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August 6, 2020

A Financing Option: Crowdfunding

Innovation & Fintech

I. Startups – An Introduction to Financing Options

The startup, in words of famous entrepreneur Neil Blumenthal, is a term used for companies working to solve a problem where the solution is not obvious and success is not guaranteed.[1] Since a not so distant past, we have often hear this term and have seen entrepreneurs’ success and sometimes failure stories. The number of entrepreneurs who don’t want to be a part of corporate culture, who have new and extraordinary ideas and who adopt a flexible working culture is rapidly increasing. When it comes to startups, success, investment, growth and earnings are on one side of the coin; whereas the other side holds the problems of the crawling period, financial difficulties and the difficulty of finding investment. Perhaps even those of you who are reading this article have or have had a successful or unfortunate startup adventure. Not everyone who touches, nurtures and feeds on the startup ecosystem is immune to the difficulties experienced in that painful birth and crawling process of a startup. Perhaps one of the most challenging of these difficulties is the problem of financing. While some entrepreneurs benefit from sources such as KOSGEB or TÜBİTAK funds or micro-loans, some of them are knocking on venture capital companies’ and angel investors’ doors to solve the financing problem that can determine the fate of a startup. Apart from these, another source of financing frequently used is the savings that the entrepreneur has made up to that day or the financial support they received from family, relatives and friends.

II. Crowdfundfing: What it is and how does it work?

Do all the options end here? No, of course, they don’t. There is another option that is widely used abroad and known as “crowdfunding” currently sprouting in our country, which is the focal point of our article. It is possible to think of crowdfunding as a “sophisticated version of collecting money from family and friends” on a legal basis. Of course, you do not have to know funders here personally. Examples of crowdfunding platforms known in the world include “gofundme” “kickstarter” “indiegogo” and “crowdrise”. Crowdfunding also has subdivisions within itself. These are; donation-based crowdfunding, reward-based crowdfunding, loan-based crowdfunding and share-based crowdfunding.

Answer to the question of “How would this work in Turkey?” and many more are hidden in the Communiqué on Share-Based Crowdfunding (“Communiqué”) issued by the Capital Markets Board (“CMB”).[2] This Communiqué, as the name suggests, regulates share-based crowdfunding. The answer to the question of whether everyone and every startup can benefit from this option is unfortunately not. Startups that will benefit from crowdfunding must first engage in technology or other production activities. Also, another condition is to be established in the last five years from the date of the information form announced by the startup at the beginning of the fundraising process called “campaign”. However, if you are a publicly traded corporation, you cannot benefit from crowdfunding. Real-estate is an area where funds collected in this way cannot be used. So, it is not possible to buy real estate projects or finance real estate with the funds you collect.

To make the process work, you must first become a member of the crowdfunding platform, then fill in the forms prepared by the CMB and upload them to the portal. The most important of these forms is the “information form” and the condition to be evaluated and found appropriate by the investment committee at the platform will be sought. After the investment committee approves the information form and publish it on the campaign page, the “campaign period” will begin, which is your fundraising period.

So in exchange for what will you collect these funds for? As it can be understood from the name of the Communiqué, the answer is shares. Your funders will have shares of your startup in return for the funds they provide. However, there are a few subtle points here. It is not possible to give out the existing shares of your company for funds, you have to follow the so-called “capital increase” procedure. So, you will create new shares in your company and you will be giving these new shares in return for the funds you receive. Another nuance is based on your preference. There is no obligation to assign voting rights to the shares that you give in return of funds, the choice is yours here. Finally, it is worth noting that you can have a maximum of two fundraising campaigns within twelve months.

[1] https://www.businessinsider.com/what-is-a-startup-2014-2 (Access Date: 23.07.2020)

[2] https://www.resmigazete.gov.tr/eskiler/2019/10/20191003-5.htm

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