1. The Brazilian Securities and Exchange Commission("CVM"), in line with the market demands, regulated, by means of CVM Regulation 588, dated July 13, 2017 ("CVM Regulation 588"), the public offering of securities issued by small businesses, aiming to contribute for the development of innovative sectors, through market financing instruments, while protecting the investor and ensuring legal protection for the participative investment electronic platforms ("Platforms").
2. CVM Regulation 588 also amends CVM Regulation No. 400, dated December 29, 2003, as amended ("CVM Regulation 400"), CVM Regulation No. 480, dated December 7, 2009, CVM Regulation No. 510, dated December 5, 2011, and CVM Regulation No. 541, dated December 20, 2013.
B. Main Elements of CVM Regulation 588
3. According to CVM Regulation 588, only companies incorporated in Brazil with a gross annual revenue limited to R$10.000.000,00 (approximately US$ 3,184,000.00 as of July 24, 2017) will be eligible for this new format of fundraising. The Regulation also includes in the definition of small business company (regulated by Supplemental Law no. 123 of 2006) the format of the corporation ("sociedade por ações").
4. The adoption of new criteria for small businesses intends to reach companies in their initial development stages, hoping to generate new business activities through investment-based crowdfunding. Small businesses will be able to publicly fund their activities with equity and debt (provided they use securities defined by Brazilian law, such as shares and bonds (debêntures)), reaching out to investors without the need of a previous registration with CVM.
Annual Funding Limit per Issuer
5. CVM Regulation 588 provides for a limit for fundraising through crowdfunding by small businesses in R$ 5,000,000.00 (approximately US$ 1,592,000.00 as of July 24, 2017), with underwriting periods of no longer than 180 days. This annual limit may be reached through one or more offers during the same calendar year, provided there is a distance of 120 days between them.
Annual Funding Limit per Investor
6. Each investor's annual investment limit in securities issued through the crowdfunding is of R$10,000.00 (approximately US$3,100.00 as of July 24, 2017), except for (i) those that are deemed qualified investors; (ii) those deemed angel investors acting as leading investors; and (iii) those who hold a gross annual revenue or financial investments higher than R$ 100,000.00 (approximately US$31,000.00 as of July 24, 2017), in which case the above limit may be increased in up to 10% of the higher of these amounts.
7. The Platforms are required to check compliance with such limits.
Procedures to be Followed in the Offer
8. The investor is entitled to a period of at least 7 days counted from the confirmation of the investment to revoke its investment order. Once the offer is terminated, the Platform shall have 5 business days to take all the steps so that the amount is invested in the small business (if the total amount of the offer is placed), or returned to the investors (if the total amount of the offer is not placed).
9. Partial offers are possible, provided that the investment floor and cap are previously defined, and provided further that the floor amount is at least 2/3 rds of the cap amount.
Standardization of Material Information
10. The CVM usually tries to protect the investor, making sure that the investment decision is an educated one, based on essential information about the offer and the issuer. For such purpose, CVM Regulation 588 contains a minimum list of material information to be disclosed by the issuer, in Portuguese, in a webpage.
Obligation to Grant Ample and Equitable Access to the Information of the Offer
11. The disclosure of the information concerning the offer must occur in an equitable manner to the public of the offer.
12. Since the Platform must keep an active electronic discussion forum for each offer, with restricted access to the respective investors, the Platform, the issuer and any related parties are barred from excluding comments that differ from the assumptions or the forecasts of future performance of the business. However, hate, discriminatory, illegal, immoral or offensive or inadequate messages or language, may be excluded.
Registration and Authorization for the Platform Operation
13. According to CVM Regulation 588, the Platforms perform a gatekeeper function, assuming a set of responsibilities before the investors and the CVM, since the offers are not registered therewith and consequently are not analyzed by it as well.
14. Therefore, the Platform must be registered with CVM since it performs an intermediation role within the public offering subject of the CVM Regulation 588. In order to obtain this registration, the Platform shall accomplish a set of requirements listed in the mentioned Regulation, among them the following:
i. have a paid-in capital in the minimum amount of R$100,000.00 (US$ 31.000.00 as of July 24, 2017); ii. have suitable proceedings and technology systems susceptible of verification;iii. adoption of a rules of conduct code applicable to its partners, managers and employees; iv. have managers that are domiciled in Brazil; and v. its partners and managers must have immaculate reputation, which have neither been criminally convicted nor suffered, in the last five (5) years, any punishment resulting of an activity subject to the control and supervision of the CVM, Brazilian Central Bank, the Superintendence of Private Insurance (Superintendência de Seguros Privados - SUSEP) or of the National Complementary Welfare Superintendence (Superintendência Nacional de Previdência Complementar - PREVIC).
15. The Platforms are responsible for disclosing to the investor that the offering and the issuer are not subject to a prior registration with the CVM, and that the CVM does not assure the truthfulness of the provided information, the conformity of the offering with the legislation in force, as well as it does not issue any judgement about the quality of the small business entrepreneur. However, the Platform shall take every precaution and act with high diligence standards in order to assure that the information provided by the issuer is truthful, consistent, correct and sufficient, enabling the investor to make an educated investment decision.
16. Lastly, considering that the Platform is not a financial institution, CVM Regulation 588 prohibits the transit of the investors' invested funds through any Platform banking account.
Prohibition of Using Advertising Material and Seeking Investors Outside of the Digital Environment
17. The offering, or its advertising material, may not be distributed outside the digital environment.
Co-offering by Participative Investment Syndicates and the Leading Investor Actuation
18. The CVM Regulation 588 provides the possibility of grouping investors that support a leader in an investment syndicate for participating in public offers of securities issued by small businesses, for which CVM permits the constitution of an investment vehicle.
Minimum Necessary Requirements for the Participation of the Leading Investor
19. Regulation 588 seeks to repeal the understanding that the leading investor acts as a securities manager, consultant or research analyst. Therefore, the possibility for the leading investor to participate in such capacity is restricted to an investor which also invests its own funds in the offering (the leading investor investment shall not be smaller than 5% of the value of the offer), and with additional obligations in comparison with the other investors.
20. The leading investor shall reduce information asymmetry among the issuer and the investors and, for this purpose, shall present to the investors its personal investment strategy for choosing that issuer in the decision-making process, as well as disclose its previous experience in the leadership of investment rounds or the performance of personal investments in small-sized businesses.
Other Aspects Regarding the Syndicates
21. Each investment vehicle of a syndicate will remain limited to the participation in just one public offering of securities, and the acquisition of securities issued by more than one small-sized company will not be permitted, in order to prevent the understanding that the syndicate could be similar to an investment fund.
C. Adaptation Period
22. The Platforms that have already performed at least one public offering of securities without the need of previous registration with the CVM, according to CVM Regulation 400 until CVM Regulation 588, shall have one hundred and twenty (120) days from the date of entry into force of CVM Regulation 588 to request the authorization for rendering of services under the new rule.
23. CVM Regulation 588 came into force on its releasing date (July 13, 2017).
In order to access the entire CVM Regulation 588, please click on the above link:
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