Brazil’s Best Counsel 2022 - Chapter Opening: IPO Readiness

Posted Monday, December 13th 2021
Brazil’s Best Counsel 2022 - Chapter Opening: IPO Readiness

The impacts caused by the COVID-19 pandemic are many and immeasurable, and the economy remains adrift.

In any case, it is common knowledge that turbulent periods and crises also create opportunities.

Many businessmen, with a long-term vision, are keen to take advantage of the opportunities brought about by the resurgence of local and global markets, and strongly leverage their businesses, expand markets, besides multiplying their assets and profits.

But how does one find resources to finance the necessary investments?

Bank financing and other forms of fundraising via incurring debt besides being scarcely available, involves guarantees and significant costs, which expose businesses to severe risks.

Many are the alternatives for fundraising, but the one that stands out as the most interesting and as having the lowest cost is going public in the stock exchange.

The recovering signs of the Brazilian economy bring great opportunities for the listing of your company. Besides the very reference of the capital markets, another favorable factor is data made public by the Stock Exchange (“B3”) itself.

According to B3, there was a 43% growth in the number of investors in the first semester of 2021

According to B3, there was a 43% growth in the number of investors in the first semester of 2021, compared to the same period in 2020.

June 2021 ended with 3.8 million accounts, and of these, 3.2 million were new CPFs. Between the end of 2020 and the first semester of 2021 there were 500,000 new investors entered the Brazilian capital markets.

Public offerings, besides representing a major fundraising opportunity at more attractive costs and reducing credit risks, brings countless other advantages, as, generally, the listing requires a radical change in terms of internal corporate controls, such as the improving the information available for business management and for additional governance components in companies.

As such, a public offering constitutes an excellent opportunity for the growth and progress of companies, that can gather strength and traction to climb even higher, obtaining unforeseen and impactful results.

Brazil and its institutions are becoming stronger and encouraging more companies to tap into its capital markets.

Even if we consider that, over the last twelve months, the number of listed companies showed highly expressive growth, Brazil remains behind its European counterparts and, above all, the United States.

B3, formerly known as Bovespa, is currently the only stock exchange operating in Brazil. In 2021, more than 400 companies were listed at B3. It also negotiates, indirectly, stocks of more than 100 foreign companies.

The recovering signs of the Brazilian economy bring great opportunities for the listing of your company

To show how there is still room for expansion of the capital market, NYSE (New York Stock Exchange), for example, has more than 2,780 companies listed, with the average amount of daily trades above $1.4 billion and a volume of daily trades of almost $1.7 billion; NASDAQ has more than 2,987 companies listed within its records.

So how can a company be listed and take part in this excellent opportunity?

In Brazil, there are five different levels of listing: New Market (“Novo Mercado”), Level 1, Level 2, Bovespa Mais and Bovespa Mais Level 2, with all of these classifications involves different standards of corporate governance.

The most attractive, interesting and, recently, most sought out level is the one called “New Market” (“Novo Mercado”), which demands the highest level of corporate governance and allows investors the greatest safety when allocating their resources.

It's important to clarify that the process of public offerings involves many previous measures that, depending on the level of the company's governance and the quality of its accounting practices adopted in the drafting of financial statements, will require energy, time and costs.

Given this context of listing levels and capital market opportunities, it is essential to state that this process is not simple: it is a long, arduous, complex process that requires investments in the form of time and financial resources to achieve success.

The sentence above is not to frighten the reader, but to effectively call their attention to the challenges involved in the process, which includes a review of corporate governance structure, the most important of its pillars.

An IPO does not happen without the effective support of a major investment bank, that is usually hired to lead the process, and also lawyers, that prepare the necessary legal documents which bring the offering to fruition. The term “initial public offering”, or IPO, means that for the first time the company will have new stakeholders through a public offering of their shares.

Next, the main aspects involving the governance requirements for a company to go public are discussed.

For a company to be listed in the New Market (“Novo Mercado”) segment of B3, an internal structuring will be required, involving several aspects, such as:

a) auditing of quarterly and annual financial statements;

b) creation of an investor relations channel, including a representative for this function;

c) implementation of internal audit, which will be responsible for supporting the administration, fulfilling an internal audit plan of the company's operational and strategic processes;

d) the establishment of a board with independent members,

e) the establishment of a fiscal board with independent members;

f) creation of robust compliance functions, internal controls, business management risk, among other functions, activities, committees and advisory groups;

g) other measures  related to statutory dispositions, stakeholders rights and other legal and statutory aspects.

Each one of the items above mentioned should observe a set of rules detailed in the orientations of Novo Mercado, issued by B3, just as all the other norms and rules issued by CVM.

The B3 and CVM regulations, in short, aim to provide transparency during business, ensure equity among shareholders, and promote accountability to the shareholders who will invest resources.

PP&C envisions, with great enthusiasm, that over the next twelve months, many companies will be taking part in IPO procedures.

Advantages such as those described above cannot be overlooked.

The implementation of all corporate governance requirements to meet the listing rules of Novo Mercado is a complex one and it involves different particularities.

Thus, relying on the external support of a specialized firm, which has experienced and expert teams, makes all the difference. This measure will facilitate this process, which is complex and robust.

Even if the company feels it is not the right time to go to the market yet, one should be consider that many of the requirements for future listing will take time.

Being ready to go to the market and capitalize your company, with reduced costs and risks, can be the difference between being able or not being able to take advantage of an opportunity.

Specialized companies can carry out a pre-diagnosis and assess the degree of effort that your company will need for an eventual IPO. You can even create a plan, based on your appetite and cash flow, to get your business ready for. Good business to all!

 

About the Authors:

Marcos Rodrigues

Partner Marcos Rodrigues has more than 25 years of experience in GRC, internal auditing, SOX and consulting, having spent the last 15 years of his career at PP&C.

E-mail: ma.rodrigues@ppc.com.br
Phone: +55 11 3883-1600


Aline Poiani

Director Aline Poiani has over 15 years of experience in GRC, internal auditing, SOX and consulting.

E-mail: a.poiani@ppc.com.br
Phone: +55 11 3883 1600