I. Introduction
For startups in Turkey exploring pathways to secure early-stage funding, the convertible bond presents a distinct, though perhaps not yet widely adopted, financial route. Known in Turkey as Paya Dönüştürülebilir Tahvil (PDT), this instrument initially provides capital in the form of a loan, which then carries the potential to be exchanged for company shares at a predetermined future point or event. This instrument can be particularly beneficial for Turkish startups seeking investment while wishing to postpone definitive company valuation or the immediate complexities of equity distribution that often arise with direct share sales in a company's nascent phase.
The decision to utilize convertible bonds in Turkey extends beyond a simple agreement between a startup and its investors. These instruments are formally recognized within Turkey's capital markets law and are subject to the oversight of the Capital Markets Board (CMB often referred to by its Turkish acronym, SPK). It is vital for both company founders and any investors in Turkey considering this mechanism to be aware that the regulatory framework for issuing such bonds differs for private companies as compared to publicly listed entities. To navigate this option successfully, a clear understanding of the specific legal requirements is necessary.
The principal regulations are detailed in the CMB's Communiqué on Debt Securities (Communiqué No. VII-128.8). Grasping the stipulations of this Communiqué, alongside relevant provisions of the Turkish Commercial Code that govern corporate procedures, forms the necessary foundation for founders, entrepreneurs, and investors alike. This knowledge is key to structuring convertible bonds in a compliant manner and enabling them to genuinely support a startup's development and long-term objectives within the Turkish commercial environment.
II. The Regulatory Framework: Convertible Bonds under the Capital Markets Board's Communiqué
The primary regulation forming the legal framework for the issuance of convertible bonds in Turkey, the Communiqué No. VII-128.8, defines the legal status of convertible bonds as capital market instruments and sets forth the principles governing their issuance and management.
A. Convertible Bonds as Regulated Capital Market Instruments
Within the Turkish legal system, convertible bonds are not treated as simple loan agreements with an equity option; they are formally designated as capital market instruments. Communiqué No. VII-128.8 specifically defines a convertible bond as a type of debt security that grants its holder the right to convert the bond into shares of the issuing company. This conversion can be achieved either by subscribing to newly issued shares, usually as part of a capital increase, or by acquiring existing shares held by the company or its shareholders, under terms clearly set out in the initial issuance documents.
This definition underscores the dual nature of the bondholder's position: initially, they are a creditor of the company, entitled to repayment of principal and any agreed interest. Upon exercising the conversion right, their status changes to that of a shareholder. Because convertible bonds fall under the category of capital market instruments, their issuance and subsequent trading (if any) are subject to the direct supervision and rules of the CMB, ensuring a standardized and regulated approach.
B. Core Principles Governing Convertible Bonds
The primary rules and conditions that define the structure and use of convertible bonds include the maturity period and timing of conversion. A convertible bond must have a minimum maturity of 365 days. Moreover, as a general rule, the right to convert the bond into shares cannot be exercised within the first 365 days from the maturity date. These provisions position convertible bonds as a medium- to long-term financing instrument rather than a short-term funding tool.
The mechanics of valuation and the treatment of interest upon conversion are also clearly addressed. The nominal, or face value of the convertible bond is used as the basis for determining how many shares the investor will receive when they decide to convert. Regarding accrued interest, Communiqué No. VII-128.8 specifies that any interest that has accumulated up to the actual date of conversion must be paid in cash to the bondholder. However, if the terms of issuance allow, interest that would have accrued by the conversion date can be added to the bond's nominal value and converted into equity. An important practical detail is that all costs associated with the share conversion process itself are to be borne by the issuing company.
Investors retain clear rights and choices, particularly at maturity. If a bondholder chooses not to exercise their conversion right by the bond's maturity date, or if any pre-agreed conditions for conversion are not met, they are simply entitled to the repayment of the principal amount along with any accrued interest, as would be the case with a standard bond. Once the issuer has fulfilled all its obligations and the conversion window closes, any unexercised conversion rights automatically lapse.
A critical protection for bondholders is the priority of their conversion rights. When conversion occurs, the new shares are allocated to the bondholders with precedence over any pre-emptive subscription rights that existing shareholders might otherwise hold under the Turkish Commercial Code, ensuring that the bondholders' path to equity is not obstructed.
C. Issuance Pathways
Convertible bonds can, in principle, be issued to the public through a public offering, or non-publicly through (i) a private placement or (ii) a sale to qualified investors. However, the conditions for a public offering of convertible bonds are quite stringent. For instance, the issuing company's shares must already be listed on a stock exchange, the company must be operating under the registered (authorized) capital system, and its articles of association must explicitly authorize the board to restrict existing shareholders' pre-emptive rights to facilitate the allocation of shares to bondholders. These prerequisites effectively mean that an unlisted Turkish startup typically cannot pursue a public offering of convertible bonds. As a result, startups are generally limited to issuing these instruments without a public offering, most commonly via a private placement to a defined group of investors.
D. The Capital Markets Board's Adaptive Approach for Non-Public Issuances
Recognizing that the standard rules for convertible bonds might sometimes be too rigid for the specific needs of privately negotiated deals or international offerings, Communiqué No. VII-128.8, particularly in its Article 23, grants the CMB a degree of flexibility. For domestic issuances that are not made through a public offering (such as private placements to qualified investors) and for issuances made internationally, the CMB has the authority to approve terms that differ from the standard provisions of this Communiqué.
This discretionary power can be very significant for Turkish startups. For example, the CMB might permit a conversion period shorter than the standard one-year minimum if the issuer provides a compelling justification and the offering is appropriately structured. This ability to seek approval for tailored terms on a case-by-case basis allows for more adaptable financing solutions, though it always remains subject to the CMB's assessment and approval, ensuring that investor protection and market integrity are maintained.
III. Conditions for Issuing Convertible Bonds
For privately-held Turkish startups, issuing convertible bonds means navigating a specific set of rules designed for offerings made "without a public offering". This route, while distinct from the requirements of listed companies, has its own framework under Communiqué No. VII-128.8 to ensure investor protection and market order. Several key conditions shape how startups can access this financing method.
A. Investor Profile and Offering Parameters
A primary consideration when issuing convertible bonds without a public offering is the profile of the intended investors and the overall structure of the sale.
Generally, such issuances by private Turkish startups must be directed either exclusively to "qualified investors" or structured as a private placement where individual bond units meet a specific minimum value. Qualified investors are defined by the CMB and typically include institutional entities like banks, brokerage houses, portfolio management companies, and venture capital funds. Certain individuals who meet high net-worth thresholds or possess relevant professional experience may also fall into this category.
If the offering is intended to include investors who do not meet the formal "qualified investor" criteria, Communiqué No. VII-128.8 stipulates that each convertible bond unit must have a minimum nominal value of at least TL 100,000. This substantial minimum aims to ensure that such private placements are confined to investors capable of making larger individual investments and are not effectively dispersed widely like a public offering.
While Turkish law does not set an explicit numerical cap on the number of investors in a private placement, the process inherently implies a limited, identifiable group of offerees known to the company, rather than a broad solicitation to the general market.
B. The Equity-Linked Issuance Ceiling
Another critical factor for non-public companies, including startups, is the issuance limit tied to the issuer's shareholders' equity. The total nominal amount of all outstanding debt securities (a category that includes convertible bonds) issued by a private company cannot exceed three times its shareholders' equity. This equity figure is determined from the company's latest audited financial statements.
This rule can have significant practical implications, particularly for early-stage Turkish startups that may have modest paid-in capital or accumulated losses. A low or negative equity base could severely restrict the amount of debt, including convertible bonds, that a startup is legally permitted to issue. Consequently, some startups might find it necessary to secure an initial equity injection to strengthen their balance sheet before they can proceed with a meaningful convertible bond issuance.
C. Mandatory Dematerialization and MKK Registration
The form and registration of convertible bonds are also strictly regulated in Turkey. Regardless of whether they are issued publicly or privately, all debt instruments created domestically must be in book-entry, or dematerialized, form. This process is managed centrally by the Central Registration Agency (MKK), which is Turkey's central securities depository.
In practice, this means that no physical bond certificates are issued. Instead, the bonds exist solely as electronic records credited to the respective investor's account within the MKK system. Furthermore, these dematerialized bonds must be issued in registered form, meaning they are officially recorded by the MKK in the name of the specific bondholder. Startups issuing convertible bonds must comply with these MKK procedures, which include opening an issuer account with the agency. This is a mandatory step for the legal validity of the bonds.
IV. Conclusion – Convertible Bonds as a Deliberate Choice for Startup Capital in Turkey
Convertible bonds, present a distinct and potentially advantageous, though regulated, avenue for Turkish startups seeking to secure investment. The path to issuing convertible bonds in Turkey is clearly delineated by Communiqué No. VII-128.8, under the authority of the CMB. This framework details specific conditions that private startups must meet, covering aspects from investor profiles and issuance limits linked to a company's equity, to the mandatory dematerialization of bonds through the MKK. These regulations, while adding layers of necessary procedure, aim to ensure transparency and protect the interests of all parties involved.
Successfully utilizing convertible bonds as a financing tool requires more than just an understanding of their potential benefits; it demands diligent attention to the established legal and regulatory requirements. Adherence to the provisions of Communiqué No. VII-128.8 and relevant aspects of the Turkish Commercial Code is not merely a formality but a cornerstone of a sound financing strategy. For Turkish startups and their investors, a carefully structured convertible bond, compliant with all applicable rules, can indeed serve as a robust foundation for future growth and collaboration.
However, companies wishing to utilize this financing instrument must carefully evaluate from the outset which legal framework they will implement it under. The conditional capital increase mechanism set forth under the Turkish Commercial Code No. 6102 stands out as a preferred method due to the legal safeguards it offers. On the other hand, alternative methods such as the registered capital system, the transfer of treasury shares held by the company to bondholders, or pre-emption/contractual transfer agreements concluded with existing shareholders may also emerge as alternatives. At this point, each method may have different implications depending on the company type, capital structure, investor relations, liquidity conditions, and shareholding balance. Therefore, making a strategic choice in light of the company's current and targeted structure is of critical importance.
In this complex yet potentially valuable financing journey, assessing the feasibility of this instrument within the framework of legal requirements, establishing a comprehensive implementation mechanism that also takes into account its long-term impacts, and making thorough preparations accordingly are key to utilizing this financing option effectively.
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.
