The investment system globally known as "Business Angel" or "Angel Funder" has recently been referred to as "Angel Investor" in Turkey. The legal foundations of this system have been laid down under the name of "Individual Participation Capital" system by the Undersecretariat of Treasury ("Undersecretariat") based on Income Tax laws and regulated within the scope of the "Regulation on Individual Participation Capital" ("Regulation") dated 15.02.2013 (an amendment to the Regulation was published in the Official Gazette no.29215 dated 24 December 2014). The main points of the Individual Participation Capital system, regulated under the Regulation, have been reviewed below.
The main concepts in the Individual Participation Capital system can be summarized as:
Individual Participation Investor ("IPI"): refers to the real persons who invest their personal funds and experience to Venture Companies at start-up or growth phase. Legal persons cannot be IPIs.
Individual Participation Capital ("IPC"): refers to cash funds the IPI shall invest in Venture Companies.
Venture Company: refers to joint stock companies the IPI shall invest in.
Entrepreneur: refers to real or legal persons who wish to start/start their own business based on a business idea.
IPC License and Investment Models
In order for IPIs to be able to perform within the scope of the Regulation, they are obliged to obtain a License. The relevant requirements and the procedure for obtaining the license are explained in detail under Article 5 of the Regulation. There are certain conditions stipulated by the Undersecretariat of Treasury relating to license applications. These conditions are classified under two main categories. Such criteria have been defined under the Regulation and are referred to as High Income or Wealth Criteria and Experience Criteria.
IPIs wishing to make a license application shall submit their documents, in accordance with the definitions of either investor with high income or wealth or experienced investor, to the Undersecretariat of Treasury through accredited IPI networks.
IPIs can make two types of investments; i) they may invest in an existing Venture Company, ii) they may invest by setting up a new Venture Company with an entrepreneur.
Conditions to Benefit from Government Support
- IPIs must hold the shares of the Venture Company, in which they have invested, for a minimum of 2 years. The 2 year period starts on the date the IPI transfers the "cash" fund to the Venture Company's account.
- IPIs may deduct 75% of the value of the shares calculated in accordance with revaluation from the income they indicate in their annual statements in the period of "acquisition of the shares".
- For IPIs participating in venture companies whose project has been supported within the last five years from the date of application to the Undersecretariat for tax pile within the scope of research, development and innovation programs determined by the Ministry of Science, Industry and Technology, The Scientific and Technological Research Council of Turkey and Small and Medium Enterprises Development Organization, the ratio herein shall be applied as 100%. The annual deduction amount shall not exceed 1,000,000 TL. The part that cannot be deducted from the related year's income shall be taken into consideration in the following years by increasing at the rate of revaluation determined for the relevant years, in accordance with the provisions of Tax Procedure Law no.213.
Conditions for Investments IPIs will make through Venture Companies
- During the 5 year period of the license, an IPI can only benefit from tax pile for investments in maximum twenty different joint stock companies. Government support shall not be provided for investments exceeding this limit.
- Investments made in each Venture Company shall be between 20,000 – 1,000,000 TL, including the premium on capital stock.
- For each investment to be made in a Venture Company, IPIs shall make an application to the Undersecretariat.
- For each investment to be made in a Venture Company, the business plan agreed upon with the Entrepreneur or the Venture Company shall be submitted to the Undersecretariat.
- Articles of Association of the Venture Company shall be submitted to the Undersecretariat before it is finalized.
- IPIs shall not demand any guarantees or securities such as hypothetical pledge or collateral from Venture Companies in consideration of the capital they put into companies invested. They shall not demand any guarantees for dividends.
- IPIs may participate in Venture Companies provided that they are not controlling shareholders and do not control the company.
It is an important step that the angel/individual investment system, which has been in practice for many years globally, to be turned into a significant establishment regulated under legal statute in Turkey. This system has created opportunities for entrepreneurs who have innovative ideas but not sufficient capital to meet with business people with experience and capital. However, due to the high level of competition in all areas of business life today, it is obvious that application for an IPI license and obtaining such license will not be enough on its own.
Establishing successful and effective IPI networks that will bring entrepreneurs and IPIs together is one of the important factors towards the success of this investment system and will play a significant role in spreading of the system.
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.