Brazil: The Brazilian Regulator Increases The Offer Of Securities With Restricted Efforts

Last Updated: 29 September 2014
Article by Walter Stuber

On September 25, 2014, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) issued CVM Instruction No. 551 (CVM Instr. 551/2014), that amended CVM Instruction No. 332, of April 4, 2000 (CVM Instr. 332/2000), CVM Instruction No. 400, of December 29, 2003 (CVM Instr. 400/2003), and CVM Instruction No. 476, of January 16, 2009 (CVM Instr. 476/2009). CVM Instr. 332/2000 regulates the issuance and trading of Brazilian Depositary Receipts (BDRs); CVM Instr. 400/2003 regulates the public offer of securities for distribution in the primary and secondary markets; and CVM Instr. 476/2009 regulates the public offer of securities distributed with restricted efforts and the trading of these securities in the regulated markets.

The trading of securities in regulated markets1 in Brazil depends on the prior registry of the issuer with CVM. According to CVM Instruction No. 480, of December 7, 2009, there are two different categories of registry: (i) category A, which authorizes the trading of any types of securities; and (ii) category B, which excludes shares and share certificates of deposit as well as securities which attribute to the holder the right to acquire shares and share certificates of deposit as a result of the conversion or the exercise of inherent rights, provided that these securities are issued by the same issuer or by a company belonging to its economic group.

CVM Instr. 551/2014 includes the following securities, in the list of instruments which may be subject to a public offer distributed with restricted efforts in the Brazilian territory2: (i) shares issued by a company registered in category A; (ii) debentures convertible or exchangeable for shares issued by a company registered in category A; (iii) subscription bonus issued by a company registered in category A, even if they are attributed as an additional advantage to the debentures´ subscribers; (iv) certificates of deposits representing any of the securities mentioned in items (i), (ii) and (iii) above; (v) Sponsored BDRs Level III3; and (vi) structured operations certificates (certificados de operações estruturadas – COE)4. This list is contained in CVM Instr. 476/2009.

Change to CVM Instr. 332/2000

CVM Instr. 551/2014 modifies CVM Instr. 332/2000 to establish that BDRs Level III may be distributed either by public offer registered with CVM or with restricted efforts.

Changes to CVM Instr. 400/2003

The first public offering of shares issued by any company in pre-operational phase will be distributed exclusively for qualified investors. Trading on a regulated market of securities issued by a company in such condition (pre-operational) must be performed only by qualified investors for a period of 18 months from the closing of the offer. This provision will also cover the subscription bonus, the debentures convertible or exchangeable into shares and the certificates of deposit of such securities and shares.

The company will be considered operational when it presents revenue from its operations in the annual financial statement or, when available, in the consolidated annual financial statement prepared according to CVM standards and audited by an independent auditor registered with CVM.

Changes to CVM Instr. 476/2009

The limit for search of qualified investors allowed by CVM was increased from 50 to 75. The number of qualified investors who can subscribe or acquire the offered securities was also increased from 20 to 505.

The reason for the increase now admitted is to enable all investors who were consulted about the offer to participate, if they so desire, facilitating the placement of offers on the market. This rule is applicable to all public offers distributed with restricted efforts, regardless of the kind of securities offered.

Investment funds and managed portfolios of securities whose investment decisions are taken by the same manager will be considered as a single investor for the purposes of calculation of the above-mentioned limits and investors that exercise the right of priority or right of first refusal will not be considered for these purposes.

As per the provisions of article 9 of CVM Instr. 476/2009, the offeror may not conduct another public offering of the same kind of securities for the same issuer within four months counted from the date of closing of the offer, unless the new offer is subject to registration with CVM. This restriction is not applicable, however, to the following situations: (i) offers of real estate receivables certificates or agribusiness receivables certificates of the same securitization company backed on credits segregated in different assets through the fiduciary regime; (ii) offers of COE of the same financial institution referenced in assets or indices of distinct benchmark; and (iii) offers of units (cotas) of closed-end investment funds, when intended solely to unitholders of the investment fund, with the cancellation, if any, of the balance of the not placed units.

Information provided to the searched investors for the issuer with registration at CVM shall be disclosed comprehensively, fairly and simultaneously to the whole market in accordance with specific rules.

Pursuant to article 13 of CVM Instr. 476/2009, the securities offered with restricted efforts can only be traded on regulated securities markets after 90 days from the date of their subscription or acquisition by the investors. This restriction is known as lock up and it is not applicable to shares issued by companies registered in category A, as well as to subscription bonus and share certificates of deposits. However, in certain cases, such assets may only be traded by qualified investors, as provided for in article 15 of CVM Instr. 476/2009.

This restriction to trading is not applicable if the issuer is registered with CVM. Non-qualified investors may trade shares, subscription bonds, debentures convertible or exchangeable for shares and certificates of deposit representing any such securities that are object of a public offer distributed with restricted efforts, if the assets are of the same kind and class of shares that have already been subject to a public distribution offer registered with CVM, pursuant to CVM Instr. 400/2003. CVM understands that, in this case, the restriction to trading only among qualified investors does not make sense. These shares are fungible because they have already been distributed to the market through a CVM registration process, which includes disclosure by means of a prospectus and broad appeal to public savings, and can be replaced by those subsequently distributed with restricted efforts.

This restriction to non-qualified investors will also not apply to the shares distributed with restricted efforts, when: (i) it has already occurred or will occur the closing of the public offering of distribution registered at CVM of shares of the same kind and class; or (ii) it has elapsed the period of 18 months from the date of admission to trading on a stock exchange of shares of the same kind and class.

The 18-month period only starts with the first deal of the shares in the stock market. It is not sufficient that the shares be admitted to trading. Therefore, if a company performs a public offer of shares with restricted efforts 2 months after the first trading, the investors must wait 16 months more to trade the securities with the general public.

For public offerings distributed with restricted efforts which have as purpose securities of the issuer in pre-operational phase, the restriction will cease from the date on which cumulatively: (i) the company become operational; (ii) 18 months has elapsed following the closing of the offer; and (iii) it has elapsed 18 months of admission to trading of the securities on the stock exchange. This provision does not apply, however, when the pre-operational company (i) has carried out the first public offering registration with the CVM; and (ii) has satisfied the restriction imposed on the registered offering.

The same rules regarding partial distribution provided for in CVM Instr. 400/2003 for the public offer of securities for distribution in the primary and secondary markets apply to public offerings distributed with restricted efforts.

The beginning of the public offer distributed with restricted efforts must be informed to CVM by the intermediary leader within five working days, counted from the first search to potential investors. Such information will be forwarded through the webpage of CVM and will contain the following content: (a) name, tax registration number (CNPJ/MF), type of company and webpage of each of the offeror and the issuer; (b) name of the intermediary leader and other intermediary institutions involved in distribution (if any); and (c) data of the offer, comprising kind, class and form of the securities and the initial date of the offer. The offeror and the intermediary leader shall maintain list of all the searched persons containing: (i) their name; (ii) their tax registration number (CPF/MF for individuals and CNPJ/MF for legal entities); (iii) the date on which they were sought; and (iv) their decision regarding the offer.

The public offer of primary distribution of shares, subscription bonus, or debentures convertible or exchangeable for shares or certificates of deposit representing any such securities distributed with restricted efforts can be carried out even with the exclusion of the right of first refusal, or if the term to exercise the right of first refusal is less than five days, as provided for in article 172, item I, of Law No. 6,404, of December 15, 1976 (the Brazilian Corporation Law – BCL)6, subject to the following conditions: (i) that priority be granted to the former shareholders in the subscription of all the securities; or (ii) that the completion of the offer with the exclusion of the right of first refusal be approved by shareholders representing 100% of the share capital of the issuer.

In any such case, the timeline laid down for the steps of the offer and the manner of the exercise of the right of first refusal must be the object of a material fact. The term of the offer shall be made for a period of at least five working days after the disclosure of the material fact so that the shareholders may exercise their right of priority on the subscription of the securities. If the by-laws of the company provide for a period of less than five days for exercising the right of first refusal, the deadline for exercising the right of priority must be "equalized" by the difference (adding the remaining days) so that the aggregate period for the exercise of both rights is equal to five working days after the disclosure of the material fact.

In the subscription of shares arising out of the capital increase, the priority to the shareholders shall be granted in proportion to the number of shares which they have, in accordance with the following rules, whenever the issuer's capital is divided into shares of several kinds or classes and the increase is made by issuance of more than one kind or class of shares: (i) in the case of capital increase, in the same proportion of the number of shares of all existing kinds and classes, and each shareholder may exercise the right of priority on shares similar to those of which he/she/it is the holder; (ii) if the issued shares are of existing kinds and classes, but they result in amending the equity ratio of such shareholders in the capital stock, the priority should be exercised on shares of kinds and classes similar to those that are held by the shareholders, and the priority will only be extended to the other kinds and classes of shares if those similar are insufficient. This rule aims to assure that the equity participation of the shareholders in the increased capital observes the same proportion they had before the capital increase and to avoid that they be diluted; and (iii) if the issued shares are different from the existing kinds and classes, each shareholder can exercise the priority in proportion to the shares he/she/it has regarding all the kinds and classes of shares arising out of the capital increase.

At the closing of the offer, the following information must be forwarded to CVM: (a) name, tax registration number, type of company and webpage of each of the offeror and the issuer; (b) name of the intermediary leader and other intermediary institutions involved in distribution (if any); and (c) data of the offer, comprising the quantity kind, class, and form of the offered securities; the price per unit; the total value of the offer (subscribed or acquired); the initial and closing dates of the offer; the final data for placement, including (i) in the case of investment funds whose investment decision is taken by the same manager, the number of investment funds managed by such manager who subscribed or acquired securities under the offer; (ii) in the case of managed portfolios whose investment decision is taken by the same manager, the number of managed portfolios and the types of investors holding such portfolios; and (iii) the number of non-resident investors who purchased securities in another offer made at the same time abroad.

The offeror and the intermediary leader will have to keep for a period of at least five years or for a longer period, by express determination of CVM, in case of administrative proceedings, all documents and information required by CVM Instr. 476/2009. These documents and information can be saved by physical or electronic means, provided, however, that the replacement of documents by their scanned images is also admitted.


The expectation is that CVM Instr. 551/2014 will drastically reduce the time and cost of operations for companies that are planning to raise funds on the capital market, facilitating the sale of shares held by private equity funds, certain corporate restructuring transactions and the IPO of smaller companies.

The initial term of CVM for evaluation of an offer with large distribution efforts is 20 working days, but the registration of the transaction may take longer or less depending on how fast the company will succeed to comply with the requirements of CVM. In the case of an issue with restricted efforts, the time of the offer may fall ideally for up to five working days, which is the deadline that the current shareholders of the company will have to express their right of priority in the purchase of the securities.

The new rules take effect immediately, but the first offers with restricted efforts should still take some time to get out because the issues also depend on market conditions which at the moment are not favorable.


1 Pursuant to CVM Instruction No. 461, of October 23, 2007, the Brazilian regulated markets comprise organized markets of securities, meaning the physical space or electronic system designed for the negotiation or registration of operations with securities by a certain number of people authorized to trade, whether they are acting on their own account or on behalf of a third party. Organized markets of securities are the Stock Exchanges, Commodities and Futures markets and the organized over-the counter (OTC) markets. These markets shall be administrated by managing entities authorized by CVM.

2 The issuer can perform a simultaneous offer abroad of securities similar to those offered with restricted efforts in Brazil, with due observance in each case of the applicable local regulations.

3 BDRs Level III presents the following characteristics: (a) public distribution on the market; (b) admission to trading on the Stock Exchange, the organized OTC market or on the electronic trading system; and (c) registration of the company with CVM.

4 Until the issuance of the CVM Instr. 551/2014, the banks could only offer COE privately. The COE is an instrument that combines features of fixed and variable income.

5 CVM Instr. 476/2009 originally determined that the securities offered with restricted efforts can be subscribed to or acquired by at most 20 qualified investors. It allowed, however, that until 50 qualified investors were sought during the offer.

The exclusion from the right of first refusal is established in the BCL as follows:

Article 172. The bylaws of a publicly-held corporation with authorized capital may provide for the issue of shares, convertible debentures, or subscription bonuses, without any right of first refusal for existing shareholders or with a reduction of the term provided by § 4 of article 171, provided that the placement of the applicable securities occurs:

I - by sale on a stock exchange or by public subscription; or

II – pursuant to an exchange for shares in a public offer for the acquisition of control, in accordance with Articles 257 and 263.

Sole Paragraph. The bylaws of the corporation, including those of a private corporation, may exclude the right of first refusal to subscribe to shares in accordance with the special law for tax incentives.

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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