Investing is one of the main components of the global economy. Every government encourages individuals and legal entities to invest. By doing so, entrepreneurs can find assets through investors to carry out their ventures. This trinity enables governments to provide employment opportunity; entrepreneurs to realize their initiatives; investors to derive a profit.
Considering these benefits, it is inevitable to promote investors to invest. However, all investments also include several risks. For these reasons, governments regulate this field for protecting and encouraging investors by enabling them to predict possible outcomes.
A qualified investor is a term that is defined in different regulations in Turkish Law. According to Turkish Law, to invest in some funds, a person must be a qualified investor. Generally, funds in which qualified investor can invest, are more independent in terms of regulation and are an exception to different investment limits. In this article, I aim to explain what a qualified investor is, in which conditions a person can be a qualified investor.
2. QUALIFIED INVESTOR
Communiqué on the Sales of Capital Market Instruments (II-5.2) art. 4/1-m defines the term. According to this definition, the term qualified investor expresses professional customer that is defined in regulations on investment institution and customers who become a professional customer on demand. This definition leads us to understand what a professional customer is, so that one may grasp the qualified investor term.
2.1. Professional Customer
Professional customer is defined in Communiqué on Principles of Establishment and Activities of Investment Firms (III-39.1). In art 31, Communiqué divides customers into two parts; professional customer, and general customer, and defines professional customer:
"ARTICLE 31 – (1) "Professional customer" refers to a customer who has experience, knowledge and expertise required for giving his own investment decisions and evaluating and assessing associated risks."
As can be seen, it is expected that professional customer has experience, knowledge, and expertise, because transactions which professional customer can carry out, includes more risk than others. With this regulation, it is drawn a line between investors those who have experience, and those who have not.
Customers need to fulfill some conditions to be a professional customer. Communiqué mentions which legal entities can be a professional customer. According to art 31/1-a:
"Intermediary institutions, banks, portfolio management companies, collective investment schemes, pension funds, insurance companies, mortgage finance corporations, asset management companies and their equivalent institutions residing abroad, pension and charity funds, funds established pursuant to temporary article 20 of the Social Security Law no. 506 dated 17/7/1964, public entities and institutions, and Turkish Central Bank, and such international organizations as World Bank and International Monetary Fund, Other institutions which may be accepted by the Board to be similar to the aforementioned institutions due to their characteristics."
Communiqué does not limit legal entities number; also, legal entities that can meet at least two criteria in terms of total assets. In art. 31/1-d, conditions are:
- "Having a total assets more than 50.000.000 Turkish Lira,
- Yearly net sales of more than 90.000.000 Turkish Lira,
- Shareholders' equity of more than 5.000.000 Turkish Lira".
Apart from the conditions mentioned above, a person (regardless of whether it is legal or natural person) also can be a professional customer on demand in the case that person meets at least two conditions mentioned in art. 32. According to art. 32, these conditions are:
- "Having executed at least 10 transactions and a minimum trading volume of 500,000 Turkish Lira in the markets where trading is requested for each quarterly period during the past one year,
- Holding total financial assets, including but not limited to cash deposits and capital market instruments, excess of 1,000,000 Turkish Lira,
- Having worked at any one of top managerial positions in the field of finance for at least 2 years or as specialized personnel in capital markets for at least 5 years or holding Capital Market Activities Advanced Level License or Derivative Instruments License".
In the case that a customer meets at least two of these three criteria, one can be a professional customer. Moreover, if this is the case that a customer only can meet the second criteria, it cannot be a professional customer but can be a qualified investor. Communiqué has an exception regarding qualified investors.
2.2. Qualified Investor and Professional Customer
The scope of the qualified investor term is broader than what professional customer includes. One can be a qualified investor, but at the same time, the same customer does not have to be professional. However, a professional customer is also a qualified investor in any conditions.
In summary, one must be a professional customer or hold financial assets that worth a minimum of 1.000.000 TRY for being a qualified investor. Having one of the two mentioned terms, one can invest as a qualified investor and take advantage of the favors of being a qualified investor.
2.3. Qualified Investor in Terms of Venture Capital and Private Equity Investment Companies
Communiqué on Communiqué on Principles of Venture Capital and Private Equity Investment Companies (Iii-48.3) determines the scope of qualified investor term more widely. According to this Communiqué, one can be a qualified investor in two ways:
- Satisfying the conditions mentioned in regulations of the Board (explained above)
- Having individual participation investor license defined in Regulation on Individual Participation Capital (published in the Official Gazette dated 15.02.2013)
We have already clarified how to be a qualified investor in terms of the regulations of the Board (in English "CMB"; in Turkish "SPK"). Nevertheless, the scope of the term individual participation investor who has the "individual participation investor" license still should be examined to set the framework of qualified investor term.
According to Regulation on Individual Participation Capital, there are two groups of conditions: The first group is having high income or wealth; the second is having experience. In the case that one fulfills one condition mentioned, it is possible to have an individual participation investor ("IPI") license and thus one can invest as a qualified investor.
2.3.1. Investor Who Has High Income or Wealth
Investors who want to have a license as a high-income earner or wealthy, need to fulfill one of the requirements in terms of what will be explained below. In terms of high income:
- In the last two years before getting an IPI license, having 200.000 TL gross annual income in the income tax return or 200.000 TL annually gross revenue.
- At the time of application, having an asset which consists of any type movable and immovable property worth 1.000.000 TL minimum (some exception cannot be included in this evaluation like the residence).
In the case that an investor can fulfill one of these requirements, it can be applied to an IPI license and by doing so, the investor also can invest in venture capital as a qualified investor.
2.3.2. Experienced Investor
Apart from having high income or wealth, one can also fulfill requirements by having some criteria in terms of experience. These requirements are:
- Having work experience for 2 years or above:
- As a fund or portfolio manager in banks, financial institutions
- As a manager or equivalent or above position in project finance, corporate finance, small and medium-sized enterprises finance departments, also venture capital companies including venture capital trust.
- Before getting an IPI license, in the last 5 years, having worked at least for two years as vice general manager or equivalent or above position in a business that has at least 25.000.000 TRY annual return,
- Before getting an IPI license, having a membership of one of the IPI networks at least one year and at the time of applying to an IPI license, being a shareholder as IPI in at least one non-public company whose net sales are less than 5.000.000 TRY in the last fiscal year.
- Having experience at least two years in domestic business incubators or technology development centers and having invested 20.000 TRY capital in one or more companies that are in the beginning or growth stage, from these technology and development centers.
Qualified investor term is a type of investor in Turkish Law. Several Communiqués refer to Communiqué on the Sales of Capital Market Instruments (II-5.2) to define qualified investor term. According to this Communiqué, a qualified investor is some institutions that are defined as a professional customer and persons who want to be a professional customer. Accordingly professional customers whose conditions are mentioned in regulations are also qualified investor. However qualified investor is a broader term than what professional customer term contains. As it is mentioned above, one who has financial assets of 1.000.000 TRY minimum, can be also a qualified investor. Besides Communiqué on Communiqué on Principles of Venture Capital and Private Equity Investment Companies (Iii-48.3) expands the term. This Communiqué also adds an IPI license owner into the scope of a qualified investor. Nevertheless, this definition is only limited to persons who will invest in venture capital funds.
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.