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On May 25 2004 the Brazilian Securities Commission (the Comissão de Valores Mobliliários or CVM) granted a waiver requested by a first time issuer and allowed a proposed initial public offering of shares to proceed despite the absence of a feasibility study otherwise required by CVM Regulation 400 of December 29 2003.

Article 32 of Regulation 400 requires issuers to produce feasibility studies in connection with any public offering in which any of the following circumstances are present:

  • the issuer will be incorporated only upon the completion of the public offering;
  • the issuer has been in operation for less than two years and is making its first public offering of securities,
  • the issuance price will be set primarily by reference to the prospects for the profitability of the issuer, or
  • the expected proceeds from the offering will exceed the shareholders' equity of the issuer.

The feasibility study requirements of Regulation 400 are of particular concern for issuers intending to conduct an international initial public offering registered in Brazil with the CVM and in the United States with the Securities and Exchange Commission. A strict application of Regulation 400 would have required many potential Brazilian first time issuers to include a feasibility study in their Brazilian prospectuses. In Brazilian practice, a feasibility study typically contains detailed quantitative projections for the major line items of a company's statement of results of operations over a period of several years.

As a consequence of including the projections contained in the feasibility study in the Brazilian prospectus, such projections might have been deemed to be material information required to be included in the US prospectus as well. In the event of a failure to achieve the projected financial results, issuers and underwriters might have faced claims of liability under US securities laws and regulations for misleading forward-looking statements despite having made diligent efforts to include meaningful cautionary language in the US prospectus. To make matters worse, initial public offerings are specifically excluded from the safe harbour provisions of the US Private Securities Litigation Reform Act of 1995.

The CVM showed itself to be sensitive to the issue of undue exposure to liability for detailed quantitative projections that are not customarily disclosed in prospectuses used in global offerings and particularly not in SEC-registered offerings. Under Regulation 400, the CVM has regulatory authority to grant waivers designed to reconcile conflicting regulatory or legal requirements in multijurisdictional offerings. Exercising such authority, the CVM waived the feasibility study requirement on the grounds that the resulting disincentive to issuers, underwriters and other participants in multijurisdictional offerings was disproportionate to the potential benefits derived from a feasibility study by investors.

In the same decision, the CVM also addressed a related technical controversy under Brazilian corporate law to limit the cases to which the feasibility study requirement applies.

In an initial public offering preceded by a bookbuilding process, the traditional understanding was that the issue price was set by reference to the prospects for the profitability of the issuer, which are one of the statutory criteria for setting the issuance price of shares of a Brazilian corporation. Under Regulation 400, however, the setting of the issue price by reference to the prospects for the profitability of the issuer constitutes separate grounds for requiring a feasibility study in a public offering.

The CVM held that a bookbuilding process is a price discovery mechanism functionally and legally equivalent to the pricing of shares on a stockmarket. Accordingly, the issuer in an initial public offering preceded by a bookbuilding process need not deem the issuance price to be set primarily by reference to the prospects for its profitability. Instead, the issuance price may be deemed to be set by reference to a market price, which avoids at least one of the grounds for the feasibility study requirement. (In the case of the specific request analyzed by the CVM, the issuer triggered the feasibility study requirement for more than one reason and needed a waiver despite having avoided certain of the triggering events for the requirement.)

Daniel Calhman de Miranda

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