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17 November 2020
The public offering of securities by small and medium companies – also known as 'investment crowdfunding' – has become a popular form of fundraising in the securities market. Under this collective investment mechanism, companies use electronic platforms to present their business as an investment opportunity to a large number of people in order to raise funds. In exchange for the funds, companies offer investors different types of security, including bonds (a credit against the company) or shares (the right to participate in the business).
Crowdfunding is especially useful for small companies and start-ups, given the difficulty that they experience obtaining financing via banks or traditional capital market options. It is in this context that crowdfunding has seen noticeable growth in Brazil. According to data published by the Brazilian Securities and Exchange Commission (CVM), in 2019 a total of R59,043,689 was raised through crowdfunding, a 28% increase compared with 2018 (R46,006,340). In addition, the number of offers launched increased from 56 to 81 and the number of offers successfully closed increased from 46 to 60.
Crowdfunding is subject to CVM regulation and inspection, pursuant to Article 2(IX) of Law 6,385/76 and, specifically, CVM Instruction 588 (ICVM 588), published on 13 July 2017. Under ICVM 588, small companies (MPMEs) can make a public offer of securities on an electronic participatory investment platform without having to register such offer – this considerably reduces the costs of the public offering.
Through ICVM 588, the CVM:
In light of the growing popularity of crowdfunding as a means of financing and maintaining small businesses' operations, it has remained on the CVM's agenda, leading to discussions as to how ICVM 588 can be improved.
Thus, on 20 August 2020, in the context of the COVID-19 pandemic, the CVM published CVM Resolution 4, which has made temporary changes, on an experimental basis, to the regulatory requirements established by ICVM 588.
The introduction of Resolution 4 was necessary due to:
Resolution 4 aims to relax the rules applicable to investment crowdfunding and mitigate the COVID-19 pandemic's impact on MPMEs in order to:
Alternative method of calculating annual gross revenue
Resolution 4 has – on an experimental basis and exclusively within the scope of matters regulated by ICVM 588 – introduced an alternative method of calculating annual gross revenue for the purposes of characterising a business as an MPME. Under Resolution 4, companies which have earned gross revenue of up to R5 million on an interim balance sheet calculated between 1 January 2020 and 30 June 2020, and which are not registered as a securities issuer with the CVM, may be eligible to make public offers of securities through electronic participatory investment platforms.
Previously, under Article 2(III) of ICVM 588, crowdfunding was available only for small businesses which:
Minimum target value
Under Resolution 4, the minimum target value for partial distributions of public offers must be equal to or greater than half of the maximum target value of said offer, subject to certain requirements.
Previously, under ICVM 588, the minimum target value for partial distributions had to be equal to or greater than two-thirds of the maximum target value of the offer.
Resolution 4 provides for an additional lot in public offerings made through an electronic participatory investment platform, limited to 20% of the maximum target value, provided that additional rules relating to the approval and disclosure of the additional lot are observed and that the annual funding limit per issuer is observed. This provision does not exist in ICVM 588.
Resolution 4 has come at an opportune moment given the economic crisis triggered by the restrictive measures introduced to combat the COVID-19 pandemic. It introduces notable rules to maintain MSMEs' access to financing alternatives and mitigate the negative impact of the current economic situation on these companies.
In addition, reducing bureaucratic tape and expanding crowdfunding operations in the capital markets is beneficial from the perspective of investors as it:
Resolution 4 took effect on the date of its publication (ie, 20 August 2020). Authorisations granted thereunder are valid for public offers initiated up to 31 December 2020.
For further information on this topic please contact Bernardo Freitas or Isabela Ardaya at Freitas Ferraz Advogados by telephone (+1 410 244 7400) or email (firstname.lastname@example.org or email@example.com). The Freitas Ferraz Advogados website can be accessed at www.freitasferraz.com.
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