Capital markets and structured investments

There are restrictions on offering and selling debt securities under Brazilian law, in general, and Brazilian Securities Commission (CVM) regulation, specifically.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities to the public in Brazil or to request that they are admitted to trading on a regulated market operating in Brazil unless:

• an approved prospectus has been made available to the public; and
• the offer is registered with CVM.

The most common types of debt securities issued in Brazil are shares and debentures. Shares may be voting (ordinárias) or non-voting (preferenciais). Debentures may be unsecured, secured, benefiting from a floating charge or subordinated. They may also be convertible into shares.

Many different types of debt securities are offered in Brazil. Some common forms include:

• commercial papers and promissory notes, which are short term securities;
• credit bank notes (cédulas de crédito bancário), which represent loans from banks and may be secured or unsecured;
• quotas of investment funds;
• derivative instruments such as securities linked to the value of one or more reference assets including shares, commodities, interest rate, currency rate or index, and credit-linked notes;
• depositary receipts (a security issued by a depositary conferring on the holders beneficial ownership of certain underlying assets held by the depositary for the holders); and
• warrants (bônus de subscrição), which are securities giving the holders the option to purchase the equity of the issuer or a related company.

There is also a number of types of securities in Brazil used to finance certain industries, in particular agribusiness and housing finance.

Institutional/professional investors benefit from an exemption from registration of a public offer with the Brazilian Securities Commission (CVM). On January 16, 2009, CVM enacted Instruction No. 476 which establishes that a public offering of certain securities will no longer be subject to registration with CVM or have to comply with CVM provisions relating to public offerings of securities, as established by Instruction No. 400, dated as of December 29, 2003 if they comply with the following requirements:

• involve one of the securities mentioned in Instruction No. 476, including, but not limited to: commercial notes, banking credit certificates that are not the responsibility of a financial institution, debentures not convertible or not exchangeable into shares, real estate or agribusiness rights certificates issued by securitization companies registered with the CVM as publicly-held companies, quotas of close-ended investment funds and financial notes (letras financeiras);
• be only targeted to qualified investors (as defined in the applicable regulation of CVM);
• be intermediated by members of the securities distribution system;
• be marketed to a maximum of 75 qualified investors and subscribed or acquired by no more than 50 qualified investors; and
• not involve marketing efforts through stores, offices and establishments open to the public or public communication services.

Public offers to any other type/number of investors are not covered by that exemption and have to comply with the applicable requirements of CVM.

Unless an exemption applies, a prospectus is necessary when there is a public offer of securities.

The sale, the sale commitment, the sale or subscription offer and the acceptance of a sale or subscription offer of securities shall be considered public distribution acts if involving any of the following elements:

• the use of sales or subscription lists or bulletins, leaflets, prospectus or advertisements addressed to the public by any means;
• the complete or partial search for undetermined subscribers or purchasers, even if attempted through standard communications directed to individually identified addressees, through employees, representatives, agents, or any individual or legal entity, whether they take part in the securities distribution system or not, or the consultation on the offer feasibility or the collection of an investment commitment with subscribers or undetermined purchasers if said consultation or collection is not in compliance with the applicable Brazilian Securities Commission (CVM) regulation;
• negotiations made in stores, offices or branches open to the public and addressed, in whole or in part, to undetermined subscribers or purchasers; or
• the use of oral or written marketing, letters, advertisements or notices, especially through mass or electronic media (pages or documents on the internet or other open computer networks and e-mail), which contain any communication addressed to the general public aiming at promoting, directly or through third parties acting on behalf of the offer or of the issuer, the subscription or disposal of securities.

For such purposes, a class, category, or group of people, even if individualized, with the exception of those who have had a close and regular previous commercial, credit, partnership or work relationship with the issuer, shall also be considered general public.

The main exchanges are the São Paulo Futures and Stock Exchange (B3 - Brasil Bolsa Balcão S.A.). 

Private placements are possible under Brazilian law, but, except for derivative transactions, there is no organized private placement market in the country.

Issuing debt securities

Issuers and, to a certain extent, brokers, are required to take responsibility for prospectuses for debt securities. Misleading statements in, or omissions from, any applicable offering document can give rise to both civil and criminal liability under Brazilian law. Brazil has various investor protection statutory provisions relevant to liability for an inaccurate offering memorandum. There are also general fraud statutes and liability may also arise under common law through a civil action for deceit, negligent misstatement or misrepresentation.

Investing in debt securities

There are a number of considerations that the investor has to bear in mind before investing debt securities. For instance, debt security terms and conditions typically contain provisions for meetings of investors to consider matters affecting the investors' interests. These provisions typically permit defined majorities to bind all investors including investors who did not attend and vote at the relevant meeting and investors who voted against the majority.

Establishing a fund, offering fund securities and operating a fund, among other things, are regulated activities and therefore subject to regulation by the Brazilian Securities Commission (CVM). According to Law No. 10,303 of 31 October 2001 the regulation and supervision of financial and investment funds (originally regulated and supervised by the Central Bank) were transferred to CVM.

Under Brazilian law, funds are considered to be as an ownership right shared by more than one person or legal entity (referred to under Brazilian law as condominiums), with no legal personality. Usually, they are established either as open ended condominiums (in which an investor may require the amortization of its quotas at any time, as provided for the in the rules of the fund) or closed ended funds (in which the quotas are only amortized by the end of the life of the fund).

Retail funds

The distribution of securities representing an interest in the capital of open-ended funds (referred to under Brazilian law as quotas) does not require advance registration with the Brazilian Securities Commission (CVM). However, the public distribution of quotas of closed-ended funds do require advance registration with CVM and must comply with all of the formalities applicable to the public offer of securities in Brazil.

Institutional/professional funds

The offer of quotas of closed-ended funds directed only to professional investors are automatically granted by CVM, provided certain documents are delivered to CVM through its internal internet system. The distribution of quotas of closed-ended funds to professional investors with limited marketing efforts also benefit from the registration exemption set out in CVM Instruction No. 476, provided the following additional requirements are complied with:

• quotas are marketed to a maximum of 75 qualified investors and subscribed or acquired by no more than 50 qualified investors; and
• no marketing efforts through stores, offices, establishments open to the public or public communication services are used.

Establishing funds

In order for a fund to be established in Brazil it has to comply with the applicable rules of and be registered with the Brazilian Securities Commission (CVM). In accordance with the applicable regulation, the fund must have a manager and an independent accounting firm. The manager must be a Brazilian entity authorized by CVM for the performance of professional management of securities portfolios, in accordance with Article 23 of Law No. 6.385.

Investing in funds

Prospectuses for funds that are offered to the public in general must specify risk factors applicable to that type of investment.

The distribution of quotas of funds (both open-ended or closed-ended) may only be done by entities authorized to operate in the securities distribution system in Brazil (eg brokers or investment banks).

The distribution of quotas of open-ended funds does not require advance registration with the Brazilian Securities Commission (CVM). However, the public distribution of quotas of closed-ended funds do require the previous registration with CVM and must comply with all the formalities applicable to public offer of securities in Brazil.

In any event, marketing materials of any type of funds in Brazil have to follow the applicable regulation of CVM, in particular Instruction No. 555.

The management of a fund is defined as the group of services directly or indirectly related to the functioning and maintenance of the fund. Those services may all be rendered directly by the manager of the fund or by third parties hired by the manager on behalf of the fund.

The manager is a legal entity duly authorized by the Brazilian Securities Commission (CVM) to provide securities portfolio management services, in accordance with Article 23 of Law No. 6.385 and other related regulations.

The manager may hire, on behalf of the fund, third parties duly authorized to render the following services to the fund (among others):

• portfolio managers;
• investment advisors;
• treasury services to manage the accounting for and control of financial assets;
• distribution of quotas;
• custody of financial assets;
• rating agencies; and
• market makers.

The management of the portfolio may be done by individuals or legal entities duly registered with CVM as professional portfolio managers.

Derivatives may be traded over-the-counter or on an organized exchange.

Multiple banks, commercial banks, investment banks, foreign exchange banks, broker dealers and securities dealerships are allowed to enter into swap, option, and future transactions in the Brazilian over-the-counter market on their own behalf and on behalf of their clients. Other financial institutions are only allowed to enter into this type of transaction on their own behalf. Those transactions have to be registered with an authorized clearing system in Brazil.

The Central Bank regulates the parameters for the calculation of the underlying indexes and prices for those transactions.

Brazilian companies may only enter into derivatives transactions in the international market for hedging purposes in connection with commercial or financial transactions which are subject to fluctuations in the international market of interest rates, foreign exchange or commodities prices. Those transactions have to be registered with a clearing system in Brazil.

Derivative contracts are entered into in Brazil for a range of reasons including hedging, trading and speculation.

All of the main types of derivative contract are widely used in Brazil:

• forwards;
• futures;
• swaps (such as interest rate or currency swaps); and
• options (call options and put options).

The value of the derivative contracts is based on the value of the underlying assets. The main classes of underlying assets seen in Brazil are:

• equity;
• interest rates;
• commodities;
• currencies; and
• credit.

Netting arrangements have to be expressly agreed by the parties of any given transaction to be valid. This arrangement has to be documented in a specific agreement, either through a public or a private instrument. Alternatively, the financial institutions may have a global netting agreement with the client, covering all derivatives transactions entered into by then.

Those agreements have to be registered either with the Registry of Deeds and Documents or an authorized clearing system in Brazil within 15 days of their execution. The agreements must set out the conditions for an event of default to occur and the methodology for the calculation, set-off and liquidation of the transactions.

Although the new Brazilian Bankruptcy Law (Law No. 11.101 dated 9 February 2005) has brought additional protections for netting arrangements, there are still a number of risks involved in the exercise of netting in a bankruptcy situation.