Welcome Convertible Note

The Convertible Debt Agreement Is Entering Turkish Law. But Will This Regulation Actually Work?

A provision buried beneath the headline measures of the widely discussed “Draft Law No. 270,” a wealth amnesty, a corporate tax cut, and a twenty-year income-tax exemption for foreign residents, is, in our view, the most structurally significant reform in the entire package: Article 11.

In essence, the article says this: companies holding a techno-enterprise badge from the Ministry of Industry and Technology and not publicly listed may now raise investment through convertible debt agreements, i.e., convertible notes, and the burdensome conditional capital increase rules of the Turkish Commercial Code will not apply.

Let us explain what this means for the startup ecosystem:

Background: Why So Late?

The convertible note has been a staple of Anglo-Saxon law for decades, and its logic is straightforward: you want to invest in an early-stage startup but cannot yet determine its valuation. Rather than debate valuation now, the investor lends money to the company; the debt converts into equity at the next funding round, usually at a discount. The founder gains speed; the investor gains a pricing advantage as compensation for early-stage risk.

In Turkey, this mechanism was attempted for years under the umbrella of “freedom of contract” without any statutory framework. Lawyers devised creative workarounds. The Turkish Commercial Code’s conditional capital increase provisions (Art. 463 et seq.) offered a theoretical basis, but in practice the procedural burden, articles amendment, general assembly resolution, commercial registry registration, made transactions slow and expensive.

Capital markets legislation already recognised “convertible bonds” but only for listed companies. The Central Bank’s Capital Movements Circular introduced a partial framework for foreign-currency convertible note transactions, but the mandatory 12-month conversion deadline effectively killed the instrument’s flexibility.

The result: Turkish startups either opted for foreign law, signing Delaware or English-law agreements, or turned a blind eye to legally ambiguous structures. Both routes damaged the ecosystem.

What Does the New Regulation Bring?

The practical impact of Article 11 can be summarised under three headings:

Removing the Turkish Commercial Code “barrier”. By disapplying the conditional capital increase rules, the transaction becomes faster and simpler: investors and startups will be able to sign the agreement and deploy capital without waiting for a general assembly, an articles amendment, or a commercial registry filing.

Conceptual legitimacy. The phrase “convertible debt agreement” will now appear in statute. This strengthens the legal footing for investors, founders, and courts alike.

A signal to foreign investors. International angel investors and VC funds already know this instrument. Turkey speaking the same language will, at least to some extent, remove the legal framework debate from the agenda.

But Key Questions Remain Unanswered

The regulation sees the right problem and points to the right instrument. That must be acknowledged. Yet the critical elements of infrastructure needed to build a functioning convertible note ecosystem are still missing.

The automatic conversion problem remains unsolved. The power of convertible notes in Anglo-Saxon law comes from conversion happening automatically: when a defined event occurs, the debt converts into equity without any further legal act. The structural weakness of Continental European legal systems is their inability to replicate this automaticity. In Turkish law, a general assembly of existing shareholders may still be required. The new article disapplies the Turkish Commercial Code rules but says nothing about what mechanism takes their place. The Ministry’s implementing regulation appears likely to provide the answer.

The content of the agreement is undefined. Globally, the core terms of a convertible note are well standardised: valuation cap, discount rate, maturity date, pro-rata rights. The statutory text uses the phrase “convertible debt agreement” but defines none of these elements. The content is left entirely to the parties and to future ministerial regulation.

Tax uncertainty is a serious risk. The tax treatment at the moment of conversion, how the resulting gain is characterised, in which period it falls, and under what procedure it is assessed, is unaddressed. A seasoned foreign investor will be reluctant to take a position in a structure where the tax outcome is uncertain.

The scope is narrow. The regulation, inserted into Article 3 of Law No. 5746, applies only to companies holding a techno-enterprise badge. Badge applications are subject to an evaluation process; the predictability and speed of that process will define the regulation’s practical reach.

No investor protection framework. Investor rights such as anti-dilution protection, information rights, and liquidation preference are left to the contract. Without a standard framework, negotiation costs rise and foreign investors in particular find it difficult to operate comfortably on unfamiliar legal ground.

Confronting the Continental Law Wall

Legal scholarship on this subject has clearly identified the longstanding structural problem: the automatic conversion mechanism is incompatible with the architecture of Continental European legal systems. In Anglo-Saxon law, a contractual provision can produce legal consequences directly upon the occurrence of a condition. In Turkish law, changes to a company’s structure, particularly a capital increase, remain dependent on decisions by the company’s corporate organs.

The new regulation does not ignore this problem but does not resolve it either. If the “procedural rules and principles” delegated to the Ministry’s implementing regulation address it, the delegation to secondary legislation being a separate concern, we can say there has been genuine progress. If not, the door opened in the statutory text will remain impassable in practice.

A Comparative Perspective

Singapore, Ireland, and France are well ahead of Turkey on this front. The common feature: their legal systems have either directly recognised the convertible note or built the full infrastructure required, a tax framework, contract standards, investor protections, in a single package. Scope is also broad; it is not tied to any administrative status.

The experience of these jurisdictions points to one thing: investors do not seek tax havens or exemption lists. They seek predictability. If they cannot calculate the consequences of a mechanism upfront, they will not invest.

Conclusion: The Right Step, Left Half-Done

We can say that Article 11 represents a turning point for Turkish startup law. It has introduced the concept into statute, disapplied the Turkish Commercial Code rules, and sent a positive signal to the ecosystem. Credit where it is due…

But an honest assessment must also say this: in its current form, this regulation is not a convertible note regime, it is a convertible note exemption. Moreover, if the ministerial implementing regulation clarifies the automatic conversion mechanism, standardises contract terms, and establishes a basis for tax treatment, this article will have real practical effect. If not, the statutory text will remain a symbolic gesture.

The fact that matters requiring clarification for workability have been delegated to a ministerial regulation is, from the standpoint of the hierarchy of legal norms, a separate and, regrettably, increasingly familiar story…