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01 December 2020
The financial crisis caused by the COVID-19 pandemic has forced companies to think creatively about how to raise funds in order to keep cash flow regular. Thus, following the introduction of social distancing in Brazil, which significantly affected commerce, there was an uptick in the use of crowdfunding platforms.
Crowdfunding platforms are virtual systems that allow the public to donate resources via the Internet. As such, there is no need for companies that register on these platforms to provide a financial return to investors. This type of financing is increasingly used by small and medium-sized enterprises, such as bars and restaurants,(1) which carry out online fundraising campaigns. As of April 2020, almost R$1 billion had been contributed through collective financing campaigns to companies affected by the pandemic.(2) Evidently, crowdfunding is an important tool that can spark real social action when used in a period of crisis.
Equity crowdfunding (also known as 'investment crowdfunding') is another form of online fundraising conducted via an electronic platform for participatory investment which can help to boost business. Unlike regular crowdfunding, parties which participate in equity crowdfunding expect a financial return on their investment.
This type of digital fundraising is centred on the investment figure; in other words, an enterprise offers equity interests or debt securities which can be converted into equity to the public via an online platform in exchange for their investment. As to the legal nature of fundraising via equity crowdfunding:
There is no doubt that the offer of securities and participatory investment contracts through electronic platforms can be characterized as a public offer for the distribution of securities, with a view to taking place via the internet, therefore accessible, at least in principle, to the entire community of potential investors.(3)
In view of the evident characterisation of this form of investment as a public offering, in 2017 the Brazil Securities and Exchange Commission (CVM) issued Normative Ruling 588 (ICVM 588) to regulate the creation and use of electronic participatory investment platforms (for further details please see "CVM eases investment crowdfunding rules"). Currently, this type of investment fund is available only to companies which:
Almost three years after the issuance of ICVM 588, the CVM commenced a public consultation (SDM 02/2020) in order to review Brazil's equity crowdfunding rules.
CVM Market Development Superintendent Antônio Berwanger explained the motivation behind the consultation as follows:
The experience accumulated by CVM in the registration and supervision of crowdfunding platforms, combined with the evolution and maturation of the market since 2017, mobilized the CVM to propose adjustments to the regulatory framework. The improvements submitted to the public consultation will bring greater protection to investors and will foster the development of this aspect of the Brazilian capital market.(4)
The main changes suggested in the public consultation document are:
ICVM 588 prohibits the disclosure of offers. However, the draft normative ruling that will amend ICVM 588, disclosed by the CVM, allows the disclosure of public offers provided that the following information is disclosed:
Further, electronic guidance setting out essential information about the offer must be highlighted on the website of the collective investment platform.
The CVM recognises the need to expand the possibilities to disclose offers to enable such offers to reach more investors.
In addition, the CVM has suggested that the annual gross revenue of a 'small' company be increased by R$30 million for the purposes of the normative ruling, and that the maximum total funding amount that a small company can raise in one year be increased from R$5 million to R$10 million. Further, the public consultation document proposes that the total amount invested by each investor per year be increased to R$20,000, with an even higher limit proposed for qualified investors.(5)
The limit of the gross annual revenue of the economic group of which a small company is part has also been increased.(6) According to the CVM, this will increase flexibility for nascent companies within larger economic groups, as well as for real estate companies with developers which use electronic platforms for participatory investment.
The public consultation document also proposes that equity crowdfunding platforms be permitted to make secondary offers of securities, provided that the total amount does not exceed 20% of the maximum target value of the offer. In the explanatory statement to the public consultation, the CVM explained that:
This measure will enable investors who own securities from the same issuer to trade through the platform, which should provide a meeting environment between them. To promote such negotiations, platforms must ensure (i) that the securities that are the subject of the negotiations are subject to bookkeeping, as well as guarantee the title to the securities by the sellers, (ii) that the buyers also acquired securities from the same issuer and, further, (iii) that the delivery of the security only occurs upon payment, assisting investors in the necessary procedures for the correct transfer of the securities.(7)
It is also proposed that issuing companies be allowed to carry out an additional round of investment, in which an additional lot of securities would be issued, limited to 20% of the maximum target value of the offer and provided that:
In addition, it is proposed that the minimum paid-in capital of an investment crowdfunding platform be increased from R$100,000 to R$200,000. According to the CVM, this is in response to its concerns about a possible lack of structure compared with other regulated activities involving platforms and compliance with the regulations.(8)
If the proposed changes are implemented, the range of companies that will be able to raise funds through participatory investment platforms, along with the values that can be raised and invested, will be significantly increased. In addition, permitting the disclosure of offers would considerably increase their reach and boost the volume of investment contributions made via equity crowdfunding platforms.
The possibility of secondary trading of securities will bring more liquidity to negotiations and represents another incentive for investors, which may be able to make financial gains by selling securities in a secondary way. Further, increasing the minimum paid-in capital of investment crowdfunding platforms would create greater security for investors.
Arguably, there is no better time to introduce the proposed changes to ICVM 588. Given the effects of the COVID-19 pandemic and the need to restart the economy once the crisis is over, any attempts to facilitate and improve fundraising possibilities will be welcomed by companies which are suffering from a continuous decline in revenue.
The public consultation was open to comments from the general public until 24 June 2020. If implemented, the proposed changes will create good investment opportunities for companies which use equity crowdfunding platforms.
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.
(1) Further information is available here.
(2) Further information is available here.
(3) Freitas, Bernardo Vianna, Teixeira, Priscila Feitosa and Ferreira, Pedro Rocha "Crowdfunding: Análise Crítica e Aspectos Práticos da Instrução CVM nº 588/2017" in Gontijo, Bruno Miranda; Versiani, Fernanda Valle [Coords] Cruz, João Vitor O da Costa and Penna, Thomaz Murta e [Orgs], Direito Societário e Mercado de Capitais, Belo Horizonte: Editora D'Plácido, 2018.
(4) Further information is available here.
The total amount invested by an investor in securities offered with exemption from registration under the terms of this Instruction is limited to R $ 20,000.00 (twenty thousand reais) per calendar year, except in the case of an investor: III - whose gross income annual or the amount of financial investments is greater than R $ 200,000.00 (two hundred thousand reais), in which case the annual investment limit mentioned in the caput can be increased to up to 10% (ten percent) of the greater of these two values by calendar year.
Paragraph 3 In the event that the small business company is controlled by another legal entity or by an investment fund, the annual consolidated gross revenue of the group of entities under common control cannot exceed R $ 60,000,000.00 (sixty million reais) in the fiscal year ended in the year prior to the offer.
(7) Public Hearing SDM 02/2020, available here.
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