The Fintech market in Brazil is growing exponentially, arousing the interest of Angel Investors, Corporate Ventures, Venture Capital and Private Equity Funds.
Among the potential targets are the Fintechs regulated by the Brazilian Central Bank (Bacen) through Resolution 4,656/2018, which are the Direct Credit Company (Sociedade de Crédito Direto or SCD) and the Company of Direct Loan Between Individuals (Sociedade de Empréstimo Entre Pessoasor SEP).
See below the possible legal structure for venture capital investment in SCDs and SEPs:
1. Investment in Direct Credit Company (SCD): SCD is a Fintech to carry out loan operations, financing and acquisition of receivables exclusively through an electronic platform.
With a capital requirement of at least BRL 1 million, Resolution 4,656 determines that SCD is prohibited from raising funds from the public, except by issuing shares.
Therefore, investments in SCDs may only be structured through acquisition of shares, with entry into the company’s equity. Convertible loan is not permitted. It will be necessary to enter into a Share Purchase Agreement among the investor, founders and the SCD, and Shareholders’ Agreement.
2. Investment in Company of Direct Loan Between Individuals (SEP): SEP is an electronic platform for the mediation of direct loan operations between people – the peer-to-peer lending (P2P). As the credit contracting is signed between the investor and the borrower directly, the P2P model does not require SEP to maintain its own resources.
Support from capitalist investors can be structured both in the form of stock purchase, with entry into the company’s equity, and through a convertible loan.
In the case of equity, it will be necessary to sign a Share Purchase Agreement among the investor, founders and SCD, and a Shareholders’ Agreement or, in the case of a loan, a Loan Agreement with Option to Convert into Shares among investor, founders and SCD.
3. General Conditions for Investiment in SCDs and SEPs: the regulation states that depend on authorization from Bacen (i) the transfer or change of control and (ii) the acts of merger, spin-off or incorporation.
Transaction should be communicated to Bacen (i) the entry of a shareholder with qualified participation or with qualified participation rights, (ii) the assumption of the condition of shareholder holding a qualified participation, and (iii) expansion of the qualified participation above 15%.
As the Fintechs above are regulated, investors must evaluate and meet the terms and requirements required to reduce the risk of reversing the transaction.