Substantive Amendments Have Been Made to the Communiqué on Principles Regarding Venture Capital Investment Funds: Will additional foreign capital flow into the venture capital ecosystem?

The Capital Markets Board (“CMB“) published the Communiqué Amending the Communiqué on Principles Regarding Venture Capital Investment Funds (III-52.4.c) (“Amendment Communiqué“), which regulates the principles regarding the establishment of venture capital investment funds, operating norms and rules, issuance of participation shares and their sale to qualified investors, issuance documents, investor information, liquidation and termination, in the Official Gazette No. 32669 on 21 September 2024, which came into force as of the date of publication.

The Amendment Communiqué aims to increase investments in funds, addresses the needs encountered in practice, and promote the widespread use of new investment instruments. The key substantive changes introduced are summarised below:

• SAFE and Conversion Agreements: Investments in venture capital through agreements granting the right to become a shareholder in the future (known as “SAFE” in the U.S.A. will be evaluated within this scope) are defined as venture capital investments. In addition to adequate maturity and interest, the term “including conditions for conversion into shares of the company” has been added to the provision of financing by funds in the form of structured funding, as a mix of debt and equity financing to venture capital companies whose shares are not traded on the stock exchange.
• Provision of Collateral: With the amendment to the fund assets provision, it has been established that fund assets may not be provided as collateral or pledged, except for transactions such as obtaining credit or securing financing, provided that the fund assets are held in the fund account and there is a relevant provision in the internal regulations.
• Umbrella Fund and Fund Basket Funds: It has been established that Venture Capital Investment Funds (VCIF) may be issued in the form of fund basket funds, thereby allowing the establishment of VCIFs that invest solely in shares of other VCIFs. By adopting the structure of an umbrella fund, it aims to facilitate the issuance of VCIF shares under a single internal regulation, thereby shortening the establishment process for new funds.
• Minimum Requirements of the Offering Document: In line with the amendments made to the issuance document of Real Estate Investment Funds (“REIF”), the minimum requirements that must be included have been reduced, and a deadline until June 30, 2025 has been granted for compliance with these requirements.
• Signing of the Fund Offering Agreement: Apart from the investor agreement, it has become necessary to enter into a “issuance agreement” prior to selling fund participation shares to qualified investors to provide information related to the fund, similar to REIF. VCIF have been granted time until June 30, 2025, to enter into the fund offering agreements and notify the CMB. In this context, the obligation to prepare an investor information form has been abolished by the Amendment Communiqué.
• Principle for being deemed as Venture Capital: For VCIF to invest in venture companies established abroad, the requirement for such foreign companies to invest 80% of their assets in subsidiaries and affiliated companies established in Turkey, , has been reduced to 51%.

 Portfolio Restrictions:

• The investment limit for investments in non-public, foreign-based companies with growth potential has been increased from 10% to 15% of the fund’s total value (“Portfolio Restriction“). These investments are not considered venture capital investments. It has been stated that in the management of the relevant assets, the issuer limitations specified in the regulations of the CMB regarding investment funds, as well as the investment strategies and limits outlined in the fund’s issuance agreement, shall be adhered to.
• The Portfolio Restriction shall be applied as follows: For the participation shares in circulation held by foreign individuals or legal entities: (i) if they hold up to 30% of the fund’s participation shares, the restriction will be 30%; (ii) if they hold up to 50%, the restriction will be 50%; (iii) if they hold up to 80%, the restriction will be 80%; and (iv) if they hold 80% or more, the restriction will be 100%.
• Regulations Concerning Construction Companies:, Companies whose total assets consist of at least 40% real estate or real estate-based assets according to their latest annual financial statements,, and companies whose primary business activity is construction, will not be classified as venture companies.
• Redemption of Fund Units: In cases where the redemption of fund units is carried out by transferring participation shares to the fund participation holder, the requirement to obtain the consent of all fund unit holders before the transaction, has been removed.

 Investment Restrictions:

• A 25% limit of the total fund value has been imposed on investments in shares of other VCIFs, and a 20% limit has been imposed on investments in non-public shares of publicly traded companies. VCIF have been granted a transition period until December 31, 2025, to comply with these restrictions.
• The investment ratio for the fund in companies where fund investors have management control is limited to 20%.
• Minimum Capital Commitment: The collection of the committed capital amount within 1 year, at the latest, following the start of the sale of the participation shares to qualified investors, has been rendered mandatory. This period has been reduced from 2 years to 1 year compared to the previous regulation.

The amendments aim to attract more foreign capital into the venture capital ecosystem and to strengthen the ecosystem in this regard. In this context, following Turkey’s change in position on the FATF list, this Amending Communiqué will be of critical importance for foreign-funded companies as the first step taken in the aftermath of this positional change.