Venture Capital in Brazil Faces New Regulatory Hurdles

The Brazilian Administrative Council for Economic Defense (CADE) has issued a decision that significantly impacts the venture capital ecosystem in Brazil.

This ruling clarifies long-standing questions about operations involving companies invested in by funds. However, it also introduces new concerns for the industry.

CADE now requires more operations to undergo its prior approval. This change could slow down investment rounds, a critical issue for the fast-paced venture capital ecosystem.

The decision stems from a case involving Digesto and Jusbrasil, two legal tech companies. The regulatory body considers operations involving two economic groups.

These groups had gross revenues of R$75 million ($15 million) and R$750 million ($150 million) in the previous year, respectively. CADE then decides if the operation can proceed or if it poses a risk to market competitiveness.

For investment funds like FIPs (Equity Investment Funds), the interpretation of control is crucial. Even with less than 20% ownership, a fund can be considered part of a company’s economic group if it exercises control.

This control can be through shareholder agreements influencing strategic decisions. CADE’s new guidelines list rights and prerogatives that characterize control by an investment fund, even with minority ownership.

These include vetoes on fundamental issues like business plans, annual budgets, and debt contracting above certain values.

This new orientation conflicts with requirements imposed by the Brazilian Securities and Exchange Commission (CVM) and guidelines from the National Venture Capital Association (NVCA).

Regulatory Challenges for Venture Capital in Brazil

The CVM requires FIPs to demonstrate “effective influence” over their investees, which often involves veto rights. The NVCA’s widely-used governance model includes standard veto clauses that CADE now interprets as indicators of control.

This puts many FIP and venture capital fund operations in a position where they may need CADE’s prior approval. This additional requirement creates more bureaucracy and delays for investment rounds, critical for startups that rely on agility to expand.

Venture capital aims to foster the growth of new companies and increase competition, benefiting end consumers. Despite these challenges, there’s room for improvement.

CADE councilor Victor Oliveira Fernandes suggested revising Resolution 33/2022 or creating a guidance document to clarify control issues. This aligns with OECD guidelines encouraging CADE to periodically review its criteria.

This presents an opportunity for the venture capital community to engage in dialogue with CADE. The goal is to streamline investment processes and ensure funds can continue promoting innovation and growth in emerging Brazilian companies.

While CADE’s decision brings important advances in defining shareholder control by investment funds, it also creates new difficulties.

The increased requirement for prior approval may delay investments that strengthen, rather than harm, competition. However, this moment is opportune for constructive dialogue between the sector and CADE.

The aim is to simplify processes and promote a regulatory environment that favors growth and competitiveness in the Brazilian market.

This article was produced by The Rio Times’ automated newsroom system. How we use AI · Report an error

LatAm Markets: Live Signals → — real-time movers, turnover leaders and FX across Latin America.