Contributed by Tsvetkova Bebov and Partners, a member of Eversheds Sutherland.
1. Market Overview
a. Biggest ECM and DCM transactions over the past 2 years
In terms of ECM transactions, the past two years were driven mainly by IPOs placed on the MiFID II SME Growth Market, operated by the Bulgarian Stock Exchange (BSE), called BEAM (Bulgarian Enterprise Accelerator Market). The booming start of the BEAM market was triggered by the IPO of Biodit in January 2021, followed by twelve successful IPOs of companies from different economic sectors until the end of 2022 and one secondary offering, totaling above BGN 43 million (approximately EUR 22 million).
It is noteworthy that the success story of the BEAM market for the past two years was recognized and supported by the Bulgarian regulators and the threshold for the exemption from publication of a prospectus including for IPOs on the BEAM market was uplifted to EUR 8 million in July 2022, meeting the maximum allowed exemption threshold under the new Prospectus Regulation (i.e., Regulation (EU) 2017/1129). The tax treatment also remains favorable – until the end of 2025, capital gains from trades in equities on BEAM don’t incur Bulgarian tax.
In addition, there were two significant IPOs targeting the Main Market (Standard Segment) of the Bulgarian Stock Exchange, being (i) Eleven Capital AD, a venture capital structure, which chose to fund its business through the capital market and completed the first Bulgarian IPO since 2018 in March 2020. Eversheds Sutherland assisted as the single legal counsel for this transaction; and (ii) Telematic Interactive Bulgaria, an online gaming business operated under the Palms Bet brand, which placed the most sizeable IPO for 2022, raising around BGN 16 million (approximately EUR 8 million).
On the DCM side, the last two years were relatively flat on the domestic market, with bank regulatory bonds being the most interesting instruments coming to the market. TBI Bank placed in July 2021 the first-ever T2 bonds traded on the Bulgarian Stock Exchange with a tranche of EUR 10 million out of EUR 30 million total books. The second successful attempt at raising funds through the market was made by Bulgarian American Credit Bank (BACB), which issued EUR 15 million MREL bonds in December 2022. Eversheds Sutherland advised on both transactions as issuer and single counsel.
In addition, during the past two years a number of local bonds were placed on the domestic market, the biggest of BGN 68 million (approximately EUR 35 million) in size.
International DCM activity from Bulgaria remains reasonably high, with the Republic of Bulgaria issuing regularly (the latest, being the Republic’s 144A EUR 1.5 billion tranches, issued in January 2023). Corporates are also issuing, with First Investment Bank issuing and listing in Luxembourg a total of EUR 40 million under its issuing program in late 2021 and early 2022.
2. Overview of the local stock exchange and listing segments (markets)
2.1. Regulated market
There are two regulated markets in Bulgaria, both operated by the Bulgarian Stock Exchange, the BSE Main Market and BaSE Alternative Market.
BSE Main Market is the main market and is divided into several segments. The prime share segment is called the Premium Segment and the other main segment is Standard Segment. There are also several other special segments, such as the Special Purpose Vehicles Segment, where the shares of REITs are traded, the Government Bonds segment, the Exchange Traded Funds segment, and the Bonds Segment.
Less liquid issues are traded on the BaSE Alternative Market. Their admission is made only ex officio by the Bulgarian Stock Exchange through relocation from the BSE Main Market if the issue or its issuer no longer complies with the requirements of the main market.
2.2. Non-regulated market
The Bulgarian Stock Exchange runs also the BEAM market, which is a MiFID II SME Growth Market. The efforts of BSE in the past year were mainly focused on the development of this multilateral trading facility (MTF) by attracting small and medium-sized companies to list their shares on BEAM. This approach has proved quite successful as thirteen IPOs were launched on the marked for the past two years, topped up by one listing on BEAM, overall giving fourteen investment opportunities for the investment base of BEAM. The BEAM market undertakes its steps toward reaching a more mature phase as several secondary offerings were already placed or are being announced to come soon.
BSE also operates the BSE International market, which is an MTF granting access for Bulgarian investors to gain direct exposure to blue-chip international companies from across the world.
3. Key Listing Requirements on the BSE
The key listing requirement for equity securities listings on the regulated market segments of the BSE is the publication of a listing prospectus approved by the Bulgarian competent authority, the Financial Supervision Commission (FSC) (see Section 4.). In addition, the following applies:
For the Premium Segment the equity issuer must have been profitable at least for two out of the preceding five years, must comply with the corporate governance standards (including to be disclosing information in English), as well as must meet the requirements for:
(i) financial history – at least five years of financial history;
(ii) free float – at least 25% free float or free float amounting to at least BGN 5 million (approximately EUR 2.5 million) in market cap;
(iii) total market cap – at least BGN 50 million (approximately EUR 25 million), alternatively the equities to have been previously listed on the Standard Segment for at least one year;
(iv) monthly average turnover – at least BGN 200,000 (approximately EUR 102,000) monthly average turnover in the equities listed on the BSE for the preceding six months; alternatively, the issuer must have an arrangement with a market maker; and
(v) a number of transactions – at least a monthly average of 100 transactions in the listed equity securities within the preceding six months; alternatively, the issuer must have an arrangement with a market maker.
The requirements for listing on the Standard Segment of the BSE are less strict and include a monthly average turnover in the listed equity securities within the preceding six months of at least BGN 4,000 (approximately EUR 2,045) and at least a monthly average of five transactions in the equity securities within the last six months.
Listings on BEAM require the production of a listing memorandum (instead of a prospectus), the employment of a BSE-approved advisor, and compliance with several other requirements.
For the listing on the Bonds Segment of BSE, the remaining maturity of the bonds must be at least one year and the total outstanding principal amount under the bonds must be at least (the equivalence of) BGN 1 million, denominated in BGN, EUR, or USD.
4. Prospectus Disclosure
4.1. Regulatory regimes (Prospectus Regulation or similar) – equity and debt
The new Prospectus Regulation, i.e., Regulation (EU) 2017/1129, applies in full as of July 21, 2019. This regulation, together with its supporting legislation (New EU Prospectus Legislation), applies directly across the European Union, including Bulgaria, and in the EEA as a whole, both for equity and debt instruments. Supporting legislation around the new EU prospectus regime (Bulgarian National Regime) has been introduced in the Public Offering of Securities Act (POSA) and became effective as of August 2020, along with certain other amendments made in the relevant secondary legislation of POSA, which have been subsequently adopted.
According to the New EU Prospectus Legislation and the Bulgarian National Regime, except where certain exemptions apply, a prospectus must be drafted, approved by the competent regulator, the FSC, and published, prior to the beginning of a public offer of securities in Bulgaria and/or the admission of securities to trading on a regulated market.
The prospectus can be drafted either as three separate documents (i.e., a registration document, a securities note, and a summary) or in one single document, which covers the required information from the three aforementioned documents. While the preferred option for issuers in Bulgaria in the last 15 years has been the preparation of a three-component prospectus, local practices are evolving towards a more commonplace use of a single document prospectus.
The prospectus must contain, as part of the registration document, information about the issuer and its organizational structure and management, the risk factors to which the issuer’s activities are exposed, a business review of the issuer, as well as information on the issuer’s financial condition. In addition, the securities note section of the prospectus must contain information on the terms and conditions of the securities and their offer and the risk factors inherent to the offered securities. The summary must contain a brief resume of the information provided in the registration document and the securities note and must make it possible for potential investors to understand easily the characteristics of the issuer and the offered securities.
Special rules apply to prospectuses in relation to securities issued by REITs. In addition to the minimum content of the prospectus, as provided in the New EU Prospectus Legislation and the Bulgarian National Regime, the prospectus for REITs must contain information regarding the investment policy, investment restrictions, and the characteristics of assets which may be acquired by the respective REIT, as well as data about the custodian bank, the services, which shall not be outsourced to third party (servicing) companies, information about such third party (servicing) companies, which shall be used, the evaluators of the REIT and applicable management fees and fees for servicing companies.
In relation to debt instruments issuances, where a publication of a prospectus is not mandatory (e.g., so-called private offerings), the Bulgarian Commercial Act provides for a minimum content of the offering circular, which must include the most important information about the offered bonds and the terms and conditions for subscription, such as information on the size of the offered bonds, face value and issue value of the bonds, their maturity and repayment schedule, the interest payment structure, the collateral (if any) under the bonds, the terms and conditions for the subscription of bonds, etc.
The prospectus or offering circular for covered bonds (the issuers of which may only be banks) must contain specific additional information to meet the requirements of the Covered Bonds Act, which transposes the requirements of the Covered Bonds Directive. This includes an outline of the rules on the cover pool register (including the access to the register and maintaining information therein), which the issuing bank must maintain for each covered bond; details of the cover pool (including details of the evaluation of the cover assets, geographic distribution, and maturity structure); and detailed for the requirements for over-collateralization, risk qualification of the cover assets, et cetera.
4.3. Local market practice considerations
After the New EU Prospectus Legislation became applicable, the local market practice follows the new regime. Nonetheless, there are still certain local specifics, which need to be taken into consideration.
Liability for the information included in the prospectus
The POSA provides, as required under the new Prospectus Regulation, that the members of the management body of the issuer, its procurators, as well as the offeror, the person asking for admission to trading, and (where applicable) the guarantor, are jointly liable for any damages arising out of untrue, misleading or omitted information in the prospectus.
However, it is noteworthy that according to the Bulgarian National Regime, in excess of the Prospectus Regulation requirements, the officers responsible for the preparation of the financial statements of the issuer are also 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.
On the other hand, there are no special rules on the liability of experts, whose expertized opinions may be referenced in a prospectus.
In addition to civil liability and administrative sanctions that may be imposed by the FSC, the Penal Code provides that there is criminal liability for any person who, in relation to a public offer of securities, knowingly uses untrue favorable information in a prospectus, or does not disclose unfavorable data, which is of material importance in the making of an investment decision to acquire such securities.
Still, there are no explicit requirements, under Bulgarian law or when it comes to local transactions market practice, for the carrying out of due diligence of the information included in the prospectus. Following the lead of Bulgaria-originated capital markets transactions, domestic practices are gradually starting to evolve towards the including of due diligence processes with the help of external advisors (legal, tax, technical, etc.), acceptable to the lead managers, aiming at reducing any potential risks of claims by investors against the issuer and/or the managers arising out of deficiencies in the prospectus.
Publication of the prospectus
According to the New EU Prospectus Legislation, the prospectus must be published in an electronic form on the issuer’s website and/or on the websites of the lead managers. Usually, the prospectus is not published on the website of the Bulgarian Stock Exchange until the offered securities are listed.
Notice for the public offer
Albeit no explicit requirement exists in the New EU Prospectus Legislation, the Bulgarian National Regime requires a notice for the public offer to be published prior to the beginning of the subscription period of the offered securities. This notice must contain the terms and conditions of the public offer and be published at least on the websites of the issuer and the lead manager/s. The publication must take place at least 7 days before the initial date of the subscription period.
4.4. Language of the prospectus for local and international offerings
The general principles of Article 27 of the Prospectus Regulation apply. Absent the practice of the FSC to date with approving prospectuses of non-Bulgarian issuers or of Bulgarian issuers who do not intend to offer their securities in Bulgaria, the FSC reviews draft prospectuses prepared in the Bulgarian language. This practice is likely to evolve toward the use of the English language even in the prospectus approval process.
Irrespective of the above rules, the preparation of English (unofficial) versions of Bulgarian prospectuses (even where an offer of securities thereunder will be made only in Bulgaria) has become relatively commonplace except in the case of smaller issuers or issuers. This trend is encouraged by certain BSE rules and corporate governance rules even though they would strictly apply to the post-IPO disclosure of information by issuers.
5. Prospectus Approval Process
5.1. Competent Regulator
The Financial Supervision Commission is the competent local regulator in relation to the Bulgarian capital market. The FSC approves prospectuses and supervises the trading of financial instruments. The FSC is also the competent regulator and supervisor for public companies. Its powers include ongoing supervision of public companies in relation to their compliance with transparency requirements, the Market Abuse Regulation regime, corporate governance standards set in Bulgaria, and the protection of the rights of the investors in financial instruments at large.
5.2. Timeline, number of draft submissions, review and approval process
The procedure for approval of the prospectus by the FSC usually takes around two months for first-time issuers and around а month and a half for follow-on offerings by more frequent issuers. However, after the introduction of the New EU Prospectus Legislation and the Bulgarian National Regime, the practice of the Bulgarian regulator is gradually evolving towards shortening the terms for prospectus approval to meet the international standards for scrutiny of prospectuses.
As a matter of practice, two submissions of drafts are necessary to obtain the approval of the prospectus by the FSC: after the first draft submission, the FSC typically reverts with instructions for revisions and updates of the information contained in the draft and subsequently approves the so revised draft prospectus if the FSC finds that the identified deficiencies have been remedied.
The approval procedure is strictly formal, but the regulatory practice towards meeting international standards for ongoing coordination with the regulator gradually evolves in the last year and is expected to be the “common rule” in the future.
According to the POSA, the FSC has special powers to reject approval of the prospectus also in cases where the public offer of shares will dilute existing shareholders due to the fact that the issue value of the offered shares is lower than the book value of the outstanding shares from the capital of the issuer, as well as where the FSC establishes that the rights of investors are not fully protected.
A decision of the FSC not to approve a prospectus may be appealed before the court. The grounds for appeal are, however, limited to a breach of procedure or law. In line with general Bulgarian administrative paradigms, the discretion applied by the FSC in the course of approval proceedings is not subject to judicial review.
6. Listing Process
6.1. Timeline, process with the stock exchange
The listing on the BSE typically takes two to three weeks after the public offer is finalized, and is not concurrent with the closing (end of placement and release of proceeds to the issuer) of a capital market transaction. The reason is that the respective securities ought to be registered with the Central Depository AD (Bulgaria’s CSD), as well as with a special register of issues and pubic companies, maintained by the FSC. The listing application with the BSE must be accompanied by (in addition to a copy of the prospectus) the FSC’s approval resolution, and the CSD’s registration certificate. The BSE grands listing by a resolution of its Board of Directors, wherein the first day of trading is determined.
Therefore, the local market is in expectation of reforms, which would make new issues immediately tradeable.
7. Corporate Governance
7.1. Corporate governance code/rules (iNED, board and supervisory composition, committees)
Corporate governance of Bulgarian public companies is regulated both at the legislative level, as well as in the National Corporate Governance Code (its current version from 2021) (NCGC), a soft law document applying the “comply or explain” principle.
The applicable law sets out requirements regarding the remuneration and composition of management and supervisory bodies of a public company and the establishment of an audit committee. Various rules are also put in place to ensure the protection of minority shareholders’ rights. For example, amendments to the POSA from 2020 transpose certain aspects of the second Shareholder Rights Directive (EU) 2017/828.
According to Ordinance No. 48 of the FSC, issued upon delegation by the POSA and several other acts of Parliament in relation to which the FSC exercises supervisory and regulatory functions, public companies are required to maintain and make public a remuneration policy which sets out details on the conditions for the award of fixed and variable remuneration and the provision of termination compensations to company directors and officers. The Ordinance sets out rules for deferral of variable remuneration, payment in instruments, and the claw-back of payments, and also allows public companies to form a remuneration committee. The POSA requires public companies’ annual reports to include a statement on the implementation of remuneration policies. Furthermore, under the Independent Financial Audit Act, public companies are required to establish an independent audit committee, which is tasked with providing additional oversight over a public company’s business and financials. Finally, under the POSA, public companies must appoint an investor relations officer and ensure that at least one-third of the members of their board of directors, respectively supervisory board, is independent. As part of the ongoing obligations under the POSA (see Section 9.a.) a public company must issue an annual corporate governance report on its compliance with the NCGC and provide information on the company’s diversity policy or explain the reasons for not maintaining one.
The NCGC supplements the legal requirements with non-binding guidelines for good corporate governance. The NCGC is aligned with the OECD Principles of Corporate Governance and contains recommendations for the composition of corporate bodies, management of conflicts of interest, protection of shareholders, and disclosure of information. The 2021 amendments to the NCGC also align it with the EU’s recent policies (including the Green Deal and SFDR, and United Nations’ sustainability and human rights policies).
A particular feature of corporate governance of Bulgarian public companies is a scrupulous regime on the shareholder approval (or qualified board approval), under threat of nullity, of certain material transactions of the public company. The POSA sets a variety of materiality thresholds (lower if an “interested party” is the counterparty to the transaction with the public company), which trigger the application of the above rules. By way of example, shareholder approval is required when a public company enters into a transaction whereby its exposure to the counterparty will exceed one-third of the lower of values of the public company’s assets according to the two latest balance sheets (which have been publicly disclosed and at least one of which is audited). The threshold is 1 percent (of the lower of the two values) if the counterparty is an “interested party,” e.g., where the same person directly or indirectly holds at least 25 percent of the votes in both the public company and the counterparty. Some would find this regime overly burdensome on public companies, others would support it in the name of protecting minority shareholders.
Another interesting aspect of Bulgaria’s regime of public companies, touching upon corporate governance, is that shareholders have a non-waivable preemption right in case of a share capital increase. This reflects on the leeway of majority shareholders (or company boards if authorized by the virtue of the company’s bylaws or a general meeting delegation) when planning follow-on offerings, i.e., share capital increases, after the initial going public.
7.2. Any other ESG considerations
Broadly at pace with global and EU-level developments, ESG considerations are gradually beginning to play an increasingly relevant role among issuers and investors. The 2021 amendments to the NCGC put a clear focus on sustainability reporting by boards (at least once per year), board education in that area, corporate focus on ESG matters (with emphasis on environmental sustainability, diversity, and human rights), and broad transparency.
We expect that Bulgaria’s first green bond is a matter of impending future, for example.
Documentation and Other Process Matters
a. Over-allotment (greenshoe or brownshoe structure)
Over-allotment structures, such as greenshoe, have not been used on the Bulgarian capital market regularly in the past years. This is due to the lower liquidity of the local market, which generally hinders oversubscription and the fact that security issues are generally placed by managers without a firm commitment (best effort placement). Thus, although the use of different over-allotment strategies is legally possible in accordance with general rules, e.g., on stabilization (see lit. c) below) or share buybacks, they have not been tested in practice.
b. Stock lending agreement – whether it is used and whether there are any issues (tax, takeover directive)
Under the current market practice, stock lending agreements do not play a role in the offering of securities in Bulgaria.
c. Stabilization – whether allowed and on what terms (MAR, local regimes)
Stabilization measures are generally allowed in Bulgaria. The conditions for stabilization follow the general requirements of the Market Abuse Regulation (MAR), as detailed in Commission Delegated Regulation (EU) 2016/1052, including e.g., any such measures/ transactions are subject to appropriate prior and subsequent disclosure and regulatory reporting and stabilization is confined to a 30-day stabilization period (60-days in the case of bonds) with restrictions applicable to the price levels during that period. Bulgarian law does not provide for specific local requirements.
Although allowed by law, stabilization measures are uncommon in domestic capital markets transactions in Bulgaria and therefore the available regulation is heavily underused. This lack of practice results in legal uncertainty as to the application of the rules on the side both of issuers and the competent regulator, the FSC.
8. Ongoing Reporting Obligations (Life as a Public Company)
The ongoing reporting obligations of issuers on the Bulgarian capital market are generally aligned with sectorial EU law and cover the disclosure of financial and other material information on an issuer, as well as the disclosure of information on certain shareholder activities. Most notably, these requirements stem from the Transparency Directive, as transposed in the POSA, and from the MAR.
8.1. Annual and interim financials
Issuers domiciled in Bulgaria that have listed equity or debt securities on a regulated market or have offered such securities to the public in Bulgaria are required to disclose regular financial information in accordance with Title 3, Chapter VIa of the POSA.
These disclosures include the following types of information:
(i) annual financial report (containing, i.e., audited annual financial statements, audit report, and a corporate governance report) – to be published on an individual basis within 90 days after the end of the financial year (in general December 31) and – where relevant – on a consolidated basis within 120 days thereafter;
(ii) semi-annual financial report (containing, i.e., six-month financial statements) – to be published on an individual basis within 30 days after the end of Q2 and – where relevant – on a consolidated basis within 60 days thereafter;
(iii) quarterly statement on the financial condition (containing key financials) or a more granular quarterly financial report – to be published on an individual basis within 30 days of the end of Q1, Q3, and Q4 and – where relevant – on a consolidated basis within 60 days thereafter.
In principle, financial information should be prepared in accordance with the IFRS if the issuer reports based on its consolidated situation, but it can also be prepared following the Bulgarian National Accounting Standards if the issuer reports on an individual basis only. Disclosures must be made (also) in the Bulgarian language if the securities are offered or traded only locally and in the case of dual listings. The biggest issuers and a number of other issuers report in both Bulgarian and English voluntarily. Where the securities are listed only on a foreign regulated market, the issuer should preferably report its financials in English.
The information must be made public through a news agency ensuring its efficient dissemination to the public in Bulgaria and the other EEA member states. Annual and semi-annual reports must be maintained for a period of at least 10 years, and quarterly reports for a period of at least five years.
An important exemption from the disclosure requirements under items (i) and (ii) above applies to issuers exclusively of debt securities admitted to trading on a regulated market, the denomination per unit of which is at least EUR 100,000 or its equivalent in another currency. This exemption, however, does not apply to the requirement under item (iii) above and is also of limited practical value due to the obligations of a bond issuer to provide similar information to the bondholders’ trustee.
Furthermore, the Commission Delegated Regulation (EU) 2017/565 sets general requirements for the disclosure of financial information by issuers, whose securities are admitted to trading on a Bulgarian MTF (see Section 2.b.). Under this regulation, MTFs must ensure that issuers publish annual financial reports within six months after the end of each financial year, and semi-annual financial reports within four months after the end of the first six months of each financial year. Operators may exempt debt issuers that have no equity instruments traded on MTF from the requirements to disclose semi-annual financial information. The details of these reporting requirements are left to the rules of each MTF.
8.2. Ad hoc disclosures
Ad hoc disclosures form another important category of ongoing obligations for issuers in Bulgaria. Its most notable example is the ad hoc disclosure of inside information under the MAR. In a broader sense, this category includes other disclosure requirements triggered by the occurrence of certain circumstances, such as the disclosure of managers’ transactions under the MAR and the disclosure of qualified holdings under the POSA.
Disclosures under the MAR
Bulgarian issuers of equity or debt securities traded, admitted, or applying for admission to trading on a regulated market or an MTF are required to disclose to the public any issuer-specific inside information, i.e., price-sensitive non-public information, of which they become aware, as soon as possible after identifying a piece of information as such. The public disclosure of inside information can be delayed, where an issuer has a legitimate interest in doing so or – in the case of issuers that are credit or financial institutions – due to financial stability considerations. The decision on the delay of disclosure must be properly documented by the issuer and comply with additional requirements aimed at preserving market integrity and confidentiality of the piece of inside information concerned.
In addition, an issuer must disclose certain transactions in or related to its instruments made by persons discharging managerial responsibilities within its structure or persons closely related to the latter, so-called “managers’ transactions.” For this purpose, the above persons are required to notify the issuer for each of their transactions in such issuer’s equity or debt securities (or related derivatives) after reaching an individual threshold of EUR 5,000 in gross transaction value per year. Issuers must fulfill their obligation within three business days of the relevant person entering into a notifiable transaction.
Both types of disclosures should be made through a media (news agency) which ensures the efficient dissemination of the information to as wide a public as possible on a non-discriminatory basis, free of charge, and simultaneously throughout the EEA. Issuers are further required to post and maintain on their websites any information made public for a period of at least five years.
Disclosures of significant holdings under POSA
Bulgarian equity issuers, whose securities are listed on a regulated market or have been offered to the public (public companies) are further required to disclose to the public any notifications received from persons who directly and/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 issuer. The disclosure obligation must be fulfilled within three business days of receipt of the respective notification through a new agency ensuring the efficient dissemination of the information to the public throughout the EEA.