By: Antonio Mazzuco and Luiz Gustavo Doles

There are several types of securities that can be offered on the Brazilian market, each with its own particularities and advantages in accordance with national legislation.

Despite this great variety, section IX of article 2 of law 6385 provides us with a general rule so that an asset can be considered a security:

1. any securities or collective investment contracts
2. that generate the right to participation, partnership or remuneration, including those resulting from the provision of services
3. whose income comes from the efforts of the entrepreneur or third parties
4. as long as they are publicly offered,

This is a criterion included in the legislation by law 10.303 of 2001, necessary due to the most diverse offers made on the market, especially due to the impact that these assets can have on popular savings.

The main difference between a security and other debt instruments is the fact that this type of asset is offered publicly, possibly affecting popular savings.

The situation is made more difficult by the fact that any investment in the capital market involves risk, i.e., there is no guarantee that the money invested in securities will be returned in full, which is why the type of guarantee for the operation is of utmost importance.

There are several titles that fit the above criteria, each with its own legislation.

ACTIONS

Shares are ideal fractions of the share capital of public limited companies, freely tradable securities on the market as long as it is an open corporation.

There are different types of shares, each offering different advantages and powers within the companies that issued them, with preferred shares and ordinary shares representing the most traded values on the market.

Common shares of publicly-held companies give their holders the right to vote in the company that issued them. Preferred shares offer another advantage: the shareholder gives up his or her right to vote and, in return, acquires an advantage over other shares in the company, whether it be priority in the distribution of fixed or minimum dividends or priority in the reimbursement of capital, with or without a premium.

It is up to the investor to decide which type of action interests him, always taking into account the risks involved in the investment.

Issuing shares is one of the most traditional ways for publicly traded companies to access the capital market, especially for companies that open their capital in the form of IPOs and other subsequent share offerings on the market.

Debentures

Debentures are debt securities issued by corporations with the aim of financing specific projects, the issuances of which are divided into series.

The acquisition of a debenture transforms the investor into a creditor of the issuing company, which makes the type of guarantee offered within the scope of the debenture issuance essential to define the risk of the operation.

It is possible that these securities are guaranteed by alienation or fiduciary assignment, in addition to other types of real guarantees, it is possible that they do not have guarantees, in which case they are unsecured debentures, or they may have other guarantees permitted under Brazilian law, such as a guarantee from the partners of the issuing company.

A debenture issue requires the following procedures to be carried out:

1. Calling of a General Meeting to request shareholder authorization;
2. Registration of the issue with the CVM;
3. Recording of issuance registered at a notary's office;
4. Trading of debentures on the market, after issuance.

Law 6404 defines the essential requirements of the SAI debenture note, such as denomination, term and remuneration, among others.

There is another type of debenture called infrastructure debenture, created by Law 12,431 of 2011. These securities have a tax advantage over traditional debentures: their income is tax-exempt for individuals and is limited to 15% for legal entities.

However, the approval of these processes depends on whether the debentures must be related to raising funds with a view to implementing investment projects in the area of infrastructure, or economic production intensive in research, development and innovation, considered as priorities by the federal government.

This approval is the result of an administrative process before the ministries, each of which is responsible, within its competence, for approving or not the project presented by the companies.

Commercial Notes

A commercial note is a credit instrument not convertible into shares, freely negotiable, representing a promise of payment in cash, issued exclusively in written form through institutions authorized to provide the bookkeeping service by the Securities and Exchange Commission.

The main characteristic of this note is the great freedom in its issuance, since both SAs and limited companies and cooperative societies can have access to these debt instruments.

However, this type of document also has bureaucracy that needs to be completed.

It is necessary for the issuer to make a decision on the issuance of a commercial note, a decision that falls within the jurisdiction of the management bodies, if any, or of the issuer's administrator, in compliance with the provisions of the respective articles of association.

It is possible that the characteristics of a commercial note may be changed depending on the approval of a simple majority of the holders of commercial notes in circulation, present at the meeting, if a higher quorum is not established in the issuance term.

This type of security will be registered in registrar companies previously registered with the CVM, an essential service since it is an entirely virtual title.

shares of investment funds in securities

The investment fund is a pool of resources, constituted in the form of a special nature condominium, intended for investment in financial assets, goods and rights, in accordance with the specific rule applicable to the category of fund duly regulated by CVM Resolution 175.

It is possible that such shares are offered on the market, in which case they become securities.

There are several different types of investment funds, which are differentiated according to the type of asset that can make up their portfolio.

The quotas themselves can have several characteristics of their own and be divided into quota subclasses according to:

I – target audience;

II – terms and conditions of application, amortization and redemption; and

III – administration, management, maximum distribution, entry and exit fees

Funds rely on a number of different service providers, with their administrator and manager being central to the functioning of the funds. This is an important point for investors as they are the service providers closest to the parties.

Receivables certificates

This is a document created within the scope of a securitization operation, that is, the acquisition of credit rights to support the issuance of Receivables Certificates or other securities and securities before investors, the payment of which is primarily conditioned on the receipt of resources from the credit rights and other assets, rights and guarantees that support it.

Only companies called securitizers, registered with the CVM, can carry out this type of activity.

The possibility of using several receivables is a novelty brought about by the securitization framework. Until the advent of this law, the market carried out the securitization of Agribusiness Receivables and Real Estate Receivables, generating CRA and CRI transactions, respectively.