Bulgaria on the road to modernisation or how collective financing will become part of the national legal framework

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The Parliament adopted at first reading a bill (the “Bill”) amending and supplementing the Public Offering of Securities Act (POSA), submitted by the Council of Ministers. The main highlight of the envisaged amendments is the introduction into national law of the figure of “collective financing“, better known as crowdfunding. The purpose of this legislative innovation is to create national measures necessary for the implementation of Regulation (EU) 2020/1503, thus ensuring the regulation and supervision of collective financing activities on the territory of the Republic of Bulgaria.

What is crowdfunding and how does it work in practice?

By definition (not legal), crowdfunding is a form of alternative (unlike traditional bank credits) financing in favour of start-ups as well as for small and medium enterprises.

There are two main legal means to provide such financing:

  • by means of loans; or
  • through the placement of transferable securities or other eligible instruments without a firm commitment.

Thus, crowdfunding services are essentially a form of neutral intermediation consisting of establishment of relations between a small/medium/startup enterprise and potential investors involved in fundraising provided to the enterprise. For each investment, a basic information document is drawn up for investors to get acquainted with the project and to subsequently decide whether to provide funds thereto.

The Bill distinguishes two main types of investors, depending on their knowledge, experience and available resources, introducing the concepts of “sophisticated investor” and “unsophisticated investor”. Crowdfunding service providers are required to provide a wider range of information to unsophisticated investors and to carry out due diligence on the appropriateness of providing services to such investors.

What is about to change after the amendments?

In line with the European legal framework, the Bill provides that, as of November 10th, 2022, crowdfunding service providers will be subject to licensing. The licensing procedure itself will take place before the Financial Supervision Commission (FSC). The so-planned licensing is somewhat similar to the one currently applicable for investment intermediaries, but is considerably simplified from administrative procedural point of view, whereas the fees and eligibility requirements are lower. Thus, the equity capital of applicants for a crowdfunding licence should be in the higher amount between the amount of EUR 25 thousand and ¼ of the applicant’s fixed total expenses for the previous financial year. The fundraising process itself shows similarities to traditional public offering of securities, but is also simplified insofar as the information document to introduce investors to the funded project is not subject to review and explicit confirmation by the FSC.

Scheduled entry into force and consequences thereof

The Bill allows incumbent crowdfunding undertakings to continue their operation as before until obtaining a license, but no later than November 10th, 2022. Carrying out crowdfunding activities without a licence leads to significant financial sanctions and fines. The introduction of crowdfunding also presupposes introduction of numerous sanctions for non-compliance with the legal framework, with fines amounding up to BGN 500 000 or up to 2.5% of the total annual turnover of the defaulting enterprise.

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