Aiming to allow the participation of private investors, both domestic and foreign, in the financing of Brazilian agribusiness, Law no. 11,076, of December 30, 2004, created the so-called “agribusiness securities”. Almost four years after their creation, in an international scenario where scarcity of credit may compromise the financing and funding of the 2008/2009 agricultural harvest, it’s fundamental for the Brazilian Securities and Exchange Commission (CVM) to regulate public distribution of these securities, as a form of increasing the financing alternatives for the Brazilian agriculture and livestock sector.

Among the agribusiness securities created by the law, three can be publicly distributed and traded in exchange and over-the-counter markets. They are the Agribusiness Credit Rights Certificate (CDCA), the Agribusiness Receivables Certificate (CRA) and the Agribusiness Credit Bill (LCA).

These securities are similar, for they all represent debt obligations. By issuing any of them, the issuer assumes an obligation to pay its titleholder a certain amount in cash, plus the agreed interest rates, as per the terms and conditions indicated in the respective obligation. Additionally, these securities must, necessarily, be linked to credit rights originating from transactions related to agricultural and livestock activity. According to the law, transactions related to agricultural and livestock activities are those effected between rural producers or their co-ops and companies or financial institutions that are active in the agriculture and livestock sector.

On the one hand, these securities differ according to the type of issuer. CDCAs are exclusively issued by co-operatives of rural producers and companies that do business related to agricultural and livestock activity. CRAs are exclusively issued by agribusiness credit right securitizing companies. LCAs, in turn, are exclusively issued by financial institutions, whether state-controlled or private.

Right after their creation, agribusiness securities were well received by the market. As an example, on December 30, 2005, one year after their creation, the BM&F carried a little over R$ 2.4 billion in listed agribusiness securities. On October 31, 2008, agribusiness securities listings were upward of R$ 11.6 billion.

The CVM does not currently have specific regulations for the public distribution of agribusiness securities. Thus, these securities can only be offered in the market privately, which means only a limited base of investors has access to them. For them to be distributed publicly to a broad investor base, both inside and outside Brazil, the CVM would need to edit a specific rule to regulate the listing both of agribusiness securities issuances and their issuers.

It should be remembered that, according to current law, only securities issued by companies listed with the CVM can be offered for public distribution, with the exception of companies that, according to regulations, are exempted from such a listing or follow a flexible listing rule, as is the case for the issuance of commercial paper and commercial notes by agribusiness.

On September 8, 2008, the CVM placed into public hearing a draft of an instruction on the public offering of securities with restricted distribution efforts. In general terms, the draft instruction regulates public offerings targeted at a restricted number of qualified investors (financial institutions, insurance companies, pension funds, among others), and also allows public offering of the securities, even if the issuer is not listed with the CVM.

According to the draft instruction, public offerings with restricted distribution efforts can be targeted, at most, at 50 qualified investors, of which 20 may acquire the offered securities. In addition, public offerings with restricted distribution efforts apply only to debt obligations (commercial paper, bank credit certificates and debentures), shares in investment funds, and realty receivables certificates (CRIs).

Though the draft instruction does not mention any of the agribusiness obligations, it may be opportune for the CVM to include CDCAs as one of the obligations targeted by public offerings with restricted distribution efforts. The draft instruction itself says that this type of offering would be directed only toward qualified investors, who are in better condition to assess the risks and information provided by the issuer. CDCAs would also be traded restrictedly, only among qualified investors.

Considering the current scenario of a liquidity crisis and scarce credit, the public offering of CDCAs would enable agribusiness companies to raise, directly from the market, resources to finance rural producers, with the additional advantage of being able to reach a broader base of potential investors. Even if limited to 50 qualified investors, this investor base can be considered larger than the one available in a private offering.

It is worth highlighting that public offerings would make it easier to offer CDCAs to pension funds, which have been playing an important role in stimulating several sectors of the Brazilian economy. According to the regulations, pension funds can invest up to 80% of their total portfolio in fixed rate bonds, of which 2% to 5% can be allocated to agribusiness obligations. Data from the Brazilian Association of Private Entities for Complementary Social Security (Abrapp) show that pension funds currently carry in their portfolios around R$ 440 billion, of which approximately R$ 18 billion could, in principle, be assigned to the acquisition of agribusiness obligations.

As concerns CRAs, the CVM recently notified the market that, in order to analyze requests for the listing of public offerings of these securities and of securitization companies that issue CRAs, they will apply CVM Instruction no. 414, of December 30, 2004, applicable to the listing of offerings and issuers of realty receivables certificates (CRIs). Regarding LCAs, given that these are securities under the responsibility of financial institutions, per the terms of applicable Law, the public offering of such securities will not be subject to prior listing at CVM.
Given the current circumstances, it falls to the CVM, in its role as watchdog and regulator of the capital market, to undertake the necessary measures to regulate the public offering of agribusiness securities, which will enable economic agents of this sector to tap alternative sources of financing, thus becoming an important tool to stimulate the growth of agribusiness and the circulation of wealth and income for rural producers.