Equity capital markets in Brazil: regulatory overview
A Q&A guide to equity capital markets law in Brazil.
The Q&A gives an overview of main equity markets/exchanges, regulators and legislation, listing requirements, offering structures, advisers, prospectus/offer document, marketing, bookbuilding, underwriting, timetables, stabilisation, tax, continuing obligations and de-listing.
To compare answers across multiple jurisdictions visit the Equity Capital Markets Country Q&A tool
This Q&A is part of the Multi-jurisdictional Guide to Capital Markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/capitalmarkets-mjg.
Main equity markets/exchanges
Main equity markets/exchanges
The only equity market in Brazil is the Bolsa de Valores Mercadorias e Futuros (BM&FBOVESPA) (www.bmfbovespa.com).
BM&FBOVESPA does the following:
Develops, implements and provides systems for trading many types of securities.
Manages organised securities and derivatives markets, providing registration, clearing and settlement transactions carried out on its trading systems.
Acts as central securities depository, and licenses software and stock indices.
BM&FBOVESPA also manages the over-the-counter (OTC) market for shares in Brazil. However, the volume of share trading is not very significant.
Market activity and deals
In 2013, there were ten initial public offerings (IPOs) and seven follow-ons, totalling about BRL23.9 billion, according to the Brazilian Association of Financial and Capital Markets (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais) (ANBIMA) press release.
The regulatory body in the Brazilian securities market is the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM). However, the Brazilian Association of Financial and Capital Markets (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais) (ANBIMA), which represent institutions doing business in Brazil's financial and capital markets, acts as a self-regulatory organisation agent, creating and supervising rules under to its Regulations and Best Practice Codes, and working together with the CVM aiming to regulate activities in Brazil's financial and capital markets.
The Brazilian securities market is regulated by the CVM, which has regulatory authority over the stock exchanges and securities markets, as well as the National Monetary Council (CMN), and the Brazilian Central Bank (BACEN), which have, among other powers, regulatory authority over brokerage firms and regulatory authority over foreign investment and foreign exchange transactions.
The main capital markets legislation is:
Federal Law No. 6,385/76, which regulates the Brazilian securities market and creates the CVM.
Federal Law No. 6,404/76, the Corporations Law.
Rules and regulations issued by the CVM, such as CVM Instruction No. 400/03, which regulates public offerings of securities in Brazil.
When a company decides to list, it must be registered as a publicly-held company with the CVM. An issuer registered with the CVM can trade its securities on the BM&FBOVESPA, once it has registered to have its securities traded on the BM&FBOVESPA, or on an OTC market.
Foreign companies can have their securities traded by way of BDRs, which are deposit certificates representing securities, giving investors access to securities issued by publicly-listed foreign companies while ensuring that the transaction is carried out on the domestic market and according to Brazilian rules.
The foreign issuer as well as any public offering of BDRs must be registered with the CVM. BDRs are also admitted for trading on the BM&FBOVESPA.
Public-held companies are divided into class A and class B categories depending on the type of security issued. Class A companies are those that can issue equity and debt securities, while class B are those that can only issue debt securities. The difference between them is basically the level of information disclosed to the market.
Minimum size requirements
There are no minimum capital requirements for an issuer to go public, but a financial feasibility study may be required by the CVM in certain situations.
Minimum shares in public hands
There is no minimum free float, unless an issuer is listed in one of the four special levels of corporate governance on the BM&FBOVESPA (Novo Mercado, Level 1, Level 2 and Bovespa Mais), in which case there is a requirement for a minimum free float of 25% of its capital stock (Bovespa Mais establishes the requirement for a minimum free float of 25% of the issuer's capital stock in up to seven years from the date the issuer is listed on the BM&FBOVESPA). The levels of the BM&FBOVESPA corporate governance are special listing segments designed to increase the company's value, and to facilitate its access to capital by improving its relationship with investors and the market by better disclosing information to the public and establishing standards for the conduct of companies, managers and controlling shareholders.
According to BM&FBOVESPA, in 2013, the total number of companies listed on all special corporate governance segments was 195, of which 134 were listed on Novo Mercado. Each segment has specific corporate governance requirements in addition to the mandatory standards established by Brazilian corporate law.
Trading record and accounts
There are no trading records requirements for an issuer to go public.
In addition, under CVM Instruction No. 400/03, the registration of a public offering of securities by an issuer with wide market exposure will be automatically granted.
Under CVM Instruction No. 480/09, the status of an issuer with wide market exposure will be granted to issuers that cumulatively fulfill the following requirements:
Issuers of stocks listed on stock exchanges for at least three years.
Issuers who have, in a timely manner, fulfilled their periodical obligations over the last 12 months.
Issuers whose market value of stocks in circulation is equal to or higher than BRL5 billion, in accordance with the closure quotation of the last business day of the quarter preceding the date of the registration request for distributing securities by way of a public offering.
The status of an issuer with wide exposure to the market will be declared by the issuer in the registration request for distributing securities by way of a public offering, through a document signed by the director of investor relations, containing:
A statement confirming the issuer meets the first two bullet points above.
A calculation chart prepared by the issuer for the assessment of the third bullet point above.
Moreover, securities issued by small and micro sized companies, as defined by Brazilian Supplementary Law 123/06, will be automatically exempted from registration.
The only equity market in Brazil is the BM&FBOVESPA.
Foreign companies can have their securities traded by way of BDRs. The foreign issuer, as well as any public offering of BDRs, must be registered with the CVM. BDRs are also admitted for trading on the BM&FBOVESPA (see Question 3).
A subsequent equity offering is structured in the same way as an IPO.
However, for a subsequent offering, if the issuer's registration with the CVM is updated, the issuer can apply for certain fast track proceedings established by the CVM, allowing the company to go to the market sooner.
In addition, CVM and ANBIMA have signed an agreement that allows ANBIMA to perform preliminary analyses of applications for registration of public offerings of debentures, promissory notes and, if already traded in the market, shares, warrants and certificates of deposit of shares. This agreement aims to reduce the analysis time for the registration of public offerings.
In Brazil, there is no provision of "rights issue" as known in other jurisdictions, such as in the USA.
Brazilian laws and regulations applicable to public offerings provide for the existence of a "priority right" instead of a "rights issue" with certain similarities. For example, in public-offerings, pre-emptive rights are usually eliminated by the shareholders when approving the offering, or replaced by a "priority right" which has the purpose of granting the right to subscribe for/or acquire shares in the context of the offering to the existent shareholders of that company. The priority right may be granted in either the IPO or follow-on equity offerings (however, it is more common in follow-on equity offerings). The "priority right" the nearest thing to "rights issues" in our present regulation in relation to a public offering.
Procedure for a primary listing
A primary listing has three main steps. The issuer must:
Request registration with the CVM (category A), if the issuer is not a publicly-held company or is a publicly-held category B company.
Apply for BM&FBOVESPA registration to have its securities listed in the Level 1, Level 2, the Novo Mercado or the Bovespa Mais. Currently, BM&FBOVESPA requires that companies that will make a public distribution of shares for the first time and listing on stock exchanges must adhere to at least Level 1 of corporate governance.
Request the CVM to register the offering.
All three steps are performed simultaneously.
Procedure for a foreign company
Foreign companies can only trade their securities by way of Brazilian depositary receipts (BDRs). The foreign issuer and the BDRs must be registered with the CVM.
Advisers: equity offering
The roles of advisors are as follows:
Underwriters. The underwriters are primarily responsible for handling the equity offering process, from establishing the timeline for the offering to defining the plan of distribution. The lead underwriter is responsible for all communications with the CVM and the information provided to the market about the offering.
Issuer's lawyers. The issuer's lawyers are responsible for drafting the prospectus and preparing all the documents needed for filing with the CVM and BM&FBOVESPA. They also review all documents prepared by the underwriters' lawyers in connection with preparing the offering.
Underwriters' lawyers. The underwriters' lawyers are responsible for preparing all documents relating to the offering, including the underwriting agreement, public announcements and subscription forms. They also review all paperwork produced by the issuer's lawyers.
Auditors. The auditors are responsible for reviewing the issuer's financial statements prepared for the offering.
The main documents produced in an equity offering are basically the same as those used in an IPO. These include, among other documents:
Offering registration application.
Drafts of public announcements in general.
Agreements executed with the underwriters.
Minutes of corporate resolutions.
Updated bye-laws of the issuer.
Reference form (formulário de referência).
Any other documents and information requested by the CVM.
Equity prospectus/main offering document
In general, a prospectus is required when the issuer applies to the CVM for registration to make a public offering. There may be a preliminary and a final prospectus, both of which must be approved by the CVM.
A prospectus must meet the disclosure requirements provided for under CVM Instruction no. 400/03 to ensure that potential investors have the necessary information to make an informed investment decision. It must contain, at least, information regarding the:
Securities to be offered and the rights attached to them.
Issuer and its financial and economic condition.
Depending on the characteristics of the public offering, the CVM, in its sole discretion, can waive registration or some of the requirements for registration of the offering, including the prospectus. However, in doing so, the CVM must always act in the best interest of the public and ensure adequate information and protection for the investor. It must consider, for example, the unit value of the securities offered or the total value of the offering, the plan of distribution, and whether it is to be directed exclusively to qualified investors.
The prospectus must contain all the information referred to in Schedule III of CVM Instruction No. 400/03. This includes:
A summary of the characteristics of the offering.
Identification of the company's management, consultants and auditors.
Information related to the offering.
Terms and conditions of the underwriting agreement.
A feasibility study, if applicable.
Issuer's reference form (formulário de referência).
Financial statements and quarterly information.
Minutes of the shareholders' meeting, or board of directors meeting, approving the offering.
Updated bye-laws of the issuer.
Dilution of the shareholders and the investors.
Use of proceeds.
Any other documents and information requested by the CVM.
The issuer, together with the underwriters, prepares the prospectus, advised by their respective lawyers and the issuer's auditors.
The information required to draft the prospectus is compiled through a due diligence process conducted by the underwriters and lawyers involved in the offering and the auditors. This is to better understand the business of the issuer, its economic, financial, legal and operational situation, as well as the risks it faces.
If a prospectus contains any untrue or misleading information, or fails to disclose any material aspect required, the CVM can impose penalties on the issuer and the lead underwriter. Penalties vary from a warning and fines to cancellation of the registration or of the authorisation to carry out activities in the securities market.
Under the Criminal Code, a false statement regarding the financial condition of a publicly-held company provided by its management or fraudulent concealment related to such information, in a prospectus, can be punished by imprisonment from one to four years and a fine, if the fact does not constitute a crime against the popular economy. If the false statement constitutes a crime against the popular economy, the punishment will be increased to imprisonment from two to ten years and a fine. A crime against the popular economy occurs when a false statement in a prospectus is made for purposes of substitution, sale or purchase of securities.
Marketing equity offerings
During the time between filing and registration, the underwriters market the securities and build up a book of interested potential investors. A variety of marketing methods are typically employed in an IPO transaction, such as pre-marketing, road shows, one-on-one meetings with key investors, and advertising.
No public advertising in relation to the offering can be made without prior approval by the CVM.
Underwriters participating in an offering cannot disclose information regarding the offering or the issuer until publication of the closing announcement (this is known as the "quiet period"), except in cases where the underwriters present to the CVM the public report and research on the issuer.
Additionally, the issuer and the underwriters must ensure the precision and adequacy of any information supplied to any investor in the prospectus, and must file such documents and information with the CVM. Violation of the quiet period is subject to penalties under Law 6,345/76.
However, the quiet period does not prevent a securities analyst from disclosing reports about an issuer already listed in the stock exchange, when performing a secondary offering.
If a securities analyst working for a brokerage firm belonging to the same economic group as the underwriter has a negative evaluation of the issuance, while the underwriters are recommending the purchase of the shares, the CVM requires such reports to be disclosed to the public.
Bookbuilding is the process of collecting investment intentions to price certain securities in offerings that have preliminary prospectuses. The size and pricing of the offering are only set once indications of demand have been received from potential investors after publication of the preliminary prospectus.
Once the level of institutional demand has been assessed, the underwriters set the offering price together with the issuer. However, in general, orders made by retail investors are not included for the offering price definition.
Subscription orders are binding and must include payment for the full amount. Due to the larger volume of applications, the retail offering usually closes before the institutional offering.
Underwriting: equity offering
The lead underwriter, with express approval from the issuer, organises a plan of distribution.
Brazilian underwriting agreements usually follow international standards in IPO transactions. Additionally, CVM Instruction No. 400/03 establishes other provisions to be included in the underwriting agreement, including:
Conditions of the underwriting agreement in relation to the placement of the securities and eventual guarantee of subscription rendered by the lead underwriter and the participants in the consortium, specifying the quota of each one, if applicable, among other clauses considered relevant for the investor.
Disclosure of the relationship between the issuer and the joint-bookrunners, such as loans, investments and other commercial transactions eventually existing, including those with financial institutions that have corporate relations with the joint-bookrunners.
Information regarding the underwriting costs, such as:
percentage in relation to the unit price;
underwriting fees and commissions;
subscription guarantee commission;
other commissions (must be specified);
placement unit cost;
expenses resulting from the registration process; and
other related costs.
The underwriting fee and commissions are set depending on the characteristics of the offering. Therefore, there is no typical underwriting fee or commissions.
Timetable: equity offerings
The IPO process and subsequent offerings can take between three to five months, depending mainly on the time needed to prepare the documents required to register the offering (see Questions 9 and 12). Preparation time varies based on the time needed to prepare the issuer's financial statements for the offering, the CVM commenting process and market conditions.
In addition, CVM and ANBIMA have signed an agreement that simplifies the procedure for registration of public offerings of securities. This agreement aims to reduce the analysis time for the registration of public offerings (see Question 6).
Stabilisation is required to avoid or postpone the falling of the share offering price after an IPO. Stabilisation is considered to be market manipulation if such agreements are approved in advance by the CVM and BM&FBOVESPA and the mechanism is intended to avoid a sudden fall in the share price after the IPO. For this reason, stabilisation agreements are considered to be beneficial to investors.
Tax: equity issues
There are no immediate tax effects for the issuer when issuing and listing equity securities. There are no tax-related stamp duties or financial taxes for issuing and listing equity securities.
However, investments in listed equity securities may be subject to withholding income tax at rates ranging from 0% to 22.5%, depending on, for example, the length of the investment, the nature of the security, the nature and value of the related income and also on who is making the investment, and so on. Moreover, income from such equity securities may also be subject to financial transactions tax (IOF).
Listed companies have continuing obligations in the following areas (CVM Instruction No. 480/09):
Disclosure of information.
Trading of securities.
Information related to controlling shareholders.
Any material facts.
Update of the reference form.
Other information that may be requested by the CVM.
Any listed company that violates its obligations to the CVM is subject to a daily fine corresponding to the nature of the violation. These penalties can also be combined with the directors' and officers' liabilities.
In addition, the CVM can suspend the issuer's registration if the issuer does not fulfil, for more than 12 months, its periodic obligations. In such cases, the CVM can then cancel the issuer's registration.
The issuer is subject to a daily fine of BRL500 for failing to comply with the deadlines for its continuing obligations, under CVM Instruction No. 480/09.
Repeated non-compliance with the deadlines for submitting periodic and event information to the CVM constitutes a serious violation of Law 6,385/76 (see Question 13).
Market abuse and insider dealing
Restrictions on market abuse/insider dealing
Market manipulation occurs precisely when there is an attempt to interfere in the proper functioning of the securities market in order to obtain undue advantage or profit through fraudulent practices designed to produce artificial prices or otherwise deceive investors.
Insider trading consists of the use of material information not yet disclosed to the market by any person who has had access to it, for the purpose of obtaining an economic advantage.
Penalties for market abuse/insider dealing
Under Law 6,385/76, the penalty for insider trading is imprisonment for one to five years, plus a fine. For market manipulation, the penalty is imprisonment for one to eight years, plus a fine.
The first step for a voluntary de-listing is that the issuer or the issuer's controlling shareholder must buy all of the free float.
A tender offer (Oferta Pública de Aquisição) (OPA) is an offering made outside the stock exchange for the acquisition of publicly-held company shares, regardless of the quantity of shares the buyer wants to acquire.
The issuer is required to make an OPA, as a condition for cancellation of its registration as a publicly-held company.
Compulsory de-listing can occur if the issuer does not abide by the applicable regulations for a certain period of time, which depends on the nature of the infraction.
CVM may cancel the securities issuer's registration on the issuer's:
Registration suspension, if for a period of more than 12 months.
Registration cancellation does not exempt the issuer, the controlling shareholder and the members of the issuer's management from liability arising from violations made before the cancellation.
In 2013, there were 19 de-listings, including both compulsory and voluntary, according to the CVM.
Recently, CVM released CVM Instruction No. 548/14, amending the CVM Instruction No. 400/03. The main goal is to eliminate the obligation to publish the notices of public offerings in newspapers. However, issuers are still requires to publish notices on the webpages maintained by the issuer, the intermediary institution, the CVM and the managing entity of the market where the securities are usually traded.
Two changes should be highlighted:
The notices must, whenever possible, be published before or after the trading session.
Summaries of the required notices can be published in newspapers and other media, indicating the direct link to the webpage where investors can find the full details of the offering.
The CVM expects that the changes made by CVM Instruction No. 548/14 will reduce the costs of accessing the Brazilian capital market, increasing its attractiveness as an alternative for financing.
CVM Instruction No. 548/14 came into force on May 6, 2014.
The CVM has also proposed changes in CVM Instruction 476/09 to allow restricted-effort offerings of shares by Class A issuers, and of debentures convertible into or exchangeable for shares in Class A issuers. The proposed changes include a method for granting existing shareholders preemptive rights and a waiver of the lock-up period. Additionally, CVM proposes to increase the number of qualified investors who may subscribe for and acquire the securities offered from 20 to 50. The CVM’s proposal reflects market wishes, and will probably significantly reduce the number of public offerings that need to be registered with the CVM.
The proposal includes other measures design to increase the scope of CVM Instruction 476/09, such as the inclusion Structured Notes (COE – Certificado de Operações Estruturadas) in the list of assets eligible for public offering under Instruction 476/09.
However, there is no guarantee that such proposals will come into force.
Fabíola Augusta Cavalcanti
Barbosa, Müssnich & Aragão Advogados
Professional qualifications. Rio de Janeiro, 1997
Areas of practice. Corporate law; finance; capital markets.
Barbosa, Müssnich & Aragão Advogados
Professional qualifications. Rio de Janeiro, 2007
Areas of practice. Corporate law; finance; capital markets.