On July 13, 2017, the CVM (Comissão de Valores Mobiliários) – the Brazilian equivalent to the Securities and Exchange Comission – issued Regulation 588, concerning the online offering of private companies' securities, more commonly known as equity crowdfunding platforms.
Equity crowdfunding platforms allow early-stage companies with potential economies of scale (i.e., startups) to raise investments for their businesses, connecting investors and entrepreneurs with previously unavailable investment opportunities.
Prior to the issuance of the new regulation, equity crowdfunding platforms were subject to CVM Regulation 400/2003, which allowed public offerings of securities for small companies up to BRL 2,400,000.00 in a 12-month period, without the costly and time-consuming process of registering with the CVM.
The new CVM regulation meets investors' demand for more transparency and reliability in these investments, as well as for an increased limit amount for the offerings.
Important changes introduced include:
- Equity crowdfunding platforms (ECPs) must legally incorporate in Brazil and register with the CVM, as well as obtain a specific authorization from the CVM to conduct their businesses.
- ECPs must comply with certain formal obligations that assure their transparency, infrastructure and entrepreneurial know-how so that the platforms can become more reliable for their investors and supporters. There are also some restraints on advertising practices to avoid misleading ads. The ECPs can be sued for negligence and malpractices.
- ECPs must have a minimum paid-in capital of BRL 100,000.00. Platforms also need to have adequate technological ability to allow them to identify the investors, control the flows of resources and store key transaction data. They must also have an open channel to address investors' questions or claims.
- Companies incorporated in Brazil and with a yearly gross revenue below BRL 10,000,000.00 in the last fiscal year are eligible to raise investments through ECPs. Companies registered with the CVM as securities issuers are not eligible.
- Public offerings not registered with the CVM are limited to BRL 5,000,000.00 for a period of 180 days.
- Investors are allowed to terminate the investment and request a refund free of charge, provided the request is submitted within seven days of the investment confirmation.
- ECPs are not allowed to use the investments raised to acquire shares or stocks of other companies or to acquire any other securities issued by other companies, whether convertible or not. The platforms also cannot lend the funds raised to other persons or entities.
- With the exception of the lead investor (see more details below), non-accredited investors who earn less than BRL 100,000.00 per year or have less than BRL 100,000.00 in net worth can invest up to BRL 10,000.00 per year though ECPs. Lead investors, accredited investors and those who earn more than BRL 100,000.00 per year or have more than BRL 100,000.00 in net worth can invest up to the lesser of 10% of their annual income or net worth.
- The new CVM regulation also creates so-called "investment syndicates," which consist of a group of investors led by a lead investor for the purpose of investing in startups.
- The lead investor must have entrepreneurial know-how and must disclose to the public his/her previous experience as a leader of investment rounds in startups, including a description of the current position of his/her investments and the outcomes achieved.
Jorge Luiz de Brito Júnior, Manager of the Tax Litigation department at Gaia, Silva, Gaede Advogados in São Paulo. Master's degree in Tax and Financial Economic Law from the University of São Paulo, a specialization degree in International Tax Law from the Brazilian Institute for Tax Law ('IBDT'), and a bachelor's degree in law from Mackenzie Presbyterian University. Visiting Foreign Lawyer at Parr, Brown, Gee & Loveless (Salt Lake City, UT, USA). Author of articles published in specialized magazines.
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