In July this year the National Assembly of Bulgaria adopted new rules and regulations concerning crowdfunding, which affect the market actors in the start-up ecosystem – the project owner, the investors and the intermediating organisation in the form of a crowdfunding service provider. Requirements for crowdfunding services are established regarding organisation, authorisation and supervision of the crowdfunding service providers, the activity of crowdfunding online platforms as well as transparency and marketing communications in relation with the provision of crowdfunding services. For breaches of the legal obligations of the crowdfunding service providers (legal persons) stringent sanctions are envisaged – 10 000 to 500 000 leva or up to 2,5% of the total annual turnover of that legal person. 1. The national legal regime incorporates the general EU legal framework.
In reviewing the summer editions of the State Gazette a trend is observed – the Bulgarian national legislator is set to amend the financial and investment laws and regulations of the state.
At the center of today’s blog publication are the amendments of the Bulgarian Law on Public Offering of Securities, State Gazette 51/01.07.2022. The amendments concern incorporation of Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937, the “Regulation”, for short. The majority of the changes are already in force.
2. Crowdfunding in the ecosystem of start-ups
Crowdfunding is increasingly an established form of alternative finance for start-ups and small and medium-sized enterprises (SMEs), typically relying on small investments. It represents an important type of intermediation where a crowdfunding service provider, without taking on own risk, operates a digital platform open to the public in order to match or facilitate the matching of prospective investors or lenders with businesses that seek funding. The two most frequent forms of crowdfunding are lending-based crowdfunding and investment-based crowdfunding usually through online platforms.
The EU legislator has acknowledged the following as benefits of crowdfunding to businesses:
- providing an alternative source of financing, including venture capital;
- validating a business idea;
- giving entrepreneurs access to a large number of people providing insights and information;
- being a marketing tool.
3. Requirements for crowdfunding services providers
a. Authorisation
Under the Law on Public Offering of Securities a crowdfunding service provider can be a joint stock or limited liability company that has received due authorisation (licence) by the supervisory competent authority – the Financial Supervision Commission. The Commission authorises a legal entity that has its seat and address of management on the territory of the Republic of Bulgaria as well as adheres to the respective legal requirements under the Regulation (Art. 12). No minimum capital requirement is established.
It is important to note that an authorisation to provide crowdfunding services does not equate to an authorisation also to provide payment services. Where a crowdfunding service provider provides such payment services in connection with its crowdfunding services, it also needs to be a payment service provider as defined in Directive (EU) 2015/2366.
b. Investor Protection
The Law directly reproduces and makes references to a number of provisions regarding the investor protection as provided for in the Regulation. To that end, crowdfunding service providers are obliged to provide potential investors with the so-called key investment information sheet. It must be in line with the increased legal requirements and criteria (See Art. 23 of the Regulation and Art. 170 of the Law on Public Offering of Securities).
All information, including marketing communications as referred to in Art. 27 of the Regulation, from crowdfunding service providers to clients about themselves, about the costs, financial risks and charges related to crowdfunding services or investments, about the crowdfunding project selection criteria, and about the nature of, and risks associated with, their crowdfunding services shall be fair, clear and not misleading.
In the interest of the effective protection of investors, a threshold at EUR 5 000 000 for a total consideration for crowdfunding offers made by a particular project owner is imposed.
To ensure adequate investor protection of different categories of investors participating in crowdfunding projects while facilitating investment flows, thе Regulation and the Law distinguish between sophisticated and non-sophisticated investors, and introduces different levels of investor protection safeguards appropriate for each of those categories.
4. What’s the importance of the Crowdfunding Regulation to the crypto businesses?
The Regulation covers both lending-based crowdfunding and investment-based crowdfunding where the funds are various financial instruments, including securities.
In the present Bulgarian legal framework, cryptocurrencies (Bitcoin, altcoins) are still perceived, audited and declared before NRA (National Revenue Agency) as a financial asset. They are subject to regulation of the upcoming MiCA (Markets in Crypto-Assets) Regulation but not of the Crowdfunding Regulation.
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In this regard, the following clarification is made in the Regulation itself:
§ 15. “Whilst initial coin offerings (ICOs) have the potential to fund SMEs, innovative start-ups and scale-ups, and can accelerate technology transfer, their characteristics differ considerably from crowdfunding services regulated under this Regulation.”
For legal advice and assistance in connection with the provision of crowdfunding services, authorisation and/or crypto-related projects, do not hesitate to contact us here.
Pavla Tsvetkova
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