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Brazilian Securities Commission to Regulate Equity Crowdfunding for Startup Businesses

Answering a market demand and following an international trend, on August 8, 2016, the Brazilian Securities Commission (Comissão de Valores Mobiliários – CVM) issued a public consultation to discuss the regulation of equity crowdfunding in Brazil.

It is a crowdfunding mechanism by means of a public offer of securities issued by startup businesses made through web-based platforms. In other words, entrepreneurs will be able to seek funding from the general public.

In exchange for his/her/its financial resources the equity crowdfunding investor receives securities (such as shares or convertible notes) issued by the business.

The Brazilian securities environment is well known for its protectionism regarding retail investors and startup businesses are high-risk investments.

To restrict such investments to qualified or professional investors would take the “crowd” out of the “crowdfunding” and, therefore, the dilemma faced by the CVM was how to balance the elevated risk of startups with the CVM’s duty of protecting investors, especially retail investors.

The following points are part of the proposed solution:

(i)            the offering must be conducted by an web-based platform authorized by the CVM and which must comply with many disclosure rules (including regarding the risks of each investment), investor registration, etc.;

(ii)          equity crowdfunding will be limited to businesses with a gross income of up to R$ 10,000,000.00 ( approx.US$ 3.2 million)  in the previous year;

(iii)         except for specific cases, each investor may invest up to R$ 10,000.00 ( approx. US$ 3.200,00) per year in equity crowdfunding;

(iv)         each crowdfunding offering will be limited to R$ 5,000,000.00( approx. US$ 1.6 million) ;

(v)          the investor will be allowed to revoke his/her/its acceptance; and

(vi)         the funds made available by the investors will be kept in an escrow account until the end of the offering.

The mentioned platforms will also be subject to many conduct rules and will need to maintain minimum assets and an adequate organizational structure. Its administrators and shareholders must reside in Brazil and have untainted reputation.

If the regulation is approved as proposed, investors will be entitled to rights like tag along in case of acquisition of the business’ control.

The investor will be required to formally acknowledge the risks of the investment, including the risk of losing the invested capital and, in case of shareholding, the risk of personal losses for the business’ liabilities in case of disregard of legal entity.

Equity crowdfunding offerings will be exempt from registration with the CVM.

The proposal is open for suggestions and comments until November 6, 2016.

This is a brief summary of the proposed regulations. The full text of the proposal (in Portuguese) is available at the CVM website.

The general information contained herein is intended for informational purposes only. It is not intended to be, and should not be construed as, legal advice or legal opinion on any specific facts or circumstances.

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