Venture Capital | Legal Matters 2023
Industry Overview
3RD QUARTER | 2023
venture capital funds HAVE investED R$ 1.9 billion in 62 rounds in Brazil.
3RD QUARTER x 2ND QUARTER
increase of 19% in relation to R$ 1.6 billion contributed TO the previous quarter.
Source: Report | Abvcap (Associação Brasileira de Private Equity e Venture Capital), together with TTR Data.
REGARDING PRIVATE EQUITY MANAGERS
3RD QUARTER | 2023
tOTAL INVESTMENT | R$ 3.1 billion
indicating a 35% reduction
compared to the previous quarter.
29% decrease in number of investments, falling from 17 to 12.
Analyzing the annual comparison, WE SHALL EMPHASIZE a significant growth of 63% in total amount invested, despite the 40% drop in number of operations performed.
STARTUPS LEGAL FRAMEWORK
A recent development WHICH HAS directly affected the VENTURE CAPITAL market and startups has continued to be the approval, on June 1st 2021, of Law No. 182. IT became effective on August 31, 2021.
The most important change brought by it is the clear liability limitation set in relation to the investors.
In addition, such clear liability limitation is applicable only when the investment is not carried out directly via equity.
For instance, convertible loans, debentures, options, warrants and any other instrument not involving the direct subscription or purchase of equity.
Furthermore, we understand as inovation brought by the Startups Legal Framework:
1. a special type of public bidding related to startups.
2. a regulatory sandbox.
3. changes to the brazilian Corporations’ Law.
Investment funds rules
In addition, innovations were brought by Resolution No. 175/22, enacted by the Securities and Exchange Commission of Brazil.
It brought important changes to investment funds rules, which consequently impact the Venture Capital market in Brazil.
Authorization for investment funds to invest via a certain type of convertible instrument in Brazil called as convertible loan.
Prior to CVM Resolution No. 175/22, convertible loans were not clearly and expressly authorized.
Tests for annual revenue of startups that some types of investment funds had to pursue in order to invest were also changed.
More developed startups are allowed to be invested by certain types of investments funds for seed capital.
Asset managers were granted with more autonomy regarding funds administrators.
Faster and more effective management, impacting the invested companies.
STOCK OPTION framework
Legislative Bill No. 2,724/22 was presented to the Brazilian Senate and it is currently under discussion.
It aims at defining conditions related to the granting of stock options with a favourable taxation, in a way that stock options are not seen by the Brazilian tax authorities as wages, and therefore are subject to a heavier taxation.
Raising capital
USUALLY, angel investors have their financial resources less exposed to market performance COMPARETD TO INVESTMENTS professional.
Foreign investment in Brazilian companies must be registered BEFORE the Central Bank of Brazil, except for investments below the minimum threshold established by Central Bank, WHICH IS US$100,000.00.
CONVERTIBLE INSTRUMENTS
seed investors receive securities convertible into COMPANY`S equity or a discount in the next equity financing, or EVEN both.
IT IS POSSIBLE THAT SUCH financing does not reach the expected outcome.
SO, parties may enter into an agreement of debt forgiveness.
In case of a successful investment, the venture capitalist has the option to convert the credit into COMPANY`S equity.
CORPORATE GOVERNANCE
VENTURE CAPITAL firms can also add intangible value to startups, as they tend to be committed to corporate governance standards and are willing to provide technical advice, FOR INSTANCE, by appointing board members or officers.
Crowdfunding
In brazil,The legal system allows both community crowdfunding, when investors do not expect financial return from the investment and financial return crowdfunding.
The Securities and Exchange Commission of Brazil solely regulates financial return crowdfunding of small companies. Crowdfunding must be intermediated by an online platform accredited with such regulator.
Investment Agreement
There is no template or specific regulation under Brazilian law.
We shall mention:
1. Convertible instrument.
2. Call option agreement.
3. Stock purchase or subscription agreement.
From the investors’ perspective, it is important to emphasize the economic terms and all matters related to voting and control powers, such as:
- anti-dilution;
- tag along and drag along;
- right of first refusal and right of first offer;
- preferred liquidation event;
- matters subject to preferred shareholders’ approval;
- price;
- vesting; and
- exercise period.
From entrepreneurs’ side it is important to emphasize all matters related to:
- restrictions applicable to their right to sell or issue new shares;
- voting powers related to the management; and
- terms that would prevent investors from participating in future rounds.
