The Capital Markets Board (“CMB”) has introduced significant amendments to the Communiqué on the Principles of Venture Capital Investment Funds ("VCIF Communiqué") through the Communiqué Amending the Communiqué on the Principles of Venture Capital Investment Funds ("Amendment Communiqué"), published in the Official Gazette dated 21 September 2024 and numbered 32669.
The Amendment Communiqué introduces new regulations on the following matters related to venture capital investment funds ("VCIF" or "Fund").
Innovations to Fund Disclosure Documents and Fund Issuance Agreement
The investor information form has been removed from the scope of the fund disclosure documents. The fund bylaws and the fund issuance document remain within the definition of fund disclosure documents.
For amendments to the fund issuance document, the approval of the CMB will no longer be required, and specific responsibilities are imposed on VCIF founders. Accordingly, any amendments to the issuance document will be the responsibility of the founder in accordance with the relevant legislation and issuance document standards.
Any amendments to the VCIF disclosure documents that could "affect the investment decision of the investor and which the investor should be informed of in advance" should be notified to the investor at least 30 (thirty) days prior to the amendment. An exception to this rule is where the written approval of the participation shareholders representing more than 65% (sixty-five percent) of the existing participation shares in funds where "participation shares can be redeemed during the fund term," and the written approval of all participation shareholders in funds where "participation shares can only be redeemed at the end of the fund term," is obtained. In such cases, the 30 (thirty) day notification rule will not apply.
A new concept, the "fund issuance agreement" has been introduced. This is defined as a standard agreement entered into between the VCIF and participation shareholders, either individually or collectively, with minimum elements listed in the relevant annex of the Amendment Communiqué. It has become mandatory for investors to sign the fund issuance agreement prior to the sale of the fund participation shares to qualified investors, while signing the investor agreement remains still optional.
The investor agreement is defined as an optional agreement entered into between the Fund and participation shareholders, either individually or collectively, to regulate matters not covered by the fund bylaws, issuance document, and fund issuance agreement.
The investor agreement may not contain any provisions that contradict the VCIF Communiqué, fund bylaws, or fund issuance agreement.
Some key points to consider in the fund issuance agreement include:
Provisions that seriously impair investor rights and grant extraordinary unilateral rights to the founder should not be included.
Any clause placing the burden of proof on the investor should not be included.
Documentation should be presented in clear and comprehensible language utilizing a font and size that ensure readability for all investors. Any font or size that may hinder or impede the investor’s ability to read the document should be avoided.
Provisions that are contrary to the VCIF Communiqué, fund bylaws, or issuance document should be included.
The values of the fund participation shares should be included in the fund issuance agreement rather than the issuance document.
A copy of the fund issuance agreement should be sent to the portfolio custodian.
A copy of the fund issuance agreement should be published on the Fund’s page on the Public Disclosure Platform.
The terms regarding the redemption of investors’ participation shares to the fund will be set forth in the fund issuance agreement instead of the issuance document. Furthermore, the calculation and implementation principles should also be included in the fund issuance agreement.
The reasons for notifying participation shareholders about amendments to the bylaws have been reduced. Accordingly, only those changes that could affect the investors' decision to invest and require prior notice should be communicated to participation shareholders at least 30 (thirty) days before the effective date of the amendments, using the most appropriate method of communication.
The rules regarding the sale of participation shares, their redemption to the fund, and the transfer of shares between qualified investors should be specified in the fund issuance agreement. It is also noted that the founder may delay the repurchase of participation shares under specific circumstances.
Fees related to the fund's establishment costs and expenses, as well as consultancy services for portfolio formation, which were previously included in the investor agreement, will now be included in the fund issuance agreement. Moreover, the upper limit of all expenses covered by the fund, which was previously included in the issuance document, will now be incorporated into the fund issuance agreement. If performance fees are to be included within this limit, this should also be specified in the fund issuance agreement.
New Circumstances for Pledging of Fund Assets
New transactions have been defined where the fund assets can be pledged as collateral. Accordingly, fund assets can now be pledged or provided as collateral in transactions such as obtaining loans on behalf of the fund, derivative instrument transactions, financing arrangements, and similar transactions entered into on behalf of the fund. While the issuance document and bylaws previously had to include provisions regarding the pledging of fund assets, with the Amendment Communiqué, it is now sufficient for such provisions to be included in the bylaws.
Establishment of Umbrella Funds and Fund of Funds Related to VCIFs
As per the Amendment Communiqué, VCIFs can be established as umbrella funds or fund of funds.
If the VCIF established under an umbrella fund:
A separate issuance document should be prepared for each participation share issuance of the VCIF linked to the umbrella fund. The assets and liabilities of each VCIF linked to the umbrella fund will be independent of each other. In the event of the liquidation or transfer of the umbrella fund, the sub- funds linked to it should also be liquidated or transferred. The provisions of the VCIF Communiqué will apply separately to each VCIF.
Expenses related to the umbrella fund, excluding establishment and participation share issuance expenses, will be proportionally covered from the portfolios of the sub-funds, taking into account the total value of the funds.
The application for the issuance of the first fund under the umbrella fund should be made within 6 (six) months from the registration of the fund’s bylaws. Otherwise, an application should be submitted to the CMB for the cancellation of the fund's bylaws. This period can be extended once for an additional 6 (six) months with reasonable grounds. In case of liquidation of the sub-funds under the umbrella fund, the liquidation will be deemed sufficient without the need for deregistration from the commercial registry.
If the VCIF established as a fund of funds:
At least 80% (eighty percent) of the total value of the fund of funds should consist of venture capital investment funds whose issuance document has been approved by the CMB, and the title of the fund should include the phrase "fund of funds."
The fees paid for management, performance, entry, and exit related to the participation shares included in the fund's portfolio will be considered as an expense item in the calculation of the total expense ratio. Also, fund of funds is prohibited from investing in other fund of funds.
Facilitation of Foreign Investments for VCIFs
Under the VCIF Communiqué, VCIFs were previously required to ensure that 80% (eighty percent) of the assets of foreign venture companies in which they invest consist of subsidiaries or affiliates established in Türkiye, based on the latest financial statements of the foreign company. With the Amendment Communiqué, this threshold has been adjusted to 51% (fifty-one percent), thereby granting VCIFs greater flexibility in their foreign investments. Additionally, the requirement that the foreign companies should be established as joint-stock or limited liability companies has been removed.
New Definition of Venture Companies
Companies whose real estate and/or real estate-based assets represent at least 40% (forty percent) of their total assets based on their latest annual financial statements, as well as companies whose main business activity is contracting, will no longer be considered venture companies. This rule will apply to investments made after 21 September 2024.
Amendments Regarding Venture Capital Investment Restrictions
The Amendment Communiqué introduces the following restrictions on venture capital investments by funds:
The fund may invest up to a maximum of 20% (twenty percent) of its total value in the non- public shares of publicly traded companies. Funds have been given until 31 December 2025 to comply with this portfolio limitation.
Investors holding participation shares in the fund, as well as the companies over which they have management control and their related parties, may only receive investments from the fund up to 20% (twenty percent) of its total value. This rule will apply to investments made after 21 September 2024.
Except for funds with the title of "fund of funds," a VCIF may invest a maximum of 25% (twenty-five percent) of its total value in the participation shares of another VCIF. Funds have until 31 December 2025 to comply with this portfolio limitation.
The maximum limit for investments in non-public and high-growth potential companies domiciled abroad has been increased from 10% (ten percent) to 15% (fifteen percent) of the total value of the fund. These investments are not considered venture capital investments. This limitation will vary depending on the ownership share of the participation shares held by foreign individuals or legal entities and will be included in the venture capital investment limitations. The limitation ratios based on participation share ownership are as follows:
30% (thirty percent) for participation share ownership between 20% (twenty percent) and 30% (thirty percent),
50% (fifty percent) for participation share ownership between 30% (thirty percent) and 50% (fifty percent),
80% (eighty percent) for participation share ownership between 50% (fifty percent) and 80% (eighty percent),
100% (one hundred percent) for participation share ownership of 80% (eighty percent) or more.
These restrictions will also apply if the amount collected in return for participation shares originates from foreign sources, provided such funds are documented. At the end of the fiscal period, the portfolio custodian will verify the ownership percentages of foreign-domiciled shareholders. The Central Securities Depository (Merkezi Kayıt Kuruluşu - MKK) will ensure the necessary infrastructure to determine whether individuals are domiciled abroad.
Amendment Regarding the Resource Commitments of Qualified Investors
The minimum resource commitment that should be collected from qualified investors within 2 (two) years following the initial sale of participation shares to qualified investors has been set at TL 50,000,000 (fifty million Turkish Lira) for the year 2024. The most significant change in this regulation is the reduction of the aforementioned 2 (two) year period to 1 (one) year under the Amendment Communiqué.
Venture Capital Investments with Simple Agreement for Future Equity (SAFE) and Convertible Debt Instruments
The Amendment Communiqué introduces a significant addition to the scope of venture capital investments. Under the new regulation, investments made through agreements that grant or will grant the right to future equity participation in venture companies will be considered venture capital investments. As per this framework, the CMB has allowed the execution of agreements similar to Simple Agreement for Future Equity (SAFE) and convertible debt instruments.
Amendments Regarding Fund Duration, Participation Funds, and Transactions Conducted on Behalf of the Fund
Information regarding the duration of the fund will only be included in the issuance document and will no longer be stated in the fund bylaws.
It is sufficient to specify in the issuance document that the fund's activities will be carried out in accordance with participation finance principles for the fund to use the term "participation" in its title.
In transactions conducted by the fund with the commercial registry, the fund is considered to have legal personality. Transactions carried out on behalf of the fund are defined as those related to the establishment of companies in which the fund will become a shareholder, as well as capital increases, share transfers, and similar actions. Additionally, the definition of individuals authorized to carry out these transactions has been expanded. Now, the chairman and members of the boards of directors of the founder and portfolio custodian, as well as individuals with at least second-degree signature authority as designated by the board of directors, are considered authorized persons.
Other Crucial Amendments
The most appropriate communication methods have been defined.
During investment committee meetings, the majority of the members required to be present as per the VCIF Communiqué should attend.
The members of the fund's investment committee will be responsible for managing the venture capital portfolio of the fund, but only within the scope of the decisions they make.
Compliance periods have been set to adapt to the regulations introduced by the Amendment Communiqué. Funds that issued participation shares as of 21 September 2024, should comply with the new regulations by 30 June 2025. Additionally, funds should comply with venture capital portfolio limitations by 31 December 2025.
The requirement for collecting the newly introduced minimum resource commitment within 1 (one) year after the commencement of sales to qualified investors will not apply to funds whose issuance documents were approved before 21 September 2024.
After the amendments took effect on 21 September 2024, venture capital investments cannot be made in companies whose real estate or real estate-based assets constitute at least 40% (forty percent) of their total assets based on their most recent annual financial statements, or in companies whose primary business activity is real estate contracting.
Conclusion
With the amendments introduced to the VCIF Communiqué, the CMB has brought clarity and transparency to several issues that the sector has needed. The Amendment Communiqué aims to increase venture capital investments by allowing the establishment of VCIFs under umbrella funds, thereby streamlining the application processes with the CMB and simplifying fund disclosure documents. Furthermore, the amendments have facilitated foreign venture company investments for VCIFs, and the inclusion of agreements granting future equity rights within the scope of venture capital investments has made a significant contribution to the ecosystem.
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