BRAZIL Law and Practice Contributed by: Ihury Bastos Pereira Darmont, Filipe Starzynski, Karyn Yoshisaki, Ariel Goldstein and Artur Marangoni Cabral Fagundes, Darmont Advogados
above the DI and investment diversification, consider - ing the country’s high interest rates. The most com - mon investors in alternative funds are professional and qualified investors in the domestic ecosystem. The most challenging profiles, which tend to carry greater risks and increasingly robust and complex structures, are: (i) large pension funds and insurance companies, as they require robust risk tracks, AML, track record and governance, as well as long due dili - gence periods; and (ii) foreign and retail investors, as they have regulatory eligibility restrictions, liquidity/ communication needs, and standardised reporting requirements. Generally, the establishment and operation of an investment vehicle in Brazil depends on the strategy envisaged for the structure and the investor’s needs. Nonetheless, in recent years, the development of the alternative investment funds markets has signifi - cantly risen, and investors are strongly assessing it. Also, considering that Brazil provides a high domestic basic interest rate, companies are forced to access the alternative investment markets, particularly credit rights investment funds, in order to obtain a more attractive form of fundraising than of those provided by traditional financial institutions and also to enhance its tax and capital structure. within the search for investors, and particularly for companies to optimise capital structure, it is important to note the robust increase in Credit Rights Investment Funds ( Fundos de Investimento em Direitos Creditóri- os , or FIDCs). ANBIMA disclosed that, within the first half of this year, FIDCs led the investment funds mar - kets with BRL22.5 billion in fund raising. 4.2 Side Letters Execution of Side Letters in the Context of Investment Funds The execution of side letters is not prohibited. How - ever, their admissibility depends on their compatibility with the general principles applicable to the constitu - tion and management of funds, in particular the prin - ciple of equity between investors in the same class or subclass of shares, as provided for in CVM Resolution No 175.
Although the rule does not specifically regulate side letters within in the context of funds, it establishes that certain conditions applicable to the fund, as well as to its classes and subclasses, must be formally incor - porated into the respective constitutive documents – including the regulations, class annexes, and subclass appendices. Such documents must comply with the minimum requirements defined by the rule in order to ensure transparency and equal treatment. Requirements for Entering Into Side Letters The use of side letters may be permitted, provided that their terms do not result in unfair or preferential treat - ment among investors of the same class or subclass, do not violate the fiduciary duties of the manager or administrator, and do not modify the economic or gov - ernance rights established in the fund’s documents. In practice, side letters are more common in alter - native or structured funds, particularly those aimed at professional and qualified investors, whose profile and trading capacity justify the adoption of specific conditions. Currently, Brazilian regulations do not impose an express requirement for prior approval or mandatory disclosure of any side letters that may be signed, nor do they require their extension to certain investors. Nevertheless, the validity and effectiveness of these instruments depend on their compliance with the fidu - ciary duties of the fund’s service providers, and with the principles governing the administration and gov - ernance of funds in Brazil. 4.3 Marketing of Alternative Funds to Investors The distribution of alternative investment funds in Bra - zil must comply with the guidelines set forth in the respective regulatory documents and be in accord - ance with the requirements established by the CVM. Regarding retail investors, Brazilian law allows access to certain alternative funds, provided that such vehi - cles meet the legal and regulatory criteria applicable. These include Real Estate Investment Funds (FIIs), Agribusiness Production Chain Investment Funds (FIAGROS), Credit Rights Investment Funds (FIDCs)
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