STO Registration Procedures in Brazil
Henrique Marcos & Yure Lira, Crypto/Blockchain Lawyers at CY2LAW.
The contents herein do not constitute legal advice and is for informational and/or educational purposes only. We recommend that any party interested in ICOs and/or STOs in Brazil or abroad seek specific legal counsel.
What are the main regulations that exist in your region if you’d like to launch an STO/ICO?
In Brazil, there’s not a specific diploma regulating crypto and the blockchain. Likewise, ICOs and STOs specifically remain unregulated. There was a particular bill of law in the works in our National Congress (PL 2303/2015), but it was shelved.
Nonetheless, there is plenty of Brazilian legislation that can be applied to crypto, the blockchain, and token offerings in ICOs and STOs.
First, there is the federal law 6.385/1976 (Lei dos Valores Mobiliários) which regulates securities and establishes the Brazilian Security Regulator (the Brazilian SEC, if you may), the Comissão de Valores Mobiliários — CVM. Likewise, there is CVM Instruction 400/2003, 476/2009 and 588/2017, which, respectively, regulate public offerings, restricted distribution efforts offerings, and crowdfunding in Brazil.
These regulations will apply to any token offering which, according to Brazilian regulation, may be considered a Security. Moreover, this is something especially interesting to mention and something that many people who are interested in running STOs fail to acknowledge. A token will be considered a Security or not according to the legislation which it is subject to and, furthermore, each legislation has a specific concept and requirements to consider offering a security. In other words, a security in the US may not be a security in Brazil and vice-versa.
Alongside specific securities regulations, there is a vast collection of Brazilian rules and laws which apply to crypto, ICOs, and STOs. For instance: the Brazilian Civil Code and Companies Act, the Brazilian Criminal Code, Anti-Money Laundering regulation, the Law on the Brazilian Financial System, etc. None of which, however, make any specific mention of anything crypto.
There are, however, a couple of official announcements issued by the Central Bank of Brazil, the CVM, and other government agencies, stating the fact that crypto is a risky investment and are still mostly unregulated in Brazil and abroad.
Are there any examples of ICO/STO projects that have already complied with regulations? Do you consider their pick to be appropriate or not? (This particular question will serve as the key portion of the whole article.)
Brazil has had some attempts at having local ICOs and some of which can be considered successful; there was even a case of a football association which emitted their utility token for fans to donate (Avaí Futebol Clube). All of these ICOs offered utility tokens based on the Ethereum Protocol; some other worthy mentions include Gimmer, Moeda, Niobium, and Iconic.
However, given what was stated in the previous question about legislation, the Brazilian regulator is still only beginning to understand how blockchain offering works, and this causes uncertainty for the entrepreneur.
Consider the “Original My” Case, (a utility token which makes it possible for the holder to register in the blockchain and verify the authenticity of digital documents, contracts, and the identity of people, as well as the possibility to sign documents). However, as soon as the people behind the project announced that they would be organizing an ICO, the Brazilian securities regulator, the CVM, started to ask questions and even more questions through subpoenas. It was clear that they didn’t understand what was going on and, in the midst of this uncertainty, Original My left Brazil and went to Estonia.
This is something that happens a lot and is part of the reason why our law firm decided to specialize in international and comparative law, especially for those countries that we consider crypto-friendly such as Switzerland, Malta, Gibraltar, Luxemburg, the United Kingdom, Estonia, Bermudas, Singapore, Hong Kong, the United States, and more. At the moment we have a Brazilian STO in the works in the US, two in Switzerland, and one taking its first steps in Hong Kong.
However, one of the first Brazilian STOs which would be happening in Brazil will be announced in the following weeks. The team behind it are making sure that it will be one hundred percent compliant with Brazilian Securities regulation and that’s why, unfortunately, for the time being, no more information can be made publicly available.
What are the recommended legal arrangements (legal structure) for pre-sale (private sale) investment deals (ST buyout, SAFT, options, etc.)?
Most of these investment deals work if they are adapted to the Brazilian corporate regulation. The best one depends on the kind of token that will be offered, its token rights, and the specific tokenomics behind the project.
An exciting possibility, which is being developed jointly with the regulator in Brazil, is a token buyback for projects which are still being structured and have some sorting out to do; to safeguard the investor’s rights in this early moment, a buyback clause is added in some of these cases.
What are the main liabilities of an STO team to the ST holders and who is in control over the fulfillment of this obligation?
A genuinely public offering in Brazil is an extremely complicated procedure which must be carried out through specific and previously authorized financial institutions which are a part of the securities distribution system (e.g., brokerage firms or distributors). Therefore, it might be argued that not only may the team behind the project be liable, but the distributor also has their legal responsibilities.
Given that STOs are not regulated in general terms, ST holders will be entitled to similar rights to which investors in a collective investment scheme would be entitled to. This qualifies them to legal action against those who made the offerings. The general rights include the right to be appropriately informed about the project, the investment, the risks involved, etc., and whatever reasons have been stated in the investment contract.
More so, as mentioned above, there is the criminal legislation that punishes larceny, various kinds of frauds and crimes against the economy, market manipulation, and the misuse of privileged information (insider trading).
What is the timeframe when going through the registration process (by stages)?
There is no need to register an ICO for tokens which are not considered securities or any other regulated asset in Brazil. So a genuine utility token offering (according to Brazilian law) may be offered in Brazil without the need to apply for any license.
STOs, on the other hand, are a different story. According to the federal law 6.485/1976, no public offering of securities may occur in Brazil without a preliminary register with the Brazilian Regulator, the CVM.
According to the regulation, the CVM will have 20 days to manifest the application for registration, which from the start needs to be accompanied by all the documents and pieces of information required by law.
We might add that this is not a simple procedure and many large corporations which are interested in issuing shares publicly have their requests denied by the CVM.
What are the documents that need to be prepared for the registration process?
There are several documents required to register a public offering of securities in Brazil including, but not limited to: Contract for the Distribution of Securities, Contracts for the Price Stabilization and Liquidity, contracts relating to the issuance of subscriptions and supplementary lots, subscription bulletins and purchase receipts with specific information on the offering, the prospectus, copy of the board’s decision of approval of offering of shares, Notice of Commencement, securities certificates, proof of compliance, financial documents, and more.
This procedure is extremely regulated and we strongly advise any candidates to seek legal counsel before initiating the process.
What are the advertising limitations for the STO marketing campaign in comparison with one for an ICO?
As mentioned beforehand, utility token ICOs do not have any specific limitation on their advertising (just general restrictions which would apply to any products or services).
STOs, on the other hand, are subject to all the limitations on the offering of securities. Implying that the usage of all texts, public documents, media announcements, etc. depend on specific approval from the CVM. All the publicity must contain correct, up-to-date, and appropriate data on the offering and make references to the content of the prospectus.
From a practical standpoint, what are the legal payment methods (to transfer the investments)? Are there any special, legally qualified platforms that provide such a service?
There are regulated crowdfunding platforms in Brazil, such as “StartMeUP”, which are beginning to list security token offerings.
Are there any periodic reports required to be filed once registration has been accepted (regular audits, etc.) How much does it cost to keep up with the regulatory filings?
In the process of the public registering of securities, many steps must be taken to comply with the regulation, including registering the offer within the CVM. The CVM monitors each of these steps through risk-based supervision (SBR).
These supervisions include the verification of information provided to the market and the documentation submitted for registering and inspecting the offers made without registration or in disagreement with the conditions of the exemption.
The specific costs are available in the following link, which is subject to periodic updates: http://www.cvm.gov.br/menu/regulados/taxasmultas/tabelas_taxa.html
What is the cost structure of the STO registration process?
The costs are a percentage of the offer registration value. They are available in the following link, which is subject to periodic updates: http://www.cvm.gov.br/menu/regulados/taxasmultas/tabelas_taxa.html
What tax residency is allowed for project founders? (Do you need to be a Brazilian citizen if you want to raise money in Brazil?)
All public offering of securities in the primary and secondary markets addressed to natural persons, legal entities, funds and similar entities, resident, domiciled, or incorporated in Brazil, must be previously registered with the CVM, regardless of the nationality or residence of the subject.
Are there any additional regulations that must be complied with if a project raises capital from non-Brazilian investors?
The entry of foreign capital in Brazil must be registered with the Central Bank of Brazil (BACEN). The registration of foreign capital in the Central Bank is based on federal laws 4.131/1962, 9.069/1995 and 11.371/2006.
More so, depending on the way the STO or ICO is structured and the way the invested capital enters Brazil, it is necessary to analyze which of the Electronic Declaratory Registry (Registro Declaratório Eletrônico — RDE) to be applied.
Additionally, foreign investments can be considered “applications in Portfolio”. In these cases, the investments of non-Brazilian investors in the financial and capital markets and others must comply with the National Monetary Council (Conselho Monetário Nacional — CMN) Resolution 4.373/2014, CVM Instruction 560/2015, and BACEN “Circular” 3.689/2013.
There are many other regulations which may be applicable depending on the case, thus it is essential to seek legal counsel before deciding these matters.
What are the main advantages of the STO regulations in Brazil when compared to other jurisdictions?
As mentioned above, there is no regulation for STOs in Brazil at the moment. However, the Brazilian crypto market is highly active and very community-based. There are many initiatives directed by essential players in Brazil that are driving change in Brazilian regulation so that it can evolve alongside crypto-friendly legislations abroad. Additionally, it is important to mention how the regulators in Brazil, like the CVM and the Federal Revenue (Receita Federal), are becoming more involved with crypto and are very open to discussing and understanding how it should be regulated.
Is there any special territory in your country that is a tax haven or has other beneficial regulations for cryptocurrencies and blockchain startups?
No.
What will be the cost of all registration procedures for a startup to incorporate in your jurisdiction? Will it differ for a foreign startup?
First of all, the origin of capital is irrelevant for a company defined as “Brazilian”; for a company to be considered Brazilian, it is only necessary for it to have its head office in Brazil and for it to be incorporated according to Brazilian law.
The average cost for opening up a company in Brazil is around 2,000 Brazilian Reais (about five hundred and thirty US dollars).
What is the legal status of cryptocurrencies in your country?
Cryptocurrencies are not explicitly regulated in Brazil. In this sense, they are subject to the same laws that govern general goods and the exchange of goods. However, given its elastic capabilities, it is possible for a token to be considered a Security or any other regulated good if it is, perhaps, backed or collateralized with something which is, in turn, regulated.
There is, however, a specific instruction issued by the Brazilian Federal Revenue (Receita Federal) regarding the preparation of tax income fillings of people who hold crypto.
Can you describe general/special taxation schemes for cryptocurrency owners and token issuers?
For tax purposes, cryptocurrencies are considered “financial assets” and are thus taxed based on the capital gains resulting from transactions. There is a specific instruction issued by the Brazilian Federal Revenue (Receita Federal) regarding the preparation of tax income fillings for taxpayers who operate with crypto.
Do you have anything further to say about the legal nuances of cryptocurrency/token regulation?
As mentioned before, Brazil still lacks specific regulations on crypto, the blockchain, and security token offerings. More so, there are a couple of official announcements issued by the Central Bank of Brazil, the CVM, and other government agencies stating the fact that crypto is a risky investment and are still mostly unregulated in Brazil and abroad.
However, there is an exciting position issued recently by the CVM which understands that an investment fund in Brazil is authorized to operate abroad, carrying out investments in crypto-assets, derivatives, ETFs, and other financial products if these are located in a jurisdiction which regulates and considers these investments legal. In this sense, a Brazilian fund may buy quotas in crypto-investment funds abroad.
Questions asked by Alex Savinkin
Former number cruncher in investment funds & strategy consulting. One of Geekforge Founding Fathers. Blockchain and technical singularity true believer.
