On June 24, 2014, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) issued CVM Instruction No. 549 (CVM Instr. 549/2014), amending CVM Instruction No. 409, of August 18, 2004 (CVM Instr. 409/2004), that regulates the incorporation, administration, operation and disclosure of information on investment funds.
CVM Instr. 549/2014 allows the creation of the so-called Stock Investment Fund – Market Acess (Fundo de Investimento em Ações – Mercado de Acesso - FMA), which is an investment fund in stocks with the most appropriate structure for the purchase of shares of smaller companies of less liquidity, in order to participate more easily in the process of transition between the pre and post Initial Public Offering (IPO) phases.
The investment policy of these FMAs must provide that at least 2/3 of the net worth of the Fund is invested in shares of companies listed on the securities trading segment voted to market access established by a stock exchange or an entity of the organized over-the-counter (OTC) market that ensures differentiated corporate governance practices through a contractual link. This type of Fund must use in its name the term in Portuguese "Ações – Mercado de Acesso" which means "Stock – Market Access".
Regardless of whether they are structured as open-end or closely-end funds, the FMAs will have 180 days to achieve the concentration limits by issuer and by modality of asset set out in their respective regulations.
The relevant aspects of the FMAs contemplated in CVM Instr. 549/2014 are outlined herein.
I. Investment in Closely-Held Corporations
When incorporated in the form of a closely-end condominium, the FMA may invest up to 1/3 of its net worth in the acquisition of shares, debentures, subscription bonus or other securities convertible into or exchangeable for shares issued by closely-held corporations, provided that the FMA must: (i) participate in the decision-making processes of the invested company, with effective influence in the definition of its strategic policies and management, particularly by: (a) appointing members of the invested company's Board of Directors (Conselho de Administração); (b) the holding of shares that integrate the respective control block; (c) the signing of a shareholders´ agreement; or (d) the signing of another contract or the adoption of a procedure which ensures that the FMA has an effective influence in defining its strategic policy and management; and (ii) solely invest in closely-held corporations that comply with the following corporate governance practices: (a) prohibition to issue Profits Participation Certificates (Partes Beneficiarias) and the inexistence of such securities in the market; (b) establishment of an unified term of office of two years to all the members of the Board of Directors; (c) to make available shareholders' agreements and programs for the acquisition of shares or other securities issued by the invested company and disclosure of information on contracts with related parties in the form required by the regulations of CVM for issuers registered in category A1; (d) resolve corporate disputes through arbitration; (e) in case the invested company goes public, it shall be bound, before the FMA, to join a special listing segment of a stock exchange or organized OTC market which guarantees at least the differentiated levels of corporate governance practices provided in the items above; (f) annual audit of its financial statements by independent auditors registered with CVM2; and (g) equal treatment in the event of the transfer of control through the put option of the totality of shares issued by the company to the purchaser of the control for the same price paid to the controller.
CVM's intent is to allow the FMA to monitor the development of companies that have not yet held an IPO but are planning to or have potential to do so in the years that follow. With this measure, CVM creates the possibility of hybrid stock funds that invest both in closely-held and publicly-held corporations. The FMA can play an important role in paving the way for these companies to the stock market, in addition to serving as a source of funding.
For bookkeeping purposes, the assessment of participation of the FMA in closely-held corporations will have to be made every 12 months at fair value, as per an accounting standard on fair value measurement approved by CVM3.
II. Repurchase of Units
In order to enable the FMA manager to have mechanisms to face the mismatching between the fair value of the units (cotas) and the value of the units practiced in the secondary market, a phenomenon that is common in closely-end funds with illiquid assets, CVM regulated the repurchase of units when the net asset value exceeds the value of trading on the secondary market, as long as there are reserves.
The possibility of repurchase, at the same time that encourages negotiations on the secondary market because it provides liquidity, allows the FMA administrator or manager to indicate to the unitholders (cotistas) his/her/its expectation of delivery of results.
The regulation of the FMA incorporated as a closely-end condominium may authorize the FMA to buy its own units in the organized market in which the units are admitted to trading, provided that: (i) the repurchase value of the unit is lower than the book value of the unit of the day immediately preceding the buyback; (ii) the repurchased units are cancelled; and (iii) the repurchase amount do not exceed, in a period of 12 months, 10% of the total number of units issued by the FMA. This 10% limit is determined by the number of units issued by the FMA on the date of the notice mentioned below.
To buy its own units, the FMA manager must announce the intention to repurchase through notice to the market with at least 14 days in advance of the date on which he/she/it wants to start the repurchase. This notice must be filed with the administrator entity of the organized market in which the units of the FMA are admitted to trading and it will be valid for a period of 12 months as of the filing date and contain information about the existence of repurchase programs and the amount of units effectively repurchased during the last three fiscal years.
The FMA will not be able to buy back its own units: (i) whenever the administrator or manager has knowledge of information not yet disclosed to the market concerning the invested companies that can change substantially the value of the unit or influence the unitholder's decision to buy, sell or hold his/her units; (ii) in order to influence the proper functioning of the market; and (iii) for the sole purpose of obtaining financial gain from expected variations in the prices of units.
III. Perfomance Fee
CVM concluded that the correlation between the remuneration paid to the FMA manager and the result of the Fund is healthy and it is in line with the best international practice and CVM Instr. 549/2014 admits the payment of a performance fee on absolute returns (interest rates or inflation) under the terms and conditions described below4.
As a parameter the FMA can use indexes tied to interest rates or inflation to calculate the performance fee, adopting at least one of the following mechanisms, which aim to protect the investor from overpayments:
(a) if the FMA chooses to charge the total performance fee at the end of the life of the FMA, the performance fee will be calculated only on the values effectively received by unitholders and that exceed the value of the total invested capital adjusted according to the parameter chosen by the FMA (interest rate or inflation, as the case may be); and
(b) if the FMA chooses to charge a performance fee on a periodic basis and, at the end of the period of the performance fee calculation, the value of the FMA unit is below the value of the unit on the occasion of the last payment of the performance fee, the administrator must give the FMA the difference between the value of the performance fee paid and that it would be due in accordance with the current value of the unit in the same terms and conditions for payment of the performance fee.
For the purpose of calculating the performance fee, the regulation of the FMA may provide that the amounts received by the unitholders by way of amortization or income will be updated as from the date of their receipt until the payment date of the performance fee, provided that that the maximum amount to be due and payable will be determined by the chosen parameter (interest rate or inflation, as the case may be).
IV. Other Considerations
Funds for Qualified Investors - An investment in a FMA incorporated in the form of a closely-held fund devoted exclusively to qualified investors could be accomplished through the capital call mechanism, that is a commitment whereby the investor is obliged to pay the value of the capital committed as the administrator of the FMA does capital calls, according to deadlines, decision-making processes and other procedures established within the investment commitment.
Market Maker - The administrator of the FMA may hire to act as market maker on behalf of the Fund any legal person duly accredited by an administrator entity of the organized markets, observed the rules in force, provided that: (i) such person is not the administrator or manager of the FMA nor any related party to such administrator and manager; and (ii) the hiring and termination of such service is disclosed as a material fact.
Other Investment Funds - CVM also allows the incorporation of funds to invest in Equity Investment Funds (Fundos de Investimento em Participações - FIPs), Emerging Companies Investment Funds (Fundos de Investimento em Empresas Emergentes - FIEEs) and FMAs named Investment Funds in Units of Equity Funds (Fundos de Investimento em Cotas de Fundos de Investimento em Participações). These Investment Funds in Units of Equity Funds must invest at least 90% of their net worth in units of FIPs, FIEEs or FMAs.
V. Conclusion
The changes introduced by CVM Instr. 549/2014 reflect the proposals elaborated by the Technical Committee of Smaller Deals (Comitê Técnico de Ofertas Menores – CTOM)5 forwarded to CVM with the objective to improve the regulatory environment so that smaller companies can access the capital market and finance the transaction through public issues of shares and comprise the following modifications: (i) investment in closely-held corporations; (ii) repurchase of units; and (iii) performance fee.
CTOM concluded that the main obstacle for smaller firms to use the stock market as a source of funding was the lack of investors able to and willing to buy shares of these companies. Shares of smaller companies have less liquidity and for this reason are less attractive for foreign investors or short-term investors6.
The creation of the FMA by CVM is welcome by all the market participants as an important step forward to facilitate the access of the smaller companies to the Brazilian capital market.
Footnotes
1 According to CVM Instruction No. 480, of December 7, 2009, there are two different categories of registry: (i) category A, which authorizes the trading of any types of securities; and (ii) category B, which excludes shares and share certificates of deposit as well as securities which attribute to the holder the right to acquire shares and share certificates of deposit as a result of the conversion or the exercise of inherent rights, provided that these securities are issued by the same issuer or by a company belonging to its economic group.
2 These are exactly the same conditions required from the Brazilian Equity Investment Funds (Fundos de Investimento em Participação – FIP) to participate of closely-held corporations in accordance with CVM Instruction No. 540 of November 26, 2013.
3 This solution was determined because the FMAs calculate daily the value of their units and this value could be very outdated, since closely-held corporations are not listed on the stock exchange. In the case of the FIP generally the value of the units are determined at cost value.
4 This structure of remuneration is already adopted with success in the private equity and venture capital industry, which also invests in similar assets.
5 The CTOM was formed by public and private entities: the Brazilian Agency for Industrial Development (Agência Brasileira de Desenvolvimento Industrial – ABDI), the Brazilian Association of Entities of the Financial and Capital Markets (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais – ANBIMA), CVM, Banco do Brasil, BM&FBOVESPA S.A. – Securities, Commodities and Futures Exchange (BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros - BVMF), BNDES Participações S.A. - BNDESpar, the Brazilian Innovation Agency (FINEP – Agência Brasileira da Inovação), the Brazilian Institute of Corporate Governance ( IBGC – Instituto Brasileiro de Governança Corporativa), the Brazilian Institute of Capital Markets (Ibmec – Instituto Brasileiro de Mercado de Capitais), the Employees´ Social Security Porftfolio of Banco do Brasil (PREVI - Caixa de Previdência dos Funcionários do Banco do Brasil), the Secretariat of Economic Policy of the Ministry of Finance (Secretaria de Política Econômica do Ministério da Fazenda), Bradesco Investimentos, Brasil Plural, BTG Pactual, FAMA Investimentos General Atlantic, Grupo DGF, Grupo Stratus, ItauBBA, Leblon Equities, Nutriplant, Senior Solutions, Taler, Votorantim and XP Investimentos.
6 The jurisdictions that have managed to develop an active market for smaller companies rely on local investors and investment vehicles suitable to the characteristics of these smaller companies. So, one of the main focuses of the work of CTOM was to make proposals that would create investment vehicles able to buy these papers of lower liquidity and greater risk.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
