Obtaining investment has always been a great challenge for small and medium-sized businesses in Brazil. The initial public offering (IPO) is light years from the reality of these businesses, which end up using angel investors (normally individuals with an appetite to invest in uncertain assets), venture capital funds (which require greater governance and a more advanced stage of business) and, last but not least, the 3 “F” (friends, family and fools).
All of these investments have one thing in common: they require the target company and investors to get to know each other and negotiate the investment – which makes it a high cost transaction and reaches only a limited number of investors.
What if small and medium-sized companies were able to obtain investments from the general public? “Pass the hat” to thousands of people? Wouldn’t it be much more practical and efficient? Well, this option already exist: it’s the so-called Security Token Offer (STO), which, instead of wearing a “hat”, use blockchain technology.
STO is a public offering via blockchain (cryptocurrencies, tokenized securities, etc.) backed by a tangible asset registered outside it (off-chain) – such as company’s shares, a fraction of real estate or any available equity asset, technically allowing investors from all around the world to acquire the offered investments.
But is that possible? Well, in Brazil, in the event that blockchain is backed by securities, the Brazilian Securities and Exchange Commission (CVM) states that the offer must be previously registered with them, except in specific cases of exemption of registration or requirements of offer, according to its own regulations.
So, how did BTG Pactual manage to make a STO – ReitBZ (RBZ) – backed by stressed assets in the Brazilian securities market? Simple, they made the offer to non-Brazilian residents investors , who are residents in other jurisdictions that have more flexible rules for such issuance.
As many countries do not yet have a specific regulation for STOs, such as Brazil, the applicable rules end up being those initially developed for traditional issues of securities – as understood by CVM – and, therefore, make it impossible for investors residing in such jurisdictions to access this type of investment.
We believe that it will not be long before CVM takes a better look to this new form of investment. After all, it is illogical to imagine that Brazilian assets have to be offered abroad and not in its own country.
Whether the Brazilian capital market is prepared for such an innovative product? We asked that same question 10 years ago, when CVM issued Instruction No. 476, which dismissed the registration of certain public offers of securities distributed with restricted efforts.
In those 10 years, Instruction 476 has been modified a few times and improved, and today it is a success!
Technology is a one-way road, and so will be the STOs, whose estimated total market already exceeds R$ 500 million and is expanding, tending to increase considerably when, at last, there is a specific regulation. Thus, it is already possible to see a new era of resource allocation, in which smaller companies, research projects, patents and new technologies will have the opportunity, at last, to show their potential directly to the investor.
By Raphael Pereira Arantes Pires, associate at Candido Martins Advogados