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CVM releases Public Hearing Notice on draft regulations for Equity Crowdfunding

Capital Markets

​CVM releases Public Hearing Notice on draft regulations for Equity Crowdfunding

The Brazilian Securities Commission ("CVM") released, on August 8, 2016, Public Hearing Notice No. 06/16 making available for public comment draft regulations ("Draft Regulations") regarding public offerings of securities issued by small-sized entrepreneurs, which are carried out by means of electronic participative investment platforms on global networks ("equity crowdfunding" or "investment-based crowdfunding") which do not require registration with CVM. 

The purpose of the Draft Regulations is to bring more legal certainty to investment-based crowdfunding, which is a financing alternative for small-sized entrepreneurs that face barriers to growth and survival, including difficulties in accessing capital and financial markets. 

The Draft Regulations, however, are not applicable to all types of participative or collaborative financing or crowdfunding carried out through a global network.  The Draft Regulations are limited to cases in which an idea, project or business is offered as an investment opportunity that leads to ownership interests or partnerships and it must be an offer to the public of securities issued by small-sized entrepreneurs. The crowdfunding initiatives involving donations or contributions that lead to the receipt of gifts, rewards or participation in the pre-sale of products and services, for example, are not deemed to be public offerings of securities and, therefore, are not covered by the Draft Regulations. 

Below, we highlight the main topics covered by the Draft Regulations: 

Eligible Issuers. Companies that are eligible for investment-based crowdfunding, called "small-sized entrepreneurs", are companies with annual gross revenues of up to R$10 million that are not registered as securities issuers with CVM. 

• Annual Funding Limit. The amount that an entrepreneur may raise via crowdfunding is capped at R$5 million per year, which may be raised in one or more offerings carried out in the same year, provided that there is a minimum period of 120 days between the two offerings. 

• Limits on the total invested amount. Considering the high risk of failure of the entrepreneur, the lack of liquidity of the securities offered, the absence of a complete prospectus/offering memorandum and analysis by CVM of the information disclosed in these offerings, the Draft Regulations establish an annual investment limit of R$10,000 per investor taking into account the set of offerings in which the retail investor's funds are applied.  This limit does not apply to qualified investors, investors that act as syndicate leaders and investors who have an annual gross income or investments in excess of R$100,000, in which case the limit is up to 10% of the investor's gross income or investments, whichever is higher.

• Offering Procedure. The Draft Regulations set out specific rules for investment-base crowdfunding offerings, which are in line with global standards, including: (i) the manifestation by the investor of an intention to participate in the offer shall not be considered binding and a withdrawal does not incur fines or penalties; and (ii) a minimum funding amount must be established and, if it is not reached, the offering will be cancelled and the investors will be reimbursed. 

• Minimum Disclosure. A minimum amount of information must be disclosed in the investment-based crowdfunding offerings, including information concerning: (i) the entrepreneur; (ii) the business plan; (iii) the terms and conditions of the offered securities; (iv) the participative investment syndicate, if applicable; (v) risk factors; (vi) conflicts of interest; and (vii) the compensation payable to the platform.  In addition, the platform should make periodic disclosures of the issuer and the offering after the settlement of the offering. 

• ​Wide and equitable access to the information concerning the offer and prohibition on advertisement. The Draft Regulations propose that investment-based crowdfunding offerings only be carried out electronically in order to ensure the wide dissemination of the terms and conditions of the offering to the public.  Any disclosure of the terms of the offering and marketing efforts made outside the electronic media are to be prohibited.

• Registration and authorization of crowdfunding platforms. One of the main innovations in the Draft Regulations is the obligation to register crowdfunding platforms with CVM as a condition to public offerings of securities of this type. These platforms must demonstrate: (a) its administrator's credibility; (b) human and technological resources appropriate to the provision of this service; (c) minimum capital contribution; and (d) a code of conduct to regulate the activities of its partners, administrators, employees and representatives. The platform's purpose, guidelines, responsibilities and obligations include: (i) ensuring that participation in these offerings is restricted to eligible issuers; (ii) controlling the amount invested by retail investors according to authorized limits; (iii) preparation and disclosure of educational material aimed at potential investors; and (iv) obtaining written acknowledgements from investors as to the investment risk. Please note that there is no requirement that platforms be financial institutions and, therefore, the Draft Regulations prohibit the transfer of investors' funds within the platform's bank accounts.

• Investment syndicate co-offerings and leading investor. Another innovation in the Draft Regulations is the concept of "leading investor" and "investment syndicate".  It provides for performance guidelines for the leading investor, which must not be confused with an asset manager, a securities consultant or a securities analyst. The leading investor must act as an interface between the entrepreneur and other investors of the syndicate, which must be incorporated as a special purpose entity that, for its part, invests funds in the small-sized entrepreneur.  Therefore, the investment would be characterized as a co-offer of securities issued by this special purpose entity, which is linked to only one small-sized entrepreneur.  It is expected that the leading investor applies its knowledge, experience and relationship network to assess the potential investment and is adequately compensated for this. The leading investor will have additional obligations compared to other syndicate investors. 

The comments on the Draft Regulations must be submitted to CVM by November 6, 2016.  We remain at your disposal to discuss any of the topics related to the Draft Regulations. 

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