The Brazilian Securities Commission (Comissão de Valores Mobiliários or CVM) has adopted regulations that give investment firms greater flexibility in establishing the investment policies and corporate governance arrangements of private equity funds. The new rules, adopted on July 16 2003, address the need for an enabling regulatory framework that could accommodate certain typical features of a private equity or mezzanine fund.
Before the enactment of these rules, an onshore private equity fund needed to be incorporated as a corporation or established as a conventional investment fund. Both options were not suitable for private equity funds.
CVM regulations restrict the ability of conventional investment funds to invest in unlisted companies, including typical start-up or development stage companies. Corporations, on the other hand, must comply with inflexible corporate governance arrangements that prevent the creation of tailored committees that could allow investors to participate specifically in investment decisions. Corporations are also less tax-efficient than investment funds.
The new rules address many of these issues. Private equity funds may now be established as closed-end investment funds and invest in unlisted companies. The newly created funds may issue different classes of equity interests and may confer decision-making authority on technical, investment and consultative committees. Investors may now agree to answer capital calls. In addition, a private equity investment fund can be established with a single filing of the requisite documentation with the CVM.
Certain restrictions still apply. Private equity funds may offer equity interests only to certain qualified investors and only in minimum denominations of R$100,000 ($34,000). A private equity investment fund must yield a degree of influence over investee companies by means of voting rights or contractual arrangements. Investee companies must abide by certain disclosure and corporate governance standards and must submit corporate disputes to arbitration.