The Initial Public Offerings Law Review: Brazil
The peak of the Brazilian initial public offering (IPO) market was 2007, when 64 companies went to the market and raised around 55.6 billion reais.2 Following a series of international and national financial crises, and political instability, the following years saw a smaller number of companies seeking the Brazilian market. The past three years, however, have seen a surge in the equity capital markets for Brazilian companies, with 21 IPOs being priced between 2017 and 2019, totalling over 65 billion reais. In 2019, with the success of the new federal government in approving the reform of the federal pension system and in keeping with sound macroeconomic policies that maintained the base interest rate at the lowest rate in many decades, investors' reading of the Brazilian scenario has been geared towards a perception that fiscal deficit will be successfully curbed and the economy will resume sustainable growth. This has propelled Brazilian capital markets in 2019, with the largest number of public equity offerings since 2007 (37 follow-on offerings and five IPOs), totalling over 85 billion reais.
In this chapter, the author proposes to give a broad survey of relevant legal and regulatory aspects for initial public offerings of equity securities in Brazil.
A public offering of securities distributed in Brazil requires registration with the CVM of the issuer as a public company and the offering itself. Under Brazilian securities laws, the securities themselves are not subject to registration.
IPOs of securities in Brazil are primarily regulated by Law No. 6,404, dated 15 December 1976, as amended (the Corporate Law); the Brazilian Capital Markets Law; and regulations issued by the CVM, particularly CVM Rule No. 400, dated 29 December 2003, as amended (CVM Rule 400) and CVM Rule No. 480, dated 7 December 2009, as amended (CVM Rule 480). CVM Rule No. 476, dated 16 January 2009, regulates public offerings of securities with selling efforts restricted to professional investors, which in theory may apply to IPOs, but in practice is mostly used to allow issuers to quickly market follow-on offerings.
Additionally, the underwriters of a public offering of securities conducted in Brazil must comply with the Regulatory and Best Practices Code for Public Offerings by ANBIMA, and the issuer must observe the rules set forth by B3, currently the sole stock exchange market in operation in Brazil.
i Main stock exchanges
B3 offers the trading of stocks, forward and futures contracts, index swaps, interest and exchange rates, and agricultural and energy commodities, as well as spot market operations such as gold, dollar and federal public securities.
In addition, B3 exercises a key role in the regulation of public companies that trade their securities on the stock exchange. The Issuers' Regulation Board has the function of regulating the issuers listed in B3, in its guiding, normative and sanctioning aspects, according to the Capital Markets Law and the CVM's regulations.
For an issuer to be able to trade its securities in the organised markets of B3, it must plead its listing and the admission of these securities to trading, and comply with the requirements of the B3 regulations.
Most of the companies listed on B3 are domestic issuers, although it admits the listing of Brazilian depositary receipts (BDRs) – certificates of deposit issued and traded in Brazil, representing securities issued by foreign companies.
Some large, blue-chip Brazilian companies have sought dual listings in the past. Most of these companies have listed American depositary receipts in the New York Stock Exchange. More recently, Brazilian technology companies have directly listed their shares in Nasdaq or the New York Stock Exchange, through holding companies incorporated outside Brazil, as Brazilian companies that go public would have to be registered with the CVM, and have their shares listed in a Brazilian stock exchange.
ii Overview of listing requirements
To develop the Brazilian capital market, it was necessary to have different segments with various levels of requirements regarding corporate governance to meet the different profiles of companies willing to list their securities on the stock exchange. B3 has five special listing segments: Bovespa Mais, Bovespa Mais Nível 2, Nível 1, Nível 2 and Novo Mercado, each with its own set of requirements. Novo Mercado has the highest standards of transparency and governance, as required by investors in new public companies, and is recommended for companies wishing to make large offers targeted at any type of investor, from individuals resident in Brazil to large global institutional investors.
When a company is filing for registration of its IPO, not only must it comply with the Corporate Law, the Capital Markets Law and the CVM regulations, but also the rules of one of the special segments of B3 and its Issuer's Manual.
The application for registration of a company with B3, as well as the application to obtain B3's authorisation to trade the company's share on one of the listing segments, must be supported by a set of documents similar to the documents required by the CVM. The terms and time frame for B3 to review and request adjustments and improvements to documents regarding the IPO are similar to CVM terms, in order to guarantee a more efficient process.
Once the registration of the public company with B3 has been granted, the company must execute the participation agreement required to be listed in one of the special listing segments, as well as provide the acceptance of the requirements set forth by the segment rules from the company's new officers, directors and controlling shareholders, if applicable.
iii Overview of law and regulations
A company seeking to list its securities and launch an IPO in Brazil should be a corporation, under the terms of the Brazilian Corporate Law, as well as obtain its registration as a public traded company with the CVM; register the public offering of shares with the CVM; and obtain its registration as a listed company with B3. As previously mentioned, under Brazilian securities laws, the issuer and the offering are subject to registration, but not the securities themselves. This means that by registering the issuer, all its securities are eligible for listing and public trading, and by registering the offering, all the securities sold in the offering may be offered to the general public, and will be fungible with other securities of the same type and class previously issued and listed.
For an issuer to be registered as a public company, it must apply with the CVM for registration in one of the two classes of issuers of tradable securities, A or B. While class A registration authorises the trading of any equity and debt securities issued by the company for trading in regulated securities markets, class B registration only authorises the trading of debt securities issued by the company for trading on regulated securities markets, excluding equity securities such as shares, warrants and share depositary receipts, as well as securities convertible into shares.
A public offering under the terms of CVM Rule 400 requires a prospectus, which primarily includes summarised information about the offeror, and full information on the offering and the securities offered, including the plan of distribution, terms and conditions of the securities, use of proceeds, capitalisation table, dilution and risk factors related to the offering. The regulatory requirement is that the prospectus must contain complete, precise, truthful, clear, objective information regarding the issuer and the offering, using non-technical and easily understood language. A prospectus must meet the content requirements provided in detail by CVM Rule 400 and the ANBIMA Code of Regulation and Best Practices of Investment Funds (the ANBIMA Best Practices Code). Nearly all qualified Brazilian investment banks and broker-dealers have pledged to comply with the ANBIMA Best Practices Code and have agreed to sanctions in the event of non-compliance with its terms and conditions. Accordingly, the underwriting agreement will typically require issuers to conform to the standards of this Code.
Additionally, CVM Rule 400 requires an announcement of commencement and closing. An announcement of commencement provides information about the procedures related to the public offering, including a timetable, the amount of securities offered and a price range reference. A closing announcement reveals, mainly, the quantity of securities allocated to each investor and the type of investor that accepted the offering, with the respective amount of security acquired. Both announcements must be published by the lead underwriter in major newspapers or made available on the websites of the offering participants, the relevant stock exchange and the CVM.
The CVM shall waive registration requirements in the case of securities issued by small and micro-sized companies, as defined by Brazilian regulations. With respect to issuers with wide market exposure, as defined under the terms of CVM Rule 480, the CVM may grant automatic offering registration pursuant to an expedited review proceeding.
The application for registration of a public offering under the terms of CVM Rule 400 must be jointly submitted to the CVM by the offeror (whether an issuer or a selling shareholder) and the lead underwriter, and must be accompanied by supporting documents, including drafts of the offering documents.
After the offeror has submitted an application to the CVM for registration of the public offering distributed under the terms of CVM Rule 400, it may release a preliminary prospectus, and initiate its book-building activities and roadshow presentations. In practice, the offeror and the lead underwriter may prefer to wait for an indication from the CVM that no major issues are anticipated in relation to the proposed public offering. No sales may be effected until the CVM has granted registration for the public offering, certain statutory announcements are published or made available on the appropriate websites, and a final prospectus is available. Upon granting of registration of the public offering, the final prospectus must be released and available on the websites of the issuer, the offeror, the underwriters, the CVM, the relevant stock exchange and ANBIMA, in the case of follow-on offerings.
The offering process
i General overview of the IPO process
The registration of a company as well as the IPO registration are usually carried out simultaneously. Upon the first filing of the required documents, the CVM has 20 business days to review and suggest improvements and adjustments to these documents. The issuer has up to 40 business days to address the requirements; however, in practice this step takes five business days. After the second filing of the set of documents, the CVM has 10 business days to review them and certify the suggestions were implemented. The day of the second filing is also the day the commencement announcement is published. If the CVM is still not satisfied with the compliance of the requirements, the issuer has another three days to adjust the documents. The registration is than granted to both the company and the IPO. As stated before, the review of the documents by B3 is done simultaneously and should be finished at the same time as the CVM's review.
The list of documents submitted to the CVM includes those related to the issuer and drafts related to the offering. Regarding the issuer, the main supporting documents include:
- the formation documents of the company, including its by-laws;
- the record data form;
- the reference form – an annual report on the periodic reporting applicable to public companies;
- minutes of shareholders' meetings held during the preceding 12 months;
- copies of the shareholder agreements filed at the headquarters of the company;
- the board resolution appointing an investor relations officer;
- audited financial statements for the preceding three fiscal years;
- audited financial statements reflecting any material change in the company's equity structure after the end of the latest fiscal year, if applicable;
- an annual financial report prepared for the most recent fiscal year;
- quarterly financial reports, as applicable;
- statements relating to the issuer's securities held by executive officers, members of the board of directors, and members of the audit committee and any other advisory committees created pursuant to the company's by-laws; and
- policies for disclosure of material facts.
Regarding the offering, the documents include the draft prospectus, the draft announcements to be released to the market during the offering period, drafts of the underwriting agreement and other contractual documents to be executed by the price-stabilising agent and by the investors, and other ancillary documents.
The reference form is the main disclosure document provided by the issuer, and its table of contents is stated in CVM Rule 480. It must be filed with the CVM during an IPO process, as well as annually, and is subject to revision if certain material information needs to be updated, pursuant to the terms of CVM Rule 480.
The reference form provides the complete profile of the company, covering aspects such as its business, products, processes, risks, contingencies, financial condition and results of operations, including a management discussion and analysis section where a comparison of the past three annual financial statements of the company is reviewed.
Considering the importance of the reference form for the decision by the investors to invest in the company, and the liability standard imposed to the issuer, the offerors and underwriters, it is crucial that the due diligence process be conducted by the legal teams representing the company and the underwriters. During the IPO process, the legal teams, the underwriters and the auditors carry out procedures to provide a reasonable basis for the offerors and underwriters to be comfortable that, as of the effective date of the registration of the company, the reference form and the prospectus will contain no significant untrue or misleading information, and no material information has been omitted.
Lastly, the company's independent auditors will provide the underwriters with the comfort letters to the financial information that is stated in the reference form and the prospectus. If any information is not provided in the comfort letter by the independent auditors, the company will provide backup support to the satisfaction of the underwriters.
The Capital Markets Law states that a qualified underwriter must participate in the marketing and placement of any public offering of securities. In equity offerings, the lead underwriter, the bookrunners and any co-managers will typically enter into a underwriting agreement with the issuer or selling shareholder. Underwriters in equity offerings usually give firm commitments to settle the securities offered in a public offering not effectively settled by the investors. The group of bookrunners will enter into separate agreements with members of the selling group, by which the members of the selling group accede to the underwriting agreement and provide their own commitment to settle the shares purchased but not settled by the investors. In debt offerings, the underwriters give a firm commitment to place and purchase the securities offered in public equity offerings that are not purchased by market investors.
In the IPO, the lead underwriter and the issuer elaborate a plan of distribution that must ensure fair and equitable treatment of investors in the offering. The special listing segment rules of B3 generally require that Brazilian issuers seek to disperse their shares widely among investors in the market. Typically, issuers meet this requirement by affecting a retail offering primarily targeting individual investors.
Underwriters will usually receive orders from retail investors in anticipation of the pricing of a public offering. Orders are permissible as long as the preliminary prospectus is available. After the public offering has been registered and formally initiated, each retail investor will receive a number of shares resulting from the division of the monetary amount of the investment order by the offering price. If the final prospectus, including the reference form, contains a materially different disclosure compared with the preliminary prospectus and reference form, any investor may withdraw its order.
Moreover, if a public offering under the terms of CVM Rule 400 is oversubscribed by more than 33.3 per cent of the offered securities, no securities may be placed with affiliates of the underwriters, the issuer or any parties involved in the offering, except for the orders placed by non-institutional investors, provided that they comply with the recommendations of the CVM and are considered sufficient to mitigate the use of confidential information by investors to obtain improper advantage.
ii Attention points
Liabilities and enforcement
The primary bases of liability in a securities transaction are regulated by CVM Rule 400, which establishes the liability of the issuer, the selling shareholders, the underwriters and their respective managers for material misstatements and omissions in the offering documents. The lead underwriter is primarily liable, among the underwriters, for any damage caused to investors as a result of material misstatements and omissions. A lead underwriter may only be held accountable by an investor for lack of diligence in performing its obligation to ensure that the offering documents are free of material misstatements and omissions. The issuer and selling shareholders that are controlling persons, however, are fully liable for any material misstatements and omissions. A non-controlling selling shareholder is only liable if it fails to act diligently to ensure that the offering documents are free of material misstatements and omissions.
Issuers, selling shareholders and underwriters may also be sanctioned by the CVM in administrative proceedings. It may initiate disciplinary proceedings and impose sanctions ranging from warnings to fines to permanent disqualification from public capital markets. The CVM enforces compliance with the Corporate Law, the Capital Markets Law and its own regulations. During the course of the offering, the CVM may also suspend the offering if it determines that it is being conducted in a manner inconsistent with its purpose, is illegal, fraudulent or violates CVM regulations.
Usually, the CVM will not take a position regarding the accuracy of any disclosure documents. In most cases, the CVM will demand amendment to the prospectus, the reference form and other documents until it is satisfied that its concerns have been addressed.
Rules of conduct in public offerings
CVM Rule 400 sets forth the rules of conduct the company and related parties must adopt regarding the disclosure of information in connection with the offering before, during and after the offering. Until the offering is disclosed to the market, the company and parties involved in the offering must (1) restrict disclosure of information relating to the offering to the extent required for the execution of the offering, having recipients being made aware that such information is non-public, and (2) restrict use of the non-public information to the extent strictly required for the execution of the offering. Restrictions on the disclosure of information set forth in CVM Rule 400 shall not apply to information that is already public at the time of its disclosure.
Communication to the media about the offering is prohibited until the publication of an announcement regarding the completion of the offering. Before this announcement, the company and parties related to the offering must abide by the principles of quality, integrity and equality regarding access to information, and disclose any material interests that they may have in the offering, as well as any transactions with related parties having at one side the given party and at the other side, the issuer.
The restrictions on publicity set forth above are not intended to stop the free flow to the public of information about the company. Consequently, the company may conduct its affairs in the normal course of business, so that it may continue to advertise its products and services, distribute customary reports to stockholders, and make announcements to the press with respect to factual business and financial developments in a manner consistent with past practice. Nevertheless, issuers have to manage the 'quiet period' very carefully, as distinctions between announcements in the normal course of business and prohibited communications may not be very clear in practice.
iii Considerations for foreign issuers
BDRs are certificates of deposit issued and traded in Brazil, representing securities issued by foreign companies. There are two types of BDRs: sponsored BDRs, issued by depository institutions, which are contracted by the foreign companies that issued the securities, classified into three types (Levels I, II and III Sponsored BDRs); and unsponsored BDRs, issued by depository institutions without the participation of the foreign companies that issued the backing securities, classified only as Level I Unsponsored BDRs.
Any foreign company that intends to list BDRs in Brazil must register with the CVM and B3, as any other public company in Brazil, as well as register a sponsored BDR programme. The registration of a foreign company with the CVM is regulated by CVM Rule 480, which sets out that only a company incorporated outside Brazil may issue securities eligible to back BDRs. The company qualifies as a foreign issuer if its headquarters are not located in Brazil and more than 50 per cent of its assets are not located in Brazil. The registration of the BDR programme is ruled by CVM Rule 332, dated 4 April 2002, as amended.
Foreign companies that have listed BDRs in Brazil need to comply with periodic disclosure requirements set out by CVM Rule 480. This rule provides that the financial statements of the foreign company must be produced in Portuguese, stated in Brazilian currency and in compliance with the International Accounting Standards issued by the International Account Standards Boards. In addition, the financial statements should be audited by an independent auditor registered under the place of incorporation of the company, and the auditor's report needs to be reviewed by an independent auditing firm registered with the CVM. Foreign issuers of listed securities also need to release a reference form on an annual basis, as well as give notices of material facts, and generally comply with the same disclosure requirements applicable to Brazilian issuers.
Upon the granting of registration of the company and the BDR programme with the CVM and B3, the foreign company will be authorised to list and trade its BDRs in the local Brazilian market.
In Brazil, companies registered with the CVM and listed in B3 are subject to a significant number of ongoing obligations under the Corporate Law, the CVM's regulations and B3's listing segments rules, as well as its Issuer's Manual. Obligations include mandatory disclosures of periodic information, timely disclosure of material information to the market and restrictions on trading its own securities.
The CVM and B3 are responsible for monitoring the compliance of the company with these laws and regulations, and failure to comply may lead to the imposition of administrative penalties on the company's management and controlling shareholders. The CVM may apply penalties such as formal warnings and monetary fines, prohibition of holding offices in public companies in Brazil or temporary bans on securities trading. In addition, breaches of the Capital Markets Law may subject offenders to civil and even criminal liability.
The following are some examples of ongoing obligations of a public company:
- Disclosure of material information: the Corporate Law and CVM Rule 358, as of 3 January 2002, as amended, mandate disclosure of any material events involving a public company, defined as any fact or action that may have an impact on the intention of the investors to trade or hold securities issued by the company.
- Periodic reporting: under CVM Rule 480, the reporting company must annually file the record data form and reference form with the CVM, and must update the documents within seven business days of the date of certain material events established in the Rule. Public companies are also required to file annual and quarterly reports with the CVM, including annual audited and quarterly unaudited financial statements prepared in accordance with Brazilian accounting principles, which are in line with the International Financial Reporting Standards requirements, as approved by the Accounting Rulings Committee.
- Mandatory disclosure for shareholders' meetings: listed companies registered with the CVM under class A and that have free float must also file certain documents and information with the CVM in advance of shareholders' meetings, to enable shareholders to evaluate certain matters to be resolved at meetings, under CVM Rule No. 481, dated 17 December 2009, as amended.
- Disclosure of information regarding shareholding: under the CVM and B3 regulations, management, directors, members of the fiscal committee, controlling shareholders and related parties are required to disclose their holdings of securities issued by a public company and any transactions involving such securities within 10 days of the end of the calendar month in which the transaction occured.
- Notice of related-party transactions: moreover, since January 2015, CVM Regulation No. 552, dated 9 October 2014, as amended, provides the criteria to determine the information on related-party transactions that must be reported by listed companies. The purpose of the regulation is to allow the investors and the CVM to monitor the most relevant transactions with related parties as the company enters into them.
Outlook and conclusion
Brazilian capital markets have had a consolidated legal and regulatory framework for the past 40 years. However, this does not mean that they are not subject to continuous revision and improvement. The most recent development is the revision of B3's Novo Mercado Rules, along with a thoroughly revised regulation that entered into force on 2 January 2018. In addition to this reform, the CVM has announced the intention to review the securities offerings regime, to address much-awaited issues signalled by the market, and the market's expectation is that a sweeping reform to CVM Rules 400 and 480 will finally be submitted to public review in 2020. These reforms have the main goals of streamlining registration requirements, allowing issuers to gain faster access to the market, reducing compliance costs and favouring smaller ventures to access the capital markets.
As a recent development, in December 2019, the CVM submitted to the public for review a draft rule amending CVM Rule 480, removing the restriction on foreign issuers based on location of assets. If the rule is approved, issuers incorporated outside Brazil, but holding assets that are substantially located in Brazil, will be allowed to tap Brazilian capital markets by listing and offering BDRs, allowing more freedom on the part of issuers to choose their place of incorporation.