Equity crowdfunding in Brazil: a closer look at the recent regulatory development

Gustavo Flausino Coelho
Bastilho Coelho Advogados, Rio de Janeiro
gustavo@bastilhocoelho.com.br

Matheus Chagas Lamarca
Bastilho Coelho Advogados, Rio de Janeiro
matheus@bastilhocoelho.com.br

The last two years have been extremely challenging. Amid a global pandemic, financial crisis and political instability, the Brazilian equity crowdfunding market thrived against all odds, unravelling its potential for growth. Perceiving the positive trend, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários or CVM) issued a set of updates and amendments to the equity crowdfunding regulation, which will be addressed in this short article.

Despite all the difficulties, the Brazilian equity crowdfunding ecosystem exceeded all expectations and proved its maturity recently. According to data collected and disclosed by the CVM,^[1] the total volume of funds raised through equity crowdfunding grew 123 per cent, increasing from 84m Brazilian Reais in 2020 to over 188m Brazilian Reais in 2021. The number of successfully closed offers increased by 54 per cent, from 74 successful offers in 2020 to 114 successful offers in 2021.

There was also a significant increase in the number of new investors (139 per cent compared with 2020) and number of active platforms (75 per cent compared with 2020). Furthermore, the data reveals an evolution of 45 per cent in the average value of funding per offer, reaching approximately 1.6m Brazilian Reais per offer.

Although there are several variables that may have influenced the growth of the Brazilian equity crowdfunding market, the solid framework provided by CVM Instruction No 588 ('ICVM 588') has had a positive impact on this outstanding result. Issued in 2017, ICVM 588 was the first regulation on equity crowdfunding issued in Brazil. It was designed by the agency after public discussions with market players in a public hearing. The regulation established a set of rules that exempted small companies (sociedade empresária de pequeno porte) from the CVM's regulation related to the public offering of securities, waiving the obligation to list their public offerings on stock exchanges, while regulating electronic platforms to protect investors and the market.

ICVM 588 provided necessary legal certainty and stability to the players involved in the equity crowdfunding business model to enable them to engage even further in the development of the Brazilian market. However, in 2020 the main players in the market began to demand changes to allow market expansion as it became clear that the regulation was rapidly becoming obsolete.

In order to hear the proposals from market participants, the CVM promoted yet another public hearing (Audiência Pública SDM No 02/20), and as a result, on 28 April 2022, the CVM issued CVM Resolution No 88/2022 ('RCVM 88'), thereby revoking ICVM 588 and establishing a brand new set of rules for equity crowdfunding in Brazil. RCVM 88 went far beyond market expectations and promoted extremely relevant changes for the development of the sector.

The first relevant change was the expansion of eligibility criteria for companies to access the equity crowdfunding mechanism. ICVM 588 had established that only small companies (sociedade empresária de pequeno porte), which were defined by the maximum threshold of 10m Brazilian Reais of gross revenue in the previous fiscal year, were eligible to benefit from the equity crowdfunding regulation. The changes implemented by RCVM 88 increased the maximum threshold to 40m Brazilian Reais, which will allow a greater number of companies to benefit from the regulation.

The second relevant change promoted by RCVM 88 was the increase in the maximum aggregate amount that a small company can raise through equity crowdfunding offerings from 5m Brazilian Reais to 15m Brazilian Reais. This change represents a threefold increase of the original threshold amount. In practical terms, this will allow startups to attract more investors and leap from pre-seed and seed funding rounds to series A funding rounds.

An interesting change addressed by RCVM 88 was the increase of the investment cap that individual non-accredited investors can invest in crowdfunding offerings over a 12-month period. The investment cap went from 10,000 Brazilian Reais to 20,000 Brazilian Reais. It is worth mentioning that accredited investors, such as those with proven experience, qualified investors (as defined by the CVM's regulation) and the lead investor in the crowdfunding offering are exempt from the annual investment cap. This change will ensure greater availability of capital for fundraising by startups and small companies.

Another novelty that should further enhance the equity crowdfunding market in Brazil was making it possible for platforms to create secondary markets of the securities of the invested companies after the crowdfunding offer, with the intermediation of peer-to-peer transactions in the digital environment of the platform. This will increase the liquidity of the securities acquired by investors and will also attract new investors. The CVM has already launched a regulatory sandbox to test and implement this secondary market regulation, with four platforms already participating.

RCVM 88 also expanded the advertising possibilities for crowdfunding offerings, allowing promotion in a broad sense in any communication vehicles and social media, including through the use of marketing material. Thus, it will be possible to hire digital influencers and marketing companies so that the offerings reach a larger number of investors.

It is worth mentioning that small companies that are seeking investment through equity crowdfunding may also benefit from the provisions of Complementary Law No 182/2021 (also called Marco Legal das Startups, that is, Legal Framework for Startups). This recent federal act evolved the legal framework for startups and innovative entrepreneurship.

Companies that are eligible to benefit from the Legal Framework for Startups and declare themselves as startups may receive investments that may or may not result in an interest in the startup's capital stock.

Moreover, investors who choose to invest in convertible bonds from eligible startups (eg, through equity crowdfunding platforms) will not be considered partners or shareholders of the invested companies; will not be liable for any debt of the company, including under judicial reorganisation; and will not be susceptible to the effects of the disregard of legal personality. Therefore, if applied strategically, the Legal Framework for Startups can provide even more protection for investors and startups in equity crowdfunding offerings.

RCVM 88 came into effect on 1 July 2022 (except for a few provisions that will only come into effect in 2023), giving the Brazilian equity crowdfunding market a breath of fresh air.