On August 30, 2016, the Brazilian Securities Exchange Commission (Comissão de Valores Mobiliários – "CVM") issued two new sets of rules relating to private equity funds, (called Fundos de Investimento em Participações or "FIPs" in Portuguese). Instruction 578, creates new rules regarding the formation, management, and operation of FIPs. Instruction 579 addresses the preparation of the financial statements of FIPs and outlines the accounting criteria for the recognition, classification, and measurement of assets and liabilities.
Instruction 578 is the result of discussions between CVM and Brazilian private equity funds and aims to improve the former Instruction 391, which is now no longer in effect. According to Antonio Berwanger, CVM's commissioner overseeing market development, "the public hearing process permitted a broad debate with industry participants which brought important changes to the final wording of the regulations, which are now closer to international industry standards and more consistent with the market's operational practice".
Some of the changes introduced by Instruction 578 are:
- FIPs can now invest in non-convertible debentures up to the limit of 33% of the subscribed capital, and may advance funds for future capital increases of an invested company.
- FIPs will be classified into one of five categories: (i) Seed Capital, (ii) Emerging Companies, (iii) Infrastructure, (iv) Intensive Economic Production in Research, Development and Innovation (FIP-PD&I) and (v) Multi-strategy.
Each category shall be allowed its own investment policy. For example, the Seed Capital and the Emerging Companies FIPs shall be permitted to invest in limited liability companies, a vital step for the development of new businesses in Brazil, facilitating the funding of startups and early stage companies. Multi-strategy FIPs will be allowed to combine investments across several categories.
- All FIPs can now invest up to 20% of the subscribed capital abroad and Multi-strategy FIPs, designed for professional investors, may invest 100% of their subscribed capital abroad.
- Possibility of granting additional specific economic and financial rights to FIPs' quotas.
- The roles and responsibilities of FIPs' administrators and managers are better defined.
With Instruction 579, CVM establishes the accounting criteria that must be observed by FIPs regarding the recognition, classification, and measurement of assets and liabilities, and recognition of revenues and expenses, and which are the same applicable to publicly held companies.
Instruction 579 also outlines specific conditions which need to be met before a fund can be classified as an investment entity. The fund's administrator is charged with making this classification pursuant to the criteria laid out in Instruction 579, using as criteria, the number members participating in a fund, the fund's portfolio of investments and the influence exercised by the fund's members participation in or the management of the fund's portfolio companies.
Both Instructions are effective immediately. The bylaws of existing funds (either venture capital funds – the so-called Fundos Mútuos de Ivestimentos em Empresas Emergentes or "FMIEEs" – or FIPs) should be made compliant with these new rules either (i) within the next 12 months, or (ii) at the time, in the next twelve months, when a fund is launching a registered or unregistered public offering of its quotas. The funds' financial statements must abide by the criteria brought by Instruction 579 starting January 1st, 2017.
We are happy to further discuss these new rules.
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