Brazil: Brazilian Private Equity Investment Funds - The Applicable Rules Change Again*

The Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) enacted CVM Instruction No. 501, of July 15, 2011 (CVM Instr. 501/2011), which amends CVM Instruction No. 406, of April 27, 2004 (CVM Instr. 406/2004), and CVM Instruction No. 460, of October 10, 2007 (CVM Instr. 460/2007), dealing, respectively, with Private Equity Investment Funds (Fundos de Investimento em Participações - FIP) that receive financial support from development entities (organismos de fomento) and Infrastructure Funds (Fundos de Investimento em Participações em Infraestrutura - FIP-IE) established by Law No. 11478, of May 29, 2007 (Law 11748/2007).

The Brazilian regulator promoted changes in CVM Instr. 406/2007 and CVM Instr. 460/2007 with the exclusive purpose of adapting the wording of the rules to the modifications introduced in Law 11478/2007 by Law No. 12431, of June 27, 2011 (Law 12431/2011), resulting from the conversion into law of Provisional Measure No. 517, of December 30, 2010. Law 12431/2011 created the Intensive Economic Production on Research, Development and Innovation Funds (Fundos de Investimento em Participação na Produção Econômica Intensiva em Pesquisa, Desenvolvimento e Inovação - FIP-PD&I).

Pursuant to article 2 of CVM Instr. 406/2007, the FIP that receives direct financial support from development entities is authorized to: (i) issue units (cotas) of different classes, with differentiated economic and financial and/or political rights, to be established in the Fund´s regulation, and (ii) borrow directly from the development entities, agencies or banks, provided that the total amount of these loans will be limited to 30% of the Fund's assets. In both situations, the FIP must obtain a formal financial support commitment from development entities of making investments or granting finance in favor of the Fund. In this context, "development entities" means multilateral organizations, development agencies and development banks whose funding is originated from contributions and dues paid mostly with budget resources of a single or several governments, and whose control is governmental or multi-governmental.

CVM Instr. 501/2011 extends the same conditions to the FIP-IE and to the FIP-PD&I that receives direct financial support from development entities.

The FIP-IE and the FIP-PD&I shall maintain at least 90% of its net worth value invested in shares, subscription bonus, debentures convertible or not into shares or other securities issued by closely-held companies or publicly-held corporations (the target companies, as allowed by the FIP regulation enacted by CVM. The target companies must carry out new projects either of infrastructure1 or of intensive economic production on research, development and innovation within the Brazilian territory, in the following sectors: (i) energy, (ii) transport, (iii) water and sanitation, (iv) irrigation and (v) other areas considered priorities by the Federal Executive Branch.

New projects are: (i) those implemented after January 22, 2007; (ii) the intensive economic production on research, development and innovation projects implemented after June 27, 2011 (date of publication of Law 12431/2011 in the Official Gazette of the Union, when the law came into full force and effect) by special purpose companies which comply with the regulation issued by the Ministry of Science and Technology; and (iii) expansions at existing projects, implemented or under implementation, whenever the investments and the results of the expansion are segregated by means of the formation of a special purpose company.

The FIP-IE and the FIP-PD&I has a term of 180 days after obtaining the registry to operate with CVM in order to start its activities and to fall within the minimum investment threshold set forth above (i.e. 90% of the Fund´s net worth value). The same deadline (180 days) applies for the reversal of any noncompliance due to the closure of the project in which the Fund has invested. Once the 180 day-term is exceeded, the administrator must immediately notify CVM about the occurrence of the noncompliance, with appropriate justifications, also informing the reframing of the portfolio, whenever it occurs.

The companies in which the FIP-IE and FIP-PD&I invest must follow at least the corporate governance practices established by CVM for the companies which receive investments from FIPs.

Each FIP and FIP-PD&I must have at least five unitholders (cotistas). Each unitholder cannot hold more then 40% of the units issued by the FIP-IE and FIP-PD&I or receive earnings exceeding 40% of the total revenues generated by the Fund.

The regulation and marketing material of the Fund, including the prospectus, if any, should highlight: (i) the risk of low liquidity of the assets in which the Fund may invest, and (ii) the tax benefits of the Fund and unitholders, if that is the case, and the conditions that must be met to maintain these benefits.


* The former rules were commented in our article entitled "Brazil: New Rules For The Portfolio Of The Brazilian Private Equity Investment Funds" published by Mondaq on May 13, 2011.

1. The President of CVM recognizes that the country needs private equity and venture capitalists to invest and to help the local entrepreneurs. Only the 2014 FIFA World Cup and the 2016 Olympics to be hosted in Brazil will require at least US$ 50 billion in infrastructure investments, many of them privately funded. Source: The Economist. Alternative investments in Brazil: The buys from Brazil. February 17, 2011.

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Walter Stuber
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