A few weeks ago, the CVM (Securities and Exchange Commission) opened a public consultation to revise Annex IV to CVM Resolution No. 175/2022 ("Public Hearing"), with the goal of modernizing the rules of investment funds in participations (FIPs). The proposal seeks to align the regulatory framework with some of the market's recurring demands, particularly those focused on promoting entrepreneurship and innovation.
As a vehicle primarily linked to Private Equity and Venture Capital investments, FIPs play a significant role in business expansion. Thus, the new rule aims to broaden access to capital for startups, small and medium-sized enterprises and to address recurring issues of illiquidity, high risk, and regulatory complexity of FIPs.
The democratization of the capital market envisioned by the new rule is not limited to the companies invested by the FIPs: retail investors will now also be able to invest in these funds, under certain conditions, as explained below.
General Public Access
The most anticipated novelty of the new rule is the possibility for general investors to invest in FIPs.
The flexibility is accompanied by some important countermeasures, such as safeguards to protect the investor, including the prohibition of capital calls and the limitation of shareholders' liability to the subscribed capital. Additionally, the shares will be tradable in organized markets, with market makers to ensure their liquidity.
Standardization of Nomenclature and Limits
The elimination of traditional classifications, such as "seed capital" and "emerging companies," represents a step towards regulatory simplification. Funds will now be identified by suffixes that indicate tax benefits or areas of activity, such as "Innovation" and "Infrastructure."
Moreover, the revenue limits for invested companies have been updated, aligning with crowdfunding norms and the EASY regime. This standardization reduces rule overlap and facilitates understanding by managers and investors.
Investment in Derivatives and Foreign Assets
FIPs will now be able to invest in derivatives and allocate a larger portion of their net assets in foreign assets. The regulation allows for up to 33% of the subscribed capital to be allocated in foreign assets for retail-focused funds, while classes aimed at qualified investors have the freedom to invest entirely outside Brazil.
This flexibility not only expands the funds' reach but also enhances their attractiveness, although it requires greater rigor in risk analysis and compliance practices to ensure the integrity and regularity of operations.
Exposure to Capital Risk
Now, FIPs can expose themselves to capital risk. The Public Hearing proposes clear limits, based on a percentage of the subscribed capital, to ensure the financial sustainability of the fund. This measure aims to stimulate higher economic impact operations, such as mergers and acquisitions, but also increases the need for monitoring by regulators.
The draft suggests a metric for easily and quickly understanding the amount of investors' exposure as the indication of what percentage of the subscribed capital is leveraged.
Influence in Invested Companies
Currently, it is required that FIPs participate in the decision-making processes of the companies they invest in, exerting effective influence on their strategic policy and management. The draft of the Public Hearing continues to require FIPs to participate in the decision-making process of the investees but suggests removing the obligation for the FIP to exert an effective influence on the strategy and management of the companies. This is a significant relaxation, especially in the case of small companies, where such a requirement could become a barrier to investment.
On the other hand, the requirement for effective influence remains for Infrastructure and R&D funds, due to the legal obligations that govern these categories. This approach seeks to balance the expansion of investments with the preservation of good governance and transparency practices.
Submission of Suggestions
The CVM encourages participation in the public consultation until March 28, 2025. Contributions should be sent to the Market Development Superintendency.
For further clarifications, contact the Banking & Finance team of FAS Advogados in cooperation with CMS. We are available to assist you in matters directly related to the Public Hearing and/or in any issues that arise from points raised by the Hearing.
