Article

New Alternative Financing Approaches and Regulations; Crowdfunding

New Alternative Financing Approaches and Regulations; Crowdfunding

Crowdfunding is a new way of raising money from a large number of people through diverse models which include online ‘Crowdfunding platforms’, social networking web sites (eg. Facebook, Twitter) for the purpose of funding social projects, innovative projects, business ventures & so on.

Though crowdfunding can exist in many forms, there are four main models;

(1) Donations-based,

(2) Reward-based,

(3) Peer-to-peer (P2P) lending,

(4) Equity crowdfunding.

Donations-based crowdfunding is where the funds are raised from many individuals for a specific noble cause without expectation of compensation, whereas in reward-based crowdfunding the funders would be expecting to get some gifts. P2P lending connects individuals or businesses looking for small loans and people willing to lend money in small amounts. An equity crowdfunding platform is where investors purchase equity in private companies in small amounts. The platform has two networks– one of investors and one of entrepreneurs. Crowdfunding is facilitated through some social media such as Facebook, Twitter because of their ability to enable the creation and exchange of user-generated content.

The global crowdfunding market has recently grown significantly in some countries. According to the research, advisory and implementation firm Massolution (2015), crowdfunding platforms raised $16.2 billion in 2014, an amount that was a 167% increase over the amount raised in 2013, and the global crowdfunding market grew to $34.4 billion in 2015, more than doubling the 2014 figure. When market share is analysed by region, North America accounts for more than half (50.1%) of the crowdfunding market, followed by Asia (30.6%), Europe (18.8%) and other regions (0.5%), which include South America, Oceania and Africa. Meanwhile, the European alternative finance market has remained substantially fragmented, and although there is no consistent data on cross-border flows, survey evidence suggests that such flows have been very limited. This observation applies to flows between member countries of the euro area and between member countries and other European countries, notably the United Kingdom. 

As the number of Internet and mobile phone users continues to increase, the potential exists for crowd investing (just like other forms of crowdfunding) to grow, depending on how the diverse and rapidly changing regulatory environment in individual economies evolves. While some countries have begun to draft new regulations governing crowdfunding, others have already implemented important new policies in response to the rapid progress in financial technology (fintech). Generally, these efforts are motivated by the dual objective of supporting entrepreneurial activity while protecting investors. In pursuing this objective, some countries have opted to regulate crowdfunding within preexisting regulatory frameworks, while others have customized regulation to govern debt- and equity-based alternative finance activities. Policies differ with respect to (i) restrictions on the type of investors who are permitted to invest in entrepreneurial startups through online platforms; (ii) the amount of capital each investor is allowed to invest; and (iii) the amount of equity a business can raise from the crowd per year and in total.

In Turkey, Capital Markets Board of Turkey ("CMB"), being authorized by the Capital Markets Law No. 6362 (the "Law"), legally accepted ‘Crowdfunding’ in Turkey in December 2017 after making some amendments on the Law and then, issued the communiqué concerning equity-based crowdfunding model that came to force on 3rd October 2019, Communiqué on Equity Based Crowdfunding No. III-35/A.1 (the "Communiqué"), but still some of the points are not very clear legally.

With this Communiqué, CMB regulates solely the equity-based crowdfunding of technology and production driven projects and leaves out the real estate-based crowdfunding as it is expressly forbidden under the Communiqué. Donation-based and reward-based crowdfunding models are left outside the scope of the Communiqué and however, these models continue to be practiced in Turkey subject to the general laws and regulations relating to reward and donation notions.

CMB requires the periodic disclosure of the information regarding the financial status of the project and use of funds in the crowdfunding platform's website for the following 5 (five) as of the year the campaign is closed. In addition to this, as required in the Communiqué, an independent audit company authorized by CMB inspects the use of funds and evaluates whether the collected funds are utilized in line with the project's goals. For this, independent audit company prepares a special purpose audit report until the date the funds are completely used, to check and control whether funds are used in compliance with the purpose of the project and in case of any misuse, this will be reported to the CMB.

Global Crowdfunding is growing fast in financial services field and digital ‘Crowfunding Platforms’ are motivating the entrepreneurs’ start-up companies in Turkey.

As cultural, social, technological & regulatory factors play a major role in the evolution of the financial systems and fintech race, ‘Crowdfunding’ framework in Turkey needs to be developed further and set forward at once.

For "Communiqué - Communiqué on Equity Based Crowdfunding No. III-35/A.1

https://www.mevzuat.gov.tr/File/GeneratePdf?mevzuatNo=33836&mevzuatTur=Teblig&mevzuatTertip=5

PARTNER, CORPORATE FINANCE ADVISORY
Gülcan Keskin Fox Contact