The Venture Capital Law Review: Brazil
The venture capital sector has been progressing rapidly in Brazil. Increasing numbers of venture capital players have been attracted by the unique set of growth opportunities that Brazil presents to them, which is primarily supported by a strong internal consumer market, a solid economic and regulatory framework, one of the most diversified ecosystems with some of the keenest start-ups when it comes to scaling internationally, and a large number of start-ups that require far more capital than is available in the domestic market.
With respect to the size of the industry, over the course of 2020, on the one hand venture capital funds with allocation to Brazil raised around 1.4 billion reais,2 and on the other, total venture capital investments in Brazilian start-ups amounted to approximately 14.6 billion reais, distributed among 200 invested companies.3 It is worth remembering that those numbers were generated in a challenging pandemic scenario. The covid-19 pandemic led to a significant drop in deal activity in the first and second quarters of 2020, but as from the third quarter of 2020 those statistics began to pick up again. In the first quarter of 2021, investments in Brazilian start-ups amounted to approximately 8.8 billion reais compared with 2.4 billion reais invested in the same period of 2020,4 and expectations are high for the rest of the year.
At the end of February 2020, when the covid-19 pandemic arrived in the country, the venture capital sector optimism of early 2020 was replaced by the prospect of a year with scarcer and more selective investments. But now looking back many venture capital players mention that 2020 has proven to be the year of consolidation of the venture capital practice in Brazil, with Brazilian investors showing their good eye and well-known resilience. Besides the fact that two Brazilian start-ups became unicorns in 2021 (there are now 13 Brazilian unicorns), over the course of 2021 the Brazilian venture capital ecosystem saw strong momentum around liquidity events, including VC-backed exits and listing as well as M&A activity.
The Brazilian venture capital industry has recently seen a diversification of the prominent general partners (GPs) responsible for the fundraising, notably the large local general partners, such as Canary, Monashees Capital, Astella Investimentos, Valor Capital Group and Redpoint eventures, the Brazilian arm of a partnership stemming from prominent US-based firms Redpoint Ventures and e.ventures, as well as the global GPs, including Softbank, Kaszek Ventures, Tiger Global Management, Global Founders Capital and Riverwood Capital. And although venture capital funds hoard most of the attention, one cannot forget the essential role played by the other investors in the Brazilian venture capital ecosystem, especially accelerators, individual investors (commonly known as 'angels') and corporate VCs.
Relevant investments in Brazilian start-ups were made in a variety of sectors, but without doubt the leader has been the fintech and insurtech industry, with the Central Bank of Brazil playing an important role by means of its competition incentive policies. More recently the healthtech, edtech and retailtech sectors have also been seen as key sectors for start-ups, drawing several relevant investors' attention.5
Year in review
The most notable and recent development directly affecting the venture capital markets and start-ups was the approval, on 1 June 2021, of Law 182, known as the 'Start-ups Legal Framework' (Marco Legal das Startups). The approval of this Law was highly expected and, although it was approved with substantial exclusions to its originally proposed text that were considered important by and to the market, the Law brought notable changes to the start-ups ecosystem, which will be explored below. It is important to note that the provisions of the Law are applicable solely to the start-ups that meet the definition provided therein, which includes some tests of annual income, an incorporation period and a self-declaration that the start-up uses innovative business models to render services or create products (as an alternative to this last requirement, the start-up may apply for a special regime called Inova Simples).
Perhaps the most important change brought by the Start-ups Legal Framework to venture capital investors is the clear liability limitation set in relation to these investors; however, only specifically when the investment is not carried out directly via equity (i.e., when investments are in fact made via convertible-into-equity titles, such as convertible loans, debentures, options, warrants and any other instrument not involving the direct subscription or purchase of equity). In these cases, the Start-ups Legal Framework is clear in the sense that investors should not be liable for any debts and liabilities of the invested company, except in cases of fraud or wilful misconduct in which the investor is involved. This provision is relevant because when it comes to investor liability in Brazil, there is an existing legal uncertainty as to the extent investors can be held liable for invested companies' liabilities, mostly related to labour and consumer rights matters.
Companies in Brazil that wish to render services to public administration must participate in public biddings. However, many start-ups are not yet as competitive as bigger and more mature companies that have participated in public biddings for several years. In this sense, the Start-ups Legal Framework created a special type of public bidding that authorises the public administration to present a certain technological challenge to be resolved and participants must present a solution to such challenge; however, the participants are not required to have the presented solution ready (as a service or a product) to be provided. If a participant presents a reasonable and satisfactory solution, at the discretion of the public administration, it will then have a certain period to develop and provide this product to the contracting party. This measure is intended to encourage start-ups to join public biddings and to make such biddings more approachable and accessible, given that participants are not required to have a service or product ready at the time of their application to the public bidding and also given that start-ups usually have a technological advantage.
Another relevant outcome of the Start-ups Legal Framework is the creation of experimental regulatory programmes (called regulatory sandbox), in which public authorities responsible for sectorial regulation may dismiss certain requirements and rules of their own concern to selected start-ups. In other words, these authorities may determine that some sets of rules and requirements are not applicable, for a definite period of time, to start-ups regulated by them with the purpose of granting these start-ups room to innovate. The respective authorities are yet to set out the details of such dismissal for start-ups. The purpose of this provision is to provide start-ups with freedom to experiment and reduce bureaucracy to facilitate creation of products and services.
Besides the most noticeable innovations mentioned above, there were also changes to the existing Brazilian Corporations' Law 6,404/1976 brought by the Start-ups Legal Framework, such as the decrease of the mandatory number of officers from two to one and the flexibility of not having to publish certain corporate documents, including corporate books, which can now be digital. These rules are currently applicable to start-ups incorporated as a Brazilian joint-stock company (sociedade anônima) and that do not surpass a certain annual income.
Legal framework for fund formation
The most important structure for the organisation of venture capitalists in Brazil nowadays and the focus of this chapter are investment funds regulated by the Securities and Exchange Commission of Brazil (CVM).
Investment funds are a pool of resources incorporated under the form of a special condominium (i.e., they are not corporate organisations) intended for investments in financial instruments and securities.
Investment funds can be divided into closed-ended and open-ended funds. Open-ended funds are characterised by the possibility for quota holders to redeem their quotas at any time, and a prohibition, as a general rule, on quotas being assigned or transferred. Closed-ended investment funds, on the other hand, do not allow the redemption of quotas at any time, except in the case of liquidation of the fund; and their quotas may be transferred by means of a term of assignment and transference, or through a stock exchange or over-the-counter (OTC) market.
The creation, management and operation of most investment funds in Brazil is generally regulated by CVM Instruction No. 555. However, certain types of funds, such as private equity funds (FIPs), are subject to specific regulations, as further detailed below.
FIPs are usually the preferred type of fund used in venture capital investments. FIPs are funds used to buy stock shares, subscription warrants, debentures, other securities convertible into or exchangeable for stock shares issued by publicly held or closely held companies, as well as securities representing equity interests in limited liability companies, which participate in the decision-making process of the investee, with significant influence over the definition of its strategies and management. CVM Instruction No. 578 is the rule governing organisation, operation and management of FIPs.
One of the major innovations introduced by CVM Instruction No. 578, is the creation of categories of FIPs specially focused on the venture capital industry, as follows: (1) FIP – Seed Capital; (2) FIP – Emerging Companies; (3) FIP – Infrastructure; (4) FIP – Intensive Economic Production in Research, Development and Innovation (FIP-RD&I); and (5) FIP – Multi-strategy.
FIP – Seed Capital is the most connected to the venture capital industry and is targeted at start-ups, used to invest in the initial venture capital cycle. FIPs – Seed Capital may invest in limited liability companies or companies with annual gross revenues of up to 16 million reais, which are not directly or indirectly controlled by a company or group of companies having assets worth more than 80 million reais or annual gross revenues over 100 million reais, while FIP – Emerging Companies is targeted at companies at a more advanced development stage but still viewed as venture capital firms. FIPs – Emerging Companies may invest in limited liability companies or companies with annual gross revenues of up to 300 million reais, as long as they are not controlled directly or indirectly by a company or group of companies having assets worth more than 240 million reais or annual gross revenues above 300 million reais.
In these FIP categories, limited liability companies and investees are dispensed from adhering to a number of mandatory corporate governance practices for investees under CVM Instruction No. 578, but such adherence rules will apply to the extent that the investee's equity exceeds the cap prescribed by CVM Instruction No. 578.
This regulatory exemption demonstrates the CVM's attention to the venture capital market, since it benefits early stage companies, for instance, with the exemption from auditing accounts, using arbitration as a conflict resolution mechanism, having a unified term for members of the board of directors, the prohibition on participation certificates and observing determined corporate governance practices.
Local professional management and administration of investment funds, including FIPs, can only be carried out in Brazil by a legal entity duly authorised by the CVM and accredited for portfolio management. In this regard, different from jurisdictions where a GP structure can be implemented to operationalise a fund management, in Brazil a separate legal entity regulated by the CVM is required for the fiduciary administration and asset management, provided that the same entity might play both roles to a fund.
For the fund formation, it is mandatory that the administrator incorporating the fund obtains prior registration with the CVM, which is automatically granted upon filing the following with the CVM:
- the fund's by-laws and act of incorporation;
- a statement from the fund administrator regarding compliance with the applicable regulation;
- submission of independent audit firm identification;
- information on the maximum and minimum number of quotas to be distributed, the issue value, all costs incurred, and other material information concerning the distribution;
- disclosure material to be used in the distribution of fund quotas, including a prospectus, if any;
- any additional information that may be provided to potential investors; and
- the fund's enrolment number with the National Register of Legal Entities (CNPJ).
As a general rule, only qualified investors, as defined in specific regulations, may invest in the fund and the distribution of its quotas must be carried out by duly qualified entities pertaining to the Brazilian securities dealership system.
In this regard, under Brazilian law, the offering of funds, which are deemed as securities when publicly offered, as per Securities Market Law (Law 6,385 of 7 December 1976), and its marketing is subject to strict regulation that affects the possibility of offering such products on a wide public basis in Brazil.
The public offering of securities in Brazil is primarily regulated by the Securities Market Law and CVM Instructions No. 400 of 29 December 2003 and 476 of 16 January 2009. According to these regulations, as a general rule, public offerings must be previously registered with and authorised by the CVM.
For the purposes of the Brazilian Securities Market Law, a public offering involves a sale, a promise to sell, an offer to sell or to subscribe, as well as the acceptance of a sale or subscription request for securities.
In addition, the Brazilian Securities Market Law defines the concept of public offering in very broad and general terms, providing that a public offering is characterised by:
- the use of sale or subscription lists or bulletins, leaflets, prospectuses or advertisements directed to the public;
- the search for underwriters or purchasers for the securities by means of employees, agents or brokers; or
- trading carried out in stores, offices or establishments open to the public, or by using public means of communications.
Brazilian law does not provide a definition of what constitutes a private placement of securities. Consequently, the concept of private placement is based on what would not constitute a public offering under Brazilian law, and therefore would not require registration with the CVM.
For reference purposes, an offer will be deemed public if any of the following occurs:
- the use of sale or subscription lists or charts, leaflets, prospectuses or announcements directed to the public, by any means or in any form;
- the complete or partial search for subscribers or indeterminate purchasers for securities, even if carried out by way of standard communication sent to specific addressees, through employees, representatives, agents or other individuals or legal entities pertaining or not to the securities distribution system or, still, if not in accordance with the provisions of CVM Ruling 400/03, the consultation about the feasibility of an offer or the collection of investment intentions on the part of unspecified subscribers or purchasers;
- trading carried out in a shop, office or establishment open to the public, fully or partially intended to unspecified subscribers or purchasers; or
- use of oral or written advertisement, letters, announcements, notices, especially through mass or electronic media (pages or documents on the internet or other open computer networks, or through email messages), encompassing any means of communication targeted at the 'general public' with a view to promoting the subscription or sale of securities, directly or through third parties acting on behalf of the offering party or issuer.
Here, 'general public' means a class, category or group of persons, even if individually identified as such, except for those that have maintained a prior business, credit, corporate or labour relation with the issuer, on a close and ongoing basis.
Since Brazilian legislation does not outline a clear distinction between a public and a private offering of securities, there is a potential risk of characterisation, by the CVM, of a private offering as a public one. Therefore, any party intending to market and sell securities in Brazil on a private basis (without registration with the CVM) should be careful regarding the means and methods to be used in connection with such activities, in order to mitigate the risk of questioning by the CVM.
In general, a private placement should not be directed to the public at large and clients should be contacted not as a group, but on a discrete and one-to-one basis. A foreign institution privately offering securities to clients in Brazil should employ even more caution as to the general procedure to be adopted. In fact, the more discrete and person-to-person a private offering is made, the lesser should be the risk of questioning by the CVM.
Foreign securities are generally not eligible for registration in Brazil. Therefore, in order for foreign entities to offer their products in Brazil, they shall adopt certain procedures to avoid their public disclosure in Brazil.
The fund formation and organisation encompass a set of agreements aimed at regulating its operation and relationship with service providers and investors. While the most relevant aspects of the fund will be set in its by-laws, the management agreement to be entered into by and between the fund and its manager is key in defining the distribution of profits to the manager, including carried interest (if any), performance fee and monthly remuneration. Except for compensation provisions, these agreements tend not to be heavily negotiated and to observe market standards.
With regard to the distribution of profits to investors, rules are mandatorily set in the by-laws. In investment funds, distribution of profits can occur either by redemption of amortisation of the fund's quotas (see Section III on closed-ended and open-ended funds differentiation).
In essence, the amortisation of quotas is a procedure carried out by the fund's administrator – either as provided for in the fund's by-laws or resolved by the quotaholders' meeting of the fund – whereby the fund's liquid assets resulting from the disposition of investments, dividends, interest or any other earnings originated from the fund's portfolio are distributed to the quotaholders ratably to the number of quotas they hold in the fund, without reduction in the number of their respective quotas. The amortisation of a closed-ended fund's quotas is an alternative to allow distributions of the fund's assets to its quotaholders other than through the redemption thereof at the end of the fund's term or the liquidation of the fund itself.
The redemption of a quota occurs upon the end of the term of the relevant series of quotas or of the fund and implies payment and cancellation of the respective quotas. In this sense, while in amortisation payment does not imply a reduction in the number of quotas, redemption effectively cancels the quota.
Local professional management and administration of funds can only be carried out in Brazil by a legal entity duly authorised by the CVM, which exercises continuing regulatory oversight of fund managers and the fund itself during the life of the fund.
Portfolio management activities in Brazil are distinguished by two types of portfolio managers with different areas of expertise:
- fiduciary administration (administrator), with direct or indirect responsibility for the custody and controllership of assets and liabilities and, generally, for the supervision of the markets; and
- asset management, with responsibility for the decision-making process of investments. This distinction is duly reflected by CVM Instruction No. 558, which establishes that portfolio managers, depending on the activities performed, shall request their registration under the fiduciary administrator category, under the asset manager category, or under both.
Additionally, CVM Instruction No. 558 introduced some other significant changes to the rules applicable to the management of funds, including assignment of certain responsibilities to statutory officers; the possibility of distribution of quotas of investment funds under management; and improvement of the rules of conduct and information duties.
Regarding the information duties required from portfolio managers, they must publish their internal policies and manuals on the internet, as well as disclose and keep an updated reference form similar to a prospectus applicable to listed companies. In addition, portfolio managers must file the annual version of their reference form with the CVM yearly, disclosing information of its internal structure, control, human resources, assets under management, compliance provisions and remuneration.
It is also worth noting the regulation enacted by a self-regulatory agency, the Brazilian Financial and Capital Markets Association (ANBIMA), which created a set of rules with increased corporate governance for its associates (e.g., asset managers, banks and brokerage firms) to comply with. In this regard, ANBIMA issues rules establishing the best practices to be adopted by its associates regarding asset management, including a Code for Regulation and Best Practices for Asset Management which replaced the Code for Investment Funds previously in force.
Finally, funds are generally prohibited from engaging in ancillary activities and are restricted to carrying out investments within their investment policy and regulatory scope.
Raising capital by start-ups
Bank financing is hardly an option for companies at seed stage of formation. Financial institutions refrain from entering into financial agreements with start-ups due to their limited cash flow, tangible assets and embryonic business. In this sense, seed start-ups rely primarily on non-equity financing made available by angel investors and seed funds.
Angel investment is the most attainable source of financing available to seed stage companies. Angel investors venture primarily local small and medium-sized businesses, operating a wide range of segments, since they lack the specialisation, financial resources and infrastructure of professional funds. Furthermore, entrepreneurs can have a hard time attracting venture capital and private equity funds amid market downturns, while angel investors usually have their financial resources less exposed to market performance than professional funds and will seldom change their willingness to invest due to macroeconomic externalities.
Seed funds may bankroll start-ups as early as angel investors, often subject to a due diligence and screening process. Seed funds tend to favour convertible loan instruments – similar to the convertible notes used in the Silicon Valley – and structure the investment via an offshore company, which is the direct or indirect controlling shareholder of the Brazilian entity. It is important to stress that any foreign investment in a Brazilian company must be registered with the Central Bank of Brazil.
In convertible instruments, seed investors receive securities convertible into equity of the company or a discount in the next equity financing, or both. If the financing does not reach the expected outcome, parties may enter into an instrument of debt forgiveness and request the cancellation of the registration of the loan with the Central Bank of Brazil. On the other hand, in case of a successful investment, the venture capitalist has the option to convert the credit into equity of the company.
Small and medium-sized companies looking to expand into new markets and recruit new talents turn to series A and series B venture capital funds, or even high-end angel investors. In this sense, participating investors and seed investors holding options to acquire shares of the company receive preferred stock in consideration for their investment. Venture capital funds will often push for superior economic and voting rights to the remaining investors, such as the appointment of board members and the obligation to obtain their prior consent to approve certain matters decided in shareholders' or board of directors' meetings.
Venture capital firms can also add considerable intangible value to start-ups, as they tend to be committed to reputable corporate governance standards and are willing to provide technical advice (e.g., by appointing board members or officers to serve the company).
With a consolidated business and sophisticated corporate governance principles policies in place, companies may wage series C and onward financing rounds to prepare for an initial public offering, M&A transactions or grow their business. These financings are frequently led by private equity and robust venture capital funds. At this stage, companies should be ready to face a broad due diligence and screening process. Larger cheque sizes will entitle late investors to demand preferred stock with liquidation preference and additional voting and economic rights to outstanding preferred shareholders.
In addition to the aforementioned financing sources, seed and pre-seed start-ups may recur to unorthodox funding sources, such as crowdfunding. The Brazilian legal system permits both community crowdfunding (i.e., when investors do not expect financial return from the investment) and financial return crowdfunding.
The CVM solely regulates financial return crowdfunding of small companies. Crowdfunding must be intermediated by an online platform accredited with the CVM. Whereas the CVM has dismissed the registration of each crowdfunding with the purpose of mitigating regulatory costs, the intermediating platform undertakes all responsibility for analysing the legitimacy of the offer. Participating lenders will be entitled to receive either equity, securities convertible into equity, or a regular credit instrument.
CVM Instruction No. 588, which modulates the rules applicable to crowdfunding in Brazil, has limited the use of this fundraising path by establishing several restrictions to it, such as: (1) the maximum amount that can be raised through crowdfunding is 5 million reais; (2) the offer is subject to a time limit of 180 days; (3) the company must raise at least two-thirds of the total amount offered; (4) the lender should always be entitled to decide whether to convert the credit into equity or claim the repayment of the principal and accrued interest; and (5) the offering company is not allowed to prepay the debt without investors' prior consent.
The CVM is also the sole governmental agency responsible for registering the entities as publicly held companies, registering public offerings and generally overseeing the Brazilian capital markets, which it enforces through a series of (1) instructions; (2) official directives prepared by the CVM's board of officers; and (3) official directive letters with the interpretation of the CVM's technical staff of the instructions published by the board of officers of the CVM.
Any Brazilian company incorporated in the form of a Brazilian joint-stock company (sociedade anônima) can be registered with the CVM as a publicly held company and list its shares (or other securities) at B3, São Paulo's stock exchange. The process for registering an entity as a publicly held company with the CVM is provided for in CVM Instruction No. 480 and the process for registering a public offering is provided for in CVM Instruction No. 400.
Even though there is no template widely available or specific regulation under Brazilian law, venture capitalists have been entering into investment agreements similar to the ones used in Silicon Valley. There are many unconventional investment alternatives, but most investments are realised by means of one of the following investment agreements: (1) a convertible instrument; (2) a call option agreement; or (3) a stock purchase or subscription agreement.
Seed and early stage investors prefer to enter into convertible instruments in order to mitigate the risk of becoming a shareholder in an undeveloped business. In consideration for the loan, lenders receive the right to convert their investment into equity on the maturity date or upon a liquidation event, such as a next equity financing or an initial public offering.
Option agreements are very similar to convertible instruments, as they are also innominate agreements regulated by general contract law set forth in the Brazilian Civil Code,6 and their terms and conditions are freely negotiated between the parties. However, different from convertible financing, the holder of a call option cannot choose between receiving remuneration interest and subscribing for shares of the company.
The holder of a call option has the vested right, but not the obligation, to acquire shares at an agreed price (strike price) and date. During the negotiation of a call option agreement, parties should focus their attention on the strike price and conditions precedent that the holder must fulfil to exercise its unilateral call option right. These agreements are widely used by accelerators in early stage companies, as they seek to contribute with intangible assets and infrastructure, instead of financial resources, and this type of agreement is easily negotiated and managed from the accounting and operating standpoints.
Once companies are past the seed and early stage of formation, investors and founders primarily engage in equity financing rounds by entering into stock purchase agreements and subscription agreements. Equity investment usually involves the drafting and negotiation of, at least: (1) a subscription agreement or stock purchase agreement; (2) a shareholders' agreement; and (3) a general shareholders' meeting approving the capital increase or transfer of shares.
Investment agreements governed by Brazilian law virtually contemplate the same key terms of investment agreements used in Silicon Valley. From investors' perspective, it is important to pay attention to economic terms and aspects relating to voting and control powers, such as: (1) anti-dilution; (2) tag along and drag along; (3) right of first refusal and right of first offer; (4) preferred liquidation event; (5) matters subject to preferred shareholders' approval; (6) price; (7) vesting; and (8) exercise period.
On the entrepreneurs' side, key terms are related to (1) restrictions applicable to their right to sell or issue new shares of the company; (2) voting powers in the management bodies of the company; and (3) terms that would prevent investors from participating in future rounds (e.g., such as an excessive discount in a next equity financing, the right to appoint a majority of the board members of the company, etc.). In this sense, drag along, lock-up, standstill and protective provisions should be carefully negotiated.
In view of potential legal risks borne by shareholders of Brazilian companies, investors may demand that investment instruments provide additional protection clauses. One common provision consists in the put option to dispose, at investors' sole discretion and at any time, all of its shares in the company's corporate stock for a symbolic price of one real. This is an interesting mechanism in the event the venture capitalist wishes to cut off its connections with the company at virtually no cost.
Over the past few years venture capital funds have typically exited their investments in Brazil through M&A. As examples of recent emblematic exits, in the first quarter of 2021:
- Redpoint eventures, Riverwood Capital, Astella Investimentos, DGF Investimentos, TPG Growth and Endeavor Catalyst exited RD (Resultados Digitais), a Brazilian marketing automation platform for small businesses in Latin America, through a 1.9 billion reais sale to TOTVS; and
- Redpoint eventures, Valor Capital Group, Peninsula Participações, Crescera Capital, Endeavor Catalyst and Grupo Xangô exited Brazilian edtech Passei Direto through a sale to Brazil's Uol Edtech.7
And in addition to the typical M&A exit for venture capital funds mentioned above, the Brazilian M&A market for tech companies and start-ups in general has been pretty active. In 2020 while Brazilian fintech Nubank acquired Cognitec, Plataformatec and Easyvest, Brazilian company XP acquired Antecipa, Fliper and DM10.8
IPO is not a typical exit for venture capital funds in Brazil, but recently, with the development of the national capital markets, this exit has become more common. After a memorable 2020 for IPOs in Brazil, the country's equity capital markets are set to break records in 2021. In the first half of 2021 alone, 28 IPOs were filed at B3, São Paulo's stock exchange, equalling the total number of public listings that occurred in 2020. And among those 28 IPOs, there were three venture capital backed start-ups: (1) Brazilian marketplace Enjoei raised nearly 1 billion reais, providing a partial exit for Monashees Capital and Bessemer Venture Partners; (2) Brazilian cashback platform Méliuz raised 629 million reais, providing an exit for Monashees Capital and Endeavor, among others; and (3) Brazilian digital platform for freelance professionals GetNinjas handled around 555 million reais, providing an exit for Tiger Global Managementand Monashees Capital, among others. In addition to that, since 2018, when Pagseguro and Stone successfully listed their shares on the NYSE and Nasdaq, respectively, IPOs in New York have also become an attractive and accessible option for Brazilian start-ups.
The Brazilian special purpose acquisition company (SPAC) market is not well developed yet. But in view of the spiking interest from the global investor community as an alternative exit strategy, with a record year for SPAC IPOs in the United States in 2020 and some of those new SPACs raising money in Nasdaq with a mandate to buy Latin American private growth companies, the CVM has recently turned its attention to this matter.
In March 2021, the CVM launched a public consultation, with a proposal to reformulate the regulatory framework for securities public offerings,9 and in this consultation the Brazilian regulator formally (1) recognised the growing popularity of SPAC IPOs in the US; (2) confirmed that those offerings are not prohibited by Brazilian regulations; (3) indicated that the Brazilian FIPs, in certain aspects could be considered similar to SPACs regarding their object; and (4) called the market agents to speak out about the target audience of SPAC offerings in Brazil. Therefore, it is expected that there will be updates and activity on the Brazilian SPAC regulatory framework and market in the coming months.
Nevertheless, it should be highlighted that although SPAC structures have not been implemented in Brazil yet, three potential structures seem to be good alternatives to be explored: (1) using a Brazilian FIP as a SPAC; (2) using a Brazilian joint-stock company (sociedade anônima) as a SPAC; or (3) carrying out an offer, in Brazil, of Brazilian depositary receipts of a foreign SPAC.
The Brazilian venture capital market has gained maturity over the past few years, attracting major GPs and sophistication of the regional industry, with local GPs raising larger funds. It is expected that this industry will continue to grow in the future mainly due to: (1) general economic drivers; (2) recent reforms on labour and social security matters; (3) diversified ecosystems; (4) dropping interest rates; and (5) recent regulatory and law changes that demonstrate the attention of the Brazilian regulators and legislature to the ecosystem. The CVM's recent regulations on FIPs connected to the venture capital industry and Law No. 182/2021 (also known as the Start-ups Legal Framework), detailed in Sections II and III, evidence this trend. However, there is still room for improvement in relevant topics, such as the stock option plan, which, among other important matters, was not regulated by the Start-ups Legal Framework, as already mentioned herein, and the SPAC potential structures in Brazil, to which the Brazilian regulator has begun to direct its attention over the past few months, as detailed in Section VII.
Looking ahead at the tax horizon, it is important to highlight the legislative bill currently under discussion (No. 2,337/2021), which, if approved, will materially affect the ecosystem. This legislative bill is called the Tax Reform and it is currently being discussed as presented on 25 June 2021 by the Minister of Economy.
If the Tax Reform is approved by 31 December 2021, the law will enter into force on 1 January 2022 and among the most relevant provisions it is worth highlighting the proposed changes to (1) profits and dividends taxation (currently the general rule is that dividends in Brazil are exempt from income tax); (2) capital gain on indirect disposal of Brazilian assets; (3) the tax treatment of stock option plans; (4) the contribution of assets in foreign companies (that according to the bill shall be made at effective market value, so that the capital gain is also taxed); (5) amortisation of goodwill; and (6) controlled foreign corporation rules and individual income tax.
1 Álvaro Silas Uliani Martins dos Santos is a partner and Giovana Raiani de Sá Silva, Lucas Marinho and Eduardo Comparato Ferreira de Sá are associates at Pinheiro Neto Advogados. The authors would like to thank the contribution of associate Victor Vinicius Pires and trainee Andressa Ickowicz in writing this chapter.
2 Fundraising from regional or global funds without specific allocation to Brazil is not included.
3 Source: KPMG. Private Equity & Venture Capital in Brazil, Industry Data Consolidation, Fourth Quarter 2020.
4 Source: KPMG. Private Equity & Venture Capital in Brazil, Industry Data Consolidation, First Quarter 2021.
5 Source: KPMG. Private Equity & Venture Capital in Brazil, Industry Data Consolidation, First Quarter 2021.
6 Federal Law No. 10,406 of 10 January 2002.
7 Source: LAVCA's 2021 Review of Tech Investment in Latin America.
8 Source: LAVCA's 2021 Review of Tech Investment in Latin America.
9 Edital de Audiência Pública SDM No. 02/2021.