Venture Capital Investment Funds and Venture Investments

Venture Capital Investment Funds

Venture Capital Investment Funds (VCIF, Fund) are regulated in the Communiqué on the Principles of Venture Capital Investment Funds numbered III-52.4 (“Communiqué”). Like other funds, they can be established by portfolio management companies. The Fund does not have a legal entity. The Fund could be established with cash or participation shares (capital stock stocks) collected from qualified investors. After their contribution, qualified investors own Fund Units. In other words, qualified investors can participate in the Fund in return for cash, or they can become Fund Unit owners by transferring capital stock to the Fund. Later, fund units are traded among qualified investors. The Fund manages the collected cash on behalf of the Fund Unitholders according to the principles of fiduciary ownership.

The Fund may be managed by the portfolio management company that established the fund, or the founder may receive management services from another portfolio management company. The Fund must comply with certain restrictions for its investments. These restrictions are included in the Communiqué.

Investment restrictions

Central investment sphere of VCIF is venture companies. Accordingly, a minimum investment amount must be allocated to investment companies. In this context, at least 80% of the fund's total value must be invested in venture capital investment. If 10% of the fund's total value is invested in venture companies included in the Small and Medium-Sized Enterprises Regulation, the 80% rate is applied as 51%. There are also proportional limitations for investments that can be made in other VCIFs and investments that could be made in companies and related parties where the investors who hold Fund Units have management control. In other words, such investments are not entirely prohibited, but are limited to a certain rate.

While at least 80% of the Fund's total value must be invested in venture capital investments, there are also some restrictions for the remaining portion. In other words, specific prohibitions in terms of investments can be made within this scope. In this context, VCIFs cannot make short selling, margin trading, and borrowing transactions about capital market instruments. They engage in derivative instrument transactions only to hedge financial risks. There must be a provision in their internal regulations to allow these hedging activities to be conducted. Total exposure in this way cannot exceed 20% of the Fund's total value. In addition, foreign investments are also subject to certain restrictions. In this context, the limits change depending on whether the owners of the Fund Units are residents abroad or whether the amount collected in return for the Fund Units is of foreign origin, and this affects the Fund’s investment which is considered as venture capital.

Venture Company

Venture companies are defined as companies that have the potential to grow and potential to create added value, that can offer high return expectations by improving operational, production, or sales performance, and that are in a position to achieve their objectives with financial and/or institutional support. In addition, companies that operate to realize a project are also considered venture companies. However, companies that own a certain amount of real estate, real estate-based assets and whose main activity is contracting (real estate/construction) will not be considered venture companies.

These features in the Communiqué draw a general framework and do not include concrete determinations. In this context, the nature of the venture company should be evaluated on a case-by-case basis. VCIF should considers these features when investing.

At the same time, venture companies must either be established in Turkey or, if they are abroad, at least 51% of their assets must be in Turkey. This rate, which was 80%, was decreased with the changes dated 21/09/2024.

Venture Capital Investment

In the Communique, after defining the venture company, it is regulated which investments qualify as venture capital investment. In this context, VCIF’s 

• They may be a founder of venture companies or become a partner of venture companies directly or indirectly through exceptional purpose companies defined in the Communiqué and organizations established abroad for collective investment purposes 
• They may invest in debt instruments issued by venture companies whose shares are not traded on the stock exchange and in lease certificates in which venture companies whose shares are not traded on the stock exchange are fund users.
• They may make direct investments in organizations established abroad for collective investment purposes to make capital investments in venture companies defined in the Communiqué. However, in this case, the risk arising from the investments must be limited to the principal amount directed to the investment.
• They may invest in capital market instruments issued by venture capital investment companies.
• They may invest in Fund Units of other VCIFs.
• They may invest in shares of public companies that are venture companies and are not traded on the stock exchange.
• They may provide structured financing as a combination of debt and equity financing to venture companies whose shares are not traded on the stock exchange. In this case, before the financing is provided, it is mandatory to execute a contract between the Fund and the venture company that includes at least the maturity, interest and conversion conditions suitable for this type of financing into company shares.
• They can become partners in special purpose joint stock companies established in Turkey or abroad, the fields of activity determined in their articles of association and limited to the sole purpose of investing in venture companies defined in the Communiqué.
• They can invest in asset-based securities issued based on loans provided/to be offered exclusively to venture companies or based on interest-free financing.
• They can invest in debt instruments of special purpose companies and institutions established abroad for collective investment purposes, exclusively defined in the Communiqué, or in lease certificates of which they are fund users.
• In the case of the sale of forward sales of venture capital shares or advance payment for the purchase of shares of venture companies, receivables and advance payments arising from these transactions are also considered venture capital investment.
• Premiums on option contracts that give the right to purchase shares of venture capital firms are also considered venture capital investments. 
• Depending on the extent to which the shares in circulation are held by persons resident abroad or the amount collected in return for the fund share is from abroad, investments made in companies resident abroad may also be considered venture capital investments. With the amendment dated 21.9.2024 such investments qualify as venture investments.
• Provided that they comply with the relevant legislation, investments made through contracts that grant or will grant the right to become partners in venture companies in the future are considered venture capital investments.

In addition, in venture investments made by VCIFs, VCIFs must sign a shareholder agreement with the other partners of the venture companies whose shares are acquired, regarding the use of their rights arising from these shares.

Conclusion

VCIFs, as a capital market institution, are regulated to support venture companies. In this context, the principles of investing in venture companies with funds to be collected from qualified investors are regulated. The concept of venture company is defined somewhat sparingly. The definition of a venture company includes general characteristics that a venture company should have. With the latest changes dated 21.9.2024, the rate of investments that VCIFs could make in international venture companies and the foreign assets they could hold has been increased.