The closest translation of the term “crowdfunding” is crowdfunding. More specifically, finance any project by raising small amounts from a variety of investors. The traditional crowdfunding, or action among friends, facilitated by information technology. However, what emerged at the beginning of the last decade as an instrument to enable humanitarian and cultural initiatives has become a way for entrepreneurs to raise capital to get their projects off the ground through Equity Crowdfunding (ECf). And that should gain a new emphasis this year. After several months of postponement, the expectation of industry professionals is that, still in the second quarter, the Securities and Exchange Commission (CVM) will publish an update of the ECf rules, allowing for the inclusion of larger companies and moving more resources. With that, it will be easier to look for the company that started in the garage and that has the potential to become the next Brazilian unicorn, worth more than US$ 1 billion before listing its shares on the stock exchange.
“This market should evolve a lot, both due to the arrival of more companies and the change in the profile of investors”, said the CEO of the fundraising platform Kria, Camila Nasser. “Until recently, investors in startups and the entrepreneurs behind them had a very similar profile: white men, residents of São Paulo, with a degree in exact sciences or economics and a postgraduate degree abroad.” Now, according to Camila, the emergence of more ECf platforms and the popularization of financial knowledge — a phenomenon known as “financial deepening” — has allowed the diversification and expansion of this market.
The sharp growth in the number of platforms dedicated to ECf is a good indicator. According to CVM data, there were 54 platforms authorized by the autarchy at the end of 2021. This number represents a growth of 69% in relation to the 32 authorized at the end of the previous year. “Now there is a differentiation in the market. Platforms dedicated to specific niches are emerging,” said Camila.
UPDATE The expectation is that the definitive impetus for this market will come with the updating of the ECf rules by the CVM. The first fundraising through ECf took place in Brazil in 2014, still far from entrepreneurship. Alongside humanitarian initiatives, such as the medical treatment of a poor child with a rare disease, there were cultural projects and the occasional startup. The CVM would only regulate the process in 2017, through Instruction 588. This is the legal framework that supports the ECf in Brazil, and which, in the opinion of professionals in the sector, needs to be modernized.
The CVM instruction currently in force deliberately establishes barriers to funding. To defend the investor, it imposes limits on the revenue of the company that will carry out the ECf, which cannot exceed R$ 10 million per year. It also restricts the size of funding, imposing a ceiling of BRL 5 million. And if an investor wants to sell its stake to another, the legislation prevents platforms from doing this intermediation. In practice, these limits reduce the scope of participating companies and their ability to raise funds, and make a secondary market for these holdings unfeasible, something that alienates investors.
Another change is expected to be an increase in freedom for platforms and companies to announce their emissions. Currently, these funding can only be disclosed by the company itself or by platforms, which reduces the scope of the initiatives.
This regulation was not created by the CVM as part of a diabolical plan to prevent this market from flourishing. On the contrary, it was a fully justified decision. It was intended to protect investors against the crazy schemes of crooks of various types who could take advantage of an emerging market. Now the profile of the participants has changed. “Companies applying to receive these resources are already beyond the early stages,” said Beegin Platform CEO Patricia Stille. “Its entrepreneurs have already gone beyond PowerPoint and are now looking for resources to develop their companies. Investors are looking for an alternative to diversify their investments.” According to Camila, from Kria, the market expectation was that the CVM would have released the update of the funding rules in the first quarter of 2021, but the pandemic ended up delaying the process.
“The market has changed, companies applying to receive these resources are already beyond the early stages.” Patricia Stille, CEO of Beegin.
OBSTACLES Patrícia stated that most investments occur through debt, such as debentures and notes convertible into equity, or loan agreements. These financial commitments are widely recognized by investors and banks. However, there is still some difficulty in transforming them into securities. This obstacle could be overcome by creating a secondary equity market brokered by companies such as Kria and Beegin.
The possibilities are wide. “An established company has to go through a long and laborious process to list its shares on the stock exchange, but the processes for startups are easier, less time consuming and much cheaper,” said Camila. According to the executive, this market has been setting successive records. Brazilian companies in their first phases raised BRL 5 billion in 2021 through venture capital. This total has already surpassed investments in private equity, dedicated to larger and privately held companies.
In the assessment of the co-founder of the ECf Efund Investments platform, Igor Romeiro, the market potential for this year is to move BRL 300 million, an increase of almost 50% compared to the BRL 204 million raised in 2021. Last year, there were 116 offers , and this year that figure could reach 200. “This market is maturing, but it hasn’t even reached its peak yet”, said Romeiro. According to Alcides Jarreta, the other co-founder of the platform, the potential for growth in the number of investors is proportional to that observed in B3, where registered CPFs exceeded 5 million in early February. “People are getting used to investing in the stock market, with the help of outreach programs and investment advisors,” he said. “With the help of platforms, a similar path can occur with startups.”
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