Crowdfunding

What is Crowdfunding?

Crowdfunding is a method of raising capital through the collective effort of a large number of individual investors, typically via online platforms. It allows startups and entrepreneurs to present their ideas, products, or services directly to the public and solicit small investments from a broad audience. Here are the key components and considerations:

Types of Crowdfunding

1. Reward and Donation Based : Investors receive a product, service, or other rewards in return for their contribution or donate money without any return. This type is usually not subject to strict regulations. In Türkiye, reward and donation based crowdfunding is out of the scope of the Crowdfunding Communique (III-35/A.2) (Communique).
2. Equity Based: Investors receive equity or shares in the company in exchange for their investment. Equity based crowdfunding is regulated and subject to regulations under the Communique in Türkiye. Equity based crowdfunding is also a type of Equity Financing.
3. Debt Based: Also known as peer-to-peer lending, investors lend money to the startup with the expectation of being repaid with interest. In Türkiye, debt based crowdfunding got regulated under the Communique after the amendments effective as of October 27, 2021. Debt based crowdfunding is also a type of Debt Financing.

Advantages

1. Access to Capital: Crowdfunding provides an alternative to traditional funding sources like venture capital or bank loans, especially for early-stage startups.
2. Market Validation: Successfully raising funds can validate your idea or product, demonstrating demand and interest from potential customers.
3. Marketing and Exposure: Campaigns can generate significant media and public attention, helping to build a customer base and increase brand awareness.
4. Customer Engagement: Crowdfunding allows direct interaction with potential customers, fostering a loyal community and gathering valuable feedback.

Considerations

1. Campaign Preparation: A successful campaign requires thorough planning, including a compelling pitch, attractive rewards, and a clear timeline. High-quality visuals, videos, and detailed descriptions are essential.
2. Legal Compliance: Ensure compliance with relevant regulations, especially for equity and debt crowdfunding. Legal counsel can help navigate the regulatory landscape and draft necessary agreements.
3. Platform Fees: Crowdfunding platforms charge fees for hosting campaigns, typically a percentage of the funds raised.
4. Intellectual Property Protection: Before launching a campaign, consider protecting your intellectual property (IP) through patents, trademarks, or copyrights to prevent unauthorized use of your ideas.
5. Fulfillment Obligations: For reward-based campaigns, ensure you can deliver promised rewards on time and as described. Failing to meet obligations can damage your reputation and lead to legal issues.
6. Transparency and Communication: Maintain open and honest communication with your backers throughout the campaign and beyond. Regular updates on progress, challenges, and milestones build trust and credibility.

Legal Landscape in Türkiye

1. Authority: Capital Markets Board (CMB) is the authorized body for the crowdfunding matters in Türkiye.
2. Platforms: Platforms are online intermediaries between the projects and investors. Platforms shall (i) have at least TRY 1,000,000 capital, (ii) operate exclusively as a platform, (iii) have at least 3 board members.
3. Investors: Individuals who are not qualified investors under CMB regulations have limits on their crowdfunding investments. In a calendar year, they can invest up to TRY 50,000 in total through equity and debt-based crowdfunding. This limit can go up to TRY 200,000 per year if it does not exceed the 10% of individual's yearly income. Additionally, they can invest no more than TRY 20,000 in a single project.
4. Entrepreneurs and Entrepreneurship Companies: Entrepreneurs and entrepreneurship companies must operate in technology and/or production fields. They need to provide detailed information about their projects and use the funds for the specified activities. Entrepreneurs must establish a Joint Stock Company (Anonim Şirket) to receive funds collected through crowdfunding platforms. If an entrepreneurship company is not initially a Joint Stock Company, it must convert to an Anonim Şirket to receive the collected funds.

Crowdfunding can be a powerful tool for startups to raise capital, validate ideas, and build a loyal customer base. By understanding the different types of crowdfunding and carefully planning your campaign, you can leverage this funding method to support your business growth.