CVM Explanatory Note 19

CVM EXPLANATORY NOTE NO. 19/80.
Ref.: CVM INSTRUCTION NO. 13, of September 30, 1980, which provides for the increase of capital by subscription of shares and registration of distribution of shares by public subscription, as dealt with in articles 82 and 170 of Law No. 6,404 of December 15, 1976.
This Explanatory Note aims to present the main concepts involved in the preparation of INSTRUCTION NO. 13, as well as the detailing of specific articles contained therein.
First of all, it is worth clarifying that the Instruction seeks to treat, in a broad and didactic manner, the regulation of information to be disclosed in the market, in the event of capital increases of open companies, whether through private subscriptions or public subscriptions.
In both cases, the basic premise for decision-making by investors was considered to be the minimum availability of information referred to in CVM Instruction No. 09/79.
In the case of a capital increase by private subscription, where the placement of shares is made only among current shareholders, in the exercise of their preemptive right, the CVM understands that there is no need for registration, based on the principle that the necessary elements for decision-making are already available (CVM Instruction No. 09/79). It is only up to the issuing company to inform the regulatory body and the market, through existing legal mechanisms (publication of notices, minutes, and announcements), notifying them of the decision taken by the competent corporate body, and of the main characteristics of the increase. On the other hand, to the extent that the information necessary for decision-making by current shareholders is not available, due to the outdated registration of the company, they may question the validity of the capital increase, with the CVM having the role of supporting them, in the judicial sphere, independently of the adoption of administrative measures already provided for by the current regulation. Regarding public distributions, in which the placement of the surplus is always made through institutions that are part of the distribution system, except for the portions previously subscribed by current shareholders, registration with the CVM will be mandatory. In this case, the registration aims to ensure that new investors have a detailed level of information about the characteristics of the investment proposed to them, verifying even the legality of the corporate acts that gave rise to it. For conscious decision-making, potential investors will have, in addition to those specific information about the issuance itself, those referring to the issuing company, based on the updated registration for trading on the stock exchange or over-the-counter. It is noted, therefore, that the proposed system is characterized by the complementarity of registrations (of issuance and of the company), allowing greater speed in the launch of new titles for companies that keep their information up to date for the market.

In defining the registration system for public distributions, the CVM was concerned with some points considered by the entire market as fundamental for the use of the primary market as an efficient mechanism for the capitalization of open companies, on the one hand, and on the other, as an instrument for the effective dispersion of company capital among the public. Among these points, the following stand out:

1. Time of Fixing the Issue Price:
   Under the current system, where the subscription price is determined months before the actual placement of the securities, serious distortions have been observed on several occasions, to the extent that the secondary market is subject to sharp fluctuations in relatively short periods of time. The main consequence for the issuing companies is the raising of resources at an extremely high cost of capital, in the case of a substantial increase in stock prices. On the other hand, this situation generates, for potential investors, a superexcitation of demand, associated with the greater difficulty in accessing launches, and the formation of a negative image of the primary market among the public. Finally, the excessive lag between price formation and the actual distribution of shares can, conversely, in a situation of decline in the secondary market, generate strong losses for intermediaries who signed the subscription guarantee contract with the company. With the aim of reducing to the maximum the time difference between these two moments (issuance deliberation and distribution of the surplus), the Instruction explicitly allows for the fixing of the issue price by the board of directors, based on the current legal provisions (Law No. 6,404/76 article 170, § 2nd and article 1st, letter b), and its forwarding to the CVM a few days before the granting of the registration. Thus, it is expected that the fixing of prices close to the phase of distribution of shares will become a common procedure, it being clear, however, that its adequate justification is fundamental, as clarified in CVM Orientation Opinion No. 01/78.
2. Dissemination of Information x Prospectus:
   First of all, it is important to define that, in addition to the publications ordered by Law No. 6,404/76 (notices of summons, minutes of general assemblies, minutes of board of directors meetings, etc...), the CVM will require, on the occasion of the distribution of public issuances, that intermediaries perform their role as disseminators of information among potential subscribers, through the preparation of prospectuses and the wide dissemination of their existence, through announcements of the start of distribution, published in the press. Recognizing also that a healthy propaganda effort is beneficial to the investor, the CVM will accept the use of advertising material, provided that it reflects the information contained in the prospectus. It is therefore necessary to distinguish between what helps investment decision-making and what conditions the market, making the information contained in the prospectus inefficient. For these reasons, the Instruction provides that the presentation of advertising material related to the distribution will be required for prior appreciation, obliging the CVM to analyze it quickly and without bureaucratic obstacles.

In terms of content, the prospectus was defined as a simple document, bringing together the basic information provided to the CVM on the occasion of the registration of the issuance and the last annual update of the company registration, plus quarterly information and relevant facts occurring in the company's business after the annual update, in accordance with CVM Instruction No. 09/79. Given that this information will already be available, the preparation of the prospectus is facilitated, without great additional burden for the issuing company.
It is worth noting here that, to the intermediaries involved in the distribution to the public, it falls to take the necessary measures to guarantee the availability of an adequate number of copies of the prospectus, it being also understood that its content will be directed mainly to intermediaries and investors with greater analytical power, destined, through them, to the common investor. By defining the prospectus as an agile and fundamental instrument for the dissemination of information about the launch, the CVM leaves implicit that the requirement of its obligation does not intend to be a simple bureaucratic formality. It is worth saying that the most important thing is not the delivery of the prospectus, for the purpose of archiving in the regulatory body, but its effective dissemination by intermediaries. If such a situation does not occur, the Instruction provides for penalties ranging from suspension of distribution to the framing of those responsible.
3. Public Access to Launches:
For various reasons, among which are certainly those pointed out above (poorly negotiated issue prices, difficulty in obtaining and/or absence of information about the launch), access to public subscriptions by investors, especially individuals, has been extremely restricted.
This fact has been followed since the beginning of the CVM's activities, constituting a cause of serious concern for this body, given that its implications affect the reliability of the system.
Therefore, an attempt was made to introduce in this Instruction a series of procedures whose basic objective is to enable investor access to public launches, using, for this purpose, the most adequate mechanism for a market regulator: "disclosure". Seeking to compatibilize the need for capitalization of open companies with the establishment of a solid shareholder base that allows the viability of future issuances, as well as to broaden the still incipient set of companies that use the primary market as an alternative source of raising resources, a system of "Guarantee of Access to Investors" was designed in the norm. Through this system, issuing companies and intermediaries commit to, already in the deliberation of the corporate body that decides on the issuance, fixing a minimum volume of surplus destined for the public, under clearly defined access conditions. In the current phase of the market, it can be observed that the vast majority of open companies have strongly concentrated shareholding control, which will allow controllers to give up significant portions of capital increases, with the aim of broadening the shareholder base. It is evident that the situation repeats itself (in more acute conditions of shareholding concentration), in the case of companies that are in the process of going public.

Thus, only a few companies that have already reached a stage of high shareholding dispersion remain, which is why they rarely resort to capital increases via public subscription, or those societies that intend, for some reason, to use a more restricted or targeted public (institutional investors, for example). In this case, they may use the alternative of adopting a more selective or differentiated system (nomenclature adopted in the Instruction).
In short, in any of the cases, the most important aspect is the definition of clear rules for the investor public, via "disclosure", starting from the disclosure on the occasion of the capital increase (minutes, notices, announcements), through the prospectus and the announcements of the start of distribution of the securities, until the effective use of the mechanisms for reservation and pro-rata allocation of surplus shares.
With the introduction of this system, which did not intentionally seek to exhaust the possibilities of its use, the CVM expects intermediaries active in the primary market to play a fundamental role as inducers and links of healthy rapprochement between issuing societies and investor public. Starting from this principle, mechanisms for placing securities in the market, such as the auction system via sealed bids, provided that the main concepts of access are maintained, will be accepted by this body.
Next, we will comment on the articles of the Instruction, with emphasis, especially on those that were most commented on by the market, during the public hearing to which the draft was submitted.
Conditions of Increase.
In art. 1st, the effective subscription of shares by old or new shareholders is linked to the use of the company registration, in accordance with CVM Instruction No. 09/79. In summary, what is intended is to guarantee investors the availability of a minimum volume of information for investment decision-making, whether in private subscriptions or public subscriptions. In the first case, the subscription is not subject to registration with the CVM, on the premise that current shareholders are exposed to the continuous flow of information about the economic-financial situation of the company. To the extent that this situation does not occur, the CVM may prohibit, under penalty of fine, the continuation of the subscription, until the information becomes available, using the faculty provided for in art. 9th, paragraph 1st, of LAW NO. 6,385, of 12-07-76. In public subscriptions, by the very concept of complementarity of registrations (company and issuance), the update of information is a basic condition for the approval of the registration of share distribution. Articles 2nd, 3rd and 4th deal, in a broad and didactic manner, with the minimum information to be provided by the company regarding the characteristics of the subscription itself, reforming provisions contained in the corporations law. It is important to note that such information, as they constitute a relevant fact for investment decision-making, must be immediately disclosed in the form of § 4th of article 157 of LAW NO. 6,404/76 and forwarded concomitantly to the CVM, as provided for in art. 18 of CVM Instruction No. 09/79. Once the steps to be followed within the scope of a capital increase by subscription have been defined (exercise of subscription right, when applicable, and form of placement of the surplus: sale on the stock exchange, pro-rata among current shareholders or public distribution), it is worth alerting to the responsibility of the administrators of the issuing company regarding the use of mechanisms other than those provided for in the Instruction. It is worth saying that if the chosen choice is private subscription, procedures such as assignment of subscription rights to institutions that are part of the distribution system, non-shareholders, to include them in the pro-rata allocation of surplus, constitute disguised public subscriptions and, therefore, subject to the penalties provided for in the Instruction (arts. 34 to 35). Still regarding private subscriptions, it is important to point out that the participation of old shareholders in the pro-rata allocation of surplus, in proportions higher than those to which they are entitled, with the aim of resale in the market, will configure secondary distributions, at the time of resale. This hypothesis characterizes a situation of registration with the CVM, to be regulated in a specific norm, in due course. However, it is worth remembering that, until the entry into force of the aforementioned regulation, operations such as
those mentioned above, will be subject to the procedures provided for in the current norms on the secondary market. Finally, within the scope of capital increase conditions, a maximum period of 60 days was introduced, in item IX of art. 4th, for the delivery of the certificates of the shares resulting from the issuance, or for the registration of book-entry shares in the name of the subscriber, if applicable. Failure to comply with the deadline subjects the company to respond for any damages caused. The CVM's competence to fix it is provided for in the Sole Paragraph of art. 104, of Law 6,404/76. Deadline for Subscription of Shares A maximum period of 6 (six) months was established, in art. 5th, for the effective placement of shares, whether in public or private subscriptions. Among the main reasons for establishing such a deadline is the expectation that intermediaries will fulfill their role in the primary market, namely, to expedite the placement of securities, as well as to assume the risks pertinent to operations of this kind, guaranteeing the subscription of any surplus for subsequent resale to the public. On the other hand, by limiting the placement period of the securities, the CVM sought to reduce to the maximum the period of coexistence between the simultaneous trading of shares of the same company, in the primary and secondary markets. Public Subscription of Shares In this chapter, in addition to making explicit the obligation of registration of the issuance resulting from the capital increase or constitution of a company by public subscription (art. 6th), an attempt was made, based on article 19, § 5th and its item I, of LAW NO. 6,385/76, to introduce definitions on situations of registration more comprehensive than those provided for in § 3rd of the same article.

Thus, in art. 7th, item II of the Instruction, the inclusion of administrators and individuals or legal entities not part of the securities distribution system has the sole purpose of characterizing the configuration of situations in which they act, improperly, as intermediaries not accredited by the regulatory body, exercising a role that is forbidden to them by law, therefore being subject to the penalties provided for in the Instruction. The CVM, in its supervisory activity, has observed such situations on several occasions and will continue to act in the sense of preventing them, aiming to preserve the reliability of the market. Instruction of the Registration Request
Article 9th defines the form of presentation of the registration request, in the case of capital increase, falling to the lead institution of the distribution to be responsible for following up the process with the CVM.
Art. 10 lists the documents necessary for the instruction of the registration request, it being necessary to clarify that publications of minutes of general assemblies or of board of directors meetings, as well as respective notices of summons and announcements to shareholders for the exercise of preemptive right, constitute documents that should already have been previously forwarded by the company, with a view to complying with CVM Instruction No. 09/79.
Regarding the listed documents, some additional clarifications are due. They are:
Art. 10, item II _ liquidity guarantee contract: if it has been signed, it constitutes relevant information about the issuance, its main characteristics must be disclosed in the prospectus. The contractual conditions that regulate the liquidity mechanisms will be analyzed by the CVM's market area, which may subsequently issue a specific norm on the subject.
Art. 10, item V _ economic-financial analysis: it is not a mandatory document, but if it has been prepared by the lead institution of the distribution and used in the formation of the launch consortium, it must be part of the prospectus.
Art. 10, item VII _ surplus declaration: in issuances where the minimum volume of shares to be distributed in the market is not known in advance, the surplus declaration is an important element for evaluation, by the market, of the impact of the entry of new papers, in addition to ensuring the existence of an effective distribution that substantiates the registration (there may be situations where, for market reasons, the subscription is exhausted within the scope of current shareholders; in this case, there will be no need to grant the registration). If, by virtue of the adoption of the access guarantee system, the company and intermediary have already defined a minimum volume of surplus, the CVM will register the issuance immediately and request, before the start of placement, the effective amount of surplus after the exercise of the preemptive right. Art. 10, items VIII and § 1st _ economic-financial feasibility study: establishes the content of the information and in which hypotheses the presentation of it will be mandatory. Some observations are due regarding this document. The first refers to the responsibility for its preparation, which lies with the issuing company; the lead intermediary should make all necessary efforts to verify the quality and sufficiency of the information contained in the study, requesting from the company, if necessary, the inclusion of complementary data that allow decision-making by potential investors. The second point, already addressed when the CVM Instruction No. 09/79 was disclosed, relates to projections. In the hypotheses provided for in § 1st of this article, projections will be mandatory and, therefore, must be updated at least annually, on the occasion of the update of the company registration. On the other hand, if the administrators of the issuing society consider that their projections are no longer valid, the fact must be immediately disclosed and justified, according to the explicit provision of CVM Instruction No. 09/79, in its article 14, item II. Art. 10, § 2nd introduces into the norm the possibility of fixing the issue price close to the actual distribution of shares, allowing, therefore, greater efficiency and flexibility, as already commented previously. It is worth noting, however, that its justification is mandatory, in any case. Analysis Deadlines Art. 11 establishes the same deadlines provided for the granting of the initial company registration, contained in CVM Instruction No. 09/79. To the extent that the registration of the issuance brings together specific information about the distribution, assuming the company registration is duly updated, it is expected to impress great speed in its analysis, such that the maximum deadlines for manifestation by this body are the exception, and not the rule. Approval and Disapproval In art. 13, the hypotheses of disapproval are based on a provision of LAW NO. 6,404/76, in the case of constitution of a company (art. 82, § 2nd); for the capital
increase, the legal competence is provided for in § 5th, art. 170 of LAW NO. 6,404/76 and in item II, § 5th of art. 19 of LAW NO. 6,385/76. Truthfulness of Information Art. 14 defines the responsibilities for the information provided to the CVM on the occasion of the registration request for distribution. The responsibility for the truthfulness of the information lies with the administrators of the company. However, it falls to the lead distributor to reanalyze the information that will be provided to the public, making all necessary efforts to verify its sufficiency and quality, even after the granting of the registration. For example, if a relevant fact arises during the distribution phase of the securities that could affect decision-making by investors, and the company has only passed the information to the leader, arguing its confidential nature, it is incumbent upon the latter to guide the issuing society on the need for its immediate disclosure, as complementary information to that contained in the prospectus. § 2nd of art. 14 endorses a concept already established by the CVM, by mentioning that the granting of registration by the High Authority does not imply guarantee of the truthfulness of the information provided or of the success of the undertaking.

Responsibilities of Intermediaries

In this chapter (arts. 15, 16, and 17), the conditions of the relationship between the institutions that will participate in the distribution process are regulated, assigning specific responsibilities to the figure of the lead institution. It is important to emphasize that the Instruction did not seek to exhaust all attributions, nor its activity of distributing securities, a matter that will be widely regulated by the CVM through a specific norm.

Prospectus

Art. 18 lists all the information and documents that the prospectus must contain, embodied in Annex I of the Instruction and in the information contained in the company's registration update.

In arts. 20 and 21, the use of the preliminary prospectus is admitted, the information of which must necessarily be equal to those presented to the CVM for registration. Behind the figure of the preliminary prospectus is the recognition that it is fundamental that information reaches investors before the subscription decision and that it is acceptable for the placement effort to begin before final registration approval.

However, sales will not be admitted using this instrument: intermediaries may only receive subscription reservation requests, as established in the sole paragraph of art. 21. After registration approval, reservation requests may be confirmed. The objective is not to lead the investor to assume definitive commitments without first being able to analyze the quality of the investment alternative being offered.

In summary, the system now introduced will allow for comparison between the preliminary and definitive prospectus, without preventing the placement effort by intermediaries.

In art. 22, the Instruction provides for the possibility that the CVM, at its discretion, dispense with the distribution of the prospectus, provided that the shares subject to the distribution constitute a insignificant volume.

Intentionally, no quantitative parameters were established, given that a low percentage of oversubscription relative to the issuance does not always correspond to an irrelevant impact of the offer of a certain title, relative to the volume traded in the market. Furthermore, the sole paragraph of the same article provides for the obligation to disclose announcements of the start and end of the distribution, so that the market as a whole becomes aware of the fact.

Advertising Material

The conditions for use and the content of information of the advertising material to be used in the distribution are contained in arts. 23 and 24, its text being self-explanatory.

DISCLOSURE AND PERIOD OF DISTRIBUTION

In arts. 25 and 30, the conditions for disseminating announcements of the start and end of the distribution are defined, the content of which must be in accordance with the scripts contained in Annexes I and II.

Art. 26 defines each of the steps to be fulfilled for the effective start of the distribution, its cumulative nature being clear.

Arts. 27 and 28 deal with the conditions under which reservations must be made, if adopted. It is important to distinguish the receipt of reservation requests from their effective confirmation. In the first case, upon placing their request, the investor will have a waiting period, in order to study and evaluate the information contained in the preliminary prospectus. This period will cease a few days after the date of registration approval and provided that, additionally, the announcements of the start of distribution have been published and the definitive prospectus is available for delivery to investors. Once these stages are completed, requests may be confirmed, once the potential subscribers will already have been duly exposed to the information necessary for their decision-making.

Regarding art. 29, it is worth noting the concept that any subscriptions for resale, provided they are carried out within a relatively short period of time (in this case, 6 months), will not imply the need for new registration with the CVM, because, in fact, operations of this kind are typical of risk assumption in the primary market.

However, if the six-month period expires, the guaranteeing institution still holds in its portfolio titles originating from the guarantee provided and wishes to resell them in the market, it may only do so within the context of secondary market norms, therefore subjecting itself to the registration or disclosure conditions to be issued by the CVM through specific regulation.

It is also worth noting, regarding art. 29, that there is no correlation between the above-mentioned timeframes and those established by legislation for the enjoyment of tax incentives in the subscription of shares.

Guarantee of Investor Access

Arts. 31, 32, and 33 introduce some innovations in terms of investor access to the primary market, the CVM having received favorable comments from the majority of participants during the public hearing phase.

Indeed, what is intended is to induce companies and intermediaries to adopt the system of access guarantee (art. 32), for all the reasons already commented on above. On the other hand, the CVM recognizes that, in certain situations, it will not be possible or even desirable for some companies to adopt it.

Thus, issuing companies are allowed to use a different or differentiated procedure (art. 33).

The most relevant aspect is the obligation of detailed disclosure, by the company and especially by the intermediary, through the distribution start announcements and the prospectus, of the conditions for public access to the launch.

Suspension of Distribution

In art. 34, the circumstances in which the CVM may suspend the distribution are defined, the legal basis being article 20 of LAW No. 6.385, of 12-07-76.

Serious Infraction

Regarding art. 35, it should be noted that the distribution of shares, carried out in accordance with the provisions of its paragraphs, were considered as a serious infraction, for the purposes of § 3 of art. 11 of LAW No. 6.385, of 12-07-76, which consists of the possibility of applying penalties of suspension of the exercise of the office of administrator of an open company or of an entity in the securities distribution system, disqualification for the exercise of said offices, suspension or cancellation of the authorization or registration for the exercise of the activities covered by the cited law.

In this sense, the CVM will carry out a work of monitoring and supervision of the norms of this Instruction, with emphasis on post-registration situations, aiming to ensure the investing public effective access to information about the launch and the distribution itself.

Other Securities

Art. 37 finally establishes that the norms of the Instruction apply to other securities, insofar as applicable. Obviously, certain securities, such as convertible debentures, have characteristics more conducive to adaptation to the content of this Instruction.

Within the principle of gradual market evolution, the CVM intends to regulate, in due course, the registration of distribution by public subscription of other securities, with debentures (simple and convertible into shares), due to their recent growth in relative weight in the primary market, being those considered a priority by this Body for future regulation.

RIO DE JANEIRO, SEPTEMBER 30, 1980.
Signed original by
JORGE HILÁRIO GOUVÊIA VIEIRA
President