A Q&A guide to capital markets law in Brazil. The Q&A gives an overview of main equity and debt markets/exchanges, regulators and legislation, listing requirements, offering structures, advisers, prospectus/offer document, marketing, bookbuilding, underwriting, timetables, stabilisation, tax, continuing obligations and de-listing.
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This Q&A is part of the PLC multi-jurisdictional guide to capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/capitalmarkets-mjg.
The only equity market in Brazil is the Bolsa de Valores de São Paulo (BM&FBOVESPA) (www.bmfbovespa.com).
BM&FBOVESPA does the following:
Develops, implements and provides systems for trading many types of securities.
Is responsible for registering, clearing and settling 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. For example, from March 2011 to February 2012, the average monthly trading volume was R$65,898.98 (as at 1 February 2012, US$1 was about R$1.74).
In 2011, there were ten initial public offerings (IPOs), totalling about R$4.8 billion.
Due to the international financial crisis, some IPOs that were scheduled to happen in 2011 were postponed. To postpone an IPO the issuer must make a request to the Brazilian Securities and Exchange Commission (CVM). The IPO process can be suspended for 60 business days. By the end of that time, if the issuer decides not to go public, the CVM, after a new request from the issuer, ends the IPO process.
There are 60 foreign companies currently trading Brazilian Depositary Receipts (BDRs) (see Question 3) on BM&FBOVESPA, 20 of which began trading in 2011.
The relevant regulatory body is the CVM.
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 will 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 the OTC market.
Foreign companies can trade 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 in the BM&FBOVESPA.
Brazilian issuers 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.
There are no capital minimum requirements for an issuer to go public, but a financial feasibility study may be required by the CVM in certain situations.
There is no minimum free float, unless an issuer is listed in one of the three levels of the BM&FBOVESPA corporate governance (Novo Mercado, Level 1 and Level 2), in which case there is a requirement for a minimum free float equivalent to 25% of its capital stock. 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.
An IPO can be structured as an issuance of equity or debt. If an IPO is structured as an issuance of equity, the issuer can raise funds through a primary offering or a secondary offering.
Offering shares to the market is always public in Brazil. It is possible to market the offering abroad, as a sale effort, under Regulation S and Rule 144A, which outline the conditions for such marketing.
A subsequent equity offering can be 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 provided by the CVM, allowing the company to go to the market sooner.
A primary listing has three main steps in which the issuer must:
Request registration with the CVM in one of the permitted categories (class A or B), if the issuer is not a publicly-held company.
Apply for BM&FBOVESPA registration to have its securities listed in one of the three levels of corporate governance (level one, level two or the Novo Mercado).
Request the CVM to register the offering.
All three steps are performed simultaneously.
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.
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 request.
Drafts of public announcements in general.
Agreements executed with the underwriters.
Minutes of corporate resolutions.
Updated bye-laws of the issuer.
Any other documents and information requested by the CVM.
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, at its sole discretion, can waive the registration or some of the requirements for the 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 exclusively targeted at 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 manager, consultants and auditors.
Information related to the offering.
Terms and conditions of the underwriting agreement.
A feasibility study, if applicable.
Issuer's reference form.
Financial statements and quarterly information.
Minutes of the shareholders' meeting, or board of directors meeting, approving the offering.
Updated bye-laws of the issuer.
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 necessary 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 against 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 the 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.
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 CVM pre-approval.
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 and retail 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.
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 is set depending on the characteristics of the offering. Therefore, there is no typical underwriting fee.
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 7 and 10). 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.
Stabilisation is required to avoid or postpone the falling of the share offering price after an IPO. Stabilisation cannot be considered as a market manipulation if such agreements are pre-approved by the CVM and BM&FBOVESPA and its mechanism intends to avoid a sudden fall in the share price after the IPO. Due to this purpose, the stabilisation agreement is considered beneficial to investors.
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.
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.
Continuing obligations apply to listed foreign companies if the foreign issuer sponsors level two and three BDR programmes.
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.
Also, 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 R$500 for not observing the deadlines to comply with continuing obligations, according to CVM Instruction no. 480/09.
Repeated non-compliance with the deadlines set out for submitting periodic and event information to the CVM comprises serious violation of Law 6,385/76 (see Question 11).
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 (realizar una oferta pública de adquisición de valores) (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 must undertake a mandatory 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 administrators from responsibilities arising from violations made before the cancellation.
In 2011, there were 47 de-listings, including both compulsory and voluntary, according to the CVM.
Debt securities can be issued privately, in deals similar to credit transactions, or publicly (see Question 25). Although private issuances are not subject to the regulation of the CVM, both publicly and privately issued debt securities can be traded in regulated markets in Brazil.
There are currently two main debt markets/exchanges in Brazil:
CETIP is Brazil's largest custodian of fixed income assets and OTC derivatives. In January 2012, CETIP was responsible for 89% of electronic trades of public bonds and 73% of private assets.
BM&FBOVESPA offers two electronic trading systems for bond trading:
An OTC market, called SOMAFIX.
An exchange system, called BOVESPAFIX.
In March 2012, the Brazilian Financial and Capital Markets Association (ANBIMA) created the New Fixed Income Market (Novo Mercado de Renda Fixa), which is a special segment of corporate governance for issuers of debt securities.
The New Fixed Income Market is not a market or exchange proper, since ANBIMA does not provide custody, settlement or clearing services. It is instead an environment with additional regulations to those provided by the CVM intending to provide more safety and transparency to investors.
On 16 March 2012, the number and volume of assets registered, held in custody and traded through CETIP equalled about US$727 billion in depositary bank certificates (CDBs) issuances and US$427 billion in debentures issuances (as at 1 February 2012, US$1 was about EUR0.76).
In 2011, the volume of the fixed income secondary market, counting both the BOVESPAFIX and the SOMAFIX, totalled R$268.14 million. Of this total, debentures accounted for R$142.78 million, receivables investment funds (FIDC) accounted for R$25.17 million, and mortgage-backed securities (CRI) accounted for R$100.19 million.
The first debt offering registered in ANBIMA's New Fixed Income Market was the debt issuance made by CEMIG Geração e Transmissão SA in February 2012, which was listed with CETIP.
CVM has regulatory authority over the stock exchanges and securities markets. The National Monetary Council and the Brazilian Central Bank have regulatory authority over brokerage firms and foreign investment and foreign exchange transactions, among other powers.
Except for government bonds and bonds issued by banks, debt securities are governed by:
Law no. 6,385/76.
Law no. 6,404/76.
Instructions and regulations issued by the CVM.
Any public offering or marketing of securities must be registered with the CVM.
Except for commercial papers (which are subject to a special regime enacted by the CVM), public offerings of debt securities are regulated by CVM Instruction 400/03.
A public offering registration request must be made to the CVM by the issuer and the lead underwriter, and must include particular information and documents.
Depending on the characteristics of the public offering, the CVM, at its sole discretion, can waive the registration or some of the requirements for the registration of the offering, including the prospectus. However, even without a prospectus, issuers must provide their investors with true, consistent, accurate and sufficient information, in addition to verifying the product's suitability for each investor.
In addition, there are some fast track procedures provided for by the CVM for public offerings that can shorten the timeline for a public offering to at least one month.
Moreover, as long as the CVM's conditions are complied with, a public offering of securities can also be processed in a special regime called "restricted-effort offerings" that provides a series of benefits to issuers, such as a shorter structuring time and lower costs. However, to qualify to run the offering on a restricted-effort basis, issuers must comply with certain limits established by the CVM. These include:
Issuers can only approach a maximum of 50 qualified investors.
The offered securities can only be subscribed or acquired by 20 or fewer qualified investors.
The minimum amount for subscription and further negotiation per investor is R$1 million.
Securities can only be traded on the regulated market after a 90-day lock-up period following subscription.
Issuers cannot make another unregistered public offering of the same type of security within four months of the close of the offering.
The main types of debt securities issued are debentures and promissory notes.
Debentures are medium- and long-term debt securities, issued by public or private companies, that give debenture holders claims against issuers according to the terms and conditions contained in indentures.
Although they have the nature of a security, as per the CVM definition, debentures are also credit obligations, subject to, for example, Corporation Law no. 6,404/76.
Debentures, as defined in the indenture, can be converted into shares of the issuing company.
Funds raised through the issuance of debentures are usually used for project funding, restructuring of liabilities or an increase in working capital.
Promissory notes, also known as commercial papers, come under the jurisdiction of the CVM and represent a short-term debt modality for corporate issues. Commercial papers are commonly issued by companies to raise funds for working capital. Closed companies are subject to a 180-day maximum term, and open companies to a 360-day maximum term.
Depending on the characteristics of the investors, the CVM has discretion to waive registration or some of the registration requirements (including publications, terms and procedures), when the offering is exclusively directed at qualified investors (see Question 24).
Additionally, restricted-effort offerings are targeted at qualified investors. This type of offering is subject to a singular proceeding (CVM Instruction no. 476/09) and it does not need to be registered with the CVM.
Trust structures are not used in Brazil. However, a similar structure where a fiduciary agent (agente fiduciário) acts as trustee is widely used (see Question 29).
In addition to the advisers described in Question 7, the following are involved in issuing or listing debt securities:
Trustee (agente fiduciário). The trustee is the legal representative of the security holders before the issuer. The trustee must represent the common interests of the security holders, acting on their behalf under the terms established by Law 6,404/76. Trustees can apply for the bankruptcy of the issuer if the issuer delays payment of charges due. The trustee structure is compulsory in all public issuances.
Rating agencies. Although rating is not compulsory for issuers, some market participants (especially pension funds) demand an issuer to be rated. In Brazil, major investors of corporate bonds are institutional rather than retail. Therefore, rating agencies are often hired to meet the investment policy or risk assessment of the targeted investors.
The required documents vary according to the type of securities offered. For a debenture issuance, for example, documents include, among others:
a prospectus (if a regular public offering);
See Question 8.
See Question 9.
In relation to restricted-effort offerings, CVM Instruction no. 476/09 does not state what the offering documents should be. Therefore, since the registration of the offering (and, consequently, the presentation of the offering documents) is exempt, it is not usual to produce a prospectus or any similar offering document.
See Question 10.
See Question 11.
For a registered offering of debt securities, it usually takes about three to five months to complete the issuing and listing processes.
Exempted registration offerings usually take two months or less to complete.
The duration of the process depends on many factors, such as the structure of the offering, whether the issuer is already registered with the CVM, and the underwriters' ability to conduct due diligence.
There are no immediate tax effects for the issuer when issuing and listing debt securities. There are also no tax-related stamp duties for issuing and listing debt securities.
However, investments in listed debt securities are subject to withholding tax at rates ranging from 15% to 22.5%, according to the term of the investment. Income from such debt securities may also be subject to financial tax (IOF).
Debt securities are almost always issued in local currency, the Brazilian real. This is because clearing and settling debt securities issued in foreign currencies is not permitted (Article 318, Civil Code). Decree-Law 857/1969 makes some exceptions to the general rule, such as obligations where the creditor or debtor is resident and domiciled abroad. However, this does not exempt the issuance of securities.
See Question 19 for regular public offerings.
Closely-held companies offering restricted-effort offerings must comply with minimum continuing obligations, such as (CVM Instruction no. 476/09):
Disclosure of information on the company's website (financial information and material facts).
Disclosure of information to the underwriter.
Limits on trading securities.
Other information that may be requested by the CVM.
These continuing obligations are included in the periodic information that a publicly-held company must provide to the market to keep its issuer registration before the CVM valid and in force. Therefore, publicly-held companies that issue securities under the restricted-effort offerings regime are not affected by these continuing obligations.
There is no developed market for foreign issuers of debt despite the authorisation granted by Corporate Law 6,404/76. However, any eventual offering of debt securities by foreign issuers in Brazil should comply with the same regulations enacted by the CVM to Brazilian issuers in this regard.
Domestic companies can also issue bonds abroad, which is regular practice since interest rates practiced in the Brazilian market are much higher than those practiced in most of the developed financial capitals' markets.
See Question 21 with respect to securities in regular public offerings, except that, in the case of debt securities, the applicable daily fine for not observing the deadlines to comply with continuing obligations is R$300.
For securities in restricted-effort distributions, violation of continuing obligations constitutes a "serious violation" under Law 6,385/76. Penalties can include a warning, fines or a temporary prohibition (up to ten years) on acting in the capital markets.
In this case, the fines cannot exceed the higher amount between:
50% of the total issuance amount.
Three times the amount corresponding to the economic advantage obtained by the issuer from not complying with the continuing obligation.
For repeated non-compliance, the fine can be up to three times the amounts above.
No reforms are currently expected.
Qualified. Rio de Janeiro, 1997
Areas of practice. Corporate law; finance and capital markets.
Qualified. Rio de Janeiro, 2007
Areas of practice. Corporate law; finance and capital markets.
Qualified. Rio de Janeiro, 2004
Areas of practice. Corporate law; finance and capital markets.