CVM issues  Rule 551, allowing restricted public offerings of shares 

Brazil's securities regulation commission, the Comiss?o de Valores Mobili?rios ("CVM") issued on September 25, 2014 Rule No. 551 ("CVM Rule 551"), amending CVM Rule No. 332, of April 4, 2000; CVM Rule No 400, of December 29, 2003; and CVM Rule No. 476, of January 16, 2009 ("CVM Rule 476"). 

The main changes brought by CVM Rule 551 are: 

  • the possibility of public distribution with restricted efforts ("Restricted Offering") of (i) shares, (ii) debentures convertible into shares, (iii) subscription bonds, (iv) depositary receipts of foreign companies - DRs issued on Level III Sponsored Programs and (v) structured transactions notes (Certificados de Opera??es Estruturadas  or "COEs");
  • changing on the number of investors that may be solicited in the Restricted Offering , from fifty (50) to seventy five (75) investors, and the number of investors who can subscribe or purchase securities in the Restricted Offering, from twenty (20) to fifty (50) investors;
  • obligation to communicate the commencement of the Restricted Offering, within 5 (five) business days from the first contact with potential investors;- obligation of recording a list of solicited investors including the name and personal data of the investors, the date on which they were contacted and their decision regarding the Restricted Offering;
  • the rules that limit the negotiation of securities offered in Restricted Offerings, which allows trading by retail investors only if certain conditions are met; and- the definition of pre-operational company.

Restricted Offerings of shares. The main change brought by CVM Rule 551 is the inclusion of shares and securities convertible or exchangeable into equity securities, among the list of securities which can be distributed through a Restricted Offering. For this purpose, the issuer must have obtained the registration of issuer of securities under category "A", pursuant to CVM Rule No. 480 of December 7, 2009. 

One of the main issues related to the viability of Restricted Offerings of shares is the observance of the preemptive rights by the other shareholders. According to the regime brought in by CVM Rule 551, the investors in Restricted Offerings exercising their priority or preference rights will not be considered for the purposes of the limit of investors who can subscribe or acquire securities under the Restricted Offering. However, the exclusion of the preemptive rights, as often occurs in public offerings, will be possible only if priority rights are granted to shareholders on the subscription of 100% (one hundred percent) of the securities, or if the non-granting of such priority is approved by the shareholders representing the totality of the company capital stock. 

Restricted Offerings target investors. The CVM Rule 551 expands the number of investors that may be contacted and may acquire the securities offered in Restricted Offerings. This change expands potential application of the rule and applies to Restricted Offerings of any kind of securities. 

Notice of commencement of Restricted Offerings and record of investors. CVM Rule 551 creates a new requirement consisting in delivering to CVM a notice of commencement of the Restricted Offering. Previously, only the termination of the Restricted Offering and its result were communicated to CVM. According to CVM Rule 551, the commencement of the Restricted Offering shall be communicated to the CVM within 5 (five) business days from the first contact with potential investors, and the offeror and the intermediary institution shall keep records including the name and personal data of the investors, the date on which they were contacted and their decision regarding the Restricted Offering. 

Concept of pre-operational company. According to CVM Rule 551, a company will be considered in pre-operational phase for the period in which it does not record revenues from its operations, in its annual financial statements or, when applicable, in its annual consolidated financial statements prepared in accordance with CVM standards and audited by an independent auditor registered with the CVM. CVM Rule 551 also establishes as a rule what has already been a constant market practice: public offerings of shares of pre-operational companies must be only marketed to qualified investors. 

New regime of limitations for trading of securities offered in Restricted Offerings in the secondary market. Given that Restricted Offerings of shares are now permissible, the restrictions to trading of securities offered pursuant to CVM Rule 476 have the following additional exceptions:

- in the event that there has occurred a public offering of shares of the same type and class registered with the CVM;- after the period of eighteen (18) months from the date the shares of the same type and class are listed on stock exchanges; and- in the case of pre-operational companies, when (a) the company becomes operational, (b) after eighteen (18) months from the date of the conclusion of the offering and (c) after eighteen (18) months from the listing of the shares on stock exchanges, except if (i) the company has carried out its first public offering registered with the CVM; and (ii) it has complied with the restrictions applicable to the registered offering.

On the other hand, the CVM Rule 551 also provides that the lock-up in the secondary market of the securities offered in the period of ninety (90) days after the conclusion of the Restricted Offering, does not apply to transactions with shares, subscription bonus and depositary receipts offered in a Restricted Offering.

Thus, CVM Rule 551 brought major changes to securities offering regulation, as they are intended to facilitate, among others: 

  • initial public offerings of shares in smaller amounts and/or by smaller companies (since the costs and efforts involved in a public offering registered with the CVM may not be justified considering the distribution amount);
  • follow-onpublic offerings by companies already listed, in a faster track, in view of the exemption from registration and the consequent dismissal of complying with any review periods by the regulator;
  • public offerings of convertible securities, also in a faster track with reduced costs; and- COE offerings with selling efforts, and procedures clearly regulated.