PARAGUAY Law and Practice Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
The EAS is a new type of vehicle available from 2020. It is easier and faster to incorporate if the pro forma by-laws are used, as it is incorporated via a govern- ment system and is ready within a week or two. How- ever, everything must be done under such a system. Another advantage of this kind of vehicle is that it is the only one that allows one shareholder. All other vehicles require at least two, even if the second share- holder has a minimum stake. An SA requires a notary public and registration before the Public Records Division. Since this type of company has existed for decades, it is the most widely recommended vehicle for investors with vari- ous shareholders, and for those who plan a local IPO (EAS shares or bonds cannot be traded in the local stock market). 2.3 Early-Stage Financing Seed investment for start-ups in Paraguay typically comes from individuals or companies who are the founders. If a start-up is deemed to have potential, local or foreign investors often acquire a majority stake in it. Meanwhile, the previous owners may continue as managers or consultants for a few years. The process usually involves private investment agree- ments that outline the terms and conditions of the investment. Additionally, depending on the bank’s risk appetite, some local bank funding can be obtained. Recently, some digital – ie, less traditional – banks have been established, and this type of loan is becom- ing more common. 2.4 Venture Capital Venture capital in Paraguay is still in the early stages of development, with limited local funding sources and minimal government-sponsored support. However, there is a growing trend of foreign investors providing funding for promising start-ups. International venture capital firms, particularly those from neighbouring countries, have begun to express interest in Para- guay’s expanding tech sector. 2.5 Venture Capital Documentation While venture capital regulation and documentation guidance or statutes in Paraguay are almost non- existent and less standardised than in other jurisdic-
tions, international best practices are often followed, especially for deals involving foreign investors. 2.6 Change of Corporate Form or Migration As start-ups grow, they may be advised to change their corporate structure, move to another location to access better financing options or enter new markets. However, many tech start-ups remain in Paraguay due to favourable tax laws and government incentives. In this scenario, the parent company, particularly if it is a venture capital investor, plays a crucial role in seeking capital or a foreign IPO to fund the local entity. Only a few Paraguayan companies issue bonds abroad, usually on the New York Stock Exchange, while maintaining their local legal structure. 3. Initial Public Offering (IPO) as a Liquidity Event 3.1 IPO v Sale In Paraguay, start-up investors are more inclined to pursue a sale process rather than an IPO due to the limited depth of the local stock exchange. Dual-track processes are uncommon in the local market, and an exit through a sale is generally the preferred option. 3.2 Choice of Listing If a company decides to become publicly traded, it is more likely that it will pursue a listing on a foreign stock exchange. This is particularly true when the local stock market lacks the depth of other emerg- ing or established regional and global markets. For- eign exchanges provide better access to capital and increased liquidity for shareholders. 3.3 Impact of the Choice of Listing on Future M&A Transactions The decision to list on a foreign exchange can sig- nificantly influence the feasibility of future M&A trans- actions. For instance, foreign exchanges often have stringent minority shareholder protection rules, includ- ing squeeze-out mechanisms that are not commonly available under Paraguayan law. This could pose a challenge in implementing a successful tender offer and squeezing out minority shareholders, especial-
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