How would you describe the general state of equity capital markets in your jurisdiction, including notable recent activity and deals?
Bulgarian equity capital markets are still relatively new and underdeveloped, and are yet to recover to match their peak performance before the 2007-2008 financial crisis. During 2018 there was one relatively sizeable initial public offering (IPO) in Bulgaria: the €25 million IPO of Gradus AD, a poultry and egg producer. Several listed companies made share capital increases on the stock exchange.
What recognised exchanges operate in your jurisdiction, and what are the pros and cons of listing in each?
Two regulated markets exist, operated by the Bulgarian Stock Exchange JSC (BSE): the BSE Main Market and the BaSE Alternative Market. The BSE Main Market is the main market in Bulgaria and is divided into several segments – the premium segment, the standard segment and several other special segments. Less liquid issues are traded on the BaSE Alternative Market. Their admission is made only ex officio by the BSE through relocation from the BSE Main Market if they no longer comply with the requirements of the main market. At the end of 2018, the BSE registered with the Financial Supervision Commission (FSC) the SME Growth Market under the EU Markets in Financial Instruments Directive (MiFID) II called BEAM (the Bulgarian Enterprise Accelerator Market). However, this is still not operational.
Reforms and case law
Are any regulatory reforms envisaged or underway with regard to equity capital markets? Has there been any recent case law affecting the markets?
MiFID II was transposed in Bulgaria in early 2018, with some aspects of the national regime yet to be adopted. The first draft of the outstanding legislation is expected to be published in Q1 of 2019.
Further amendments are expected to the Public Offering of Securities Act – transposing, among others, Directive 2003/71/EC – in order to reflect the new EU Prospectus Regulation (2017/1129), which is applicable as of 21 July 2019. The expected timeframe for these amendments is the end of Q2 of 2019.
Have there been any notable recent developments in financial technology (fintech) which affect equity capital markets in your jurisdiction?
In December 2018 the FSC launched an innovation hub aimed at facilitating the development of fintech projects targeted, among others, at the Bulgarian capital markets. This innovation hub is part of the FSC’s Fintech Development Strategy, which was approved in July 2018.
What primary and secondary legislation governs the issue and trade of equity securities in your jurisdiction?
Bulgarian securities law is centred around the Public Offering of Securities Act, the main piece of legislation related to public offers of equities and public companies’ regime. Among others, it transposes the EU Prospectus Directive (2003/71/EC), the EU Transparency Directive (2004/109/EC) and the EU Takeover Bids Directive (2004/25/EC). The Public Offering of Securities Act is supplemented by statutory instruments, such as Ordinance 2 of the Financial Supervision Commission (FSC), which introduces national rules for the public offers of securities and disclosure of information by public companies in addition to the requirements of EU Regulation 809/2004.
In respect of trading in equity securities, Bulgarian law complies with the EU Markets in Financial Instruments Directive II, implemented in the Markets in Financial Instruments Act and FSC Ordinance 58. In addition, there is a national regime, set out in FSC Ordinance 38 and in several other FSC acts.
The national legal regime is a combination of directly applicable EU regulations, acts of the Bulgarian Parliament, ordinances (mostly adopted by the FSC) and EU and local regulatory practices.
Which authorities regulate equity capital markets in your jurisdiction and what is the extent of their powers?
The FSC is the national competent authority for the Bulgarian capital market and supervises public companies. Its powers include, but are not limited to:
- granting and withdrawing licences for rendering investment services;
- prospectus approval;
- supervision over trading in equity securities;
- approval of tender offer memoranda;
- imposing penalties; and
- coercive measures for securities law violations.
What eligibility and disclosure requirements apply for primary listing of equity securities on recognised exchanges in your jurisdiction (eg, aggregate share value, free float requirements, trading record, working capital)?
For the Bulgarian Stock Exchange JSC (BSE) premium segment, equities should meet the following requirements:
- to have been previously listed on the standard segment for at least one year or the issuer’s total equity to be at least Lev50 million (the euro to Bulgarian lev exchange rate is fixed at €1 equals Lev1.95583);
- at least a five-year financial history;
- at least a 25% free float or a free float of at least Lev5 million;
- a monthly average turnover on the BSE for the preceding six months of at least Lev300,000, or the existence of a market-making arrangement for the securities;
- a monthly average of at least 150 securities transactions for the preceding six months, or the existence of a market-making arrangement;
- a reporting profit for at least two of the preceding five years;
- ongoing compliance of the issuer with applicable corporate governance standards and disclosure requirements; and
- information disclosure in both Bulgarian and English.
The listing requirements for the BSE standard segment are less strict (ie, a monthly average turnover for the last six months above Lev4,000 and a monthly average of at least five transactions).
Are there any exemptions from the listing requirements?
Exemptions apply where admission on a regulated market is sought in respect of:
- securities fungible with securities already admitted if they represent, over 12-month period, less than 20% of the latter;
- shares resulting from the conversion or exchange of other securities or from the exercise of the rights conferred thereof where the resulting shares are of the same class as these already admitted and represent, over a 12-month period, less than 20% of the latter;
- securities offered in respect of an exchange tender offer, a merger or division, bonus shares or offers directed solely to the managers and employees of the issuer.
Procedure and timeframe
What is the procedure and typical timeframe for listing?
In the absence of an exemption from the prospectus requirement, a listing prospectus must be drafted. The prospectus must conform with the requirements of the Public Offering of Securities Act and the EU Prospectus Regulation. As of 21 July 2019, the new Prospectus Regulation will apply and prospectuses will have to be aligned with it.
The Financial Supervision Commission (FSC)-led prospectus approval procedure typically takes two to three months. The listing on the BSE usually takes another two to three weeks. The equity securities must be registered with the Central Depository and with a FSC special register. When filing for listing, the issuer must attach to the application certain documents, including a copy of the prospectus, the FSC’s approval resolution and the registration certificate from the Central Depository.
What fees apply for an application to list equity securities?
As a supporting measure for the development of the Bulgarian capital market, the initial public offering prospectus approval procedure before the FSC is free of charge until the beginning of 2021. After that the FSC will charge a fee based on the total issue price of the offered equity securities: Lev900 plus 0.1% of the total issue price in excess of Lev200,000.
The BSE charges a listing fee of Lev500, excluding value added tax.
Listing versus admission to trading
Is there a distinction between listing and admission to trading in your jurisdiction?
In theory, equity securities may be listed on a multilateral trading facility organised in Bulgaria. However, multilateral trading facilities in Bulgaria are still underdeveloped. For this reason, standard practice is to list on the BSE regulated market.
Are there any differences in the rules, restrictions and procedures for secondary listings of equity securities?
A prospectus is unnecessary for secondary listing of securities if these have already been admitted to trading on another EEA regulated market for more than 18 months, provided that such admission was made based on a prospectus and that the ongoing obligations for trading on the respective regulated market have been complied with. Nonetheless, a prospectus summary in Bulgarian should be published, stating where the prospectus can be obtained and where the issuer’s published financial information is available.
Bulgarian issuers wishing to make a secondary listing on a foreign stock exchange may choose to offer their securities either by way of a secondary listing on the selected stock exchange or through issuance of depository receipts (eg, global depositary receipts). If the selected stock exchange is EEA domiciled, a prospectus should be filed either with the FSC (in case of listing of equities, unless prospectus exemptions apply) or with the respective home member state of the depositary receipt issuer (in case of issuance of depositary receipts).
Where a Bulgarian issuer is considering a listing in a third country (eg, on NASDAQ), it should meet the applicable foreign listing requirements (eg, produce a prospectus approved by the US Securities and Exchange Commission). It will also have to notify the FSC of its intentions and to provide copies of the draft prospectus and other listing particulars required by the third country`s laws (eg, the US Securities Act 1933), as well as a binding statement that it will present to the FSC copies of all documents made public or otherwise provided under the third county`s securities laws post-listing.
The secondary listing of a Bulgarian issuer abroad requires a careful legal analysis in view of any necessary amendments to the corporate status of the issuer and the unhindered exercise of shareholder rights under the equities, including when serving as underlying for depositary receipts. Ensuring a link between the central securities depositories involved is also important.
Are there any differences in the listing rules and procedures for foreign issuers?
Other EEA issuers can apply for admission to trading under the same terms as local issuers if they have undergone the prospectus passporting procedure under the EU Prospectus Directive. Once listed, ЕЕА domiciled issuers should submit to the BSE all relevant information, reports and other data subject to public or regulatory disclosure under their national law.
Issuers from third countries wishing to list their equities may choose to draft a prospectus in accordance with their national law, if the prospectus complies with the international standards determined by the International Organisation of Securities Commissions and the contents requirements under their national law are equivalent to these under Bulgarian law. If the issuer intends to publicly offer in Bulgaria equities which are not publicly offered or listed on a regulated market in the European Economic Area, the equities must comply with the requirements of Public Offering of Securities Act and the issuer must submit evidence that the offer will not breach its national law and that the exercise of rights of the domestic investors is ensured. Such issuers may apply for admission to trading under the same terms as local issuers. The prospectus must be submitted in Bulgarian.
Under what circumstances can a company be delisted? What rules and procedures apply?
A public company may be delisted in Bulgaria only if it meets one of the following requirements:
- The general meeting of shareholders has passed a resolution for delisting by a majority of two-thirds of the represented capital, provided that:
- the number of shareholders was less than 50 persons 14 days before the day of the general meeting, as well as on 31 December of the two preceding years; or
- the total value of the assets of the company was less than Lev200,000 according to the latest monthly balance sheet, as well as according to the two latest audited annual balance sheets.
- The general meeting of shareholders at which all shareholders were present or represented has passed a unanimous resolution for delisting.
- Following a tender offer, either:
- shareholders owning at least half of the tendered shares have accepted the tender offer; or
- the general meeting of shareholders has passed a resolution on the delisting by a majority of half of the represented capital, where the tender offeror may vote only with any tendered shares acquired.
- A squeeze-out was performed.
- Certain other conditions are present (eg, the issuer is subject to insolvency proceedings or declared insolvent or the FSC has imposed coercive measures ).
In practice, delistings follow mandatory or voluntary tender offers. Tender offer memoranda should be drafted in accordance with FSC Ordinance 41 and are published following FSC approval. The FSC checks whether the calculation of the proposed price is fair according to the calculation methods used. The tender offer must be valid for a period of 28 to 70 calendar days, as the offeror has chosen. After the completion of the tender offer procedure, and provided the company meets one of the above-mentioned requirements, it may apply for delisting before the FSC and delist its shares from the BSE.
Initial public offerings
What are the most common structures used for IPOs in your jurisdiction, and what are the advantages and disadvantages of each?
Issuers use mostly the book-building method, albeit some initial public offerings (IPOs) have been carried out by way of an auction on the Bulgarian Stock Exchange JSC (BSE). The book-building method tends to be preferred by issuers as it offers the possibility of achieving relatively higher prices of the IPO shares. The book-building procedure still requires a careful design in order to ensure fair treatment of all participating investors in the allocation of the offered shares.
Procedure and timeframe
What is the procedure and typical timeframe for launching an IPO?
Unless exemptions apply, an IPO requires a prospectus according to the Public Offering of Securities Act and the Prospectus Regulation. The prospectus should be approved by the Financial Supervision Commission (FSC). After approval, a notice for the public offer should be published stating the terms and conditions of the IPO. The notice must be published at least in one national newspaper or on the website of an information agency or other eligible media, as well as on the website of the issuer and the IPO managers. Publication must take place at least seven days before the start of the IPO. The notice publication requirement will not apply after 21 July 2019, when the EU Prospectus Regulation becomes fully effective. The prospectus must be published by:
- publication in the press;
- making printed forms available to potential investors at the offices of the issuer and IPO managers; or
- publication in electronic form on the website of the issuer and IPO managers.
After the IPO has been completed, the new securities must be registered with the Commercial Register and the Central Depository. Subsequently, the new securities must be registered with an FSC register and are eligible for admission to trading on the BSE. Typically, it takes six to seven months for completion of an IPO project.
What due diligence is required and advised in the IPO process?
Bulgarian law poses no explicit requirement for the carrying out of due diligence of the information included in the IPO prospectus. However, practice has gradually evolved towards due diligence processes by external advisers (eg, legal, tax or technical), acceptable to IPO managers. In the context of Bulgarian law, such checks will reduce any potential risks of claims by investors against the issuer or the IPO managers arising out of deficiencies in the prospectus.
Pricing and allocation
What rules and standards govern share pricing and allocation in the context of an IPO?
The IPO managers must comply with the requirements for pricing and allocating offered securities pursuant to Articles 38 to 43 of EU Regulation 2017/565. Before taking the mandate, the managers must inform the issuer of the targeted investors to which they will offer the equities and introduce internal rules and procedures aiming to prevent or manage any potential conflict of interests (eg, to prevent any under-pricing or over-pricing to promote interests of the managers’ other clients or their own interests and to prevent unlawful practices of allocating the offered securities, such as spinning or laddering). The IPO managers must provide the issuer with information about the pricing techniques that they intend to use. They must also adopt an allocation policy. This policy should be provided to the issuer before the managers receive the mandate. The managers must discuss with the issuer the placing process and obtain the issuer’s consent for the proposed allocation per type of client in accordance with their allocation policy.
Types/pros and cons
What types of follow-on offering are commonly used in your jurisdiction, and what are the advantages and disadvantages of each?
Follow-on offerings in Bulgaria are regulated under the Public Offering of Securities Act. Every existing shareholder has a pre-emption right to participate in follow-on offerings. This right cannot be waived and may not be overcome by a vote of the general meeting, except in limited cases such as the allotment of shares under share (option) plans for directors and employees of the issuer.
The pre-emption rights are materialised through the issuance of share capital increase rights in a proportion of one existing share to one right. The rights issues are admitted to trading on the Bulgarian Stock Exchange JSC (BSE) and are tradeable for a period of 14 to 30 days, as determined by the issuer. Within this term, existing shareholders and investors which purchased rights on the BSE can exercise the rights by subscribing to new shares in a proportion set out in the terms and conditions of the follow-on offering. On the fifth business day after expiry of the rights trading term, the unexercised rights are offered in a special auction organised by the BSE. Investors can acquire rights at this auction. The proceeds from the rights thus sold are distributed pro rata among rights holders who did not exercise their rights. Investors acquiring rights at the auction can exercise them within an additional subscription period (usually 10 business days).
Applicability and exemptions
When must a prospectus be filed? Are there any notable exemptions?
Generally, a prospectus is required for any public offer of equities and for their admission to trading on a regulated market, provided that an exemption does not apply. Notably, pursuant to the Public Offering of Securities Act and Article 1(3) of the new EU Prospectus Regulation, which already applies across the European Economic Area, a prospectus is unnecessary for a public offer with a total consideration in the European Union of less than the lev equivalent of €1 million for a 12-month period. In addition, a prospectus is not required for:
- offers solely to qualified investors or to less than 150 addressees per EEA member state, which are not qualified investors;
- offers in respect of exchange tender offers or in connection with a merger or division, provided that a document is made available, containing equivalent information as the information which otherwise will be provided in a prospectus;
- offers of new shares representing the distribution of dividends to existing shareholders, provided that they are from the same class shares and a document is made available, containing information on the terms and conditions of the offer; or
- certain offers directed solely to the managers and employees of the issuer (eg, under share (option) plans). In that case, existing shareholders have no pre-emption rights, provided that the public offer will not result in a capital increase of more than 1% within one year and any such subsequent capital increases will not result in an increase of more than 3%, if there was no standard capital increase procedure in the meantime under which the issuer’s capital was increased with at least 10%. The shares issued as a result of a public offer directed solely to managers and employees may not exceed 5% of the capital of the issuer.
Where admission on a regulated market is sought, a prospectus is unnecessary in respect of:
- securities fungible with securities already admitted to trading on the same regulated market, provided that they represent, over a 12-month period, less than 20% of the latter;
- shares resulting from the conversion or exchange of other securities or from the exercise of the rights conferred by other securities, where the resulting shares are of the same class as these already admitted to trading, provided that the resulting shares represent, over a 12- month period, less than 20% of the shares already admitted to trading; and
- securities which are offered under the exemptions from the prospectus requirement, specified in the second, third and fourth cases above provided that, in the third and fourth cases above, the respective securities which are to be admitted to trading are from the same class as those already admitted.
What must the prospectus contain?
The prospectus may be drafted as a single document or as three separate documents (ie, registration document, securities note and summary). The registration document generally contains:
- information about the issuer and its organisational structure and management;
- the risk factors to which the issuer’s activities are exposed;
- a business review of the issuer; and
- information on the issuer’s financial condition.
The securities note contains information on the terms and conditions of the public offer (including the subscription procedure) and the risk factors inherent to the offered securities. The summary must contain a brief resumé of the information provided in the other two documents.
Filing and approval procedure
What is the procedure for filing for and obtaining prospectus approval from the regulator? Can draft prospectuses be submitted to the regulator for preliminary comment?
According to EU Regulation 2016/301, the draft prospectus must be filed with the Financial Supervision Commission (FSC) in a searchable electronic format via electronic means. The draft prospectus must be accompanied by an approval request form drafted in Bulgarian and signed by a qualified electronic signature, as well as other supporting documents (eg, a certified copy of the issuer’s articles of association, the issuer’s resolution for the public offer/admission of securities to trading on a regulated market and for adoption of the draft prospectus). The FSC should acknowledge via electronic means the receipt of the draft prospectus no later than the second business day thereof.
The FSC will review the draft prospectus within 10 business days, or 15 business days for first-time issuers. After an initial review, the FSC may request the prospectus to be amended to eliminate any deficiencies. The FSC must direct the applicant to any necessary revisions to be made. The revised version of the prospectus must be submitted to the FSC for review within one month. This version must be submitted via electronic means in a marked-up version and a clean version. The FSC should review this revised version and either approve the prospectus (within an additional 10 business days, or 15 business days for first-time issuers) or decline approval.
There is no express procedure for the preliminary review of draft prospectuses by the FSC, and this is not a supervisory practice.
What types of prospectus liability can arise (eg, statutory, contractual, tort)? Which parties may be held liable?
The members of the management body of the issuer, its procurists and the offeror and the person asking for admission to trading are jointly liable for any damages arising out of untrue, misleading or omitted information in the prospectus. The officers responsible for the preparation of the financial statements of the issuer are jointly liable with the foregoing for any damages arising out of untrue, misleading and omitted data in the financial statements of the issuer. The issuer’s auditors are liable for damages arising out of the audited financial statements of the issuer. This liability derives from statute and is regarded as a form of tort liability.
There are no special rules on the liability of experts, whose expert opinions may be referenced in a prospectus.
Before launching the initial public offering (IPO) project, the persons who would be jointly liable for damages arising out of untrue, misleading or omitted information in the prospectus may enter into agreements among themselves in order to stipulate how liability, if any, will be allocated among them.
In addition, pursuant to the Penal Code criminal liability is imposed on any person who, in relation to public offer of securities, knowingly uses untrue favourable information in a prospectus or does not disclose unfavourable data which is of material importance in the making of an investment decision to acquire such securities. The penalty is imprisonment for up to three years and a fine up to Lev500.
What defences are available for liable parties?
The persons liable for the content of the prospectus may mitigate the potential risks of claims by investors by introducing full and comprehensive information in the risk sections of the prospectus for the risks to which the issuer and its business activities are exposed. A key defence would also relate to a pre-IPO due diligence as well.
It is extremely rare that cases against persons responsible for the contents of prospectuses reach the Bulgarian courts. As a result, the practicalities of the legal regime of prospectus liability in Bulgaria are still underdeveloped.
What methods are commonly used to market equity security offerings in your jurisdiction?
Equity securities are commonly marketed through roadshows and investor presentations, distributed among institutional investors. If retail investors are targeted as well, there are marketing campaigns and interviews with the management of the issuer in the national press.
Rules and restrictions
What rules and restrictions (if any) apply to the marketing of equity securities?
Marketing materials and publications relating to the public offer of securities must include information that the prospectus has been or will be published, and how potential investors can familiarise themselves with it. In addition, the marketing materials and publications relating to the public offer must not:
- include untrue or misleading information, including information which contradicts the information included in the prospectus, or refer to information which contradicts that contained in the prospectus;
- present a materially unbalanced view of the information contained in the prospectus, including by way of omission or presentation of negative aspects of such information with less prominence than the positive aspects; and
- contain so-called ‘alternative performance measures’ concerning the issuer, unless they are contained in the prospectus.
Further, the issuer and the initial public offering (IPO) managers may not make any statements which are inconsistent with the information contained in the prospectus or which contain any material information which is unavailable in the prospectus.
To what extent is bookbuilding used in your jurisdiction, and how does the process customarily play out? What are the advantages and disadvantages of using this process?
The book-building method is widely used in Bulgaria in relation to IPOs. Usually, according to the terms and conditions of the IPO, the price of the offered securities is proposed to potential investors either in a range or with a proposed floor, without a price cap. Potential investors are expected to submit their bids for the quantity and price of the securities they wish to subscribe for, and the final price of the offered securities is determined in accordance with the methods designated in the terms and conditions of the IPO, based on the bids submitted by investors (eg, as weighted average price of the investors’ bids).
The main advantage of the book-building method is that the pricing is achieved taking into consideration the demand by the market participants and how they evaluate the opportunities for future growth of the company. However, the terms and conditions of the public offer should be carefully designed as to ensure fair treatment of all bidding investors.
Role of advisers
Adviser roles and responsibilities Describe the role and responsibilities of the following advisers in the context of equity securities offerings, including how their relationship with the issuer is formalised (eg, through terms of agreements):
According to market practices in Bulgaria, IPO managers are responsible for structuring the entire IPO process, including the type of offering, the pricing and allocation methods. They also take charge of the placement of the offered securities and the determination of marketing initiatives relating to the IPO. Within the subscription procedure, banks and investment firms act as bookrunners and registration agents. They are usually the listing agents in respect of the admission of the securities to trading.
Auditors review the financial information included in the prospectus in order to verify that it is compliant with the audited financial statements of the issuer. In the case of forecasts or profit estimation to be included in the prospectus, auditors issue letters confirming that these are consistent with the accounting policies of the issuer. Other than that, the auditors issue letters confirming that the financial information included in the prospectus is, to the best of their knowledge, true and complete and complies with the issuer’s audited financial statements.
As per local practice, the issuer’s lawyers draft the prospectus and review whether the information incorporated therein is complete and complies with the minimum content requirements. They also provide legal assistance during the entire IPO project, such as drafting all necessary documents and representation of the issuer before the Commercial Register, the Central Depository, the Financial Supervision Commission and the Bulgarian Stock Exchange JSC. Lawyers acting for the banks usually check and verify whether the information included in the prospectus is true and not misleading and will take part in the IPO due diligence process.
The role of external legal counsel tends to increase in IPOs due to their professional skill and regulatory expertise as regards the due diligence process and the application of liability mitigation techniques.
(d) Any other relevant advisers?
Unlike debt capital market projects where there is an explicit requirement under Bulgarian law for the fair market value of any collateral posted to be determined by an external licensed evaluator on the posting of such collateral and subsequently at least on an annual basis, there is no such rule in respect of equity offerings. However, it is good market practice to evaluate the issuer’s most significant assets independently and to attach to or reference in the prospectus the respective expert reports.
What continuing obligations apply to issuers of equity securities? What are the penalties for non-compliance?
The continuing obligations under applicable law are set out in the Public Offering of Securities Act, which transposes the EU Transparency Directive, and in the EU Market Abuse Regulation.
Issuers of equity securities domiciled in Bulgaria are required to disclose regular financial (or regulated) information, as well as information on significant shareholdings.
The following types of regulated information must be publicly disclosed:
- the annual financial report within 90 days (if applicable, also consolidated within 120 days) of the end of the financial year (ie, 31 December);
- the semi-annual financial report within 30 days (if applicable, also consolidated within 60 days) of the end of Q2; and
- a statement on the financial condition or a more granular quarterly financial report within 30 days (if applicable, also consolidated within 60 days) of the end of Q1, Q3 and Q4.
Annual and semi-annual reports must remain public for 10 years, and quarterly information for five years.
Further, public companies are required to publicly disclose notifications received from persons who directly or indirectly have acquired or transferred voting rights representing 5% or a multiple of 5% of all voting rights in the general meeting of the respective company. The disclosure should be made public efficiently throughout the European Economic Area within three business days of receipt of such notification.
Breaches of the obligation to disclose information as per the first and second points above or information on significant shareholdings are punished with the higher of the following amounts:
- up to Lev50,000 or 5% of the issuer’s annual turnover as reported in its last official (consolidated) annual financial statement; or
- up to twice the profit realised or the loss avoided following the breach.
Failure to publish quarterly regulated information is punishable with lower penalties than above.
Issuers of equity securities listed on a regulated market or a multilateral trading facility are required to disclose to the public any issuer-specific inside information (ie, price sensitive non-public information) of which they become aware as soon as possible after identifying such information, subject to limited exceptions providing for a delay of the disclosure.
In addition, issuers must make public any notifications of so-called ‘manager’s transactions’ received. Such notifications should be sent by persons discharging managerial responsibilities within an issuer and persons closely associated thereto for every transaction in the issuer’s equity or debt securities or related derivatives after reaching an individual threshold of €5,000 in gross transaction value per year. Issuers must disclose such information within three business days of the notifiable transaction.
All information disclosed should be made public efficiently throughout the European Economic Area. Issuers are also obliged to post and maintain on their websites any such information for five years.
For breaches of the ad hoc disclosure obligation, issuers face pecuniary penalties of up to Lev2.5 million. The breach may also constitute market manipulation, punishable with a pecuniary penalty of up to Lev15 million.
For breaches of the obligation to disclose manager’s transactions, issuers face pecuniary penalties of up to Lev1 million.
In practice, most breaches of the Market Abuse Regulation are punished at the substantially lower statutory minimal thresholds.
Further to disclosure requirements, issuers of equities are required to report to the Financial Supervision Commission certain changes in their constitution and general corporate structure.
Market abuse provisions
Rules and restrictions
What rules and restrictions are in place to combat market abuse and insider trading? What are the penalties for breach of these rules?
The measures in place to combat market abuse are set out in the Market Abuse Regulation, the Implementation of Measures Against Market Abuse in Financial Instruments Act (the Market Abuse Act) and Articles 260a to 260c of the Penal Code.
Under the Market Abuse Regulation, market abuse in the following forms is prohibited:
- engaging or attempting to engage in insider dealing as defined in Articles 8 (1) and (3) and subject to exceptions in Article 9 (eg, trading in a security on the basis of relevant inside information);
- recommending that another person engages in insider dealing or to inducing another person to engage in insider dealing as defined in Article 8 (2) (eg, “tipping”);
- unlawfully disclosing inside information as defined in Article 10 and subject to the exceptions in Article 11 (eg, disclosing inside project information to not involved third parties); and
- engaging in or attempting to engage in market manipulation as defined in Article 12 and subject to the exceptions in Article 13 (eg, disseminating false information about an issuer or its securities in order to trade upon a change in the stock price).
In general, market abuse is an administrative offence punishable under the Market Abuse Act. Individuals are liable for negligence and wilful misconduct. Attempt and complicity (if not in themselves violating the Market Abuse Regulation) are not punishable by the law.
Responsible individuals are subject to a fine of up to Lev5 million. Legal entities are subject to a pecuniary penalty of up to Lev15 million.
Where the offence has caused or was aimed at causing significant harm, the individuals responsible can be subject to criminal penalties pursuant to the Penal Code. Individuals are liable only for wilful misconduct. Attempt and complicity are punishable.
Individuals who breach the prohibitions set out in the first, second and fourth points above can be punished with imprisonment of up to four years and a monetary fine, and can be deprived of the right to hold public office or the right to exercise a certain vocation or activity.
Individuals who breach the third point above can be punished with imprisonment of up to two years.
Legal entities which (would) have gained a financial or non-financial benefit from the criminal offense of an individual representing or working as an employee of such legal entity may be punished with a pecuniary penalty of up to Lev1 million. An additional administrative penalty as mentioned above is also possible.
The prohibition of market abuse is complemented by measures for the prevention and detection of detecting abusive behaviour. These measures include:
- ad hoc disclosure requirement for issuers;
- obligation of issuers to draw up and update insider lists;
- obligation of persons discharging managerial responsibilities within an issuer and persons closely related thereto to notify such issuer and the Financial Supervision Commission (FSC) within three business days of every transaction in that issuer’s equity or debt securities or related derivatives after reaching an individual threshold of €5,000 in gross transaction value per year;
- obligation of issuers to disclose to the public notifications received from persons discharging managerial responsibilities or persons closely related thereto, within three business days of the transaction date;
- obligation of persons discharging managerial responsibilities to refrain from trading in a respective issuer’s equity or debt issuers or related derivatives during closed periods of 30 days before the announcement of the issuer`s (consolidated) annual and semi-annual financial reports;
- documentation requirements for the disclosing market participant and the receiving market participant in the course of market soundings as defined in Article 11 of the Market Abuse Regulation;
- organisational requirements for persons professionally arranging or executing transactions to establish and maintain effective arrangements to detect and report suspicious orders and transactions; and
- requirements on the disclosure of conflict of interest for persons who produce or disseminate investment recommendations and public institutions disseminating statistics or forecasts.
For the breach of these requirements, the penalty is a fine of up to Lev1 million for individuals and up to Lev2.5 million for legal entities).
In practice, most breaches of the Market Abuse Regulation are punished by the FSC in the substantially lower statutory minimal amount.
In addition, the FSC may apply a variety of coercive measures (eg, an order ceasing the trade of a security, banning a person from dealing on their own account for a prescribed period or banning a person from holding a managerial position in an investment firm). The FSC has also established a whistleblowing function aimed at allowing individuals to report suspected market abuse, including through anonymous means.
What tax liabilities arise in relation to the issue and trade of equity securities in your jurisdiction?
Bulgaria applies a favourable tax regime for listed equity securities.
Pursuant to Bulgarian tax law, trading in equity securities which is made on the floor of a regulated market, whether in Bulgaria or elsewhere in the European Economic Area, is exempt from any taxes in respect of the capital gain received (for individuals) and is tax neutral for legal entities (for which tax losses are also offsettable). The tax exemptions apply to non-resident recipients of the capital gains alike. If the trading in equity securities is made over the counter, a 10% flat tax applies on the capital gain received (the tax is applied on the overall corporate profit of gainers which are business entities).
There are no stamp duties and transaction tax liabilities relating to the issuance and trading of equity securities.
Where a Bulgarian company carries out an initial public offering or lists on a foreign market by way of depositary receipts, this tax exemption will not apply to the capital gains on the sale of such receipts.
How can these tax liabilities be mitigated?
Bulgaria has an investor-friendly tax regime as regards equity securities and does not charge taxes on the capital gains received from the transactions in equity securities made on a regulated market. It also imposes no stamp duty or financial transaction taxes.
However, investors are strongly advised to seek the advice of tax counsel since the application of tax exemptions may require the preparation of relevant evidence, especially in the case of non-resident investors.