The IPO process
The first formal procedure for a company to go public in Brazil is its application, as a publicly traded company, with the Comissão de Valores Mobiliários ("CVM"), or the Brazilian Securities and Exchange Commission. The CVM is a federal autarchy responsible for regulating and supervising the Brazilian capital market. Among other functions, it: (a) protects securities holders against fraudulent issues and illegal actions carried out by publicly traded company management members, controlling shareholders and fund managers; (b) supervises fraud or market manipulation which may give rise to artificial pricing formation in the securities market; (c) regulates disclosure requirements by market participants; and (d) ensures that all market participants adopt fair trading practices.
The legal framework rule that regulates the registration of an entity as a publicly traded company is CVM Ruling 480 dated December 7, 2009 ("ICVM 480"). The main documents required to be presented when dealing with an application are:
- request letter signed by the Investor Relations Officer;
- minutes of the meeting of the Board of Directors or the minutes of the General Shareholders' meeting in which the Investor Relations Officer was elected;
- updated copy of the bylaws;
- financial statements and explanatory notes for the three most recent fiscal years, prepared as set forth in article 176 of Law 6.404 (Brazilian Corporation Law) dated December 15, 1976, indicating the newspapers and dates of their publication;
- financial statements for the last fiscal year prepared as per ICVM 480 (which should necessarily include explanatory notes, a management report, the independent auditor's opinion, declarations and confirmations of the directors attesting that they have reviewed the financial statements and a report from the audit committee, in case the company has set up a committee of such kind);
- minutes of all shareholders' meetings which occurred in the last 12 (twelve) month period preceding the date of application of registration with the CVM;
- standardised financial statements (Demonstrações Financeiras Padronizadas – DFP) for the last fiscal year;
- quarterly information report (Informações Trimestrais – ITR) containing information on the three-month period of the current fiscal year, provided that not more than 45 (forty-five) days have elapsed since the closure of each quarter. Such information should be accompanied by a special revision report issued by an independent auditor registered with the CVM;
- copies of shareholders agreements which the company is subject to;
- securities trading policy;
- disclosure policy;
- information on the company's securities held by its management members;
- disclosure report, or reference form (Formulário de Referência), prepared as per Annex 24 of ICVM 480; and
- registration form (Fomulário Cadastral), as per the terms of ICVM 480.
The Formulário de Referência, mentioned above, is a detailed document that aims to provide information on the company. It is similar to a shelf document and requires a vast number of disclosure requirements. It is the investors' main source of information on the company, with a standardised format, and favours the rendering of information on a continuous basis. It is a dynamic document updated annually, whenever there is a public offering of securities, or within 7 (seven) days of the occurrence of specific events. The Chief Executive Officer and the Investor Relations Officer must declare that they have read and revised the Formulário de Referência, and that the information contained in it is in compliance with ICVM 480 and portrays the company in a true, precise and complete manner.
Once filed, the CVM has 20 (twenty) business days to analyse the request and issue a comment letter. The company has up to 40 (forty) business days to comply with the CVM's comments. Once the documentation has been re-filed, the CVM has an additional 10 (ten) business days to issue a second comment letter. Another 10 (ten) business days may be used by the CVM to issue a third and final comment letter. Application for registration as a publicly traded company is carried out in electronic format and the company must register itself with the CVM and B3's electronic systems in order to file the documents listed above. The whole process takes approximately three to four months to be carried out, assuming the CVM does not issue heavy comments.
Once the entity has been registered as a publicly traded company, it can proceed with the application for registration of the offering of its shares (the IPO per se) and its listing at the B3. However, it is very common that companies proceed with the registration of the entity as a publicly traded company and the offering simultaneously. Therefore, two applications must be carried out at the CVM: the procedure mentioned above (application as publicly traded company) and the procedure to register the offering. Different departments of the CVM analyse the documentation, and the procedures run in parallel.
The offering registration application requires the filing of the main following documents: (a) a public offering prospectus (in which the information in the Formulário de Referência is incorporated by reference); (b) underwriting agreement; (c) announcements of the initiation and closure of the offering; (d) sale of shares or subscription agreement; and (e) confirmation statements of the lead underwriter and the company, attesting that the information disclosed to the market is correct, precise and complete. These documents are presented in draft form and the CVM will comment on them.
Like the procedure for registration of the company as publicly traded, the CVM has 20 (twenty) business days to issue its comment letter. The company and the lead underwriter have up to 40 (forty) business days to comply with the CVM's comments. Once the documentation has been re-filed, the CVM has an additional 10 (ten) business days to issue a second comment letter. Another 10 (ten) business days can be used by the CVM to issue a third, and final comment letter.
Roadshow material, and any other supporting documents that are aimed to be presented to investors, must be filed at the CVM and must not contain information that has not been included in the company's Formulário de Referência and offering prospectus. More recently, in February 2019, through CVM Deliberation 809 and on an experimental basis, the CVM has allowed companies to request confidential treatment when applying for an offering registration request. With this confidential request, companies will not need to disclose to the market the fact that they have filed for an IPO until the launch of the offering.
In terms of regulators of an IPO, not only the CVM must be involved. The company must also register itself, its shares and the offering per se at the B3 – Brasil, Bolsa, Balcão ("B3"), the most important Brazilian stock exchange. ANBIMA (the Brazilian Financial and Capital Markets Association), as a self-regulatory entity, will also need to be involved and will register the offering after its completion, in case the lead underwriter of the transaction is an investment bank and an affiliate of ANBIMA. ANBIMA is an entity that acts as a representative of players operating in the Brazilian financial and capital markets.
Simultaneously with the application for registration as a publicly traded company with the CVM, a filing of the company per se, its shares and the offering at the B3, must occur. In the listing procedure for trading shares at B3, the company must define which of the special segments of corporate governance it will adhere to: Bovespa Mais, Bovespa Mais Nível 2, Novo Mercado, Nível 2 or Nível 1.
The differences between these segments relate to corporate governance: the rules governing each segment go beyond the obligations that companies have according to Brazilian Corporation Law, and are intended to improve the assessment of companies that decide to join one of these segments voluntarily. The rules also attract investors, since they ensure shareholders' rights and guarantees, as well as establishing the dissemination of more complete information for market players, aiming to mitigate risks related to informational asymmetries. B3 also has the Basic Segment, which does not contain corporate governance rules. Below is a comparative chart of the listing requirements of the above-mentioned segments:
Once the company reaches a preliminary understanding with the underwriting syndicate, the IPO process starts in full force, and the marketing of the offering begins. This is the period during which the company is subject to CVM guidelines regarding the publication of information not contained in the offering prospectus. The so-called "quiet period" required by articles 48 and 49 of CVM Ruling 400 dated December 29, 2003 ("ICVM 400"), kicks in.
Under ICVM 400, the issuer and the intermediary institutions involved in the public offering (the latter since the contracting thereof has been decided or projected) and the persons working, or in any other way advising such parties, shall until the public offering is disclosed to the market, limit: (a) the disclosure of information related to the offering and the company strictly as necessary for the purposes of the offering, thereby warning the addressees of the privileged nature of any delivered information; and (b) the use of confidential information exclusively for the purposes of preparing the offering.
Such parties shall also: (a) refrain from trading any securities issued by the issuer, or referenced thereby until the disclosure of the notice of termination of the offering, except in certain events listed in ICVM 400; (b) deliver to the CVM public research and reports on the company and the transaction that have been prepared; (c) refrain from making public statements to the media regarding the offering or the company up to the disclosure of the notice of termination of offering; and (d) once the offering becomes public, when disclosing information related to the issuer or the offering, comply with the principles of quality, transparency and equal access to information. The intermediary institutions are also required to clarify to the market, the relations they have with the company or its interest in the offering.
The registration of a public offering takes approximately three months, on average, from the application for the request until the granting of the registration statement. This period may be shorter or longer, depending on the complexity of the transaction, the number of investors and the number of transactions being analysed at the time. The time required tends to be shorter as a result of agreements between the CVM and self-regulators, such as ANBIMA.
In general, the launch of the IPO and the roadshow begin after compliance with the first round of comments from the CVM. After this and until the bookbuilding date, the underwriters will contact and present the offering to the public investors, as described in the prospectus.
Once the registration is issued by the CVM, the publication of the notice of initiation of the offering takes place and the bookbuilding process is terminated. The final offering prospectus is prepared, placed on the company, the underwriters', the CVM and B3's websites, and disclosed to investors. Settlement of the shares takes place and the closure notice of the offering is published. As mentioned above, filing of the offering at ANBIMA is also carried out.
After going public
Brazilian Corporation Law and securities regulations of the CVM require that publicly held companies file the following periodic information with the CVM and the B3:
- financial statements prepared in accordance with Brazilian GAAP and related management and auditors' reports, within 3 (three) months from the end of the fiscal year or on the date on which they are published or made available to shareholders, whichever occurs first, together with the Demonstrações Financeiras Padronizadas;
- notices, filed on the same date as their publication, of the company's annual shareholders' meeting;
- a summary of the decisions made at annual shareholders' meetings, filed on the day following the meeting;
- a copy of the minutes of the annual shareholders' meeting, filed within 10 (ten) days from the date the meeting is held;
- quarterly reports on a standard form containing relevant quarterly corporate, business and financial information, together with a special review report issued by the independent auditor, filed within 45 (forty-five) days from the end of each quarter;
- the Formulário de Referência, filed within 5 (five) months from the end of each corporate year and in case of the occurrence of certain events listed in ICVM 480;
- formulário cadastral, which must be updated within 7 (seven) business days if any of the information contained therein is modified;
- management report within one month before a shareholders' meeting is scheduled to occur, giving notice that certain management documents, as required by Brazilian Corporation Law, are available to shareholders;
- corporate governance report (Informe sobre o Código Brasileiro de Governança Corporativa) containing information on the company's corporate governance practice in a "comply or explain" format, within 7 (seven) months after the end of the fiscal year; and
- any documents deemed necessary for shareholders to exercise their voting rights.
In addition to the foregoing, a publicly traded company must also file the following information with the CVM and the B3:
- notices, filed on the same date of their publication, of extraordinary or special shareholders' meetings;
- a summary of the decisions made at extraordinary or special shareholders' meetings, filed on the day following the meeting;
- minutes of extraordinary or special shareholders' meetings, filed within 10 (ten) days from the date they are held;
- a copy of any shareholders' agreement, filed on the date on which it is registered at the company's headquarters;
- any press release giving notice of material facts, filed on the date the release is published to the market;
- information on any filing for corporate reorganisation, the reason for such filing, special financial statements prepared for obtaining a legal benefit and, if applicable, any plan for payment of holders of debentures, as well as copies of any judicial decision granting such request;
- information on any bankruptcy filing, on the same day the company becomes aware of it, or the filing of a judicial claim, as applicable;
- a copy of any judicial decision granting a bankruptcy request and appointing a bankruptcy trustee, filed on the date the company takes notice of it; and
- any other information as requested by the CVM.
Publicly traded companies must also disclose to the public, any material facts or acts. Material facts or acts are defined by the CVM as a fact or act of a political, administrative, technical, business or financial nature related to the relevant company that may significantly affect: (a) the trading price of the securities issued by the company or related thereto; (b) the decision of investors to purchase, sell or hold these securities; or (c) the decision of investors to exercise any rights related to the ownership of securities issued by the company or related thereto.
The Investor Relations Officer has the duty to immediately disclose any material fact to the CVM and the market. If the controlling shareholder(s), members of management or any administrative committee with technical or advisory functions have personal knowledge or notice of a material fact, and omit to the Investor Relations Officer such information, impeding him/her to carry out his/her duty of disclosure, such shareholder(s), officers, directors and professionals will only be exempt from liability towards the CVM and the market if they immediately communicate such fact/information to the CVM. The CVM may determine the disclosure of the information as well as require its correction or amendment.
Also, disclosure of trading of securities by controlling shareholders, management members or members of the Fiscal Council must be sent to the CVM, B3 and disclosed to the market on the first business day after their appointment or within 5 (five) days of the trading. Additionally, the company, acting through its Investor Relations Officer, must send the above-mentioned information to the CVM and, as appropriate, to B3 or organised OTC market entities where the company's shares are traded, within 10 (ten) days after the end of the month when changes in the positions held occurred, or the month when the above-mentioned people were elected (name and position) of those acquiring the shares.
Disclosure is required of the purpose of the acquisition and purchase amount including, if necessary, a statement from the person acquiring the shares, that the purpose of the acquisition is not to alter the administrative structure or the control structure. The number of shares, subscription bonuses, and rights to subscribe shares and share purchase options, must be disclosed to the market. Such communication is also compulsory for the person or group of people representing the same interest, holding 5% or more of shares of the publicly traded company or whenever such ownership increases or decreases by 5%.
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.