In July, the Brazilian Securities and Exchange Commission (CVM) issued regulations pertaining to public offerings of securities on crowdfunding platforms (collaborative financing). As a result of Public Hearing SDM 06/2016, CVM Instruction No. 588/2017 governs "public offers for distribution of securities issued by small businesses conducted with exemption from registration through an electronic investment platform."
In addition to representing a major willingness on the part of the Brazilian capital markets regulator to innovate, the regulation provides more certainty for the various stakeholders and, in the long run, should contribute to the development of this kind of fundraising mechanism.
The new rules for the so-called equity crowdfunding and investment crowdfunding in Brazil expressly exclude from their scope the activity of loans granted by individuals to individuals or legal entities, through the internet, without the issuance of securities (peer-to-peer loans). However, the regulation did not limit the type of security to be offered. That being the case, small businesses may issue shares, debentures, or other securities, as long as legally available.
A small business must be registered with the competent public registry and not be registered with the CVM as a securities issuer. It must have gross annual revenues of no more than R$ 10 million, calculated in the fiscal year immediately prior to the public offering (or a proportional amount when it has been in operation for less than 12 months). If the issuer is controlled by another legal entity or investment fund, the aforementioned amount must be calculated on an aggregated basis.
The public offering must take place through an electronic platform duly incorporated in Brazil and registered with the CVM. The platform will be the entity responsible for verifying compliance by the issuer and the offering with the requirements of CVM Instruction No. 588.
In attendance to the requests of market agents, the CVM established 180 days as the maximum period for raising funds via platforms. This is the time frame, for example, for public offerings with restricted distribution efforts. The draft regulation submitted for public consultation provided 90 days, but the time frame was extended in order to mitigate the risk of failure of this type of offer, which may depend on a longer offering period in order to reach the issuer’s funding objectives.
The offers are intended for any investor, provided that the investment limit of R$ 10,000 per calendar year is observed for securities offered under the regime created by this instruction. The exceptions are the offering’s lead investor (type of angel investor with prior experience recognized by the platform), qualified investors (as per applicable regulations), and investors who have annual gross revenues or financial investments exceeding R$ 100,000. In the latter case, the annual investment limit may be increased by up to 10% of the higher of these two amounts, per calendar year.
After an investor's expression of interest in participating in the public offering on the platform, a minimum period of seven days must be guaranteed for withdrawal, without the application of any fines or penalties.
The platforms may admit into their electronic environment the grouping of investors supporting a lead investor in so-called "participatory investment syndicates." The creation of an investment vehicle for the syndicate is acceptable, provided that each vehicle only participates in one public offering and does not expose the supporting investors to risks other than those they would be subject to, had they invested individually in the same public offering.
The maximum amount of funding for the public offering will be R$ 5 million, a limit that must also be observed for all the public offerings made by the same issuer based on CVM Instruction No. 588 within the same calendar year. It is possible to make a partial distribution of the offering, provided that the offeror establishes the minimum and maximum funding target amounts (the minimum must be equal to or greater than 2/3 of the maximum).
Once the public offering is closed, the platform will have five business days to arrange for the transfer of the total amount raised to the issuer or to return the amounts to the investors if the offer has not been able to reach the minimum funding target amount.
Although the regulations of equity crowdfunding by the CVM are new and have brought in a number of new elements and requirements for those who intend to use this framework for public distribution of securities, this type of investment had already been taking place in Brazil for approximately three years at a considerable level of sophistication. The first equity crowdfunding offer in Brazil was made in June of 2014, through the Broota platform, with the objective of raising funds to finance the start-up of the platform's own activities. The transaction was structured by Broota and counted on the legal advice of Machado Meyer.