COMMUNIQUÉ ON PRINCIPLES REGARDING VENTURE CAPITAL INVESTMENT FUNDS WAS AMENDED

26 September 2024

Introduction:

The Communiqué Amending the Communiqué on Principles Regarding Venture Capital Investment Funds numbered III-52.4 (“Amending Communiqué”) was announced by the Capital Markets Board (“CMB”) and published in the Official Gazette dated September 21, 2024, and numbered 32669. The Amending Communiqué amends certain provisions of the Communiqué on Principles Regarding Venture Capital Investment Funds (“Communiqué”) to solve certain market shortcomings of venture capital investment funds (“VCIFs”) and to increase the investments to VCIFs in a healthy manner suitable to their purpose.
The Amending Communiqué entered into force on September 21, 2024. With the Provisional Article 2 added to the Communiqué, VCIFs whose units were issued as of the effective date of the Amending Communiqué were given until June 30, 2025, to fulfill the requirement of signing a fund issuance agreement with investors and to comply with the minimum elements required to be included in the issuance documents. VCIFs also need to comply with the new portfolio limitations until December 31, 2025.

You can access the Amending Communiqué here and the CMB's announcement here, both in Turkish.

Important Regulations:
The important amendments introduced by the Amending Communiqué are as follows:

Expansion of the possibility of investment in foreign venture capital companies by VCIFs:In order to invest in venture capital companies established abroad, at least 80% of the company’s assets must have consisted of subsidiaries or affiliates established in Turkey according to the financial statements dated in the last year from the date of the investment or the closest date to the date of the investment. The 80% limit was lowered to 51% by the Amending Communiqué, thereby expanding the scope of investment of VCIFs in venture capital companies established abroad (Communiqué Art. 18/1).
Relaxation of the requirements for venture capital companies to be joint stock companies and limited liability companies: The requirement that the companies to be invested must be joint stock companies or limited liability companies has been abolished for investments to companies established abroad (Communiqué Art. 18/2). The requirement for the company to be invested to be a joint stock company applies only to domestic venture capital companies.
Inclusion of framework agreements for future shareholding in the scope of the legislation:Simple agreements for future equity (“SAFE”) may be considered as venture capital investments, provided that the conditions set forth in the legislation are complied with (Communiqué Art. 18/3-k). In this context, the limit for investments in venture capital companies established abroad will be increased from 10% to 15% of the total value of the VCIF, and this ratio may be gradually increased up to 100% if the outstanding shares of the VCIF are held by real persons and legal entities abroad (Communiqué Art. 23/5).
Regulation of the fund basket structure of VCIFs: VCIF funds may be issued in a fund basket structure in which at least 80% of the total value of the fund is composed of other VCIF fund units (Communiqué Art. 12/B-2a).
Exclusion of real estate and construction sector:Companies with at least 40% of total assets composing of real estate or real estate-based assets according to their latest annual financial statements, and companies whose main activity is contracting will not be considered as venture capital companies (Communiqué Art. 18/8).
Adjustments to the investment limitations of VCIFs:VCIFs may invest: i) in other VCIFs up to a maximum of 25% of the total value of their funds, ii) in unlisted shares of publicly traded companies that are venture capital firms up to a maximum of 20% of the total value of the fund, and iii) in companies and related parties of which investors holding VCIF units have management control up to a maximum of 20% of the total value of the fund (Communiqué Art. 19/1c).
Easing the return of fund units to the fund through the transfer of participation shares to the fund unit holder:The requirement to obtain the approval of all fund unit holders for the return of VCIF fund units to the fund through the transfer of participation shares to the VCIF fund unit holder was abolished (Communiqué Article 16/3).
Compliance with issuer restrictions:Investments in capital market instruments during the period from the commencement date of sales of fund units until at least 80 percent of the fund's total value is allocated to venture capital investments and afterwards will be required to comply with the issuer restrictions set forth in the CMB's Communiqué on Principles Regarding Mutual Funds No. III-52.1 (Article 23/8 of the Communiqué).
Removal of the CMB's approval for amendments to the issue documents:The obligation to obtain CMB approval for amendments to issue documents was abolished by introducing obligations on VCIF founders (Communiqué Article 14/2b).
Reducing the collection period of the fund commitment:The fund commitment amount will now be required to be collected within one year at the latest, instead of two years from the date of commencement of the sale of fund units to qualified investors (Communiqué art. 22/1).
Explicit regulation of umbrella funds:VCIFs may be issued under an umbrella fund such as securities investment funds and real estate investment funds (Communiqué art. 12/A).
Updating the valuation report obligation:The amounts regarding the obligation of the valuation institution to prepare a report in the valuation of venture company investments have been updated. The obligation to prepare a valuation report by valuation institutions will continue in funds where only investors who have made a resource commitment can participate in the fund and at the same time, except for the exceptions specified in the fund issuance agreement, investors cannot return their participation shares before the expiration of the fund's term (Communiqué Art. 20/2-b).
Drafting the fund issuance agreement and determining its minimum elements:Regarding the VCIFs, the principles regarding the simplification of the contents of fund information documents and the inclusion of certain issues in the fund issuance agreement to be signed between the fund and the fund unit holders within this scope were regulated and the minimum elements to be included in the fund issuance agreements were presented as an annex to the Communiqué (Communiqué art. 3/1a). Furthermore, it is also mandatory to sign a fund issuance agreement in accordance with the legislation with the relevant investors prior to the sale of fund units to qualified investors, and it is also regulated that these agreements must comply with certain principles and guidelines. However, this obligation will not apply to investors who purchase fund units from the stock exchange (Communiqué Art. 13/13).

Conclusion:
In order to increase investments to VCIFs, the Communiqué provides flexibility, especially for foreign institutions, and eliminates the CMB approval obligation in certain cases and instead introduces the obligation to regulate the minimum elements of fund issuance agreements and to comply with the legislation, in order to overcome the hurdles faced in practice. Considering the additional provisions for umbrella funds, fund baskets and SAFEs, the CMB has likely envisioned the need for a regulatory structure that supports foreign investors and is suitable for the widespread use of VCIFs in Turkey.

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