unqualified investors can also meet with entrepreneurs. However, the entrepreneur and the investor are subjected to certain terms and conditions by the above-mentioned Communiqué. In other words, if you desire to become an entrepreneur or an investor in this field, you should know that you have limits determined by the Comminique.

The entrepneur refers to the person that: people who live in Turkey and limited or joint-stock companies with a development potential seeking a funding for their future promising projects through loan-based crowdfunding. Entrepreneurs and investors who may meet in a kind of virtual world shall be able to advance in their economic lives by investing via an online platform.

Since the main subject  of this article constiitutes “Loan-Based Crowdfunding”, the frame considers only the loan-based crowdfunding system. Share-based crowdfunding is the main subject of our different letters.

Accordingly, in loan-based crowdfunding:

  • Except for the maturity-interest and conditions included in the information form that the investor saw, read and even hit during the campaign; funding will not be available except for another loan relationship or loan instruments, such as a loan or loan agreement.
  • Interest and other rate of return could not exceed in an amunt of 50% more than the weighted average of interest rates, one of which has a long and the other has a short term funding and the maturity date will not be more than five years.
  • The revenue of the venture will be first distributed to the investors and the collected revenue will not be used in order to pay the loans which not relevant to the project of the venture.
  • The investment committee shall monitor the venture and control the investments.

 

In conclusion, the regulations on crowdfunding and all the limits have actually been determined with a single Communique and The Communique leads up small or medium-sized technology and manufacturing companies in order to raise funds from the capital markets without quating their shares to the stock exchange. 

Hilal Şimşek, Attorney At Law

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