Turkey: Venture Capital Investment Funds Under Turkish Capital Markets Law

I General Information

A venture capital fund (the "Fund") is an investment system by which portfolio management companies operate portfolios for the account of investors subject to fiduciary ownership principles. Investors are given participation certificates in return for cash or other assets contributed by them to the Fund.

Under Turkish law, a Fund is regulated under the Capital Markets Law (the "CML") and the Communiqué on the Principles regarding Venture Capital Investment Funds numbered III-52.41 (the "Communiqué").

The Fund is required to be managed in line with an internal regulation that must be approved by the Capital Market Board (the "CMB"). A Fund does not have a legal personality2, and therefore it is regulated differently from the investment companies.

II Establishment

According to the CML, a Fund can be established by a portfolio management company as a joint stock company and incorporated for the purpose of managing investment funds. The CMB must grant permission to the joint stock company for the establishment of the Fund.

In order to establish a Fund, the founder is required to execute an agreement with a portfolio depositary service company authorized by the CMB for the safekeeping of the Fund's assets in line with the related regulations. Secondly, the founder must prepare an internal regulation setting forth the principles of the Fund and submit an application to the CMB with the internal regulation and the other required documents. Upon the approval of the CMB, the internal regulation must be registered with the trade registry and published in the Turkish Trade Registry Gazette. Under the Communiqué, the internal regulation is an adhesion contract3 concluded among the founder, the portfolio depositary service company, the portfolio management company and the holders of the Fund's participation certificates.

The internal regulation must include the principles of the Fund, such as its name, duration, investment strategies, liquidation process, distribution of profit etc. Furthermore, a Fund cannot engage in any transactions or acquire assets except for those specified under the Communiqué.4

III Issuance of Participation Certificates

After the establishment of a Fund, the founder must submit an application package5 to the CMB for the issuance of participation certificates. Upon the approval of the CMB, the Fund may issue participation certificates to investors. The investors' assets must be invested in line with the issuance certificate. The participation certificate does not have a nominal value and the unit value of the Fund is calculated by dividing the total value of the Fund by the number of participation certificates. The unit value of the Fund is calculated at least once a year and notified to the investors. Investors may sell their participation certificates to other investors provided that the initial value of the certificate is paid to the Fund in cash.

IV Management and Representation

Under the Communiqué, the founder is entitled to dispose of the Fund assets in its own name and on the account of the Fund and exercise the rights arising therefrom. The Fund is represented by a board of directors of the founder. The board of directors may appoint executive directors and delegate their representation authority to such executive directors. However, the Communiqué prohibits the delegation of authority to executive directors for transactions that may affect the investment decisions of the participation certificate holders, such as issuance of the participation certificate, liquidation, increasing the portfolio management fee, etc.

The founder is responsible for the representation, management and supervision of the Fund in order to protect the rights of the participation certificate holders and also for the activities of the Fund.

V Segregation of the Fund Assets

The assets of the Fund must be segregated from the assets of the portfolio management company and portfolio depositary service company. The assets of the Fund may only be used as collateral or be pledged for obtaining loans, derivative instrument transactions, or similar transactions provided that these transactions are on the account of the Fund, and only if a provision to this effect is included under the internal regulation. Through the segregation of the Fund's assets, investors will be protected from the use of their investments (i.e. the Fund assets) for purposes other than Fund's own investments. In this regard, the risks associated with the fact that the fund does not have a legal personality are controlled.

VI Conclusion

The principles of a Fund are regulated in detail under Turkish law, which has created a different investment system. Although the Fund is composed of only assets and does not have a legal personality, it is entitled to act on its own account and to dispose of Fund assets through the founder or the portfolio management company. On the other hand, the potential risks arising from the absence of a legal personality are balanced by specific provisions, such as the segregation of the Fund assets and the limitation on the activities of the Fund.


1 Issued by the CMB based on Article 54 of the CML in order to regulate the principles of the Funds in detail.

2 Save real property transactions before the land registries.

3 Adhesion contracts are contracts where the terms of the contract are drafted by one party and accepted by the other party without any negotiation.

4Under the Communiqué, the assets and transactions in which the Fund is authorized to invest are as follows: i) venture capital investments, ii) shares of joint stock companies incorporated in Turkey, the private sector and public debt instruments, iii) foreign private and public sector debt instruments and shares of joint stock companies under the Decree No.32 Regarding the Protection of the Value of Turkish Currency, iv) deposit and participation accounts, v) term deposits and participation accounts, vi) mutual fund shares, vii) repurchase and reverse repurchase transactions, viii) warrants and certificates, ix) rent and real estate certificates, x) transactions of the Settlement and Custody Bank, xi) cash collateral for derivatives transactions and premiums, xii) foreign investment instruments and loan participation notes approved by the CMB and xiii) other investment instruments approved by the CMB.

5 Issuance document and other documents required by the CMB.

© Kolcuoğlu Demirkan Attorneys at Law, 2014

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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