Convertible Instruments in Turkish Law: How Are SAFEs and Convertible Loans Characterised?
For foreign investors looking at Turkish start-ups, a recurring question is how “convertible instruments in Turkish law: how are SAFEs and convertible loans characterised?” In other words, when you sign a SAFE-style document or a convertible loan agreement with a Turkish company, are you holding debt or equity, how do interest and discounts work, and what are the key compliance points under the Turkish Commercial Code (TTK) and Capital Markets Law (SPK)?
1. Are SAFEs and Convertible Loans Debt or Equity?
Under Turkish law, there is no codified “SAFE” instrument. In practice, what foreign investors call a “SAFE” is usually documented either as:
- a convertible loan (borç sözleşmesi + conversion right), or
- an advanced subscription / investment agreement that creates a contractual obligation to issue shares in the future.
From a strict legal standpoint, until conversion takes place and the capital increase is registered:
- a convertible loan is treated as debt: the company owes money to the investor;
- a SAFE-style advance that is not clearly documented as a loan may still be viewed as a financial liability rather than equity, because shares do not yet exist.
Equity arises only when:
- the competent corporate body (board + general assembly, depending on the company type and articles) resolves on a capital increase,
- the investor’s claim is capitalised and set off against the subscription price, and
- the capital increase is registered with the trade registry.
Before those steps, the investor is not a shareholder under TTK, and usually has no voting rights or dividend rights, only contractual protections.
2. Interest and Discount: Turkish Law Constraints
Most foreign investors are familiar with two main economic levers:
- Interest on the loan amount until conversion;
- Discount on the share price at the next financing round, or a valuation cap.
Under Turkish law, interest on a convertible loan is generally permissible, subject to usual limitations (no usury, compliance with tax rules, thin capitalisation and transfer pricing in related-party situations). Parties are free to agree a commercial interest rate, often lower if the main upside is equity.
The discount mechanism must be structured carefully:
- TTK prohibits issuing shares below nominal value.
- Therefore, discounts are normally applied not to nominal value, but to the per-share price based on the valuation of the next round (i.e. to the “premium” portion).
- In practice, the company issues new shares at nominal value plus a share premium; the discount affects the premium, not the nominal value.
SAFEs and convertible loans should therefore be drafted so that the conversion formula respects minimum nominal value and uses discounts only in a way compatible with TTK capital rules.
3. TTK Compliance: Capital Increases and Shareholder Rights
Foreign investors should be aware that capital increases in Turkish joint stock (A.Ş.) and limited liability (Ltd. Şti.) companies are formal processes:
- They require resolutions of the relevant bodies (board + general assembly for A.Ş.; partners’ meeting for Ltd. Şti.).
- They must respect pre-emptive rights of existing shareholders, unless those rights are restricted or waived by proper resolution.
- They become effective only upon registration and announcement at the trade registry.
Convertible documentation should therefore:
- Oblige the company and existing shareholders to support the capital increase and waiver of pre-emptive rights in favour of the investor on conversion;
- Clarify what happens if the company or shareholders refuse to pass required resolutions (e.g., redemption, default interest, put options).
Without these safeguards, the investor may hold a contractual right to convert that is difficult to enforce in practice.
4. SPK (Capital Markets Law) Perspective
Most early-stage Turkish start-ups are not public companies and their share issues are not public offerings. In such cases, SPK rules may be of limited direct relevance, provided:
- the offering is limited to qualified / institutional investors; and
- there is no public solicitation or crowd-funding element without authorisation.
However, SPK becomes important where:
- the target is, or envisages becoming, a public company;
- the instrument is structured close to convertible bonds or similar capital markets instruments; or
- the VC fund itself is a regulated capital markets player with its own compliance obligations.
Foreign investors should therefore obtain Turkish counsel’s view on whether a specific deal structure might inadvertently trigger public offering or capital markets instrument qualifications under SPK.
5. Practical Takeaways for Foreign VCs
In summary, in Turkish law:
- SAFEs and convertible loans are usually characterised as debt-like claims until the capital increase and registration are completed.
- Interest and discounts are allowed but must be drafted in a way that respects TTK rules on nominal value and capital integrity.
- Proper TTK-compliant mechanics (resolutions, pre-emptive rights, trade registry procedures) are essential to make conversion workable in practice.
- SPK compliance must be checked where there is any public-offering angle or regulated entity involved.
With the right structuring, “convertible instruments (SAFE, convertible loan) in Turkish law” can mirror the economics familiar to international investors, while staying within the boundaries of TTK and SPK. However, each transaction should be reviewed under current legislation and practice; this overview is no substitute for tailored Turkish legal advice.
Yanıt yok