Facilitated access to the Brazilian capital market

The vertiginous drop in Brazil’s base interest rate to the record low of 2 percent per year has increased the number of Brazilian investors looking to diversify their portfolio by investing in foreign assets. In the past twelve months alone, an additional BRL 62.8 billion were allocated to investment funds dedicated to offshore assets, which represents a 34.8% increase when compared to the previous two years.

In this context, new rules on Brazilian Depositary Receipts (BDRs), the local equivalent to the American Depositary Receipts (ADRs), create new opportunities for both foreign issuers and local investors.

Amended rules issued by the Brazilian Securities Commission (CVM) broaden the concept of a foreign issuer, allow retail investors to acquire certain types of BDRs, and authorize the issuance of BDRs backed by debt securities and by foreign index investment funds’ shares.

Since 1 September 2020, it has become possible to issue BDRs backed by securities issued by foreign companies registered and subject to supervision by a regulator similar to CVM, as long as such companies i) have less than half of their assets and revenues in Brazil or ii) despite having a significant presence in Brazil (meaning more than half of their assets and/or revenues in Brazil), have, as its main trading market, a stock exchange located outside Brazil in a country deemed as a “recognized market” by following certain parameters defined by regulation. These parameters include sufficient liquidity, adequate information disclosure, and investor protection instruments.

This change may have been spurred by recent initial public offerings (IPOs) made by Brazilian groups abroad (such as Stone, PagSeguro, and XP Investimentos). Companies usually choose to have an IPO abroad due to the prospect of better valuations, the greater liquidity of mature markets, and the possibility of raising higher sums while still granting limited political rights.

Regarding this last reason, many of the offerings abroad entail two classes of shares: the first, with the right to one vote per share, is offered to the market; the second, which confers ten votes per share ("super-voting shares"), remains with the founders of the company. Although super-voting shares are currently not permitted by Brazilian law, local investors now have another option for accessing and investing in companies that adopt such arrangements as it is now possible to have BDRs backed by the shares issued on IPOs by Brazilian groups abroad.

The possibility for retail investors to acquire certain kinds of BDRs is another positive development. Indeed, there was no justification to restrict such assets to qualified investors and prohibit Brazilian retail investors from being shareholders, through BDRs, of “blue chip” companies accessible to retail investors abroad.

CVM has also allowed the issuance of BDRs backed by debt securities, which gives Brazilian investors additional options for capital allocation and foreign issuers another gateway to the local capital market. Furthermore, it is now possible for BDRs to be backed by shares issued by foreign index investment funds (ETFs). This is an initial step towards flexibility, and it is expected that the experience, if successful, will serve as a model for the issuance of BDRs backed by other types of foreign investment funds.

To address the increasing number of Brazilians investing abroad, CVM also amended rules on securities advisory services to allow foreign advisors to provide services in Brazil. This change, which came into force on 1 June 2020, is likely to stimulate Brazilian investments in overseas markets and foster the securities advisory services industry in Brazil as a whole. This is good news as the local capital market is also growing in size and complexity.

The changes made by CVM facilitate Brazilian investors’ access to products and investment strategies that are not necessarily available in the local market. For foreign issuers, timing is perfect. The new rules help overcome some of the obstacles to the Brazilian capital market at the very moment when local investors are encouraged to diversify their portfolios and increase their portion of international investments.