Brazilian Private Equity Investment Funds - The Applicable Rules Change Again*

The Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) enacted CVM Instruction No. 501, of July 15, 2011 (CVM Instr. 501/2011), which amends CVM Instruction No. 406, of April 27, 2004 (CVM Instr. 406/2004), and CVM Instruction No. 460, of October 10, 2007 (CVM Instr. 460/2007), dealing, respectively, with Private Equity Investment Funds (Fundos de Investimento em Participações - FIP) that receive financial support from development entities (organismos de fomento) and Infrastructure Funds (Fundos de Investimento em Participações em Infraestrutura - FIP-IE) established by Law No. 11478, of May 29, 2007 (Law 11748/2007).

The Brazilian regulator promoted changes in CVM Instr. 406/2007 and CVM Instr. 460/2007 with the exclusive purpose of adapting the wording of the rules to the modifications introduced in Law 11478/2007 by Law No. 12431, of June 27, 2011 (Law 12431/2011), resulting from the conversion into law of Provisional Measure No. 517, of December 30, 2010. Law 12431/2011 created the Intensive Economic Production on Research, Development and Innovation Funds (Fundos de Investimento em Participação na Produção Econômica Intensiva em Pesquisa, Desenvolvimento e Inovação - FIP-PD&I).

Pursuant to article 2 of CVM Instr. 406/2007, the FIP that receives direct financial support from development entities is authorized to: (i) issue units (cotas) of different classes, with differentiated economic and financial and/or political rights, to be established in the Fund's regulation, and (ii) borrow directly from the development entities, agencies or banks, provided that the total amount of these loans will be limited to 30% of the Fund's assets. In both situations, the FIP must obtain a formal financial support commitment from development entities of making investments or granting finance in favor of the Fund. In this context, "development entities" means multilateral organizations, development agencies and development banks whose funding is originated from contributions and dues paid mostly with budget resources of a single or several governments, and whose control is governmental or multi-governmental.

CVM Instr. 501/2011 extends the same conditions to the FIP-IE and to the FIP-PD&I that receives direct financial support from development entities.

The FIP-IE and the FIP-PD&I shall maintain at least 90% of its net worth value invested in shares, subscription bonus, debentures convertible or not into shares or other...