Article: Startups’ Legal Framework in Brazil

23 . June . 2021 |

After partial presidential approval (with vetoes in two sections of the Bill), Supplementary Law No. 182/2021 (“LC182/2021” or “Startups Legal Framework”) was enacted on the Federal Official Gazette on June 2, 2021.

The bill was approved in the House of Representatives in December 2020, but the proposed changes made the matter return to the agenda, being finally sanctioned and published last week.

The Startups Legal Framework innovates in various areas, such as corporate and regulatory laws and bidding procedures in order to give a more friendly environment to those types of companies.

Below are the main points brought by the new legislation, highlighting: (i) Definition of Startup; (ii) Investor liability; (iii) Amendments to Law 6,404/76; and (iv) Contracting with the Public Administration, as better described hereafter.

What is considered a startup?

The definition of startup is key to benefit from the change brought by the LC182/2021. According to the terms of the new law, the following companies may be considered a startup:

(i) Whose activities are characterized by the innovation applied to its business plan or to the products and services offered by such company – that it: (i) enrolled with the Inova Simples regime or (ii) representing in its bylaws or amendment thereto, as the case may be, the use of innovation in its business plan;

(ii) Having up to 10 years of registration in the Corporate Taxpayers’ Registry (CNPJ); and

(iii) Having gross income of R$16MM per year or R$1.3MM per month, if the company has less than 12 months of incorporation.

Inova Simples

Enrollment in the Inova Simples tax/legal regime is one of the requirements for a company to qualify as a startup.

The Inova Simples is a special simplified regime that allows the startups to benefit from a simpler and less bureaucratic treatment, “aiming to stimulate their incorporation, formalization, development and consolidation as agents inducing technological advances and the generation of employment and income .” (1)
LC182/2021 refers to article 65-A of Supplementary Law No. 123 of 2006, that is, providing tax rules to the new regime.

In the terms of the law, the special treatment granted to startups consists in a simplified way to open and to terminate companies, that will be carried out automatically by means of an electronic environment (Redesim portal) of the Federal Government.

In this context, the owners of the company shall fill out their registry with basic information (such as qualification, domicile and taxpayers’ number (CPF)), and this will automatically generate a corporate taxpay registry number (CNPJ) for the startup.

Another new feature is that the company’s name shall carry the expression “Inova Simples (I.S.)” in its corporate denomination.

Once the CNPJ is issued, the company incorporated under the Inova Simples, shall, immediately, open a corporate bank account for purposes of raising and receiving capital, which may come from the initial contribution of the shareholders themselves or investors domiciled in Brazil or abroad (2).

Non-Shareholder Investor of the Startup

The new legislation reinforces the protection of investors in startups from the company’s obligations, such as the ones of labor and tax natures. The Startup Legal Framework provides that early stage/angel investors, whether individuals or legal entities:

(i) Are not considered a partner or shareholder, and shall not have the right to manage or vote in the company’s management, as per the company’s bylaws;

(ii) Will not be liable for any of the company’s debts, including in the case of judicial reorganization (except for willful misconduct, fraud or simulation with the investor’s involvement); and

(iii) Will be remunerated for their contributions in up to 7 years.

In addition, the contracting parties may:

(i) Set forth periodic remuneration, at the end of each period, to the investor, according to the investment agreement; or

(ii) Provide for the possibility of converting the capital contribution into equity participation.
Regarding investor participation on boards of directors, the Legal Framework for Startups is not clear about this possibility. However, given that the objective of the law is to protect the investor from possible liability for the company’s debts, there are arguments to defend that participation in the board of directors is allowed. In addition, we understand that the expression “as per the company’s bylaws” allows the parties to agree on this issue.

The express possibility of converting different types of investment agreements, especially loans, into equity brought by the Startups Legal Framework brings legal support to a market practice and increases the security of a widespread investment structure.

It is established that angel investors may only exercise the right of redemption after at least 2 years have elapsed from the capital contribution, or a longer period established in the participation contract, and their assets will be repaid as provided in article 1031 of the Brazilian Civil Code, not being allowed to exceed the amount invested duly adjusted by an index provided in the contract.
LC 182/2021 enlarged the maximum term for remuneration of the angel investor from 5 to 7 years.

However, by keeping limits to the contractual freedom in aspects relates to redemption of investment, both in terms of time and value, in line with the 2017 legislation about angel investment, this new legislation can still represent an obstacle to the broader use of this type of contract.

Other Forms of Investment

Angel Investors who make contributions under different legal arrangements (aside from the participation agreements) will remain not being considered partners/shareholders of the startup and shall not be liable for the startup’s corporate debts, if they choose to make the investment by means of convertible debentures, option, convertible loan, partnerships agreements, or other instruments, provided that such investment are not represented by shares/quotas of the invested entity.

Such sorts of investment are ordinarily used in the venture capital market without making the investor a shareholder until the conversion into equity of the invested amount. In this sense, the law reinforces the legal framework that protects investor and allows greater security to such activities.

Investors’ liability

The Startups Legal Framework is categorical in preventing the liability of investor for any of the company’s debts.

This phenomenon applies to the contractual modalities set out in article 5, §1 of the Startups Legal Framework, which, as stated in the legal diploma itself, do not imply in a corporate relationship with the invested entity, preventing the investor’s liability, except in the cases highlighted above, such as willful misconduct, fraud or simulation.

In addition, investor protection is reinforced by the provisions of Supplementary Law No. 123 of 2006, such as article 61, §3, §4 and §5, which present the same guarantees contained in the Startups Legal Framework (such as exemption from liability and remuneration for the investments made).

Amendments to the Corporations’ Law (Law 6,404/76)

The Startups Legal Framework brings relevant change to the Corporations’ Law (Law 6,404/76). The new legislation reduces some bureaucracies related to this corporate type, in order to facilitate and reduce costs of the operations carried out by them.

In this way, the use of more complex corporate structures becomes feasible as the receipt of financial investments does not imply in increasing costs to the business.

In this regard, the following amendments are worthy of note:

(i) Management can be composed by a single officer, as opposed to the previous requirement of, at least, two officers;

(ii) Possibility of closed capital corporations, with annual gross revenue of up to R$78,000,000, to make publications electronically (in lieu of publications in official gazette and newspapers), and replacement of corporate books (such as minutes or share books) by mechanized or electronic records; and

(iii) Clearer and more specific duties, defined by the Securities and Exchange Commission, regarding the access of smaller companies (3) to the capital markets.

Research, Development and Innovation

Certain entities insert in regulated sectors are required to invest resources in research, development and innovation. The Legal Framework for Startups allows regulatory agencies, such as ANEEL (National Agency of Electric Power) and ANP (Brazilian Oil Agency), to authorize such entities to comply with such obligations by investing in startups, through:

(i) Endowment funds for innovation;

(ii) Private Equity Funds (in seed capital, emerging companies and companies with research, development and innovation intensive economic production); and

(iii) Investments in programs, notices and competitions aimed at financing, acceleration and scalability of startups, managed by public institutions.

Public Administration

Regulatory Sandbox:

The experimental regulatory environment, or regulatory sandbox, consists of a set of simplified special conditions so that participating legal entities can receive temporary authorization from bodies or entities with sectorial regulatory competence to develop innovative business models and test experimental techniques and technologies.

The competent bodies and entities may, individually or in collaboration, rule out the incidence of regulations under their competence, and may establish:

(i) Criteria for selection or qualification of the regulated;

(ii) Duration and scope of suspension of the application of the rules; and

(iii) Covered standards.

Special Bidding Rules:

To solve public demands that require innovative solutions with the use of technology, and to promote innovation, the hiring of startups by the State through a special bidding process is allowed, according to the following rules:

(i) The bid notice will be published 30 days in advance on the public entity disclosure website and in the State’s official gazette, and may only indicate the issue to be resolved, the technological challenges and the waiting result, and it is up to the bidders to propose innovative solutions; and

(ii) The proposals submitted must be evaluated and judged by a special committee formed by at least 3 people, according to the criteria of potential problem solving and economy for the public administration, degree of development, feasibility and maturity of the business model, economic feasibility, and cost/benefit analysis.

Once the result of the bid is ratified, the Public Contract for Innovative Solution (CPSI) will be signed, and it shall:

(i) Establish the goals to be achieved;

(ii) Predict the risk matrix applicable to the parties;

(iii) Establish the form and frequency of delivery of reports by the startup on the progress of the project;

(iv) Define the ownership of the product’s intellectual property rights;

(v) Define the participation in the results of its exploitation, notably the rights of commercial exploitation, licensing and transfer of technology;

(vi) Have a cap of R$1.6MM, updated by the IPCA inflation index (however, public and mixed-capital companies may set higher values); and

(vii) Have a maximum term of 12 months, extendable for another 12 months, at the end of which the startup may become a supplier of the product, process or solution without the need for a new bid.
In this way, startups will be able to enjoy a faster, less bureaucratic and less costly bidding process, and will have the possibility of contracting with the government, which means a counterpart with great purchasing power. At the same time, the government will have access to innovative solutions and advanced technology, as well as influence the growth and development of startups in the country.

Validity

Considering that the Startups Legal Framework enters into force 90 days after its publication, entities that fall under the concept of Startup may be part of the Inova Simples system, enter into or amend participation contracts with angel investors in accordance with the new rules, verify the feasibility of transforming the corporate type into a joint-stock company, and participate in any regulatory sandboxes and/or in any special bids.

References:
(1) Marco Legal das Startups: o que é a lei e o que muda para empresas
by Maria Clara Dias published: 06/02/2021
https://exame.com/pme/o-que-e-o-marco-legal-das-startups/
(2) Our tax team can give more operational details about the new regime.
(3) Definition of a smaller company as one that has a gross annual revenue of less than R$500,000,000.00


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