The Brazilian Securities and Exchange Commission [Comissão de Valores Mobiliários - "CVM"] enacted on November 26, 2013, CVM Regulation No. 540, to amend CVM Regulation No. 391 of July 16, 2003, as amended ("CVM Regulation 391"), which regulates the equity funds ["fundos de investimentos em participações - FIP"), intended to boost investments in small- and medium-sized companies.

The proposed amendments have been based on studies and discussions conducted by the Technical Committee of Smaller Deals [Comitê Técnico de Ofertas Menores - "Committee"], which was formed, among other invited public and private entities, by the Brazilian Agency for Industrial Development [Agência Brasileira de Desenvolvimento Industrial – ABDI], the Brazilian Association of Entities of the Financial and Capital Markets [Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais – ANBIMA], Commodities and Futures Exchange [Bolsa de Valores, Mercadorias e Futuros - BM&FBOVESPA], BNDESPar, CVM, and the Brazilian Innovation Agency [Agência Brasileira da Inovação - FINEP] with the objective of studying reforms in the Brazilian system to make it possible to finance small-sized companies through the stock market.

The Committee understands that changes in the regulation of FIPs may contribute to increase the investments of such funds in small- and medium-sized companies which obtain financing by distributing stock in the securities market without putting at risk or distorting the characteristics of such funds.

Under CVM Regulation 391, FIPs are investment funds in the form of closed co-ownership that use their funds to buy stock, convertible debentures, subscription warrants or other bonds and securities convertible into, or exchangeable for, stock issued by publicly held or closely held companies, participating in the decision-making process of the invested company.

The changes on CVM Regulation 391 concern a flexibilization on the requirement that FIPs have an effective influence in setting policy and strategic management of the invested companies. To this effect, it was provided the possibility of a FIP to invest up to 35% of its owners' equity in companies in which the FIP does not participate on the management, provided that these companies are listed in a segment oriented to the alternative investment market with corporate governance standards stricter than those required under the law, such as Bovespa Mais.

Initially the limit set for a FIP's investment was 20%, and the participation in the management was not required — after the public hearing, CVM adopted a limit of 35%, based on the market's reaction that the 20% limit was overly conservative.

Another suggestion put forward by the market, and accepted by CVM, was the change of the application period of resources, initially considered by the market as insufficient for the fund to identify companies in the market with the intended profile, take action and carry out investigations related to the negotiations with the selected companies before deciding in favor of or against the investment. The period was increased to 6 months, without the possibility of extension, as suggested by the market.

The strategy proposed by CVM was a more flexible requirement for participation in the management during the stage of divestment in regard to each invested company. This measure was important for the FIPs to be able to acquire interest in a closely held company, contribute to such company's strategy and management during the investment and maturation stage, promote the initial public offering and then, cease influencing the management as the interest held in the company decreases.

Such changes are another initiative on the part of the Committee to achieve its purpose of improving the Brazilian regulatory environment in order for the smaller companies to overcome the difficulty to access the stock market and obtain financing through public offerings. The work carried out by the Committee is extremely important because it develops the Brazilian stock market and improves the trading environment in view of the number and relevance of the small- and medium-sized companies in Brazil.

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