New regulatory framework established for Brazilian Depository Receipts

On May 11, 2023, the Brazilian Securities and Exchange Commission (CVM) published CVM Resolutions No. 182 and No. 183, establishing a new framework for Brazilian Depositary Receipt (BDR) programs.

CVM Resolution No. 182 revokes CVM Instruction No. 332, whereas CVM Resolution No.183 amends certain provisions concerning BDRs in the CVM’s recently enacted Resolution No. 80 (for publicly traded companies) and Resolution No. 160 (for public offerings).

The new rules have updated the regulatory framework for BDR programs, introducing some innovative provisions (such as changes to the requirements for qualifying as a ‘foreign issuer’ and the automatic registration of level I BDRs) while consolidating understandings arising from recent decisions by the CVM Collegiate Board. Furthermore, they uphold provisions introduced by CVM Resolution No.3 in 2020, which provided more flexible rules and boosted the BDR market in Brazil. The framework for BDR public offerings has been adapted to the new regulatory framework for public offerings of securities in Brazil, which CVM Resolution No. 160 introduced last year.

CVM Resolutions No. 182 and No. 183 will take effect as of June 1, 2023.

What are BDRs?

In general terms, BDRs are securities issued in Brazil backed by securities (such as shares, depositary receipts for shares, or debt securities) issued abroad.  With BDRs, Brazilian investors can invest in securities issued in other jurisdictions without the need to open an investment account or transfer funds abroad.

BDR levels

BDRs can be issued within sponsored programs, which are subdivided into levels I, II, and III, or non-sponsored programs, limited to level I BDRs only. This structure and the current characteristics for each level were maintained in the new rules.

Sponsored BDR programs must be established by a single depositary institution (a legal entity that issues BDRs in Brazil backed by securities held abroad), contracted by the sponsor (a foreign issuer of the securities that serve as the underlying assets for the BDRs, acting under an agreement with the depositary institution). As for non-sponsored BDRs, the program can be established by one or more depositary institutions without the involvement of foreign issuers.

One aspect of the new resolutions is that a sponsored BDR program and a non-sponsored program cannot be run simultaneously. The depositary institution responsible for the non-sponsored BDR program must request to convert it and, if applicable, transfer the program to the depositary institution that is responsible for the sponsored BDR program.

Another new aspect concerns the possibility of a BRD program shifting levels (always to a higher level), provided the program complies with the requirements applicable to the level it will be converted to.

Main changes to the BDR framework

• More flexible issuer registration requirements – one of CVM Resolution No. 183’s key innovations concerns the exclusion of asset location and revenue origin criteria for registering foreign issuers, which was necessary for establishing level II and III BDR programs. Instead, two new criteria have been established to determine registration requirements for foreign issuers (in addition to exposure to ‘recognized markets’):
  • Previous experience in the issuer’s home market – the issuer of shares or depositary receipts for shares that will serve as the BDRs’ underlying assets must have a free float equivalent to 10% or more of its shares for the 18 months prior to their application for registration in Brazil. Moreover, the average daily trading volume of the shares and depositary receipts for the issuer’s shares must total at least BRL 10 million;
  • Signed agreement with the CVM – for issuers based in countries whose local regulator has entered into a specific bilateral agreement with the CVM regarding cooperation, information exchanges, and more effective monitoring and supervision measures (these do not exist yet, but the CVM expects to conclude them in the future).
• Concept of ‘public company or similar entity’ replaced – in line with the CVM Collegiate Board’s recent decisions on the subject, the new rules have replaced the concept of a foreign issuer as a “publicly traded company or similar entity” with a more objective definition. The specific characteristics required for a foreign issuer that issues securities underlying BDRs aim to provide greater predictability and legal certainty. According to the new rules, entities headquartered abroad should only be considered ‘foreign issuers’ if they meet the following characteristics:
  • They must have their own legal personalities;
  • Shareholder liability must be limited to the issue price of subscribed or acquired shares;
  • The issued securities must be admitted to trading in securities markets;
  • They must remain registered with a supervisor in their local jurisdictions, which must be responsible for overseeing them (the rules allow for the local supervisors to conduct registration and supervision functions directly or through other means permitted in their jurisdictions, such as self-regulatory entities);
  • Elected management, including a board of directors; and
  • Shareholders must have rights to vote and receive dividends, subject to limitations and differences between classes and types of shares issued.
• Investment entities – A specific information disclosure regime has been created for foreign issuers classified as investment entities. Therefore, foreign issuers classified as investment entities under sponsored programs must submit the following information to CVM and make it available on their websites:
  • Fees charged for remunerating administration and management service providers;
  • A list of charges that may be imposed on the issuer, including the maximum overall limit per fiscal year;
  • A list of service providers contracted for management, evaluation, consultancy, cashflow, asset control and processing, registration, custody, and market making;
  • A report explaining and justifying changes to the fair value of investments that materially impact the issuer’s net worth; and
  • Their portfolio structures – specifying the quantity and type of securities included.
• Public offerings – in SDM Public Hearing Notice No. 3/2021, the main change the CVM proposed regarded redefining the requirements for trading on organized markets and conducting public offerings applicable to BDRs, considering the original conception of these instruments in Brazil and other jurisdictions. It proposed that sponsored BDRs of levels I and II should once again serve as a means for issuers to establish their presence in Brazilian markets. As such, their securities would have been eligible for trading but not for raising funds through public offerings, with the latter only possible with level III BDRs.  However, following feedback from the market, the CVM decided to introduce the following provisions instead:
  • Level I BDRs (sponsored) and level II BDRs with underlying equity securities can only be publicly offered to professional investors, and the automatic registration process can only be used for subsequent offerings (follow-ons);
  • Level III BDRs with underlying equity securities can be publicly offered to any investor. The automatic registration process can be used for subsequent offerings (follow-ons) targeting professional investors, qualified investors (provided a prospectus and fact sheet are presented), or the general public when the registration request is previously reviewed by a self-regulatory entity;
  • Level I, II, and III sponsored BDRs with underlying debt securities can use the automatic registration process for offerings targeting professional investors only. The CVM has explicitly stated that public offerings of level III BDRs with underlying securities targeting qualified investors or the general public must follow the ordinary registration process.
  • A rule was maintained that provides that public offerings of BDRs – regardless of the level or underlying assets – must comply with the same investor qualification restrictions applicable to public offerings of the foreign securities that serve as their underlying assets.

Another change regarding the public hearing notice was that Brazilian debt securities may be underlying assets for BDRs traded in Brazil, even if they are not traded in organized markets abroad.

The final version of the new rules also provides for the automatic cancellation of BDR programs backed by debt securities with a pre-defined maturity date once that date is reached. The depositary institution must notify the CVM of the cancellation within five business days of the maturity date passing.

Finally, it is worth noting that the registration of level I BDR programs will be automatically granted once depositary institutions submit the required documents specified in the regulation.  However, applications for registration of level II and III BDR programs will be reviewed according to the applicable timeframes for public offering registration requests under the ordinary process, as established in CVM Resolution No. 160.

For further information, please contact Mattos Filho’s Capital Markets practice area.