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BDRs and the market for foreign shares in Brazil
Francisco (Chico) Antunes Maciel Müssnich
BMA - Barbosa Mussnich Aragão Advogados, São Paulo
BMA - Barbosa Mussnich Aragão Advogados, São Paulo
The global trend toward low interest rates and high liquidity has reached Brazil in the last few years, sparking renewed interest by Brazilian investors in opportunities in equity markets. The local stock market, which had been slow for almost a decade, saw a sharp rise in new offerings late in 2019 and, despite the profound impacts of the Covid-19 crisis in Brazil, there were more Initial Public Offerings (IPOs) on the Brazilian Stock Exchange (B3) in 2020 (25 all told) than in the previous six years combined.
This scenario, along with the significant depreciation of the Brazilian Real against other global currencies over the last two years, has also contributed to increased interest among Brazilian investors in opportunities for investing in foreign companies, boosting the market for Brazilian Depositary Receipts (BDRs).
BDRs are negotiable securities in the form of depositary certificates, which represent shares (or similar ownership interests) in foreign ‘publicly-traded corporations or similar entities’. Structured similarly to American Depositary Receipts (ADRs), BDRs allow shares in foreign companies to be traded in the Brazilian capital market.
Like ADRs, BDR programmes may either be ‘sponsored’ by the foreign issuer of the underlying securities, or ‘not sponsored’, in which case they are coordinated directly by one or more depositary institutions, without the participation of the foreign issuer. Sponsored programmes also have three different levels (1, 2 and 3), with increasing disclosure and issuer registration requirements, and only Level 3 sponsored BDRs may be publicly offered to the general market and retail investors. Level 1 and 2 BDR programmes may be offered to professional investors through restricted offerings under CVM Instruction 476.
Since BDRs were first regulated in 2000, the Brazilian Securities Commission (CVM) has registered over 750 BDR programmes, 619 of which were registered since 2019. Most programmes were not sponsored by the foreign issuers, and, to date, only eight Level 3 sponsored programmes have been registered by the CVM and offered to the Brazilian public, four of which are still trading.
As this article shows, while the Brazilian public is interested in investing in foreign companies, few foreign issuers are willing to act on that interest by going through the process of sponsoring BDR offerings on the Brazilian market.
Current rules and requirements
According to current CVM regulations, BDR programmes may be backed by shares issued by foreign corporations, which are registered and subject to supervision by the capital markets regulatory authority in their main trading market. The foreign issuer must also meet one of the following criteria: (1) it must have most of its assets and revenues outside of Brazil; or (2) its main trading market must be an eligible ‘recognised foreign market’, in which case it must also:
- be a ‘seasoned issuer’ in such foreign market, with its shares traded on the market for at least 12 months; or
- carry out a simultaneous IPO abroad, with the ‘recognised market’ as the main market for the offering.
To be an eligible ‘recognised market’ under the CVM’s regulations, a stock exchange must: (1) be located in a jurisdiction in which the regulator has entered into cooperation agreements with CVM or has subscribed to the memorandum of understanding with the International Organization of Securities Commissions (IOSCO); and (2) be officially recognised as such by an organised securities market administrator approved by the CVM (currently, B3 S.A. – Brazil, Bolsa, Balcão), based on factors such as the foreign exchange’s transparency, disclosure requirements and investor protection mechanisms, as well as the potential risks to the health of the Brazilian capital market. To date, six entities are considered ‘recognised markets’ by B3: the New York Stock Exchange (NYSE), the Nasdaq Stock Market, Euronext Amsterdam (the Amsterdam Stock Exchange), the Toronto Stock Exchange (TSX), London Stock Exchange (LSE) and the Chicago Board Options BZX Exchange, Inc. (CBOE BZX).
In case of Level 3 BDRs, there’s an additional box to check: registrations of the BDR programme, the BDR IPO in Brazil and a public offering of the underlying shares abroad, must occur simultaneously.
The rules outlined above were recently consolidated under CVM Resolution 3 (August 2020), which was issued with a view to simplifying the offering of BDRs in Brazil and addressing certain questions as to the type of sponsors and securities that may back BDR programmes. According to the materials prepared for public hearings with respect to such Resolution, the CVM’s aim was to broaden the scope of investment opportunities for local investors and simplify access to the Brazilian market for foreign companies.
With the improvements it has introduced, along with greater flexibility in certain concepts, CVM Resolution 3 can be considered successful in sparking a renewed interest in BDRs. Since its publication, however, there has been considerable debate over some of the concepts and applicable criteria under the Resolution, even within the CVM’s technical divisions and the Colegiado (Board of the Commission).
One concept that has been the subject of much discussion is the corporate nature of foreign issuers that can sponsor BDRs. The CVM’s rules required that the issuers be companhias abertas (publicly traded corporations) or similar entities, but this ‘similarity’ is open to debate since the forms of corporate organisation in foreign jurisdictions do not always find a clear counterpart in the Brazilian legal system.
The criteria for determining which foreign issuers can sponsor BDR programmes have also come under scrutiny: registrants have questioned whether the requirement of having the majority of assets and revenues abroad is the most appropriate measure for determining whether the economic essence of an entity is ‘foreign’. Questions have also come up over the subjective aspect of the CVM’s and B3’s assessment of what constitutes a ‘recognised market’, and to what extent the foreign issuer’s corporate documents must be adapted to Brazilian governance standards.
Resolution 3 also raises questions as to the requirements for simultaneous public offerings abroad. In BDR programmes registered prior to the new Resolution, the simultaneous foreign offering was usually carried out in the United States under Regulation S and Rule 144A, for qualified investors. With the change introduced by Resolution 3, the CVM now requires that the foreign offering must be directed to the general public.
New rules proposed by the CVM
In view of these issues, in December 2020 the CVM announced plans to refine its BDR regulations in 2021, in particular regarding sponsor requirements.
On 17 June 2021, the CVM opened public hearings aimed at ‘modernising’ the BDR regulations. The CVM’s stated main objectives were to establish more objective eligibility criteria for issuers, provide greater clarity on the expected role of regulators in foreign jurisdictions in which underlying securities are listed, and refine the rules applicable to Level 1, 2 and 3 BDRs to increase the protection of the Brazilian investors.
The public hearing materials contained the CVM’s proposal for changes to the BDR regulations, which the market generally considered to be more restrictive than the current rules.
Two of the changes proposed by the CVM drew particular comment from the market: the changes to the eligibility criteria for foreign issuers and the restriction on public offerings for raising new capital via Level 1 or 2 BDR programmes in Brazil.
With respect to eligibility criteria, the CVM’s draft contemplates three possible ways to qualify as a foreign issuer: (1) having a ‘recognised market’ as the main trading market, in line with the current rule; (2) being a ‘seasoned issuer’ for longer than 18 months in a foreign market, maintaining a free float of at least 25 per cent and an average daily trading volume of at least BRL 25m; or (3) being headquartered in a country in which the local capital market regulator has entered into a specific bilateral cooperation agreement with the CVM with respect to BDRs and local market supervision rules.
With these changes, foreign issuers wishing to launch BDR programmes would no longer be able to rely solely on the location of their assets and revenues abroad. In practice, given that the CVM does not have any specific bilateral agreements in place with foreign regulators, and that negotiating such agreements could be a lengthy process, the draft rule would significantly limit the number of issuers eligible for BDR programmes, at least for a while.
As for the proposed restriction on using public offerings of Level 1 or 2 BDRs to raise new capital, the market (including B3) asked the CVM to reconsider the change and allow Level 1 and 2 BDRs to be used to raise funds in restricted public offerings, directed to professional investors. As drafted, the change means that only existing shares would be eligible for backing BDR programmes at these levels.
Some of the CVM’s plans were welcomed by the market, such as the automatic registration of Level 1 BDR programmes upon filing of the required documents with the CVM, simplifying the listing process. The draft also adapts the BDR regulations to recent requirements and rulings by CVM on other issues, providing a greater level of legal certainty.
The market is now waiting for the CVM to issue its report on the public hearing and the new regulations, which are expected within the next few months.
The growing number of foreign-backed securities offered over the past couple of years seems to show that Brazilian investors have an appetite for more exposure to the international markets. The CVM’s latest reform of its regulations on BDRs, which simplified and broadened the possibilities for foreign issuers, seemed to have resonated positively in the BDR market, resulting in increased activity.
Even so, most of the registered BDR programmes are non-sponsored Level 1 BDRs. Foreign issuers still appear to be resistant to actively accessing the Brazilian market by sponsoring BDR programmes.
With a healthy and well-organised capital market environment, spearheaded by a sophisticated regulator (CVM), with strong self-regulating bodies, stock exchange and market administration institutions and backed by a rapidly increasing number of individual and institutional investors, Brazil has great potential to become a regional capital markets hub. The post-pandemic recovery also presents an interesting opportunity for attracting listings and offerings from companies headquartered in other countries in which the capital markets are not as solid.
It remains to be seen what the CVM’s new rules on BDRs will be, and whether they will contribute to the development of the Brazilian capital market and its international profile. Foreign companies interested in accessing the Brazilian market should keep a close watch for the new regulations, which should be issued in the next few months.
 Source: CVM (http://sistemas.cvm.gov.br/port/redir.asp?subpage=ofertaregistrada).
 As per CVM Instruction 332.
 Sources: CVM (http://sistemas.cvm.gov.br/port/redir.asp?subpage=programmeadeDR) and B3 (www.b3.com.br/pt_br/produtos-e-servicos/negociacao/renda-variavel/bdrs/).
 According to the CVM’s official regulatory agenda for 2021, published in December 2020.
 Source: CVM, http://conteudo.cvm.gov.br/audiencias_publicas/ap_sdm/2021/sdm0321.html.
 In the Public Hearing materials, the CVM specifically asked for input from the market on these thresholds, so the numbers may change in the final rule.