Brazilian companies have been waiting for more than a decade for a new window of opportunity to raise funds in Brazil's capital markets through initial or follow-on public offers of equity-linked shares or securities (public equity offers). Since 2006 and 2007, it has been years of low or no funding through these transactions. In 2019, the market expected constant growth in these offers, with an effective resumption (boom) expected by 2020.
The information on applications for registration of public equity offers available for consultation on the website of the Brazilian Securities and Exchange Commission (CVM) confirms these expectations: on March 16, 2020, there were 27 applications undergoing CVM review, pursuant to CVM Instruction No. 400/03, as amended, in contrast to ten recorded throughout 2019 (not considering the offers under review on a strictly confidential basis).
With the news about the rapid spread of the coronavirus causing covid-19 in China at the end of 2019, issuing companies and other agents involved in public equity offers in Brazil began to discuss the need to include in the documentation of these applications a risk factor that would address potential deterioration of the world economy and, consequently, of the activities, business, and revenue of the issuing companies. This risk, however, became a reality with the spread of the coronavirus to other countries, including Brazil, and with the outbreak of an unprecedented crisis with the decree by the World Health Organization (WHO) on March 11, 2020, that covid-19 is a pandemic.
As a result of this scenario, in recent weeks there has been enormous volatility in the price of securities of companies around the world and a significant deterioration in their market prices, which many experts are classifying as an even more serious crisis than the one experienced in 2008 due to subprime mortgages. The viability of public equity offers in a period of such uncertainty and global economic crisis has been called into question, and the CVM has had to review some rules and interpretations applicable to the Brazilian capital market.
With respect to public offers of securities governed by CVM Instruction 400, which include public equity offers, the CVM has disclosed, as of March 13, three important and unprecedented measures for the exclusive purpose of, at least for the time being, trying to prevent a flurry of requests for cancellation (i) of public offers of securities registered with the CVM that have not yet been settled (registered public offers) and (ii) of public equity offers and other public offers of securities currently under review by the regulator.
The first guideline disclosed by the Bureau of Securities Registration of the CVM (SRE), through Circular Letter No. 2/2020-CVM/SRE, is applicable to the public offers registered. The agency sought to clarify that, as a result of the impacts of coronavirus on the world capital markets and, especially, on the Brazilian market, the CVM will automatically respond to requests for modifications to these offers (in consideration for the agency's prerogative, set forth in the head paragraph of article 25 of CVM Instruction 400, to accept or deny the request for modification), provided that such request is related to the impacts of the coronavirus on such offer. In addition, the CVM granted an additional time period for the modified offer to be held, which went from up to 90 days, as provided for in paragraph 2 of article 25 of CVM Instruction 400, to up to 180 days.
The guidance disclosed by the CVM was well received by the market, inasmuch as it gave the issuing companies and other agents involved in the registered public offers the assurance that the CVM will not prevent such offers from being modified (automatic acceptance of requests for modification) to the detriment of being cancelled or discontinued. This gives the parties involved in structuring the offer greater flexibility and predictability in relation to its effective settlement.
The second move made by the CVM culminated in the promulgation of CVM Resolution No. 846, of March 16, 2020. The measure changed the maximum period of interruption from 60 to 180 business days for the review period for public equity offers (and other public offers governed by CVM Instruction 400) by the SRE and by the Company Relations Bureau of the CVM (SEP), provided that the application for registration as a securities issuer (a publicly-held company) with the CVM is made at the same time as the application for registration of a public equity offer with the SRE. Faced with the impossibility of predicting the impacts of the coronavirus on the market, the CVM, in practice, has granted issuing companies and other agents involved in structuring public equity offers the possibility of interrupting registration procedures for an additional period. This increases the chances that the market and stock prices will recover at least partially and may prevent cancellations of offers.
The third and last measure presented by the CVM was Circular Letter No. 3/2020-CVM/SRE, of March 18, 2020. Seeking once again to encourage the maintenance of public equity offers (as well as the other public offers governed by CVM Instruction 400), the CVM has decided to make more flexible the understanding regarding the applicability of article 48 of CVM Instruction 400 to offers during the interruption period. On an exceptional basis and in view of the lengthening of the period during which an offer may be interrupted, the CVM clarified that the expression "decided or projected" in the article, which is the basis for defining the beginning of the silent period during the course of an offer, will now be interpreted as the moment when the issuing companies decide to resume review of the application for registration of the public equity offer.
The measure, certainly correct in the exclusive context of fostering the market, eliminated a major motivator for the cancellation of public equity offers, i.e. the issuing companies and other agents involved are no longer subject to compliance with the rules regarding the silent period provided for in article 48 of CVM Instruction 400.
Regarding postponement of the decision to cancel the public equity offer, two possible alternatives must be currently evaluated by the issuing companies and the other agents involved in structuring the transaction: (i) use the regulatory deadlines to meet the CVM's requirements (which, in relation to the first requirements letter, may reach 60 business days) and, if applicable, after this time has elapsed, request from the CVM interruption of the review deadlines (which went from up to 60 business days to up to 180 business days); or (ii) request, at any time, including after the receipt of the first requirements letter, interruption of the review deadlines with the CVM (which went from up to 60 business days to up to 180 business days) and, if applicable, use the regulatory deadlines to meet the CVM's requirements (up to 60 business days).
The review of the best pathway to be adopted usually depends on factors intrinsic to each issuing company, but it is important to note that the CVM reserved the right to reassess the content of CVM Resolution 846 30 days after of its publication. This means that issuers that do not opt to discontinue the public equity offer now (or at least within 30 days from the date of the resolution) may eventually no longer enjoy the extended deadline. On the other hand, since interruption of review causes the CVM's deadlines to start running again as if a new registration application had been made, opting to interrupt a public equity offer at this time in order to benefit from extension of the deadline may lead to a loss of agility in the transaction schedule, which does not occur in the case of a decision to use the regulatory deadlines to meet the CVM's requirements.