Brazil: CVM Relaxes The Criteria For Fund Raising By Brazilian Small And Medium-Size Companies

Last Updated: 27 November 2012
Article by Walter Stuber

The Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) found a way to facilitate fund raising for Brazilian small and medium-size companies with the issuance of shares, without changing the applicable law or regulations.

At a Board meeting held on November 13, 2012, CVM decided to communicate to the market that it will assess on a case by case basis the possibility to grant an exemption (waiver) from the requirements of CVM Instruction No. 400, of December 29, 2003 (CVM Instr. 400/2003), which regulates the public offers for distribution of securities in the primary and secondary markets. This waiver intends to facilitate the access of small and medium-size companies to raise funds through the placement of shares with the investors in the Brazilian securities market.

CVM understands that is part of its institutional mission initiatives such as this, since Law No. 6,385, of December 7, 1976, that disciplines the Brazilian securities market and created CVM, establishes among the purposes of CVM in the exercise of their duties: (i) to stimulate the creation of savings and their investment in securities; and (ii) to promote the expansion and the regular and efficient operation of the stock market, and to stimulate permanent investments in the capital stock of publicly-held corporations controlled by private Brazilian capital.

For the purpose of giving this waiver, CVM is willing to consider applications for registration of public offers for distribution of securities by simplified analysis procedure, granting an exemption of the requirement relating to the non-compliance with the maximum limit of placement of shares in an amount equivalent to up to 1/3 of the outstanding shares in the market, provided that certain requirements are present.

In practice the bidder would be exempted from presenting the prospectus for distribution (prospecto de distribuição), which would be replaced by a notice (edital) of public offering on the stock exchange. In this way, the formation of price is kept in a transparent trading environment through auctions in the regulated market. Therefore, CVM can authorize distribution deals through auction, even when the offered shares exceed the 1/3 of the outstanding shares limit. This exemption would allow an initial public offering of shares (IPO) through an auction on the stock exchange.

Although the information available in the set represented by the auction notice and by the form of reference (formulário de referência) are quite similar to those contained in the prospectus, by means of the CVM`s waiver this information is not required to follow a typical preparation of prospectus for offers governed by CVM Instr. 400/2003. This process is very important to ensure the quality of the information, but CVM understands that it can be waived when the interest of facilitating the small and medium-size issuers' access to the Brazilian capital market is assessed.

CVM already waives the prospectus for offers with restricted efforts since 2009 and the experience has been positive.

This is an innovation in the regulatory framework of public offerings and CVM understands that it must act sparsely. Therefore, the offers to be analyzed through the simplified procedure initially must comply with the following parameters:

(i) the company should not be considered as a large-size corporation as defined by the applicable law. According to the sole paragraph of article 3 of Law No. 11,638, of December 28, 2007, which amended Law No. 6,404, of December 15, 1976 (the Brazilian Corporation Law - BCL), it is considered "large-size corporation" for the exclusive purposes of the BCL, the company or set of companies under common control that has in the previous fiscal year total assets exceeding R$ 240 million or annual gross revenue higher than R$ 300 million;

(ii) the company should not be in a pre-operating stage;

(iii) the company must be registered with CVM as category "A" issuer, pursuant to CVM Instruction No. 480, of December 7, 2009 (CVM Instr. 480/2009), and be with the updated record. The category "A" registration authorizes the trading of the issuer's securities in regulated securities markets;

(iv) the shares issued by the company must be admitted to trading on a regulated market segment with adoption of corporate governance practices;

(v) the amount of the offer may not exceed R$ 150 million;

(vi) the waiver of the requirements granted in this context cannot be reused by the same company within a period of six months from the date of closure of the offer; and

(vii) the offer should be directed exclusively to qualified investors within the meaning of article 109 of CVM Instruction No. 409, of August 18, 2004 (CVM Instr. 409/2004), being prohibited the trading for investors not considered qualified in the 18 months following the closure of the offer.

According to the provisions of article 109 of CVM Instr. 409/2004, the following are considered qualified investors: (a) financial institutions; (b) insurance companies and capitalization societies; (c) private welfare opened or closed capital organizations; (d) individuals or legal entities that hold financial investments in an amount superior to R$ 300 thousand and that additionally attest in writing their qualified investor condition according to an own term, set forth in Annex I to CVM Instr. 409/2004; (e) investment funds directed exclusively to qualified investors; (f) portfolio administrators and securities consultants authorized by CVM, in relation to their own monies; and (g) own social security regimes instated by the Federal Government, by the States, by the Federal District or by Municipalities.

With the simplification of the stock offerings for small and medium-size companies, CVM took another step in the direction of fostering capitalization via market. However, for a significant volume of new offerings to take place, specific points still need to be addressed, such as ways to attract closely-held companies. The IPO process is still costly for these companies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Walter Stuber
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