Investments of Brazilian residents in offshore investment funds

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André M. Mileski
Lefosse, São Paulo
andre.mileski@lefosse.com

Ariela Ana Sznirer
Lefosse, São Paulo
Ariela.Sznirer@lefosse.com

The arrival of the Covid-19 pandemic in Brazil reshaped many aspects of the Brazilian capital markets. The social distancing measures adopted to avoid the spread of the virus in March 2020 propelled the federal government to launch several fiscal and monetary measures aimed at combating the coronavirus-driven economic malaise.

Amongst these measures, the Central Bank implemented additional cuts to the already record-low Selic rate,^[1] which was reduced from 4.25 per cent in early March to 2 per cent in August. Four years earlier, the Selic rate was 14.25 per cent. The low interest rate environment has driven Brazilian investors to seek higher return investments not only locally but also overseas.

It is in this context that offshore financial products such as shares of offshore investment funds – which until recently were not very popular among most segments of Brazilian investors – started to become more well-known and became investment alternatives.

Although the interest for offshore investments has increased in Brazil, their regulatory framework has yet to be modernised in order to give more access to general investors, and bring more transparency and safety to sponsors of international investment funds interested in the Brazilian market. In essence, there are two main ways for Brazilian investors to invest in offshore funds: direct investments or local-formed feeder funds.

Direct investments

The Brazilian Securities Commission (CVM), the regulatory authority in charge of the Brazilian capital markets, provides that public offerings of offshore securities – such as shares of investment funds – to Brazilian investors must be duly registered with CVM and underwritten by a member of the Brazilian securities distribution system (ie, financial institutions and other entities authorised by CVM and the Brazilian Central Bank to perform these services).

CVM has stated that it is possible for Brazilian investors to reach offshore products through websites, provided that this is made without any prospection from offshore entities, and not intended to target Brazilian investors. In other words, it is acceptable for Brazilian investors to invest in offshore securities if they seek these investments on their own, but not if they have been targeted by any marketing efforts in relation to these securities.

Apart from certain guidelines and decisions issued many years ago, CVM has not enacted any rules that involve specific procedures for the registration and offering of offshore securities in Brazil if the issuer is an offshore investment fund. Accordingly, until CVM issues a specific regulation, shares of offshore investment funds can only be subject to private placement efforts in Brazil.

Private placements procedures are not regulated by CVM and there is no legal or regulatory precise definition of what constitutes a private placement versus a public offering in Brazil – in other words, a private offering is the offering which is not characterised as a public offering. Thus, private placements should be carried out in a way that is not considered as a Brazilian public offering, a matter which should require special attention from international sponsors and distributors interested in marketing shares of offshore investment funds to investors based in Brazil.

Local feeder funds

Another way for local investors to invest in offshore funds is through local feeder vehicles formed in accordance with Brazilian laws and regulations.

Brazilian-formed investment funds may only be structured and managed by locally licensed entities, and their quotas, classified as securities under the applicable laws, can only be marketed by local entities duly authorised by CVM. In this regard, international investment management companies tend to partner with local banks, distributors or asset management companies, which are legally allowed to market and distribute shares of the feeder funds to local investors. Thus, local investors can invest directly in these vehicles, and, in turn, such local funds, following their investment policies provided in their bylaws, invest in shares of the offshore funds.

Many international investment management companies have recently partnered with Brazilian financial institutions or distributors with the purpose of distributing local feeder funds, a trend which is expected to continue to rise in Brazil within the next few years.

Although the current regulations only allow local investment funds targeted at Brazilian qualified and professional investors to invest up to 100 per cent of their net worth offshore, CVM is currently discussing the potential extension of this permission to investment funds aimed at retail investors, as a means of updating current rules and enabling access to a higher number of investors to the offshore capital markets.

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