Following the publication of the Communiqué on Amendments ("Amendment Communiqué") to the Communiqué on the Principles Regarding Venture Capital Investment Funds ("VCIF Communiqué") in the Official Gazette No. 32669 dated September 21, 2024, the provision that previously prohibited the establishment of funds as umbrella funds has been abolished. In its place, new regulations concerning umbrella funds and sub-funds under umbrella funds have been introduced. In this article, to fully comprehend the changes brought about, the concepts of investment funds and umbrella funds, as well as the terms used in their definitions, will first be examined.
The term "investment fund," as regulated in the Communiqué on the Principles Regarding Investment Funds (III-52.1) ("Investment Fund Communiqué"), refers to an asset pool established by portfolio management companies with no legal personality. It is set up by means of an internal statute to operate one or more portfolios on behalf of the investors based on fiduciary ownership principles, using the money or other assets collected from savers in exchange for participation shares in accordance with the provisions of Capital Markets Law No. 6362 ("Law").
Within the same Investment Fund Communiqué, an umbrella fund is defined as an investment fund that covers all the funds whose participation shares are issued under a single internal statute. Participation shares represent the rights held by investors and reflect their participation in the fund, being monitored in electronic form under the Central Registry Agency. Essentially, participation shares indicate the investor's share in the fund's portfolio. Just as investors become shareholders in companies by acquiring shares, they become co-owners of a fund portfolio by purchasing participation shares. Although this ownership is similar to company shareholding, participation share owners do not have the right to take part in the fund's management.
Capital market instruments include securities, derivative instruments, and investment contracts as defined by the Capital Markets Board ("CMB" or "Board"). Securities include shares, debt instruments, and instruments based on securitized assets and revenues, along with depository certificates related to these, as well as debt instruments or depository certificates based on them.
Principles Regarding Umbrella Funds and Sub-Funds under Umbrella Funds
Umbrella funds are enumerated in the Investment Fund Communiqué as "Debt Instruments Umbrella Fund," "Equity Umbrella Fund," "Precious Metals Umbrella Fund," "Fund Basket Umbrella Fund," "Money Market Umbrella Fund," "Participation Umbrella Fund," "Variable Umbrella Fund," "Free Umbrella Fund," "Guaranteed Umbrella Fund," and "Protected Umbrella Fund." For a portfolio management company authorized by the Board to establish an investment fund, it must first establish one of the specified types of umbrella funds. Although these umbrella funds do not have any assets of their own, as stated in the Investment Fund Communiqué, they are investment funds that cover all funds whose participation shares are issued under a single internal statute.
While it was previously not possible for funds to be established as umbrella funds under the VCIF Communiqué, the new provisions now allow venture capital investment funds to be established either as umbrella funds or as fund basket funds. Of course, they can also be established without an umbrella fund structure. For each issuance of participation shares, a separate issuance document must be prepared, but the formation of sub-funds under umbrella funds is permitted. Among the principles to be applied to sub-funds under umbrella funds, it is stated that each fund's assets and liabilities must be separate. Another principle is that the expenses incurred for the umbrella fund, excluding the establishment costs and the costs related to the issuance of participation shares, must be proportionally covered from the portfolios of these funds based on the total value of the funds. Additionally, it should be noted that in the event of the liquidation or transfer of an umbrella fund, the sub-funds under that umbrella fund must also be liquidated or transferred.
It is also stipulated that the first issuance application for a sub-fund under an umbrella fund must be made within six months following the registration of the fund's internal statute, otherwise, an application must be made for the removal of the fund's internal statute from the trade registry. This period may be extended by an additional six months by the Board upon reasoned request. Furthermore, the condition for removal from the trade registry stipulated for certain provisions will not apply to funds issued under umbrella funds. The liquidation of the umbrella fund will be considered sufficient.
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.
