The amazingly easy transmission and virtual dissemination of information offered by the Internet has made possible for institutions performing in the securities intermediation business to offer their services to clients residing in any foreign country irrespective of any physical representation in the country. This means of communications has been a concern for regulatory authorities in several jurisdictions due to the difficulty to actually oversee and monitor Internet transactions, especially if the offender is located in another jurisdiction. The Brazilian authorities too share the same concern to the extent that Internet transactions include not only transactions made abroad but also offerings and activities in the securities market1 made entirely in Brazil.
The capitals market regulatory body in Brazil is the Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM), which is charged with regulating and overseeing the issuance, distribution, trading and intermediation of any and all securities in Brazil. Private transactions, obviously, are not subject to CVM monitoring and control. There is great interest on the part of foreign institutions to offer securities intermediation services to residents in Brazil, particularly over the Internet. Therefore, it is important to know exactly which transactions are subject to CVM registration and which can be freely made.
CVM’s position in respect to the Internet and securities offerings and transaction intermediation, and the intermediation and offering of securities issued and listed in other jurisdictions was recently communicated in CVM Directives 32 and 33, both dated September 30, 2005, whose conclusions will discussed below.
Those two directives should always be interpreted as one single instruction as they contain CVM’s understanding about the securities offerings and the activities subject to its authorization, whenever Internet is used as a means of communication: (i) between finder located abroad and investors residing in Brazil, there included investors residing, domiciled or organized in our Country; or (ii) to offer securities issued abroad to investors residing in Brazil.
Public offers or securities intermediation is prohibited in the Brazilian market without the prior consent of CVM, which prohibition is intended to protect the resident investors against irregular issuances. In that regard, securities trading will be conditioned on the prior registration of the issuer with CVM,2 except where the CVM itself waives the registration3. Public offering of distribution of securities, in turn, is also conditioned on the registration of the issuance.4
For the purpose of the regulation in force, public is a class, category or group of people, even if individualized, with the exception of those who have a close and regular previous commercial, credit, partner or work relationship with the issuer.5
I- Internet and the Public Officer of Distribution of Securities.
As a rule, the use of the Internet as a means to communicate the offering of securities characterizes a public offer6 because such communication allows the indiscriminate access to information disclosed in connection therewith.7 Therefore, unless preventive measures have been taken or under special circumstances, such offers should be previously registered with CVM.
Included in the preventive measures and special circumstances that may render such offer of distribution of securities made on the Internet non-public, are the following: (a) effective measures taken by the information provider to prevent the general public from accessing the contents of the webpage; (b) the information provider may not communicate to the public by way of unwanted email, search engines, chat rooms, advertising on Internet sites or magazines, etc.; and (c) indication, directly or indirectly, but sufficiently clear that the page was not designed for the general public. It is not necessary for all the those factors to be present to constitute a certain transaction as private and factors other than those expressly mentioned may be taken into account in the determination that an offering is public. CVM will examine the actual circumstances to determine whether a transaction carried out over the Internet is a public or private offer.
II – Activities subject to CVM’s authorization and the Internet
The use of the Internet for the intermediation or brokerage of securities transactions, distribution of issuances on the market or acquisition of securities for resale on one’s own account is conditioned on the prior consent of CVM.8
III – Intermediation of securities transaction in other jurisdictions
Only participants of the distribution systems9 properly registered with CVM are authorized to offer securities transaction intermediation services in Brazil or carry out intermediation in Brazil.10 There are only two requirements a legal entity needs to meet to qualify for registration with CVM as a participant in the Brazilian distribution system. The institution needs: (i) to be domiciled or have a registered office in Brazil; and (ii) to secure authorization to perform its intermediation business in Brazil.
Consequently, a legal entity organized abroad also needs specific authorization from CVM to intermediate securities trading in the Brazilian market. Thus, the authorization for the provision of securities intermediation services granted by foreign regulatory body, or resulting from applicable laws and regulations in other jurisdiction, is not assurance of that right in Brazil.
The intermediation of securities issued and offered exclusively abroad, rendered to investors residing in Brazil by intermediary entities organized abroad, will not be irregular provided that the following requirements are met: (i) investors have been prospected abroad; and (ii) transaction to be intermediated is not a public offer in Brazil. However, if investors have been prospected in Brazil to offer securities issued abroad to residents in Brazil, the intermediary organized abroad must register with CVM, as a participant in the Brazilian distribution system, or alternatively hire an institution participating of the Brazilian distribution system to carry out the intermediation in Brazil. Additionally, the foreign intermediary must also confirm whether the issuer or its offer are subject to registration with CVM.
IV – Public offer of distribution of securities
On the terms of applicable laws and regulations,11 a securities issuer willing to publicly issue securities in the Brazilian market must register with CVM prior to distributing them. Additionally, the public offer of distribution itself must also be registered with CVM,12 except in the cases where the registration is dispensed with by the CVM itself.13
According to the present system, foreign publicly-held or similar companies may trade their securities issued abroad on the Brazilian market by way of the Brazilian Depositary Receipt (BDR) system. Thus, securities issuers with headquarters abroad, to the extent that they are registered with foreign regulatory body equivalent to CVM, may have their securities traded in Brazil in adherence with the BDR related procedures provided in the CVM rules.14 In order to do so, any interested party must arrange for the registration with CVM of the issuer, in the case of transaction with securities listed on the organized-over-the-counter market or stock exchanged intended for public distribution (Level III BDRs)15 and registration of the issuance of securities to be traded.
To date, CVM has not laid down any rule dispensing with, generally, the registration of public offer of distribution of securities issued by issuers organized in other jurisdictions. Therefore any public offer of securities by foreign companies with prospecting in Brazil of investors residing in the country, not falling under the situations where registration applicable to public offer in general is dispensed with according to current laws and regulations, must register with CVM first.16
In order for an offer of distribution of securities issued abroad to be regarded as public offer in Brazil17 it is necessary the performance of any of the acts described in the subsequent paragraph and that neither the offer nor the issuer fall under any of the exceptions provided in the CVM regulation.18 On the terms of the current regulation, without prejudice of the other instances to be specifically considered by CVM, any public offer of distribution including any of the following situations will have its registration automatically dispensed with: (a) disposal of stock belonging to legal entities governed by public law and entities directly or indirectly controlled by the Public Power19; (b) single and indivisible lot of securities; and (c) securities issued by small and micro sized companies, as defined by law.
The following are acts of public distribution: sale, promise to sell, offer for sale or subscription and acceptance of securities sale or subscription request, involving any of the following: (i) use of sale or subscription listings or bulletins, folders, prospectuses or advertisements targeted to the public, by any media or in any format; (ii) soliciting, in whole or part, of undetermined subscribers or purchasers, even if carried out in standardized communications addressed to individually identified addressees, by way of employees, representatives, agents or any individual or legal entity, whether or not participants of the Brazilian distribution of securities, or even inquiry about the viability of the offer or collection of investment intents from undetermined subscribers or purchases; (iii) trading made at store, office or establishment open for the public and intended, in part or in whole, for undetermined subscribers or purchasers; or (iv) use of advertising, whether oral or written, letters, advertisements, warnings, specially in mass or electronic media (Internet or webpages or documents in other open computer networks or electronic mail), that is, any type of communication targeted to the general public with a view to promoting, directly or through third parties performing on account of the issuer or issuing company, a the subscription or disposal of securities.
Thus, it is not the simple use of any of above-mentioned means of communications but, whatever the choice, it must have been made with a view to targeting the general public residing in Brazil, in order for an offer of distribution of securities abroad to characterize public offer within the national territory. It is worthy of mention that, even if no intention is there to target the general public residing in Brazil, an offer can be regarded as public in the event of use of any means of communication that allows one to target that audience and the precautionary measures fail to be taken to prevent that.
In order for an offer of distribution of securities issued abroad, made on the Internet, not to be regarded as being target to residents in Brazil and, consequently, not be subject to the control and supervision of CVM and its registration, in addition to the preventive measures and special circumstances mentioned previously that may result in the operation being regarded as private, the following requirements must be met: (a) announcement made in a conspicuous manner and easily accessible that the distribution is directed to countries where the Internet access provider, or entity whose securities distribution is posted on the webpage, is authorized to offer such securities. A list of those countries can be included in the announcement; (b) effective measures taken by the Internet provider to prevent investors residing in Brazil from having access to the page contents; (c) indication, directly or indirectly so long as made clearly, that the webpage was not designed for resident investors. In that regard, the following are regarded as indicative that the webpage is also targeted to investors residing in Brazil: disclosure of economic projections in national currency or including Brazil among the countries listed in forms, or even comparison between the securities issuer and other Brazilian publicly held companies; and (d) there can be no text, even in a foreign language, to attract investors residing in Brazil. Although not as important as the requirements listed here, in order to determine whether the offer was directed to investors residing in Brazil, CVM may also consider the use of the Portuguese and the physical location of the Internet access provider.
V – Conclusion
If the required filings with CVM have not been secured, the offer will be regarded as illegal. Illegal will also be the actions of those who, in any manner, join to or cooperate to any illegal intermediation. Offenders, whether individuals or legal entities residing, domiciled or with headquarters in Brazil or abroad, are subject to CVM oversight and, consequently, the penalties provided in the applicable laws and regulations.20 In the discharge of its oversight authority, where the offender is located outside Brazil, CVM may turn to the cooperation of the foreign regulatory agency of competent jurisdiction.
Administrative wrongdoings may also constitute crimes. In that regard, the issuance, offering or trading, in any manner, of bonds or securities without prior registration with the relevant authority, under conditions other than those indicated in the registration or improperly registered or without prior consent of the relevant authority if legally required are crimes against the financial system.21
The performance of any activity or duty, without the proper authorization or registration with the relevant administrative authority if required by law or regulation is a crime against the capitals market.22 It is up to CVM to communicate the Department of Justice whenever any such criminal violation comes to its attention.23
These aspects have not been addressed by the two CVM Directives discussed in this article, but result from the sheer application of the laws and regulations in force.
Footnotes.
1. Law No. 6385, of December 7, 1976, which makes provisions on the securities market and establishes the Securities and Exchange Commission, defines "securities" as: (i) shares, debentures and subscription bonuses and their respective coupons, rights, subscription receipts and split certificates; (ii) certificates of deposit of securities; (iii) debentures certificates; (iv) shares of mutual funds investing in securities and shares of investment clubs investing in any type of assets; (v) commercial papers; (vi) futures, options and other derivatives agreements whose underlying assets are securities; (vii) other derivatives agreements regardless of the respective underlying assets; and (viii) any other collective investment instrument or agreement that creates the right of participation on profits or remuneration, including as a result of the rendering of services, and whose profits derive from the efforts of the entrepreneur or from the efforts of third parties, as long as they are offered publicly, (main section of article 2 of Law No. 6385/76). This category includes also debentures issued by financial institutions. Federal, state, or municipal government bonds and negotiable instruments guaranteed by a financial institution are however not subject to these provisions (art 2, § 1, of Law No. 6385/76).
2. Only the securities of a corporation listed with the CVM may be traded on the securities market. (article 4, § 1, of the Corporation Law – Law No. 6404, of December 15, 1976, and article 21 of Law No. 6385/76). CVM Instruction No. 400, of December 29, 2003, regulates public offers of distribution of securities in the primary and secondary markets and is intended to ensure the protection of investor interests and the market in general through equal treatment of bidders and by requiring a broad, transparent, and adequate disclosure of information on the offer, including: securities offered, the issuing company, the issuer, and any other people involved.
3. Article 19, § 5, item I of Law No. 6385/76 allows CVM to lay down rules of exceptions to the prior registration requirement applicable to public offers. Pursuant to the main section of article 4 and § 1 of CVM Instruction No. 400/03: "Article 4 Depending on the characteristics of the public offer of the security distribution, at its sole discretion and in the best interests of the public and ensuring adequate information and protection for the investor, CVM can waive the registration or some of the requirements, including publications, terms, and procedures set forth in this Instruction.. § 1 In the exemption mentioned in the main section, CVM shall consider, cumulatively or separately, the following special conditions of the intended operation: I - the open capital company registration category (art. 4, paragraph 3, of Law No. 6.404, dated December 15, 1976); II - the unit value of the securities offered or the total value of the offer; III - the securities distribution plan (art. 33, paragraph 3rd); IV - the distribution being performed in more than one jurisdiction, and conforming to the different procedures involved, as long as the equality of conditions with the local investors is assured; V - characteristics of the swap offer; VI - the target public of the offer, including their geographical location or quantity; or VII - exclusive direction to qualified investors." On the terms of said § 3 of article 33 of CVM Instruction No. 400/03, the distribution leader, with the express approval of the Issuer, shall organize a distribution plan, which should take into account the relationship with clients and other considerations of commercial or strategic nature of the leader and of the Issuer so that the Corporate Brokers can assure: I - that the treatment of investors is fair and equitable; II – that the adaptation of the investment to the risk profile of its respective clients is good; and III - that the sales representatives of the institutions participating in the distribution consortium receive a sample of the Prospectus for mandatory reading prior to involvement, and that their questions can be clarified by a person appointed by the leading distribution institutions..
4. No public distribution of securities will be carried out on the market without its prior registration with CVM (article 4, § 2, of Law No. 6404/76 and article 19 of Law No. 6385/76).
5. As per definition found in article 3, §1 of CVM Instruction No. 400/03.
6. A public issue is characterized by: (i) the use of sales or subscription lists or bulletins, leaflets, prospectuses, or advertisements directed at the public; (ii) the search for underwriters or purchasers of securities by employees, agents, or brokers; (iii) trading carried out in a store, office, or establishment open to the public, or by using public communication services. (article 19, § 3, of Law No. 6385/76).
7. This is the understanding of article 3, IV, of CVM Instruction No. 400/03, according to which: "Article 3 The sale, sale commitment, offer for sale or subscription are public distribution acts, as are the acceptance of a sale order or the subscription of securities, consisting of any of the following elements: (…) IV- the use of oral or written marketing, letters, advertisements or notices, especially through mass or electronic media (pages or documents on the worldwide web or other open computer networks and e-mail), and any form of communication directed to the general public with the objective of promoting, directly or through third parties acting on behalf of the offeror or issuer, the subscription or disposal of securities."
8. The following activities shall require prior authorization of the CVM: (i) distribution of securities issues on the market; (ii) purchase of securities for resale, for their own account; (iii) intermediation or brokerage on operations involving titles; and (iv) clearing and settlement on operations involving titles. Only independent agents and corporations registered with the CVM may engage in securities intermediation or brokerage activities outside the stock exchange. (article 16 of Law No. 6385/76).
9. The Brazilian securities distribution system comprises: (i) financial institutions and other corporations engaged in the activity of distributing securities issues: (a) as agents of the issuing corporation; (b) for their own account, subscription or purchasing the issue in order to place it on the market; (ii) corporations engaged in the activity of purchasing securities available on the market, in order to resell them for their own account; (iii) corporations and independent agents engaged in intermediation activities in the trading of securities, on stock exchanges or the over-the-counter market; (iv) stock exchanges; (v) organized over-the-counter markets; (vi) commodities brokers, special operators and the commodities and futures exchanges; and (vii) securities clearing and settlement entities. (article 15 of Law No. 6385/76).
10. As per article16 of Law No. 6385/76.
11. Pursuant to article 4, § 1, of Law No. 6404/76 and article 21 of Law No. 6385/76.
12. As provided in article 4 , § 2, of Law No. 6404/76 and article 19 of Law No. 6385/76.
13. Item I of § 5 of article 19 of Law No. 6385/76 establishes that it is incumbent on CVM to establish the cases where issuance registration may be dispensed with, depending on the investor audience.
14. CVM Instruction No. 255, of October 31, 1966, as amended by CVM Instruction No. 321, of December 10, 1999, makes provisions on the issuance and trading with securities deposit certificates – BDRs backed on securities issued by publicly held or similar companies with headquarters abroad. These rules laid down as a result of the increasing internationalization of capital markets, but in accordance with the legal precepts relating the registration of issuers and public offers.
15. The regulation requires the issuer or similar company registers with CVM, except for Levels I and II BDRs. On the terms of § 1 of article 3 of CVM Instruction No. 255/96, the characteristic of the sponsored BDR program is that it is created by one single depositary or issuer, engaged by the issuer of securities object of the certificate of deposit, and may be classified as follows: I – Level I Sponsored BDR characterizes by: (a) Trading is limited exclusively to the non-organized over-the-counter market; (b) Exemption from the need to provide information about the issuing company other than that required by law in its country of origin; and (c) Exemption from the need to register the company with the CVM; II – Level II Sponsored BDR characterizes by: (a) admission to trading on stock exchanges or organized over-the-counter markets (b) waiver of registration of the company with the CVM; and III – Level III Sponsored BDR characterizes by: (a) public distribution on the market; (b) admission to trading on the stock exchange or the organized over-the-counter market; and (c) registration of the company with the CVM.
16. Pursuant to article 4, item IV, of CVM Instruction No. 400/03, upon waiver of registration, CVM may consider the distribution being performed in more than one jurisdiction, and conform the different procedures involved, as long as the equality of conditions with the local investors is assured. Articles 57 and 58 of that same Instruction regulate the offers made in several jurisdictions. In case of simultaneous offers in Brazil and abroad requiring the registration of the regulating authority of the capital market abroad, at the request of the Issuer, CVM can observe the preliminary confidential analysis procedure. The preliminary confidential analysis procedure can be used only in cases where the registration abroad would be granted by a regulating authority with which CVM has reached an agreement of understanding or exchange of information, and such authority assures the same confidentiality. The preliminary confidential analysis procedure can be also used in cases where it is necessary for making CVM procedures compatible with related procedures in process before foreign regulating authorities. The confidential treatment shall immediately cease in the event the operation becomes public in other markets or if there is an information leak regarding the offer in Brazil. Issuer can present the Prospectus in the format prepared for presentation and registration in other countries for registration at CVM, in Portuguese, as long as it contains a specific section describing the relevant differences between the national juridical system and the one of the country in which the Prospectus was developed, including, mainly, the treatment relative to: (i) information on stockholding and relevant facts, as well as on periodic information; (ii) operations with securities of its own issuance; (iii) existence of public offer purchase and other alternative means of protecting minority stockholders; (iv) possibility of exercising the right to vote through mail or electronic medium; (v) accounting criteria used in the preparation of the financial statements; and (iv) distribution of profits. The financial statements presented shall follow the accounting norms and principles generally accepted in Brazil, with CVM being able to exceptionally authorize that the financial statements are presented in accordance with internationally accepted accounting norms or principles. The documents presented can, by observing the ruling legislation, have values reflected in currency of the country of origin, containing in this case, indication of the exchange rate for the national currency and the respective reference date. The Issuer that submits public offers that are object of concomitant distribution efforts abroad for registration in the country, shall direct, together with the Prospectus in Portuguese, all documents related to the public offer that have been presented to the Securities and Exchange Commissions of the countries where the offer was made, even if not required by their regulations, as well as any documents supplied to the foreign investing public, including advertising material.
17. The concept of public issuance is found in article 19, § 3 of Law No. 6385/76 and discussed further in article 3 of CVM Instruction No. 400/03.
18. Said exceptions are provided in article 5 of CVM Instruction No. 400/03.
19. Instruction CVM No 286, of July 31, 1998, makes provisions on the disposal of shares owned by public legal entities and companies directly or indirectly controlled by the Government and is dispensed with the registration dealt with in articles 19 and 21 of Law No 6385/76, in the situations described therein.
20. Article 11 of Law No. 6385/1976 provides as follows: "Article 11. The CVM may impose the following penalties on the violators of any provision of this law, the Corporation Law, or its resolutions, as well as any other legal provisions which are the CVM responsibility to enforce: (i) warning; (ii) fine; (iii) suspension from duties of a director or member of the fiscal council of a publicly-held corporation, from an entity taking part of the distribution system, or from other bodies which require authorization by, or registration with, the CVM (Brazilian Securities Commission); (iv) temporary disqualification, up to a maximum period of 20 years, from occupying the posts mentioned in the previous item; (v) suspension of the authorization or registration for the execution of the activities covered by this law; (vi) cancellation of the registration or of the authorization to carry out the activities covered by this law; (vii) temporary prohibition, up to a maximum period of 20 years, from performing certain activities or transactions, to the entities that compose the distribution system or other entities that depend on authorization by, or registration with, the CVM; (viii) temporary prohibition, for a maximum period of 10 years, to operate, directly or indirectly, in one or more types of transaction in the securities market". The fine shall not exceed the larger of the following amounts: (i) R$ 500,000.00; (ii) 50 per cent of the amount of the securities issuing or of the irregular operation; or (ii) three times the amount of the economic advantage gained or loss avoided due to the violation (Article 11, § 1 of Law No. 6385/1976). If the offense is repeated, the fines can be imposed and multiplied up to three times or, alternatively, the penalties provided for in items III to VIII of this article may be applied and will only apply when there has been a serious breach, as defined by the rules of the CVM (article 11, §§ 2 and 3, of Law No. 6385/1976).
21. On the terms of article 7 of Law No. 7942, of June 16, 1986, which contains definitions of crimes against the national financial system and makes other provisions: "Article 7 To issue, offer or in any way transact bonds or, securities: I – that are false or falsified; II – without the issue having been previously registered with the proper authority, on conditions other than those shown in the registration or irregularly registered; III – without sufficient fund or guarantee, under the law; IV – without the proper authorization when required by law: penalty: confinement of , 2 (two) to 8 (eight) years and fine."
22. Pursuant to article 27-E of Law No. 6385/1976 which lists the irregular discharge of duties appertaining to the occupation, position, title or activity among the crimes against the capitals market: "Article 27-E. To act in the securities market, whether free of charge or not, as an institution belonging to the distribution system, as a collective or individual portfolio manager, self-employed investment agent, independent auditor, securities analyst, fiduciary agent or to exercise any position, profession, activity or function without being so authorized by or registered at the applicable administrative authority, when required by law or regulation: penalty – imprisonment of six (6) months to two (2) years and fine."
23. Main section of article 28 of Law No. 7492/1986 determines as follows: "Article 28. When, in the performance of their legal duties, the Central Bank of Brazil or the Securities and Exchange Commission determines to have occurred a crime under this law, they shall communicate the Federal Government Attorney’s Office of the fact and forward the supporting documentation." And article 9 of Complementary Law No. 105, of January 10, 2001, which deals with secrecy of financial institutions transactions and makes other provisions, sets forth as follows: "Article 9 Whenever, in the discharge of their legal duties, the Central Bank of Brazil and the Securities and Exchange Commission determines that a crime defined herein as public action has occurred, or finds indications that any such crime has occurred, they will communicate the Federal Government Attorney’s Office, attaching all documentation necessary to ascertain or prove the facts. § 1 The communication referred to herein must be made by the Governors of Central Bank of Brazil and of the Securities and Exchange Commission, delegation of authority allowed, within no later than fifteen days of the receipt of the records, and response from the respective Legal Departments. § 2 Regardless of the provisions in the main section of this article, Central Bank of Brazil and of the Securities and Exchange Commission will communicate the relevant authorities the irregularities and administrative wrongdoings that have come to their attention, or the signs indicative thereof, attaching all supporting documentation."
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.
