New CVM Regulation Encourages Private Equity Funds To Invest In Smaller Companies

The Brazilian Securities and Exchange Commission [Comissão de Valores Mobiliários - "CVM"] enacted on November 26, 2013, CVM Regulation No. 540, to amend CVM Regulation No. 391 of July 16, 2003, as amended ("CVM Regulation 391"), which regulates the equity funds ["fundos de investimentos em participações - FIP"), intended to boost investments in small- and medium-sized companies.

The proposed amendments have been based on studies and discussions conducted by the Technical Committee of Smaller Deals [Comitê Técnico de Ofertas Menores - "Committee"], which was formed, among other invited public and private entities, by 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], Commodities and Futures Exchange [Bolsa de Valores, Mercadorias e Futuros - BM&FBOVESPA], BNDESPar, CVM, and the Brazilian Innovation Agency [Agência Brasileira da Inovação - FINEP] with the objective of studying reforms in the Brazilian system to make it possible to finance small-sized companies through the stock market.

The Committee understands that changes in the regulation of FIPs may contribute to increase the investments of such funds in small- and medium-sized companies which obtain financing by distributing stock in the securities market without putting at risk or distorting the characteristics of such funds.

Under CVM Regulation 391, FIPs are investment funds in the form of closed co-ownership that use their funds to buy stock, convertible debentures, subscription warrants or other bonds and securities convertible into, or exchangeable for, stock issued by publicly held or closely held companies, participating in the decision-making process of the invested company.

The changes on CVM Regulation 391 concern a flexibilization on the requirement that FIPs have an effective influence in setting policy and strategic management of the invested companies. To this effect, it was provided the possibility of a FIP to invest up to 35% of its owners' equity in companies in which the FIP does not participate on the management, provided that these companies are listed in a segment oriented to the alternative investment market with...

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