Brazil focus: Drawing a crowd
On August 8, 2016 the Securities and Exchange Commission of Brazil (CVM) published the Notice of Public Hearing SDM 06/2016 to gather comments and suggestions from attorneys, executives and investors on a regulation draft that will govern investment-based crowdfunding. The applicable regulation, which will be effective at the end of November 2016, will be the first one on crowdfunding, which is a fast-growing method of raising funds in Brazil to promote innovation and cultural and artistic projects.
The regulation aims to create requirements for, and establish transparency on, the public offering of securities by small entrepreneurs (equity shares in their company or a small stake in the business) through collective electronic platforms, sites and internet portals in exchange for investments in ideas, technology development projects and business.
The regulation allows any legal entity with an annual revenue of up to approximately $3.5 million to offer, via an internet platform, asset participation or shares in exchange for collective finance that will promote technology and business without any prior authorisation by government bodies, including the CVM. There is an annual limit of approximately $1.8 million that can be raised per company through equity crowdfunding.
Small investors such as physical persons can participate in equity crowdfunding, but they are limited to financing projects with up to $3,500 annually. This amount may increase if the small investor shows an annual revenue of above $35,000, in which case the investment would correspond to 10% of the investor’s annual revenue.
In view of the expected funding, it is clear that the regulation aims to reach and finance startups, technology entrepreneurs and businesses in a more advanced stage of development. In this regard, the proposed regulation needs to be understood under the concept of technology development, since innovation has become an obsession to Brazilian companies and government authorities in recent years.
Such an obsession derives from the exhaustion of tools to bring development, eg, commodities to foster the exportation of products and finance the economy, and the acquisition of foreign technology to increase competitiveness.
"the crowdfunding platforms will have the obligation to point out to investors any existing financing risks specific to the venture project by providing clarifying materials and information."
The dependence of Brazilian exports on the international price of commodities is notorious. Brazil has not been able to increase the export basket of manufactured products due to a lack of technological products and price, and therefore there has been a general fear that Brazil will not end its recurrent economic cycle based on the supply of commodities, including agricultural goods.
Foreign technology also faces extensive legal restrictions in Brazil, such as those limiting the amount of royalties and the negative presence of the Brazilian Patent and Trademark Office in recording technology transfer and licensing agreements. As a result, the proposed regulation on equity crowdfunding should be added to the existing legal framework on local innovation and technology development.
Protection for investors
Besides securing capital from crowdfunding equity, the proposed regulation establishes mechanisms for protecting investors, such as the fact that a public offering can be made only through an equity crowdfunding portal, platform, site, and website duly registered at the CVM. The purpose of such registration rules is to protect investors against fraud and misappropriation based on false projects and inadequate use of the collected capital.
The registration will be subject to the supply of relevant information, as follows:
