One of the methods used by companies to acquire capital and expertise is venture capital. Turkey has one of the fastest growing venture capital markets; due to a favorable regulatory environment, government initiatives promoting entrepreneurship, and a growing pool of talented entrepreneurs. Venture capital aims to serve startups in two areas which they tend to have the largest deficit: financial stability and industrial knowledge. The rise in entrepreneurial activities in the recent years and the need for fuel in the startup market has evolved venture capital as an opportunity for both investors and entrepreneurs.
The Venture Capital Market ("VC Market") has been recently regulated pursuant to the Communiqué on Companies whose Shares will be Traded on the Venture Capital Market ("Communiqué"), prepared by the Capital Markets Board ("Board") and published in the Official Gazette on May 18, 2023. The regulations stipulated under the Communiqué provide an alternative method for companies to go public by selling newly issued shares via capital increase to potential qualified investors as pre-IPO (initial public offering).
To comply with VC Market regulations under the Communiqué, companies must submit a registration statement to the Board in order to be evaluated and approved. Companies seeking approval must satisfy the capital requirement of 10.000.000 Turkish Liras, asset requirement of 20.000.000 Turkish Liras and net sales requirements of 10.000.000 Turkish Liras, brought by the Communiqué. After this approval, companies may offer their new shares not the public but to the qualified investors. In other words, only qualified investors have the right to purchase the shares newly issued in VC Market as per the Communiqué. It is important to note that shares held by existing shareholders of the companies that are not newly issued through capital increase cannot be converted into tradeable shares on the VC Market. Moreover, shares issued in accordance with the Communiqué cannot be sold within 2 years of their listing on the VC Market, and companies who have their shares listed on the VC Market must apply to register their shares on other markets on the stock exchange within 5 years. If the registration statement is not approved by the Board or the application is not made in due time, the shares will be deemed to have been removed from the VC Market by the stock exchange.
As a result, the Communiqué requires companies to issue new shares through capital increase for the purpose of sale to qualified investors without public offering. However, although this recent regulation aims to be a gateway for companies to offer their shares by fulfilling easier conditions and more comfortable requirements, the consequences are still uncertain for financial investors of the startup companies since the Communiqué may indirectly prevent the companies from undertaking the initial public offerings (IPOs) or obstruct usage of the "exit" rights.
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