In late August, the Brazilian Securities and Exchange Commission (CVM, its acronym in Portuguese) announced a temporary change in fundraising rules via crowdfunding platforms so that small Brazilian startups are more likely to raise successful rounds during the crisis caused by the COVID-19 pandemic. Among the changes in the regulatory requirements established in 2017 for the regulation of investment crowdfunding in Brazil, there is the threshold level of money raised.
Crowdfunding is an alternative means of fundraising by public collaboration that connects project developers to people interested in investing or donating resources for these projects. The online business financing crowdfunding platforms offer investor’s equity in the business.
This way, the entity that regulates the capital market and its participants increased the list of companies that can raise funds in Brazil. Now any company that had a revenue of BRL 5 million in the first half of the year can raise through equity crowdfunding, which is a broader range than the general norm. “The main change was in the way of assessing gross revenue because, in theory, the general rule provides that only companies that had revenues below BRL 5 million in the previous year could raise through these platforms”, explained Rachel Sampaio, partner at Platta, an online crowdfunding investment platform, in an interview to LABS.
Another change was the minimum value for the round to be completed, which is now equal to half of the proposed total, with an additional lot increase of 20%. In other words, the CVM proposed a reduction in the percentage of the offer to be considered successful: from one third to half the proposed value. The resolution is already in force and lasts until the end of 2020.
Sampaio, who is also the coordinator of the Financial Innovation Laboratory (LAB), explained that capital access to micro, small and medium-sized companies is essential for the economic development of Brazil: They contribute to 30% of the Brazilian GDP.
In the text of the resolution, CVM states that it took into account the severe impacts resulting from social isolation measures on economic activity and the special vulnerability of micro, small and medium-sized enterprises to the retraction of economic activity and the difficulty faced by them to finance their activities. According to the resolution, the access of these companies to the capital market may constitute an alternative or complementary source for financing working capital and for maintaining operations.
One of the largest equity crowdfunding platforms in the country, EqSeed took part in this process with requests for more flexible rules and ideas for the entity. Speaking to LABS, EqSeed’s COO, Eduardo Castro, said that the company’s idea is to democratize and bring scale to the collaborative investment service. “A startup that uses the service of a crowdfunding platform is using a service from an investment bank to make a small-scale IPO. We treat it with the same seriousness,” he says.
Based on the English equity crowdfunding model, EqSeed was created in 2015 and has so far made 31 rounds on its website, raising BRL 33 million. During the pandemic, it raised BRL 2.3 million for Joycar. “At the height of the pandemic, investment activity stopped in a general way. Later then we felt that the demand returned,” he said. The platform now benefits from investors seeking diversification through investment assets in a startup.
“Another very important driver of increased demand is the volatility of the stock exchange itself. People feel a little safer to be investing in the real economy, in something that is a little less susceptible to volatility such as the stock exchange”, he says, even if investments in startups are considered risky.
Equity crowdfunding in Brazil: growing, but there is still a long way
The equity crowdfunding market has grown year on year in the country. According to the President of CrowdInvest (Brazilian Association of Investment Crowdfunding), Adolfo Menezes Melito, the average offer came out of BRL 347,600 in 2016 to BRL 1 million in 2018. However, there are still a few individuals who have invested in crowdfunding: 5,000 since 2016. “This is almost nothing. The development of crowdfunding in Brazil is still in its infancy. We have to work on doing a strong simplification and the movement that the CVM has done now is positive. I think it will make room for things to happen”, he told LABS.
Last year, BRL 59 million were raised via crowdfunding platforms in Brazil, an increase of 28% compared to 2018. The number of offers launched jumped from 56 to 81. For the association’s president, CVM’s flexibilities “are two minimum but important concessions”, when, due to the pandemic, there was a decrease in offers due to reduced demand. Melito reckons that at least 100,000 people may invest in startups in Brazil in the future.
Early-stage investment figures in Brazil are still much lower than in the United States and Europe, but, in contrast, crowdfunding platform startups tend to be more successful than in the American open sea, according to him. “When you do the process within the platforms, the degree of assertiveness and success of startups is in the range of 20% upwards. In some cases up to 60%. While in the open sea of American startups, for example, the success rate of a startup is 7%. Crowdfunding ends up organizing the proposal and the offer a bit more”, he says.
In addition to equity, the pandemic also led the association to deal with the raising of debt-related crowdfunding, a kind of debenture, since the CVM standard was never used as a debt instrument, only for equity interest. According to Sampaio, the current moment is more favorable for debt instruments than for equity. Melito adds that if regulated by the CVM, investment in debt would draw more Brazilians’ attention to put their infusions in investment crowdfunding. “It is a model that gives the individual entrepreneur a higher rate than he would earn if he invested in government bonds, whose Selic rate is 2%,” he said.