BRAZIL Law and Practice Contributed by: Fernanda Levy, Aline Bauermeister, Rodrigo Menezes and Fabiana Fagundes, FM/Derraik
receive an acceptable return on their invest - ment before the fund principals can share in the profits. • Claw-back provision: This ensures that, if the fund does not achieve a certain level of overall performance, any carried interest paid to the fund principals must be returned. This protects investors from overpaying the fund principals during the life of the fund if early exits provide temporarily high returns that are not sustained. • General partner (GP) commitment: Fund principals are often required to invest their own capital into the fund, typically 1% to 3% of the total fund size. This “skin in the game” aligns their interests closely with those of the LPs. • Governance and voting rights: These often include provisions about the governance of the fund, specifying the rights of the LPs to have a say in major decisions. • Key-person clauses: These clauses are triggered if certain key individuals (usually senior fund principals) are no longer actively involved in managing the fund. This can lead to a halt in new investments or even winding- down of the fund if replacements are not suitable. • Transparency and reporting requirements: Regular, detailed reporting on the performance of the fund, the status of investments and the management fee calcu - lations are required to maintain transparency. This includes annual audits and frequent performance reports. The foregoing mechanisms and terms have been developed to ensure that fund principals are motivated and incentivised towards good performance, while providing investor protec - tion and governance in the VC ecosystem. It is important to note that the specifics can vary
based on the fund’s structure, its strategy and the regulatory environment in which it operates. 2.3 Fund Regulation Investment funds in Brazil are classified as con - dominiums according to the Brazilian Civil Code and are regulated by Resolution No 175 of the CVM, enacted on 23 December 2022. FIPs, in particular, are regulated by Annex IV of said Resolution. 2.4 Particularities It is very common for VC investment funds to be categorised in accordance with the adopted investment strategy (ie, early-stage, growth- stage, late-stage, Series A, Series B, impact investments and others). Although many funds are agnostic in terms of industry, some industry-focused funds exist, including for fintech, agritech, cleantech and healthtech. Reorganisations among funds is the available strategy to accommodate extended average holding periods for investments. 3. Investments in Venture Capital Portfolio Companies 3.1 Due Diligence Due diligence is an essential element in the pro - cess of completing an investment or acquisition. Start-ups at their initial stages of development are usually subject to fast and less complex due diligence proceedings, since they tend to have had few years of existence and thus have fewer clients or contractual obligations. Due diligence of early-stage start-ups is focused on corporate aspects – ie:
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