Innovative Legal & Business Services

The present analysis particularly concerns crypto projects that aim at rendering services related to investment activities like portfolio management. This material is not exhaustive and does not constitute legal or financial advice.
There are various forms for organising your financial and investment activity such as collective undertakings like collective investment scheme and alternative investment fund, European venture capital fund, investment firm, etc., depending on what you want to achieve. How, though, can a blockchain- and digital assets-based project team make an adequate choice for organising the business?

Navigating EU regulatory regimes

The EU legal framework in the field of financial assets, investments and other activities inherent to capital markets includes several regulatory regimes, namely under the MiFID II (Markets in Financial Instruments Directive) and under the upcoming MiCA Regulation (Markets in Crypto Assets). Other relevant acts are AIFMD (Alternative Investment Funds Managers Directive) as well as the EuVECA Regulation (European Venture Capital Funds). Upon a comparative analysis, what’s to note at the outset is that there is some overlapping between these acts and often times one refers to another regarding subjects’ obligations, competences, etc. On the one hand, MiCA Regulation will add legal certainty to the crypto-related industry; on the other hand, though, it is likely that crypto-related project and platform owners might get confused as to which regulatory regime is applicable to their business.

The present legal framework in Bulgaria

In the present Bulgarian legal framework, cryptocurrencies (Bitcoin, altcoins) are still perceived, audited and declared before NRA (National Revenue Agency) as a financial asset. Up to this moment, no licensing regime is envisaged for crypto-related services and activities.

For more information about the current legal framework on crypto assets in Bulgaria, read here.

As to which EU country is best suited for your crypto project, including licensing terms, you may read more here.

SME Growth Market beam

If you are a startup (not positioned in the crypto-asset industry for the time being, though) and looking for an opportunity to raise funds, listing on the SME Growth Market beam is an option to look into. The SME Growth Market beam is a special market organised by the Bulgarian Stock Exchange (BSE) which allows small and medium companies in Bulgaria to receive financing. It falls within the definition of a Multilateral Trading System (MTF) and is not a regulated market within the meaning of the Markets in Financial Instruments Act.

Only financial instruments like issues of shares, depository receipts, bonds, warrants and subscription rights may be admitted to trading on the beam market. Only financial instruments issued by joint stock companies can be traded on the beam market. A company is considered an SME before being admitted to trading if it meets at least two of the following three criteria:
- Less than 250 employees;
- The net annual turnover does not exceed 50 000 000 €;
- The total book value of the assets does not exceed 43 000 000 €.

Thus, in view of what assets can be traded and the legal and organisational form of the companies admitted to the market, listing on the beam market is restrictive regarding crypto assets.

Alternative Investment Fund

An alternative investment fund (AIF) is a collective investment undertaking which raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors. AIFs are an alternative to conventional investments in stocks, bonds and fiat (it is not an undertaking for collective investment in transferable securities) and may include venture capital funds, derivatives, private equity, hedge funds, cryptocurrencies, etc.
The national and EU framework regulates the activity of alternative investment funds managers (AIFMs). An AIFM may be external or the AIF itself, where the legal form permits it. All AIFMs, based in the EU, regradless of whether they manage one or more AIFs within the EU or in a third country, fall within the scope of the AIFM Directive (AIFMD).

In Bulgaria the Financial Supervision Commission is the competent authority for licensing AIFMs. Under the licensing regime, the value of the assets in AIF exceeds the following thresholds: € 100 000 000 (with leverage), respectively € 500 000 000 (when the portfolios consist of non-leveraged AIF). For assets below these thresholds, a registration regime is set. Authorisation is valid for all EU Member States.

AIFM which is an internally managed AIF must have an initial capital of at least 300 000 €. Where an AIFM is appointed as external manager of AIFs, the AIFM shall have an initial capital of at least 125 000 €. A number of operating conditions for AIFMs are envisaged in the AIFMD (management and representation, conflict of interests, liquidity management, depositary, etc.).

Thus, the AIFs are defined as “innovative investment strategies and concepts” and, at present, there is no explicit legal prohibition assets in AIFs to be virtual currencies. What’s more, at the end of last year the European Commission provided an answer to the ESMA’s (European Securities and Markets Authority) question whether managers of undertakings investing in crypto assets are subject to the AIFMD. The Commission underlines that an assessment should be made on a case-by-case basis and as long as a collective investment undertaking which raises capital from a number of investors to invest in crypto assets in accordance with a defined investment policy for the benefit of those investors, it will be deemed as an AIF under Article 4, para. 1, letter a) under the AIFMD. Plus, as the AIFMD does not provide a list of eligible or non-eligible assets, AIFs may, in principle, invest in any assets provided that the AIFM can ensure compliance with the AIFMD.

In any case, it is recommendable to get familiar with the specific regulatory requirements and guidelines of national financial supervisors regarding investments of AIFs in crypto assets. Malta and Liechtenstein, for example, are among the European countries which have developed clear guidelines, rules and requirements for AIFs investing in cryptocurrencies.

European Venture Capital Fund

Under certain conditions, AIFMs that focus on newly established undertakings and/or undertakings at an early stage of development, may qualify for the so-called EuVECA passport with regards to marketing their venture capital funds. The EuVECA label allows eligible AIFMs to target not only accredited investors within the meaning of the MiFID II, but also semi-professional investors (including startups) across the EU. This serves as an advantage in choosing to organise your crypto business as an AIF and, as an AIFM, to qualify for the EuVECA label.

Investment Firm

Licensing as an investment firm (IF) is also an option to consider when choosing in what legal form to organise your investment activity. At present, however, there are restrictions when it comes to investment activities and services related to crypto assets.

An investment firm is a legal person whose regular business is providing one or more investment services or performing one or more investment activities on a professional basis. The legal form is a limited liability company or a joint stock company. The initial minimum capital varies depending on the selected investment services and activities (for instance, 250 000 leva for execution of orders on behalf of clients and/or portfolio management). IFs may also provide custodianship and related services as additional investment services. IFs have more freedom than AIFMs as they can make transactions with financial instruments both when dealing on own account and on behalf of clients. There are strict obligations for notifying clients about the risks pertaining to transactions (there are specific requirements for the content of this information, etc.).

Licensing as an IF would allow you to offer more diverse services and activities, but here the limitation when compared to an AIFM is that, currently, the regulatory framework lets IFs perform only transactions in financial instruments within the meaning of MiFID II and the Bulgarian Markets in Financial Instruments Act respectively, and cryptocurrencies are not considered as financial instruments.

Can an AIFM act as an investment firm?

An AIFM may choose to expand the scope of its license to include additional investment services typical of IFs under the MiFID II (the so-called “top-up permissions”). These services include:
1. management of portfolios of investments in accordance with mandates given by investors on a discretionary, client-by-client basis;
2. investment advice on financial instruments;
3. safe-keeping and administration in relation to shares or units of collective investment undertakings;
4. reception and transmission of orders in relation to financial instruments.

Additional authorisation by the Financial Supervision Commission is required.

These top-up permissions do not pre-qualify an AIFM as an investment firm under the MiFID II.

Investment firms authorised under the MiFID II shall not be required to obtain an authorisation under the AIFMD in order to provide investment services such as individual portfolio management in respect of AIFs (Art. 6, para. 8 AIFMD).

Are the AML/CFT measures applicable to investment firms and AIFMs?

Investment firms and AIFMs are obliged entities pursuant to Art. 4, p. 8 and 9 under the Bulgarian Anti-money Laundering Act. Therefore, they are obliged to identify their clients and to verify their identity, plus to comply with the rest of the measures envisaged therein.

What does the upcoming EU regulatory framework on markets in crypto assets hold for the crypto business?

When assessing which is the most suitable legal form for your investment activity and the related licensing requirements for legal entities providing the services, the relationship between the applicable MiFID II rules and the forthcoming single regulation of the markets in crypto assets is important.

In addition to the requirements for issuers of crypto assets, the MiCA Regulation sets out a framework for regulated "crypto-asset services", modeled largely in line with "investment services" under the MiFID II.

In order to provide crypto asset-related services, which include the operation of a trading platform for crypto assets and the exchange of crypto assets for fiat currency or other crypto assets, the company must be authorised as a crypto-asset service provider, investment firm or credit institution. The authorization process will include strict control over the company's business, including in relation to its management and in particular the suitability and competence of its bodies, its owners/controllers and the control systems set in place.

The MiCA Regulation Proposal envisages that investment firms authorised under MiFID II shall not be subject to licensing as crypto-asset service providers where they only provide one or several crypto-asset services equivalent to the investment services and activities for which they are authorised. For that purpose, if you are licensed as an IF for dealing on own account, you will be equally authorised to provide services like „the exchange of crypto assets for fiat currency” and „the exchange of crypto assets for other crypto assets”. It goes the same when you are authorised to perform the investment activities “operation of an MTF” and “operation of an OTF” which are equivalent to “the operation of a trading platform for crypto assets” under the MiCA Regulation.

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Although the upcoming European single framework for regulation of crypto assets is under discussion, a timely preparation of your crypto business by getting familiar with the specific regulatory requirements on the way is recommendable. Amid the dynamic environment in which innovative technologies are developing at rapid terms, the maxim "Change is the only constant" well applies. And law is not and should not be an exception to it.

Get an in-depth overview of the MiCA Regulation and how to get your crypto business ready for the future in Jenny Gancheva’s latest e-book, “EU crypto assets regulation (MiCA) - what to expect?”, here.

For legal advice and assistance in connection with crypto-related projects, do not hesitate to contact us here.

Pavla Tsvetkova

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