ABSTRACT
This article analyzes and compares the Capital Markets Board’s (“Board”) Resolution no. i-SPK-128.21 (“Old Resolution”) and Resolution no. i-SPK-128.23 (“New Resolution”) regarding public offering processes.
I. INTRODUCTION
Financial markets are categorized under two separate headings: money markets and capital markets. The most important distinction between money markets and capital markets is the potential maturity of investments1. The instruments of money markets are generally comprised of shortterm borrowing instruments with a duration of one year or less. On the other hand, capital market instruments are examined under three separate categories: equity securities, debt securities, and other capital market instruments. Equity securities are entirely made up of stocks. Among these stocks, the most prominent are shares of closed jointstock companies, publicly traded jointstock companies, and jointstock companies traded on the stock exchange2.
Money markets include shortterm loans that borrowers can obtain for their daily operations and needs. In contrast, capital markets are oriented towards longterm investments. In this respect, capital markets are an area where governments and companies have the opportunity to raise funds for large projects and longterm investments3. Capital markets thus connect companies that require additional funding with the public, who seek to evaluate their savings4.
Capital markets are fundamental importance for a country’s economic development and financial functioning; especially in today’s conditions where borders have disappeared due to the effect of globalization, capital movements have been largely liberalized, and international investments have gained strategic value for countries, this importance has become even more prominent.
Public offering (Initial Public Offering) is one of the most fundamental functions of capital markets. Public offering is accepted as the first offer to sell shares in a company to the public as investors5. The dissemination of capital to a broader base occurs through the method of public offering. Public offerings are preferred not only by private enterprises but also by states through privatization6.
There are many important reasons for a jointstock company to aim for a public offering. Public offering, offers companies and their shareholders the opportunity to convert part of their equity into cash without completely relinquishing control, access to public stock markets, the ability to acquire other companies through the cash flow obtained, the ability to more easily attract and reward key employees and managers by offering the opportunity to share the company’s returns through stockbased compensation7. Indeed, in addition to providing companies with cheap financing opportunities, public offering gives companies credibility, publicity, and institutionalization opportunities through the public trading of shares on the stock exchange8. In addition to the liquidity that emerges for existing investors, the visibility and prestige of being able to be listed on the stock exchanges of countries are seen as very attractive for many companies9. On the other hand, public offering is preferred as a financing method instead of debt instruments as a result of the jointstock company’s inability to bring the cash resources it needs through capital increase by partners10 or other internal sources and the current interest policies in the economy trending against the partnership11.
At this point, it should be particularly noted that the concepts of public offering and going public are not legally bound to the same result.
Public offering is defined in the Capital Markets Law (“Law No. 6362”) as follows:
“ARTICLE 3 – f) Public offering: A general call made in any way for the purchase of capital market instruments and the sale carried out following this call”12,
“ARTICLE 16 – (1) (Amended first sentence: 28/11/2017-7061/109 art.) Except for companies whose shares are traded on the stock exchange and companies that collect money from the public through crowdfunding, the shares of jointstock companies with more than five hundred shareholders are deemed to have been offered to the public. These companies are also subject to the provisions of publicly traded companies.”13.
The definition of public offering made in Article 16.1 of the Law No. 6362 has been accepted as a presumed public offering in the doctrine14. According to this provision, it should be said that in the “presumptive” public offering that occurs as a result of the shares being traded on the stock exchange or the number of partners exceeding five hundred, the shares are not actually offered to the public. This is because, as a result of this presumptive public offering, it is not mandatory for the shares to be traded on the stock exchange or offexchange organized markets15.
The simplest method for a company to offer its shares to the public is to set a price for each share and offer each share to potential investors at this price.
Pricing can also be done through auction. In English law, the public offering method through auction is called “Tender Issue”16. The risks that may arise in terms of a fixedprice offer are that if the offer price is high, there may not be sufficient demand, and if the offer price is low, the company may earn less income than it should. The risk in the auction is that the bids may come in very low or that investors may not be clear about what to bid and may stay completely out of the bidding process. This is especially problematic for individual investors17.
Today, many public offerings worldwide are carried out using the simple fixedprice offering. In this system, the financial institution advising the issuer who wants to offer its shares to the public values the shares of the issuing company and determines a price range. The issue price for the public offering of each share is determined towards the end of the process after the demand for the shares is collected18.
Now, a wide range of investors become stakeholders in the shares of the jointstock company offered to the public. In order to protect this investor base, the realization of public offerings has been subject to comprehensive regulations.
II. INITIAL PUBLIC OFF ERINGS ( IPO ) AND THE AUDIT PROCESS OF PUBLIC OFFERINGS
A. How is an Public Offering Conducted?
Conducted? Initial public offerings are called “Initial Public Offering – IPO”. Initial public offerings have an important place in Law No. 6362. This is because, through initial public offerings, nonpublic jointstock companies legally gain the status of public jointstock companies and thus become subject to capital market legislation19.
“ARTICLE 3 – e) (Amended clause: Article 107 of Law No. 7061 dated 28.11.2017) Publicly traded company: Jointstock companies whose shares have been offered to the public or are deemed to have been offered to the public, excluding those who collect money through crowdfunding platforms,”20.
Indeed, according to the Communiqué21 published in the Official Gazette No. 28685, initial public offerings can occur in two separate ways. The first of these ways is the public offering of existing shares by the shareholders of nonpublic companies (“Shareholder Sale”), and the second is the public offering of shares to be issued through capital increase by nonpublic companies (“New Share Issuance Method”)22.
B. Capital Markets Board’s Public Offering Audit: Intermediary Agreement and Prospectus
Capital markets are subject to important regulations as they directly concern citizens who want to invest their savings through investment. The authority for supervision and oversight of the markets, which are of great importance for the country’s development and economic stability, has been given to the State by the Constitution. Article 167 of the Constitution clearly imposes these responsibilities on the State with its regulation stating, “The State takes measures to ensure and develop the healthy and regular functioning of money, credit, capital, goods and services markets; prevents monopolization and cartelization that will occur in practice or by agreement in markets”. According to this constitutional provision, the State is obliged to establish the necessary legal and administrative infrastructure to ensure the supervision and oversight of the markets and is responsible for implementing the legislative regulations for this purpose. In this context, the first comprehensive regulation regarding capital markets was implemented with the enactment of Law No. 2499 in 1981. The Board, established by Law No. 2499 enacted in 1981, is the most important authority for regulations regarding capital markets in Turkey.
According to Article 2 of the Communiqué, it is mandatory to apply to the Board for approval of the public offering. The Board examines whether the articles of association of the jointstock company whose shares will be offered to the public comply with capital market legislation, whether there is an authorized institution to intermediate the public offering, the financial statements of the jointstock company whose shares will be offered to the public, and the public offering prospectus submitted by the jointstock company whose shares will be offered to the public, and makes its positive or negative decision regarding the process.
The board of directors of a company that wants to be offered to the public and have its shares traded on the Stock Exchange is obliged to submit draft amendments to the articles of association to the Board first, within the scope of preliminary preparations, in order to comply with capital market legislation. If there are provisions in the company’s articles of association that restrict the transfer and circulation of shares to be traded on the Stock Exchange or prevent shareholders from exercising their rights, these provisions should be removed from the articles of association and other provisions should be brought into compliance with capital market legislation23. In addition, it is mandatory to obtain the Board’s approval for amendments to the articles of association, and these amendments must be submitted for the approval of the company’s general assembly24.
Before applying for a public offering, it is necessary to sign a contract with an institution authorized to intermediate the public offering. The list of institutions authorized to intermediate public offerings is announced on the Board’s website. The said intermediary agreement can be signed with a single authorized institution or with a consortium formed by more than one authorized institution in case the public offering amount increases. Within the scope of the contract, it is mandatory to include the rights and responsibilities of the authorized institutions and the company, whether there is a remaining commitment, how the commitment will be realized, the public offering method, and other essential matters25.
According to Article 4 of the Law No. 6362, in order for capital market instruments to be offered to the public, a prospectus must be submitted to the Board and this prospectus must be approved by the Board26. The prospectus submitted to the Board for public offering is a document that presents the financial reports of legal entities offering capital market instruments to the public as issuers, in order to inform the public. In this respect, prospectuses provide investors with information that can make healthy evaluations for the future regarding the jointstock company to be offered to the public27. In this context, the public disclosure function in the issuance process of capital market instruments is fulfilled through the prospectus, and the capital market instruments issued start to be traded in the markets after this process. The prospectus is a document that contains detailed financial, commercial, legal, and administrative information and risks that investors may need when making investment decisions, both about the issuing institution and the capital market instruments issued. In this context, legal disputes of special importance to which the company is a party and possible legal disputes are included, and legal transactions are evaluated and possible legal risks are stated. According to the relevant legislation, the prospectus, which is prepared comprehensively as a result of due diligence studies, must also include financial statements reflecting the company’s financial situation for the last three years.
C. Sales Methods for Initial Public Offerings
According to the Communiqué, various sales methods are applied for capital market instruments offered to the public. While the sales methods regulated according to the Communiqué are sales through demand collection, sales without demand collection, and sales methods on the stock exchange, only stock exchange sales and demand collection methods are used for initial public offerings28. The procedure of these sales methods is regulated by the Sales Communiqué29, which deals with the principles regarding the sales methods, distribution, and delivery of capital market instruments.
D. Stock Exchange Sales Method
According to Article 16/1 of the Sales Communiqué, the stock exchange sales method means the sale of capital market instruments on the stock exchange in accordance with stock exchange regulations. In order to apply the public offering method in the primary market at Borsa Istanbul Joint Stock Company (“BIST”), an application must be made to BIST and this application must be approved by the BIST Board of Directors. The public offering process is carried out within the period specified in the prospectus and can also be done through the demand collection method30. According to the New Resolution of the Board’s Decision-Making Body, which was published in the Board’s Weekly Bulletin No. 2024/48 in accordance with the Board Decision No. 1508 dated 19.09.2024, the stock exchange sales method is mandatory for public offerings with a market value of 750,000,000 TL and below. In case of using the sales method through demand collection outside the stock exchange in public offerings with a market value abov 750,000,000 TL, the provisions to be applied are included in the New Resolution of the Board’s Decision-Making Body published in the Board’s Weekly Bulletin No. 2024/48.
The New Resolution aims to protect investor rights and increase market efficiency by regulating distribution methods for individual and institutional investors. The new regulations offer important innovations in terms of market transparency and sustainability.
E. Sales Through Demand Collection
According to Article 14/1 of the Sales Communiqué, the sales method through demand collection refers to the collection of investors’ demands for capital market instruments offered to the public and the sale of the part of these demands that are met in accordance with predetermined procedures and principles. In the demand collection method, investors’ requests for the offered shares are gathered, and these demands are evaluated according to predetermined principles and the shares offered for sale are distributed among investors. In this method, investors’ demands for capital market instruments are collected by filling out a demand form, and the sales transaction is carried out in accordance with the procedures and principles specified in the prospectus after the demand collection process31. In addition, investors have the right to set a lower limit for the capital market instruments they want to purchase in the demand form if they wish.
III. COMPARISON OF RESOLUTION NO . I - SPK 128 . 23 WITH THE OLD RESOLUTION AND THE CONVENIENCES PROVIDED BY THE NEW RESOLUTION
In order to meet the demands of investors as much as possible in the initial public offering process of nonpublic companies’ shares, it has been decided that the relevant provisions of the Sales Communiqué will be applied as specified in the New Resolution until a new decision is made. In this context, the Old Resolution of the Board’s Decision-Making Body has been repealed. There are significant differences between the Old Resolution and the New Resolution in terms of provisions regarding public offering processes, both conceptually and in terms of application. When evaluated in a legal context, it is seen that these differences have important consequences both in terms of protecting investor rights and ensuring the transparent and effective functioning of the market. Although the Old Resolution has been repealed, the general regulations in the Old Resolution have been preserved in the New Resolution.
A. Removal of Proportional Distribution
According to the Old Resolution, it was stipulated that only the equal distribution method would be applied to the individual investor group, and the proportional distribution method was not applied for individual investors. This regulation ensured the protection of small investors and prevented larger investors from obtaining more shares than offered, but at the same time, it limited the demands of large investors, making it difficult to effectively manage demands. On the other hand, while the New Resolution foresees the continuation of the equal distribution method for individual investors, it allows the application of the proportional distribution method for the investor group that will make high demands and in this context, it has made it mandatory to show cash for the entire amount requested or 120% BIST 30 index share collateral, thus enabling the demands of this group to be met. While the complete removal of proportional distribution for individual investors ensures equality among small investors and increases market confidence, the collateral requirement for in - vestors making high demands ensures that the demands of large investors are managed more transparently and reliably.
B. Distribution Flexibilities for Institutional Investors
Within the scope of the Old Resolution, it was adopted that the shares allocated to domestic institutional investors should not exceed 1% of the total public offering share amount and this limit should be applied as 3% for portfolio management companies (“PMC”), but allocation principles were regulated in a general framework without giving any priority to investment funds among institutional investors. With the New Resolution, it has become mandatory to allocate at least 50% of the shares allocated to institutional investors to investment funds, pension investment funds, and automatic participation system pension funds. While the 3% limit for PMCs is preserved, a 2% limit has been introduced for legal entities with which these institutions are related in terms of management, supervision, or capital. Thus, distribution principles have been detailed and a more professional structure has been created. This regulation ensures the effective management of institutional investor demands while increasing market stability by giving priority to investment funds and allowing more effective participation of professional investors in the public offering process.
C. More Detailed Regulations for Foreign Investors
Within the framework of the Old Resolution, regulations for foreign investors remained general, did not contain concrete provisions for the supervision of foreign demands, and did not impose any special responsibility on issuers and intermediary institutions to ensure that foreign investors act in accordance with local legislation. On the other hand, with the New Resolution, regulations regarding foreign investors have been handled in a more detailed framework, it has become mandatory to obtain a commitment from issuers and authorized institutions conducting the public offering that foreign investors will be determined in accordance with local legislation and necessary examinations will be made and also the circumvention of regulations through indirect demands by real and legal people residing in Turkey has been prevented. In this way, by ensuring that the demands of foreign investors are carried out in accordance with local regulations, the confidence of international investors has been increased and an important contribution has been made to the protection of market order.
D. Demand Amount Limitation on Investor Basis
According to the Old Resolution, the amount of shares that can be demanded on an investor basis was limited to 25% of the total share amount allocated to the relevant group, aiming to protect small investors and balance excessive demands. With the New Resolution, this limitation has been preserved, but the effectiveness of the regulation has been increased with the collateral requirement introduced for groups making high demands. Thus, the limitation of excessive demands with the collateral application has contributed to the more fair and reliable execution of the distribution process.
E. People Who Can Access Inside Information in Public Offering
The Old Resolution introduced regulations preventing the participation of people with inside information and their firstdegree relatives in the public offering process, thus aiming to prevent unfair advantages based on inside information. While the New Resolution preserves this regulation, it has imposed increased responsibilities on issuers and intermediary institutions to prevent the violation of this regulation. Thus, the regulation has contributed to ensuring investor equality and enabled the effective prevention of possible violations based on inside information.
F. Regulation of the Distribution List
Within the framework of the Old Resolution, general regulations were made regarding the preparation of distribution lists but detailed information requests were not included. On the other hand with the New Resolution, it has become mandatory to specify details such as demand number, whether the demand form is written or electronic and collateral amount in the distribution lists. This regulation has created a more reliable structure by increasing transparency and accountability in the process.
G. Regulations for Off-Exchange Sales
Within the scope of the Old Resolution, general provisions were envisaged for offexchange sales but no special regulation was made for investor groups making high demands. On the other hand with the New Resolution, it has been stipulated that up to 10% allocation can be made to groups making high demands and a collateral requirement has been introduced for these groups. Thus, justice and auditability in the distribution process have been significantly increased by ensuring more effective management of the demands of investors making high demands.
IV. CONCLUSION
The Capital Markets Board’s regulations regarding public offering processes are of great importance in terms of protecting investor rights and ensuring market stability. The New Resolution has repealed the 2023 regulation and introduced a more detailed and systematic regulation. These changes aim to balance domestic and foreign investor groups, regulate large demand groups, and increase market efficiency. The New Resolution protects small investors and increases market confidence by preserving the equal distribution method for individual investors while ensuring more transparent and reliable management of demands by introducing a collateral requirement for investors making high demands. Regulations for institutional investors increase market stability by giving priority to investment funds while increasing the confidence of international investors with detailed regulations for foreign investors. In addition, preventing the participation of persons with inside information in the public offering process and requesting detailed information in distribution lists increase transparency and accountability in the process. As a result, the New Resolution no. i-SPK 128.23 makes important contributions to both protecting investor rights and the effective functioning of the market by creating a fairer and more reliable structure in public offering processes.
BIBLIOGRAPHY
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FOOTNOTE
1 Tolga Ayoğlu, The Concept of Public Offering in Capital Markets Law and Public Offering Intermediary Agreements, İstanbul, 2008, p. 16.
2 Vural Günal/ Yalçın Özge Okat, Principles of Capital Markets Law, İstanbul September 2021, p. 21.
3 Investopedia, Money Markets vs. Capital Markets: An Overview: https:// www.investopedia.com/articles/investing/052313/financial-markets-capital-vs-money-markets.asp (Access date, 31.12.2024)
4 Andrew M. Chisholm, An Introduction to International Capital Markets, Second Edition, 2009, p. 1.
5 Chisholm, p. 138.
6 Tekin Memiş/ Gökçen Turan, Capital Markets Law, Updated 6th Edition, Ankara 2022, p. 53.
7 US IPO Guide, p.1, Latham & Watkins LLP, 2024. edition: https://www. lw.com/admin/upload/SiteAttachments/lw-us-ipo-guide.pdf (Access date, 31.12.2024).
8 Memiş/ Turan, p. 53.
9 David J. Goldschmidt, The Initial Public Offerings Law Review, Fourth Edition, May 2020, p. 211.
10 Burak Manavgat, Publicly Held Joint Stock Companies and Public Offering, February 2016 p. 42-43.
11 US IPO Guide, p. 1.
12 Capital Markets Law No. 6362 (“CML”) Art. 3/f Published in the Official Gazette: Date: 30.12.2012 Issue: 28513.
13 Capital Markets Law No. 6362 Art.16/1 Published in the Official Gazette: Date: 30.12.2012 Issue: 28513.
14 Manavgat, p. 42.
15 Manavgat, p. 42.
16 Chisholm, p. 138.
17 Chisholm, p. 138.
18 Chisholm, p. 138.
19 Günal/ Okat, p. 96.
20 Capital Markets Law No. 6362 Art. 3/e Published in the Official Gazette: Date: 30.12.2012 Issue: 28513.
21 Share Communiqué (VII-128.1) (“Communiqué”) published in the Official Gazette No. 28685. Share Communiqué (VII-128.1) Art. 2 Published in the Official Gazette: Date: 22.06.2013 Issue: 28685.
22 Share Communiqué (VII-128.1) (“Communiqué”) published in the Official Gazette No. 28685. Share Communiqué (VII-128.1) Art. 2 Published in the Official Gazette: Date: 22.06.2013 Issue: 28685.
23 Günal/ Okat, p. 100.
24 Günal/ Okat, p. 100.
25 Capital Markets Board, Public Offering, Investor Information Booklets Series, p. 12: https://spk.gov.tr/ data/61e34f9a1b41c61270320792/ Halka%20Arz.pdf (Access date, 31.12.2024).
26 Capital Markets Law No. 6362 Art. 3/f Published in the Official Gazette: Date: 30.12.2012 Issue: 28513.
28 Capital Markets Board, Public Offering, Investor Information Booklets Series, p. 15.
29 Communiqué on Sales of Capital Market Instruments (II-5.2) (“Sales Communiqué”)
30 Capital Markets Board, Public Offering, Investor Information Booklets Series, p. 15-16.
31 Memiş/ Turan, p. 88
