Turkey: Investment Vehicles: Venture Capital Investment Funds And Venture Capital Investment Companies Under Turkish Capital Markets Law

I General Information

Turkish business environment has seen a great demand from private equity funds and venture capital firms in the last decade. While some of these investment vehicles are incorporated abroad such as in Luxembourg, the Netherlands, Guernsey etc., others are incorporated in Turkey and regulated by the Capital Markets Board of Turkey (the "CMB"). There are major differences between Venture Capital Investment Funds ("Investment Funds") and Venture Capital Investment Companies ("Investment Companies") in terms of incorporation of investment vehicles, asset portfolio and investment restrictions, and raising capital.

II Relevant Legislation

Investment vehicles are mainly regulated under the Capital Markets Law1and secondary legislation namely, the Communiqué on Principles of Venture Capital Investment Fund numbered III-52.4 and the Communiqué on Principles of Venture Capital Investment Companies numbered III-48.3. The Communiqué on Portfolio Management Companies and Activities of Such Companies numbered III-55.1 is also of great importance since Investment Funds are incorporated by portfolio management companies or venture capital portfolio management companies authorized by the CMB.

III Incorporation

Investment Companies are incorporated as joint stock corporations by way of incorporation at the beginning or conversion into Investment Companies from an existing joint stock corporation. Investment Funds can only be set up by portfolio management companies or venture capital portfolio management companies. Thus, Investment Funds have no legal entity and they are represented by founder on behalf of fund.

Additionally, operations of Investment Companies are regulated by their articles of association whereas those of Investment Funds are regulated by their internal statutes. Both documents are subject to approval of the CMB. Upon the approval, both documents must be registered with the relevant trade registry and published in the Turkish Trade Registry Gazette.

The minimum capital requirement for Investment Companies depends upon whether they are intended to raise capital through public offering or private placement. For companies to go public, the minimum capital is TRY 20 Million as opposed to TRY 5 Million for the latter. Furthermore, upon the incorporation of the company, the shareholders must undertake to offer at least 25% of the shares to public or sell to qualified investors. However, Investment Funds have no legal entity and there is no minimum capital requirement. Instead, , the investors must undertake to subscribe at least TRY 5 million and the commitment requires to be reached within the period of 1 year upon the issuance of participation certificates.

Lastly, Investment Companies intending a public offering must have a leading partner with specified characteristics holding at least 25% of the shares. The specified characteristics of leading partners differ from each other. Individuals need to have (i) a minimum of 5 years' experience in related fields and (ii) a real estate or movable worth minimum of TRY 10 million, or TRY 20 million if there is more than one individual. For legal entities, it is required that (i) they have been operated at least three years, (ii) its consolidated and solo financial statements of the last accounting period prior to the date of application to the Board have been audited by an independent audit firm, and (iii) its shareholders' equity shown in these financial statements should be at least equal to twice of the issued capital of the company to be founded or converted, and lastly (iv) its total assets should be at least three times of the issued capital of the company to be founded or converted.

IV Asset Portfolio and Investment Restrictions

Under the Communiqué, the investment firms are required to invest in venture firms2 at certain ratios in proportion to their portfolio values. Minimum of 80% of the entire portfolio of Investments Funds and 51% of Investment Companies must consist of venture capital investments. As to Investment Funds, if the investment to Small and Medium Enterprises3 exceeds 10% and 5% of the entire portfolio, the portfolio ratios apply as 51% and 35%, respectively. Therefore, Investment Companies' asset portfolio is less limited, which enables the companies in return to diversify their investment portfolios.

Both Investment Companies and Investment Funds are required (i) to make a venture capital investment within 18 months following the registration of the company to the relevant trade registry and (ii) to fill and submit a public offering application document or issue certificate in a form satisfactory to the CMB with a request of approval of their prospectus/issue certificate regarding the sale of shares representing minimum 25% of the issued capital. Investment Companies to go public also need to build a venture capital and private equity portfolio within three years under the provisions of the Communiqué. In case of breach of any of these obligations, they are deprived of their rights as to operate as an investment vehicle.

V Raising Capital

In order to raise capital, Investment Companies might choose to offer its shares to public or to qualified investors through a private placement4. Public offering requires companies to prepare a prospectus and go through other procedures required by the CMB, which would have higher transaction costs. Within 15 days following the termination of the sale of public shares, Investment Companies are required to apply to the CMB in order to obtain necessary documents required for quotation to Borsa Istanbul. Upon the delivery of documents, Investment Companies must fill an application to Borsa Istanbul within 15 days after the delivery of such documents. On the other hand, prospectus is not a requirement for private placement. Instead, they must prepare an issuance certificate to be approved by the CMB.

Investment Funds, however, is required to issue a participation certificate which is also subject to approval of the CMB. The participation certificates can only be offered to the qualified investors. Unlike public shares, the participation certificate does not have a nominal value. Rather, the unit value is calculated by dividing the total value of the Fund by the number of participation certificates. Valuation and announcement of participation certificates must be carried out each year in accordance with the terms and conditions set out in the documentation of participation certificate.

VI Conclusion

Both Investment Companies and Investment Funds are regulated under Turkish Capital Markets Regulations. Investment strategies and preferred legal structures might depend upon each investment firms. While some companies may prefer to set up an Investment Company in order to attract investors by way of public offering, others may prefer to set up an Investment Fund and focus on raising capital from qualified investors.


1 Published in the Official Gazette dated 30 December 2012.

2 The venture firms are defined as "the firm established or will be established in Turkey, which has a potential of growth and needs resources".

3 Companies with less than 250 employees and with yearly sale or financial statement of TRY 40 Million are considered as a SME under Turkish Law.

4 Under the Capital Markets regulations, qualified investors are as defined as banks, insurance companies, intermediary institutions, pension funds, portfolio management companies, funds established according to Temporary Article 20 of Social Securities Law, other investors to be accepted as similar to these organizations by the CMB and individuals and legal entities that have total asset amount equal to TRY 1 million in terms of cash in Turkish and/or foreign currencies and capital markets instruments.

© Kolcuoğlu Demirkan Koçaklı Attorneys at Law 2015

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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