Among its duties, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) shall promote the expansion and the regular and efficient operation of the Brazilian stock market, and stimulate permanent investments in the capital stock of publicly-held corporations controlled by local private capital, as well as it shall avoid or prevent any kind of fraud or manipulation intended to create artificial conditions of supply, demand or price of the securities traded on the market1.
Pricing integrity is essential to the capital raising process and CVM recently enacted specific rules of protection to the price formation process in the context of stock public offerings, by means of CVM Instruction No. 530, of November 22, 2012 (CVM Instr. 530/2012).
This Instruction brings security to the publicly-held corporations already registered and stimulates the realization of subsequent public offerings in the Brazilian capital markets. A significant increase of short sales in the period prior to the definition of price in subsequent public offerings after the initial public offering (follow on or repeat offer) is observed in the local and international markets, which leads to an artificial fall in the price of the offered shares.
These new rules are based on Regulation M and Rule 105 adopted by the Securities and Exchange Commission (SEC) of the United States to safeguard the integrity of the capital raising process and protect issuers from manipulative activity that can reduce issuer´s offering proceeds and dilute security holder value2.
CVM Instr. 530/2012 prohibits the acquisition of shares in the context of stock public offerings by investors who have held short sales (vendas a descoberto) of the offered shares on the date the pricing is fixed and in the five trading sessions that precede such date. Under this Instruction, “short sale” means any transaction carried out by an investor who is not the holder of the offered shares, or whose ownership results from a loan or any other kind of contract that has an equivalent effect.
Operations of the same investor are deemed to be short sales and purchases of shares held in his/her/its own name or by means of any vehicle whose investment decision is subject to his/her/its influence. This means that an investor who buys shares in a public offering and is also a unit-holder (cotista) of a discretionary management investment fund, who/which held in the restricted period short sales with those shares, does not fall in the event of infringement to the provisions of CVM Inst. 530/2012.
Investment funds whose investment decisions are taken by the same manager will not be considered as a single investor for the purposes of CVM Instr. 530/2012, provided that the transactions are included in the respective investment policies of each fund.
The prohibition imposed by CVM Instr. 530/2012 does not apply to the following cases:
- operations carried out by legal entities in the exercise of the activity of market maker of the offered shares; and
- operations later covered by acquisition in the market of the total quantity of shares corresponding to the short position up to a maximum of two trading sessions before the date of fixing the offer price.
The disobedience to the rules introduced by CVM Instr. 530/2012 is defined by CVM as a serious breach for the purpose of paragraph 3 of article 11 of the Brazilian Securities Act3.
The Brazilian regulator concluded that short sales in the period specified in Instr. CVM 530/2012 can generate a bad price formation on the offered shares, ensuring gains without risk to short sellers, to the detriment of publicly-held corporations and other issuers, as well as of other market participants. Thus, in the restricted period, investors who have carried out these operations may only purchase the shares in the market, and not on offer. With the adoption of the new rules CVM hopes to contribute to restore pricing conditions free of artificial forces, so that the prices of offers arise under the natural supply and demand movements, to foster public offerings.
CVM Instr. 530/2012 is addressed to the investors, and not to the intermediary institutions or to the managing entity of the organized market. The investors that do not comply with the provisions of CVM Instr. 530/2012 will be identified within the framework of the supervision and monitoring of CVM.