Brazilian Equity Investment Funds (FIPS) May Increase Their Investments In Small And Medium-Size Companies

The Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) decided to amend again the provisions of CVM Instruction No. 391 of July 16, 2003 (CVM Instr. 391/2003), which regulates the incorporation, management and operation of the Brazilian Equity Investment Funds (Fundos de Investimento em Participações - FIPs), by means of CVM Instruction No. 540 of November 26, 2013 (CVM Instr. 540/2013).

The FIP, incorporated as a close-ended condominium, is a communion of resources for the acquisition of shares, debentures, warrants, or other securities convertible into or exchangeable for shares issued by privately and/or closely-held corporations, participating in the decision-making processes of the invested company, with effective influence in the definition of its strategic policies and management, particularly by appointing members of the invested company's Board of Directors. The FIP´s participation in the decision-making process of the invested company may occur: (i) by holding shares of the controlling block; (ii) through the execution of a shareholders' agreement; or (iii) through the execution of other arrangements or procedures which guarantees the FIPI's effective influence in the determination of strategic policies and management1.

The investment in the FIP may be made by means of an investment commitment whereby the investor is bound to pay up the amount of the committed capital as the FIP's manager calls for payments, pursuant to periods, decision processes and other procedures established in the respective investment commitment.

The existence of an active initial public offerings market is an important source of long-term financing for new projects and for accelerating the growth of small and medium-sized companies, being vital to the existence and continuance of a strong capital market. Companies exposed to the capital market are more transparent and adhere to stricter corporate governance rules. These factors tend to reduce the cost of capital of these companies, increase their competitiveness and improve their performance.

The changes introduced by CVM Instr. 510/2013 reflect two proposals submitted to CVM by the Technical Committee of Smaller Deals (Comitê Técnico de Ofertas Menores)2, with the objective to improve the regulatory environment so that small and medium-size companies are able to access the capital markets and get funding through public issues of shares, without putting at risk or...