Equity Crowdfunding Regulatory Space and Turkish …...The crowdfunding platform facilitates the...

Equity Crowdfunding Regulatory Space and Turkish Draft Communique on Equity

Crowdfunding(III–35/A.1)

Dr. M. Aslı KÜÇÜKGÜNGÖR SERMAYE PİYASASI KURULU 22.03.2019

Conducted with the with PWC with the support of the EBRDThe Project Components Review of the Draft communique prepared by the CMB with

relevant country examplesAdvice on the drafting of the possible other secondary legislation

that will regulate crowdfundingPublic awareness event

Project: Support with the CrowdfundingSecondary Legislation In Turkey

17.05.2019SERMAYE PİYASASI KURULU

THE CONCEPT OF CROWDFUNDING The Rise of Crowdfunding Distinct Categories Equity Crowdfunding Non-Equity vs. Equity Crowdfunding

KEY ASPECTS OF CMB LEGISLATION ON EQUITY CROWD FUNDING IN THE LIGHT OF THE RECENT REFORMS IN THE US AND SELECTED EUROPEAN COUNTRIES Crowdfunding in Turkey CML Provisions Draft Communiqué on Equity Based Crowdfunding (III–35/A.1)

Comparative Country Regulations Based on The Regulatory Responses to Equity Crowdfunding

OUTLINE OF THE PRESENTATION

17.05.2019CAPITAL MARKETS BOARD OF TURKEY

THE RISE OF CROWDFUNDING


Convergence of two concepts: Crowdsourcing & Microfinance

Crowdsourcing The collection of contributions (whether

services, ideas or content) from a large group of people (ie the crowd) to achieve a task

It can divide an otherwise overwhelming task into small enough pieces so as to make the task achievable.

Most successful and best-known example Wikipedia (an online user edited

encyclopaedia)

Microfinance The practice of extending small loans to the poor

without collateral Typically involves lending very small amounts of

money Usually to impoverished or socially disadvantaged

borrowers who may not be able to access financefrom conventional channels.

The brainchild of Nobel prize winner MuhammadYunus

Crowdfunding A combination of those two ideas: small contributions from a large number of people to fund small entrepreneurial ventures

DISTINCT CATEGORIESBased on What is Promised in Return for a Contribution

Donation Model Reward Model Pre-purchaseModel

Lending Model(Often Called Peer-to-Peer Lending)

Equity Model

Nothing is promised to thecontributor

Something of nominal value is promised to thecontributor

The actualproduct beingcontributed to is purchased in advance

The contributor loansfunds

The contributor receivesan interest in the businessor project in return for thecontribution

THE RISE OF CROWDFUNDING


EQUITY CROWDFUNDING


Non-Equity vs. Equity Crowdfunding Non-equity crowdfunding

donate money online or purchase products or experiences in exchange for contributions to a project.

In equity crowdfunding Investors contribute money in exchange for a tangible interest in the venture they are funding, most often stock. As investors receive equity in exchange for their funds, they are purchasing securities, and thus the securities laws regulate the transaction.

Ahlers, Cumming, Günther, Schweize (2015) (Combining three insights)

“Equity crowdfunding is a method of financing whereby an entrepreneur sells a specified amount of equity or bondlike shares in a company” Entrepreneurs make an open call for funding on a crowdfunding platform, and investors make

their decisions based on the information provided therein The crowdfunding platform facilitates the transaction by providing a standardized investment

contract and settling the payments Individual equity crowdfunding investments in start-ups are generally much smaller than

venture capital or angel investments

Bradford (2012) “A model in which funders receive an interest in the form of equity or equity-like arrangements (e.g., profit-sharing) in the ventures they fund”

Definition : has not been specifically defined in previous research

Belleflamme, Lambert, and

Schwienbacher(2014)

“Central difference between equity crowdfunding and traditional capital raising is the funding process itself”

REGULATORS ARE PAYING ATTENTION TO CROWDFUNDING


Each crowdfunding model poses its own regulatory issues and limitations consumer protection, anti-money laundering and counter-terrorism financing, investor protection securities and financial services regulation

However it is apparent that regulators want to overcome these

The challenge for regulators To adapt the existing pre-crowdfunding regulatory frameworks to the post-crowdfunding world With full benefits of the crowdfunding phenomenon being enjoyed Without compromising the overall regulatory outcome

REGULATORS ARE PAYING ATTENTION TO CROWDFUNDING


Regulatory Responses to EquityCrowdfunding: Equitycrowdfunding specific regulationsThe United States (2012)(acted as

the benchmark for equitycrowdfunding regulations)Italy (2012-13) The United Kingdom (2013-14)France (2014)Turkey (CML/2016) (Draft

Communique/2017)

Crowdfunding involves threeparticipants: a crowdfunding platformthe crowdfunding campaign

creator (fund seeker) the crowd (or contributors);

However, the scope and implementation differ

Key Aspects of Crowd Funding in Turkey


Introduced through amendments in the CML [Offical gazette dated 05.12.2017 No: 30261] Draft Communiqué on Equity Based Crowdfunding (III–35/A.1) Project named “EBRD Support with the Crowdfunding Secondary Legislation In Turkey”

conducted with the with PWC with the support of the EBRD Advice on the drafting of the secondary legislation that will regulate crowdfunding Review of the Draft communique prepared by the CMB with relevant country examples

CML Provisions Crowd Funding defined (Art 3d)

Collecting money from the public via crowdfunding platforms for the purpose of providing the funds that a project or a venture capital firm needs in accordance with the rules set by the CMB without being subject to the provisions of investor compensation

Publicly-held Corporation and issuer definitions revised to exclude Crowd funding (Art 3(e) and (h)) Crowdfunding Activities are Exempted from Obligation to Prepare a Prospectus (Art 4)

Collecting money from the public through crowdfunding: shall be carried out by the crowdfunding platforms that are authorized by the Board and is not subject to the provisions of CML regarding the obligation to prepare a prospectus or an issuance certificate

CML Provisions

Crowdfunding platforms are regulated Art 35/A Crowdfunding platforms are entities that intermediate the crowdfunding and operate electronically.

It is obligatory to obtain permission from the CMB for the establishment of crowdfunding platforms and commencement of its operations.

The CMB will determine the principles and procedures applicable to: establishment, shareholders, share transfers, employees, maximum funding limits of each funder or the limit of the money to be collected to the fund by project owners and venture capitals, operations and the principles regarding the control and auditing of crowdfunding activities whether if the funds are used in accordance with

these principles.

Crowdfunding and transactions made in relation to crowdfunding and crowdfunding platforms will not be subject to CML Art. 37 and 38 (Investment Services and Activities)

Crowdfunding activities will not be subject to the provisions of the CML relating to exchanges, market operators and other organized market places

Crowd Funding in Turkey: CML Provisions


Crowd Funding in Turkey: Draft Communiqué on Equity Based Crowdfunding (III–35/A.1)


Purpose: to regulate the principles and procedures for equity-based crowdfunding, Scope: Equity-based crowdfunding

Raising funds from the public through the crowdfunding platforms in return for shares. Share

A security representing the equity of the venture capital firm and giving direct ownership in the share capital of the company to its owner

Draft Communiqué on Equity Based Crowdfunding (III–35/A.1) Purpose, Scope, Basis, Definitions and Abbreviations (Part I) Crowdfunding platforms (Parts II and III) The crowd (investors) (Part IV) The crowdfunding campaign creator (fund seeker) (Part V)

The fund-raising activities in return for any reward or donation, instead of shares through the crowdfunding platforms are not subject to the provisions of this

Communiqué

Draft Communiqué (III–35/A.1)Principles Regarding the Platforms


Notable Conditions to be met by the Platform in order to be included in the list by the CMB: must be founded as joint stock company and have minimum paid in capital of 1.000.000 TL the shareholders and board of directors members must qualify the conditions stated in the Communiqé must establish an investment committee must have its systems integrated with CSD and Takasbank must establish the infrastructure at the platform enabling the member to communicate with the

venture capital firm officials and/or entrepreneur electronically at least one of the shareholders or board of directors members must be holding an individual participation

investor license must have the “Crowdfunding Platform” in its trade name

Inclusion in the list (Draft Communiqué/Art 5) The operations of the crowdfunding platforms in accordance with the provisions of this Communiqué shall depend on the inclusion in the list by the CMB

It is sufficient for the brokerage houses with limited or broad authority to meet the requirements in bold.

Draft Communiqué (III–35/A.1)Principles Regarding the Platforms


Crowdfunding information form The form to be published

on the campaign page for the purpose of gathering funds needed for the project or venture capital firm and the standards of which are determined by the Board

Investment Committee (Draft Communiqué/ Art 9)Determined by the board of directors of the platformQualificationsMust be comprised of at least three members At least two of its members must have a minimum of five years of

experience in related fields No more than one of its members must be a member of the board of

directors’ of the Platform All of its members must have met the requirements for platform

shareholders and board members Tasks evaluates the venture capital firm or the project of the entrepreneur approves the crowdfunding information form

The platforms can exclusively engage in crowdfunding activities (Draft Communiqué/ Art 11)

Within this scope platforms are obliged to: create a campaign page for each venture capital firm or project which raises funds and establish the necessary

infrastructure publish the information form approved by the investment committee on the campaign page and keeps it

updated fulfill the duties related to the dematerialization process of the shares at the CSD or ensure such duties are

fulfilled by an investment firm take preventive measures in order to protect the rights and interests of the investors and prevent them

from possible losses of rights or abuses maintain the confidentiality of the information related to the investors, entrepreneurs and the venture capital

firm and to take all types of measures Prepare a report on a semiannual and annual basis containing at least; the information about the total number of campaigns that have been funded, have not been funded or cancelled, and the total funds raised from the members for campaigns that have been funded

Draft Communiqué (III–35/A.1)Principles Regarding Activities of the Platforms


Activities that cannot be performed by the platforms (Draft Communiqué/ Art 12)

Crowdfunding platforms cannot: intermediate in activities of granting credits or lending money in return for interest or any other

consideration howsoever perform crowdfunding activities for the sale and purchase of any real estate or real estate-backed rights, or

for the development of any real estate project and for the participation in venture capital firms. perform crowdfunding activities in order to raise funds from residents in Turkey, for the companies who are

resident abroadmake any review, analysis or comment about a venture capital firm or a project to the investors which would

qualify as investment advice publish advertisements of any commercial product and/or services related to the venture capital firm or the

project for which the campaign process is continuing intermediate secondary market transactions related to the shares [except the brokerage houses with limited

or broad authority] fund the venture capital firm or the project for which the campaign process is ongoing

Draft Communiqué (III–35/A.1)Principles Regarding Activities of the Platforms


Draft Communiqué (III–35/A.1)Principles for Platform Membership and Campaign

Process


Platform Membership (Art 14) The investors must become a member to the platform in the electronic environment to be able to engage in the crowdfunding

activities. Minimum content of the membership agreement is determined by the CMB General Risk Announcement Form minimum content of which is determined by the CMB must be signed by the members. The platforms shall as part of the membership operations conduct identity validation as defined in the Regulation E-Government

Services Platforms decline applications for membership of persons who are not found eligible for crowdfunding investments

Investmet Limitations (Art 15) Natural persons who are not qualified investors can make investments as of 14th day after becoming a member of the platform. Natural persons who are not qualified investors, in any calendar year, can invest

up to 20.000 TL The CSD will monitor investment limits

Principles (Art. 16) Funds can only be transferred to the venture capital firm in exchange for new shares created by means of a

capital increase Funds cannot be raised by selling the existing shares of venture capital firms

Shares to be issued through capital increase may be deprived of votes A venture capital firm or an entrepreneur, may only raise funds with maximum two campaigns in any twelve-

month period The amount of funds that can be raised within twelve-month period cannot exceed the issuance limit announced

by Bulletin of the Board each year that grants exemption from the obligation to prepare a prospectus: As of 2018 the amount is 6.700.000 TL

Additional funds can be raised at a maximum of 20% of the demanded funds under the condition that it is set forth in the crowdfunding information form and it does not exceed the issuance limit

For the fund demands that exceed 1.000.000 TL, the amount corresponding to at least 10% of the targetedfund amount must have been covered by the qualified investors

Draft Communiqué (III–35/A.1)Fund Raising


Campaign Announcement of the fund-raising of a venture capital firm or a project in order to raise the funds needed through platforms to the

public

Campaign Page Website of a venture capital firm or a project created at the platform which can only be accessed by the members

The Campaign Process It starts as soon as a venture capital firm or entrepreneur requests for fund raising to any platform. No other campaign process can be initiated before the current campaign process is completed.

Campaign period It starts from the commencement date of the crowdfunding information form as approved by the Investment committee on the

campaign page this period shall be determined as no longer than 60 days Requests of platform members regarding fund raising for the relevant venture capital firm or project are transmitted to the platform

during the campaign period

Escrow Agent The company that is authorized by the CMB as escrow to safeguard the funds raised by crowdfunding platforms until they are

transferred to the venture company or returned to the investors

Draft Communiqué (III–35/A.1)Campaign Process


Draft Communiqué (III–35/A.1)Campaign Process


Collected funds are returned to the investors and Campaign Process ends

Venture Capital Firm

Project

Capital increse within 30 days at the latest

Formation of the companywithin 90 days at the the

latest

Capital Increse witin 30 days at the latest

Ending of thecampaign process

with the completion of the capital increase

and the transfer of the shares to the

accounts of investors following the issuance

in a dematerialized form in the electronic

environment at the CSD

Application bya Venture

Capital Firm or entrepreneur

for fund raising to any platform

Denial of the applicationby the Platform

Presenting theapplication to the

approval of InvestmentCommitee

Denial of the application by the Investment

Committee

Approval of theInformation Inform by

the InvestmentCommittee

Publishing of the

information form on the campaign

page

Collection of fund

demandsfrom

members(Max 60

days)

Not reaching thetargeted fund amount

Collection of thetargeted fund amount

Campaign Period

Draft Communiqué (III–35/A.1)Principles Regarding the Crowdfunding Campaign

Creator (fund seeker)


Venture Capital Firms

Joint stock companies established or to be established

in Turkey which have growth potential are in need of funding

Qualifications must engage in technological and / or production activities, must have been established within the last two years as of the date

on which the information form has been published financial statement items must be below the thresholds set by the

CMB (in Communique II-16.1) for being within the scope of CMB must have a registered website that is regularly monitored and

controlled

The companies that cannot raise funds through equity-based crowdfunding Publicly-held corporations Companies whose management control belongs to another legal person Companies in which publicly-held corporations and capital market institutions are shareholders having

significant influence

The raised funds cannot be used for

the purchase of any real estate, real estate-backed rights

development or financing of any real estate project directly or indirectly

The Entrepreneur or the venture capital firm must prepare a report regarding the purposes for which the raised funds will be used

the report must be disclosed on the campaign page following the commencement date of the campaign period

Independent audit report prepared confirming that the funds raised have been used as stated in the crowdfunding information form

Special Purpose Audit Report:

Draft Communiqué (III–35/A.1)Fund Usage Areas


Funds Raised<= 1.000.000 TL Funds Raised > 1.000.000 TL

Yearly (until the funds are used)

At the date when the funds have been used in full

At the date when the funds have been used in full

SUPERVISION AND MEASURES


Platforms

Liabilty on the Board of Directors Measures applicable By the CMB in case of identification of any breach

Exclusion of the platform from the list Application of Administrative Fine Restriction of the access to the relevant website by the Information

and Communication Technologies Authority upon the request of CMB CML Art 96 (Measures to be applied in the illegal transactions and

activities of capital market institutions) shall be applied by analogy

Venture CapitalFirms

Liability on the Board of Directors In case of usage of the collected funds contrary to the disclosed

practice areas: Application of Administrative Fine Criminal complaint under General Provisions

The Regulatory Responses to Equity CrowdfundingComparative Country Regulations


Legislators can decide to create a new regulation or a new exemption. The United States was the first to address crowdfunding. Italy, France, and the United Kingdom

All applying a similar set of European Directives However approached crowdfunding differently

All regulations require that funds be raised through an internet portal and limit the raiseable funds over a twelve months period. Beyond these commonalities, each country focused on a different participant (platforms, fund seeking companies, investors)

Italy focuses on Innovative Early Stage Investment: Strong requirements for fund seeking innovative startups New regulations

introduced a new broker category for online portals and a differentcompliance procedure

limit the type of companies that may raise funds, ensuring thatcrowdfunding provides seed financing for young innovativecompanies

Investing in new and innovative companies involves potential risks As a counterbalance, the involvement of professional investors is

required (5%)

The US focuses on the investing crowd and to a smaller extent on the fundraising companies Platforms, acting as intermediaries, are regulated under

the same registration requirements and regulations These filing costs may deter some small and medium

enterprises and impact on equity crowdfunding The JOBS Act:

limits the amounts that can be raised, requires a continuous filing from these companies with

their regulator It limits the financial participation of each investor may

put into crowdfunding.

The Regulatory Responses to Equity CrowdfundingComparative Country Regulations


France Focuses on the PlatformsNew regulations:Grants a prospectus exemption if the

investment is done through online portal. Create a new status for platforms called as

"conseillers en investissementsparticipatifs"(investment-crowdfunding adviser) These online portals have many requirements

including a civil insurance requirement.

Companies can raise up to €1 million and any contributor can participate

No limitations for investors

UK considers equity crowdfunding as a high-risk investment (focuses on the investing crowd) A new type of "non-readily realisable securities" is

introduced into the FSM Act, referring to those shares or debt securities not listed on the stock markets but carrying significant risks

New regulations: extended the definition of investors beyond the

traditional certified/self-certified investors and high net worth individuals.

limits investors (who willingly take on the risks) to ten percent of their portfolio by making them ‘restricted qualified investors’

regulate how platforms present information about investing specifically they require disclosure about the risks

involved and the platforms are responsible for making sure that

only authorized investors are contributing. The U.K. regulator did not address the prospectus

requirement platforms must still register with the FCA and use the

currently available exemptions in the prospectus directive (limiting fundraising to €5 million and only 150 non-qualified investors)

United States United Kingdom Italy France Turkey

Platforms Licensed Licensed Licensed LicensedInsurance

Licenced

FundraisingCompanies

Restrictions: Yearly filings

- tax returns for offerings < $100,000- financial statement reviewed by an independent public accountant from $100,000 to $500,000 - audited financial statement for offerings >$500,000.

Cap: $1 million every 12 months Cap: €5 million every 12 months

(In line with EU prospectusDirective/Chosen upper limit)

Restrictions: Young, Small Innovative Companies(Strong requirements forfund seeking innovativestartups)

Cap: €5 millionevery 12 months

(In line with EU prospectusDirective/Chosen upper limit)

Cap: €1 million every 12 months

(In line with EU prospectusDirective/Chosen lowerlimit)

Restrictions: Two campaigns in any twelve-month period.Filing requirements (audit)

>1.000.000 TL [yearly]<= 1.000.000 TL [at the date the funds have been used]

Cap: 6.700.000 TL (As of 2018:) every 12 months

Investors Tiered investment thresholds:

- $2,000 [for under $40,000 net worth]

- 5% of income or net worth if incomeand net worth[between $40,000 and $100,000]

- 10% of income or net worth[if income and net worth over$100,000]

Direct business promotion by platforms is confined to:- Certified or self-certify as sophisticated investors- Certified as high net worth investors(annual income of at least £100,000 or net assets of at least £250,000)- retail investors

-with investment advice fromauthorized persons

- who will not invest more than 10% of their net investible portfolio in a 12 months period

5% invested from professionalinvestors

No restrictions Natural persons who are not qualifiedinvestors in any calendar year; can invest up to: 20.000 TL

No restrictions for legal persons and qualifiedinvestors

For demands that exceed 1.000.000 TL, % 10 of the targeted fund must be covered by thequalified investors

EQUITY CROWDFUNDING: COMPARATIVE SUMMARY OF REGULATIONS


THANK YOU

CAPITAL MARKETS BOARD OF TURKEY 22.03.2019

Equity Crowdfunding Regulatory Space and Turkish …...The crowdfunding platform facilitates the...

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