|Targeting specific investors increases fundraising effectiveness|
Restricted-effort distributions, targeted at qualified investors, are exempt from registration but have limits on the number of participants
The Brazilian capital market is becoming more modern, enabling the development of different fundraising products. Issuers are now able to narrow down the range of targeted investors if they wish.
The regulations on Equity Investment Funds (FIPs) and restricted-effort distributions aim to give innovative treatment to qualified investors.
FIPs are the Brazilian version of private equity funds. They were created as an option for those who want to invest directly in companies, but with better tax treatment and less complexity. The rules for FIPs require its quotas to be restricted to qualified investors as defined in article 109 of CVM Instruction 400. The definition includes financial institutions and individuals or companies with investments of more than R$ 300 thousand.
The CVM issued Instruction 476 to address the trend of targeting certain products to premium investors, i.e. those with greater capability of making risky decisions about complex products. The instruction determines that offerings of securities whose distribution efforts are restricted to qualified investors are not required to register with the CVM.
Public offerings and restricted-effort distributions – governed by CVM Instructions 400 and 476, respectively – both enable companies to reach a larger base of investors that fund structures would not normally have access to.
Restricted-effort distributions bring a series of benefits to issuers, such as less structuring time and lower costs because of the exemption from registration with the CVM. They also make it unnecessary to write a prospectus, which is normally a time-consuming process. However, not needing a prospectus does not mean issuers are exempt from having to provide their investors with true, consistent, accurate and sufficient information, in addition to verifying the product's suitability for each investor.
When deciding how to set up an offering, issuers must observe the limitations presented by CVM Instruction 476. They are only allowed to approach a limited number of investors – a maximum of 50. Furthermore, the offered securities can only be subscribed or acquired by 20 or fewer qualified investors, and set a limit on subscriptions’ minimum level, which is R$ 1 million.
There are other limitations, such as: the fund quotas can only be traded in the regulated market 90 days after the investor's subscription; and the issuer cannot make another unregistered public offering of the same type within four months of the transaction's closing date.
On the other hand, public offerings under CVM Instruction 400 can be a good choice for funds that intend to approach an even wider base of investors. They may also target those investors that prefer securities whose offerings are registered with the CVM, for reasons related to investment policy or risk assumption.
This means that issuers that want to distribute FIP shares must consider all aspects involved in each type of offering, including their benefits and limitations. Only then should they decide what option will be best for distributing the quotas and receiving the desired investments.