In view of the ever-growing movement of innovative economic activities, the Securities Commission – Comissão de Valores Mobiliários (“CVM”) edited in July 2017 the CVM Instruction no. 588 (“IN 588”) to regulate the public fund raising by small-sized business companies. According to the IN 588, the relationship between investors and takers occurs through an electronic platform of participative investment, responsible for the offer and distribution of the securities issued by the taker companies.
Thereby, it is formally authorized and regulated in Brazil the equity crowdfunding, category of collective fund raising by which a group of investors allocates funds in a certain startup company, in exchange of equity or equity convertible securities, by means of an electronic platform.
The securities offers conducted in accordance to the IN 588 are automatically exempted from registry before the CVM. However, the takers’ fund raising under this format is limited to an annual limit of BRL 5.000.000,00, through one or several offers carried out on the same calendar year, with a 120 days span.
The taker must be a small-sized business company, incorporated in Brazil, defined as those whose annual gross revenue in the corporate year ended in the year prior to the offer, does not exceeds BRL 10.000.000,00 and which are not registered before the CVM as a securities issuer. Despite that, in case the small-sized business company is controlled by another legal entity or by an investment fund, the gross revenue of the group of entities which are under common control cannot exceed BRL 10.000.000,00.
The takers must provide to the potential investors information regarding its business plan, the characteristics of the offered security, the main risk factors, the platform compensation, among others. The requirement of submission of such information aims the knowledge, by the potential investor, of the characteristics of the offer and its possible risks, allowing the potential investor to take an informed decision regarding his investment.
On the other hand, its required that the investor formalizes its commitment with the taker by means of the transfer of resources or by executing an investment agreement, being assured to the investor the possibility to waive from the investment within 7 days, counted from the its confirmation. During this waive period, the investor is exempted of any fees or penalties.
Regarding the electronic platforms, the CVM establishes a series of conditions for operation permit, such as: (i) being a legal entity incorporated in Brazil; (ii) being registered before the Brazilian National Taxpayers’ Registry (“CNPJ”); (iii) having a paid-up corporate capital of at least BRL 100.000,00; and (iv) good reputation of its officers. Once obtained the permit, the electronic platform shall comply with certain rules of conduct and provide a series of periodic information to the CVM.
The IN 588 is the outcome of several discussions and debates on the subject, due to the legal uncertainty that such category of fund raising represented, in view of the lack of specific regulation, allowing the public offer of securities for the startup companies, exempting them of registry before the CVM.
Bruno Cunha (NBF|A, the firm Garrigues collaborates with in Brazil)