The BM&FBOVESPA S.A. – Securities, Commodities and Futures Exchange (BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros), hereinafter referred to simply as BVMF, in its new Regulation for Listing of Issuers (Regulamento de Listagem de Emissores), has tightened the siege against speculative securities and this affects directly the trading of the so-called "penny stocks". This new Regulation will be in full force and effect as of August 8, 2014, but the companies will have a period of 12 months, until August 8, 2015, to adapt to the new rules.1

Created with the aim to modernize and streamline the list of issuers with BVMF and market participants, the new Regulation seeks to improve the quality and consistency of information provided by the issuers; align the issuers listing in Brazil to the best practices adopted in the international market; standardize and modernize the listing procedures of the issuers aiming at simplification and future automation of processes, enabling BVMF to receive more issuers in less time; and, to delimit criteria and responsibilities, in order to provide mitigation of risks and the increasing of the interest of the investors.

In the context used herein "penny stock" means any share whose average value is lower than BRL 1.00 (one Brazilian Real). For the purpose of the new Regulation, shares of listed companies must be quoted above BRL 1.00.

After deciding to prevent the participation of penny stocks in the new theoretical portfolio of the Ibovespa index, whose methodology was changed as from January of 2014, the new BVMF Regulation took a definitive step to prohibit the trading of the penny stocks in the regulated securities markets, comprising the stock exchange and the organized over-the-counter (OTC) market.

If a certain share or Brazilian Depositary Receipt (BDR) is quoted below BRL 1.00 over 30 consecutive trading days, the company will have to take the necessary measure to increase such value, regardless of whether the assets have been traded during this period or not. Therefore, as from September of 2015 the company may be notified by BVMF by non-compliance with the rule and will have 15 days to announce how it will adapt to the new BVMF Regulation.

One of the most common measures to remedy this type of situation is the reverse stock split (grupamento de ações), that is a corporate action in which a company reduces the total number of its outstanding shares and requires certain procedures, including the amendment of the company's bylaws.

The company will then have a period of at least six months and no later than the date of the next annual general meeting to comply with the new rule and must keep the price of its shares above BRL 1.00 for the next six months.

If at the end of that period the company fails to meet the requirements, BVMF will suspend the trading of its assets and apply a fine. The value of the penalty applied to the company´s controlling shareholder may reach BRL 500,000.00. If after 30 days the company does not take any further action to fix the situation, its shares shall be excluded from the stock exchange and the OTC market, even though the company remains listed. If this occurs, BVMF may require that either a public offer for the acquisition of shares (oferta pública de aquisição de ações – OPA) be made by the controlling shareholder or simply exclude from the listing the company that does not fit to the new rule.

The OPA requirement will vary on a case-by-case basis, according to the liquidity of the company's shares and if and when the OPA happens, it will take into account the average price of the shares in 12 months to give the investors who do not want to stay in the company the opportunity to withdraw. If an OPA is not made, the company will be delisted and migrate automatically to the unorganized OTC market.

The expectation of BVMF is that on August 8, 2015 all companies will trade their shares above the value of BRL 1.00. From now on the new companies are advised to target the price of their shares between BRL 10.00 and BRL 20.00, to stay away from the penny stocks scenario.

1 The new BVMF Regulation, whose drafting started on 2011, was approved by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) on January 14, 2014 and by the Board of Directors of BVMF on January 30, 2014 and it was announced to the market on February 14, 2014.

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