Legal Framework for Startups is sanctioned

Authors: Daniel Caramaschi and João de Godoy

On Tuesday, June 1, 2021, the federal government sanctioned Complementary Law No. 182, which established the Legal Framework for Startups and Innovative Entrepreneurship.

The new Law recognizes innovative entrepreneurship as a vector of economic, social and environmental development; encourages the creation of more legally sound environments; grants greater contractual freedom and promotes investments; modernizes the Brazilian business environment in light of emerging business models; encourages innovative entrepreneurship as a means to generate skilled work; creates an ecosystem of entrepreneurship through cooperation between public entities, between such entities and the private sector and between private agents; and encourages the hiring by the government of startups that offer innovative solutions to public problems, taking advantage of potential economic opportunities.

The Legal Framework for Startups sets out a legal conception of startups, according to which newly constituted companies or companies in recent operation, whose business model is characterized by innovation, will be considered startups. Under the Law, companies (as well as individual entrepreneurs) will be considered startups: (i) with annual gross revenue of up to BRL 16 million in the previous calendar year or BRL 1.3 million multiplied by the number of months of activity in the previous calendar year (when less than twelve months), regardless of the corporate structure adopted; (ii) with up to 10 years registered in the National Register of Legal Entities (CNPJ); and (iii) that have expressly declared, in their corporate documents, the use of innovative business models or that are framed in the special regime Inova Simples provided for in the Statute of Micro and Small Companies (Complementary Law No. 123/2006).

The Law also ratifies investment practices for raising financial resources, without integration to its share capital, including: (a) option to subscribe or sell equity; (b) debentures and convertible loans; and (c) holding companies. The new Law also establishes that an investor who invests according to the modalities described above will not have any management power or even the right to vote in corporate resolutions, but may participate in the resolutions on a consultative basis. In addition, it establishes that the investor will not be liable for the company’s debts, not even in Judicial Reorganization, and the provisions relating to piercing of the corporate veil will not be extended to him.

The Law also authorizes companies that have R&D investment obligations to fulfill their commitments to invest funds in startups through Equity Investment Funds (FIP), in the seed capital categories, emerging companies and companies with R&D-intensive economic production.

The Legal Framework creates experimental regulatory environment (sandbox) programs, according to which the government can establish special simplified conditions so that participating startups can receive temporary authorization to develop innovative business models and test experimental techniques and technologies, through a facilitated procedure.

Furthermore, the State may carry out tenders and enter into contracts that are intended to resolve public demands that require an innovative solution through the use of technology, as well as that promote innovation in the production sector.

The contracts that are entered into with the government within the scope of special tenders – Public Contract for Innovative Solution (CPSI) – will have a term limited to 12 months, renewable for another period of up to 12 months. Such contracts will define: the goals for measuring the success of the innovative solution; the risk matrix between the parties and the intellectual property rights of the creations resulting from the CPSI; and profit-sharing from its commercialization. Also, the maximum amount to be paid to the startup contracted through a CPSI will be BRL 1.6 million.

The Law also establishes amendments to the Corporations Law (Law No. 6404 of 1976) to simplify procedures applicable to corporations with annual revenues of less than BRL 78 million and incorporates the provisions in Complementary Law No. 123/2006 related to the capital contribution made by angel investors in micro or small businesses. In addition, it allows corporations to appoint only 1 director, changing the rule previously in force that required the appointment of at least 2 directors per company.

Although relevant issues, such as those of a labor, tax and regulatory nature, have not been addressed by the Law, it is indisputable that the Legal Framework for Startups will represent an important step towards a more legally sound environment that encourages investment in innovative entrepreneurship.

The Legal Framework for Startups, which was sanctioned by Brazil’s president with few vetoes on June 1, 2021, will come into force in early September 2021.

Demarest is available for more information on the new Law and has a team specifically focused on startup activities, through its recently developed Disrupt initiative. Disrupt brings with it the offer of legal advice and solutions for both entrepreneurs and investors interested in the new opportunities created by startups, as well as for regular clients who look to such companies for solutions to their technology and innovation needs.