Brazil: New Rules For The Public Offering Of Distribution Of Promissory Notes In Brazil

Last Updated: 6 August 2015
Article by Walter Stuber

On July 31, 2015 the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) issued CVM Instruction No. 566 (CVM Instr. 566/2015), whose may purpose is to consolidate, update and give the same treatment to the provisions related to the public offering of distribution of promissory notes[1]. The new rules are part of the constant effort of regulatory improvement in our jurisdiction and this is a natural process of evolution of the Brazilian securities market.

By means of CVM Instr. 566/2015, CVM details the features that the promissory notes publicly offered must observe and the offering procedures available to the issuers.

I. Features

Promissory notes may be issued by corporations (sociedades anônimas), limited liability companies (sociedades limitadas) and agribusiness co-operatives (cooperativas do agronegócio), comprising co-operatives whose activity is the production, marketing, processing or manufacture of agricultural products or inputs, or agricultural machinery and equipment.

The promissory note must circulate for endorsement in black, containing the clause "without warranty" (sem garantia) given by the endorser. While object of centralized deposit, the movement of the promissory notes operates by book-entry releases on deposit accounts maintained by the central depository, which will endorse such notes to the final creditor at the time of extinction of the centralized deposit. These provisions must be included in the announcement of commencement of distribution and, as the case may be, of the prospectus or summary information blade.

Upon issuance and subscription the promissory notes must be paid at sight and in Brazilian currency (Reais).

The term of maturity of the promissory note shall no exceed 360 days counted from the issuance date. Each series must have only one repayment date. Promissory notes are not subject to this maximum period of maturity when they cumulatively: (i) arise out of a public offering distribution with restricted efforts, according to specific rules; and (ii) rely on the presence of a fiduciary agent of the note holders.

The promissory note must contemplate that it will be redeemed and settled in Brazilian currency on the maturity date. The issuer can redeem in advance the promissory note, provided that there is a provision expressly admitting this possibility.

The redemption of the promissory note implies the extinction of the title, being forbidden its maintenance in treasury. The partial redemption is made through the drawing of lots or auction.

The bylaws or articles of association of the issuer must provide for the authority to resolve on the issuance of promissory notes,  and the resolution containing such authorization must be filed at the appropriate public registry.

This resolution must provide for: (i) the value of the issue and its division into series, if applicable; (ii) the quantity and par value of the promissory note; (iii) the conditions of remuneration and price-level restatement (monetary update), if any; (iv) the term of maturity of the securities; (v) the guarantees, if any; (vi) the place of payment; (vii) the designation of the organized market entities on which the securities will be traded, if applicable; and (viii) the hiring of the provision of services, such as custody and settlement, as the case may be.

II. Procedures

In relation to the offering procedures available to the issuers, the public distribution of promissory notes will occur in accordance with the existing regulations, subject to the provisions of CVM Instr. 566/2015. In practice, this means that the issuers will have at least three procedures at their disposal, which in turn will also correspond to three distinct target audiences:

(i) for any investor, the procedure set forth by CVM Instruction No. 400, of December 29, 2003, which regulates the public offering distribution of securities on the primary or secondary markets;

(ii) for qualified investors[2], the automatic registration procedure (registro automático) with provision of reduced information contemplated in CVM Instr. 566/2015; and

(iii) for professional investors[3], the procedure established by CVM Instruction No. 476, of January 16, 2009, which regulates the public offerings of securities distributed with restricted efforts and trading of such securities on regulated markets.

In the definition of the different target audiences CVM considered the informational level offered vis-à-vis the degree of sophistication of the investors, in each of the respective procedures.

Regarding the automatic registration, the record of public offering distribution of promissory notes issued by an issuer registered with CVM shall be granted automatically, under certain conditions[4]. These conditions are the following: (i) the application must be instructed with the documents and information required in the specific rules on public offering distribution of securities, with the exception of the prospectus, all in its final version. The submission of an application for exemption from requirements in the regulation of public offering distribution of securities is prohibited; (ii) the request for registration of a public offer, replacing the prospectus must be attached to the reduced information blade, in the form of Annex I to CVM Instr. 566/2015; and (iii) the use of advertising material intended for public disclosure is not allowed.

The subscription or purchase of promissory notes distributed in the case of automatic registration can only be carried out after the adoption of the following cumulative measures: (i) disclosure of the announcement of commencement of distribution; and (ii) provision of the reduced information blade required by Annex I to CVM Instr. 566/2015 for the investors at least five working days before, in the form laid down in the specific rules on public offering of distribution of securities. The public offering must be targeted exclusively to qualified investors. In the first 90 days after the offer, the promissory notes so distributed may be traded on organized markets but only among qualified investors.

The great exposure to the market issuer (Emissor com Grande Exposição no Mercado – EGEM)[5] that conducts a public offering of distribution of promissory notes is not required to hire an intermediary institution to make the offer. To obtain this benefit, however, the following requirements shall be met: (i) the offered promissory notes must have a maturity term of less than 90 days; and (ii) the offer must be intended exclusively to professional investors. The issuer is responsible for ensuring that the provisions of item (ii) herein be observed.

This model was designed by CVM having as parameter the US market of short-term promissory notes (with an average maturity of 30 to 35 days). In the USA, only large issuers can do their commercial paper placements directly without intermediaries. Although the Brazilian market is different, CVM concluded that the EGEMs are already sufficiently accompanied by investors and analysts and may reduce their cost of funding when issuing short-term promissory notes, if they are released from the obligation of hiring an intermediary institution.

It is considered a serious breach, for the purpose of the Brazilian securities legislation[6], the execution of public offerings of distribution of promissory notes under conditions other than those listed in the registry or articles 3, 4, 5, 9, item III, 10, 11, 12 and 13 of CVM Instr. 566/2015.

CVM Instr. 566/2015 will come into full force and effect on October 1, 2015.

[1] CVM Instr. 566/2105 revokes four standards dealing or with relationship with the subject: (i) CVM Instruction No. 134, of November 1, 1990, about the issue of promissory notes for public distribution; (ii) CVM Instruction No. 155, of August 7, 1991, regarding the simplification of the requirements for obtaining the registration of distribution of promissory notes; (iii) CVM Instruction No. 422, of September 20, 2005, which provides for the issuance of commercial agribusiness note for public distribution; and (iv) CVM Instruction No. 429, of March 22, 2006, establishing automatic registration of public offerings of distribution of certain securities, including promissory notes. Articles 4 and 11 of CVM Instruction No. 554, of December 17, 2014 have also been expressly revoked.

[2] The following entities are considered qualified investors: (i) professional investors; (ii) individuals or legal entities that hold financial investments in an amount superior to R$ 1 million and that additionally attest in writing their qualified investor condition according to an own term, set forth in Annex 9-B to CVM Instruction No. 539, of November 13, 2013 (CVM Instr. 539/2013); (iii) individuals that have been approved in examinations of technical qualification or who have certifications approved by CVM as requirements for the registration of autonomous investment agents and securities´ portfolio managers, analysts and consultants, in relation to their own monies; and (iv) investment clubs, provided they have their portfolio managed by one or more unit holders, that must be qualified investors. 

[3] The following entities are considered professional investors: (i) financial institutions and other institutions authorized to operate by the Central Bank of Brazil (Banco Central do Brasil - Bacen); (ii) insurance companies and capitalization societies; (iii) private welfare opened or closed capital organizations; (iv) individuals or legal entities that hold financial investments in an amount superior to R$ 10 million and that additionally attest in writing their qualified investor condition according to an own term, set forth in Annex 9-A to CVM Instr. 539/2013; (v) investment funds; (vi) investment clubs, provided they have the portfolio managed by a securities´ portfolio administrator authorized by CVM; (vii) autonomous investment agents and securities´ portfolio administrators, analysts and consultants authorized by CVM in relation to their own monies; and (viii) non-resident investors.

[4] While a computerized system of granting automatic registration and receipt of documents is not available, the automatic registration shall take effect five working days after the submission (protocol) of the request at CVM.

[5] Pursuant to CVM Instruction No. 480, of December 7, 2009, which establishes rules for registry of issuers of securities admitted for trading in the Brazilian regulated markets, an EGEM must comply with the following cumulative requirements: (i) it must have shares traded in the stock exchange for at least three years; (ii) it shall have complied timely with its periodical obligations for the last 12 months; and (iii) the market value of its shares in circulation shall be equal or above R$ 5 billion, pursuant to the closing quotation of the last business day of the three-month period before the date of the securities public offering distribution application request. The expression "securities in circulation" or "shares in circulation" means all the securities or shares of the issuer, other than those hold by the controlling shareholder(s), the persons linked to the controlling shareholder(s), the administrators of the issuer and those securities or shares kept in treasury. "Linked person" (pessoa vinculada) means any individual or legal entity, fund or universality of rights acting for and representing the same interest of the individual or legal entity to whom/which such person is linked.

[6] Paragraph 3 of article 11 of Law No. 6385, of December 7, 1976 (the "Securities Act").

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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