On November 28, MDIC/SUFRAMA Joint Ordinance No. 1 of November 22, 2024 was published, regulating the investment of funds by companies benefiting from the exemption from the Tax on Industrialized Products (IPI) provided for in Article 9 of Decree-Law No. 288/67 in equity investment funds (FIP) aimed at capitalizing technology-based companies with headquarters or main activity in the Western Amazon or in the state of Amapá.
The new Ordinance, which will come into force on January 1, 2025, repeals and replaces MDIC Ordinance No. 1,753 of October 16, 2018, and brings substantial changes, which this text will deal with.
Concept of "Technology-Based Company"
The first relevant change is the definition of "technology-based company".
In the current Ordinance, a "technology-based company" is considered to be a "business company that has at least two of the following characteristics: (a) it develops technologically new goods, services or processes or significant technological improvements in these; (b) it commercializes intellectual property rights (invention patents, utility model, industrial design, computer programs, new application or apparatus) or copyrights owned by it, or which are in the process of being obtained; or goods protected by these rights; (c) research and development expenses are not less than five percent of gross revenue, excluding amounts directed to the formation of fixed assets; or (d) it carries out software development, engineering, technological and market research and development activities through partners or direct employees, technical professionals at a higher level."
From 2025 onwards, "technology-based companies" eligible to receive funding under the new Ordinance will be considered "entrepreneurial or corporate organizations, whether new or in recent operation, that use scientific knowledge or technologies as basic inputs and whose activities are characterized by innovation applied to business models, production processes, products or services offered".
There is an apparent simplification of the concept, but the framework has become more restricted. Companies that currently fall under the concept of Ordinance 1753 may no longer be able to receive incentive funds from next year.
In addition, the requirement that the company be a start-up or in recent operation - up to 10 years of registration with the CNPJ - is an innovation.
Main Activity
Ordinance 1753 always required the investee company to have its headquarters or main activity in the Western Amazon or in the state of Amapá, but there was no objective definition of what would characterize this main activity.
Would it be the number of employees in the region - a concept substantially affected by the COVID pandemic, which has made remote working more of a rule than an exception - or the proportion of turnover in the region?
In addition to requiring a "formalized establishment with an address" in the region, the new Ordinance defines "main activity" as "research, development, production or innovation activity with the potential to generate revenue for the invested technology-based company".
The Ordinance also requires the company to have a main activity compatible with one of the concepts of activity referred to in art. 21 of Decree No. 10,521/2020 and to carry out this activity within the limits of the Western Amazon or in the state of Amapá. According to the aforementioned Decree, research, development and innovation activities are:
I - basic research - experimental or theoretical work carried out primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any particular application or use in mind;
II - applied research - original research carried out with the aim of acquiring knowledge, which is primarily directed towards a specific practical objective or target;
III - experimental development - systematic work, based on pre-existing knowledge and aimed at producing new products and processes or improving existing ones;
IV - technological innovation - the implementation of new or significantly improved products, goods and services or technological processes;
V - professional training or qualification - those at secondary, higher or postgraduate level, in areas considered a priority by CAPDA, or those linked to the activities referred to in items I to IV; and
VI - scientific and technological consultancy services - studies, trials and tests, standardization activities, management of research, development and innovation projects, technological management, promotion of invention and innovation and management and control of intellectual property generated in research, development and innovation activities, provided that they are associated with any of the activities set out in items I to IV.
It is clear, then, that the company's establishment in the region must develop these activities, and it is not enough, for example, to maintain a sales team in the region while research and development is carried out elsewhere.
In our opinion, despite clarifying the concept, the Ordinance disregards the dynamics of remote work and the potential shortage of research and development professionals in the region.
The new Ordinance also requires the company to use the funds received from the FIP "exclusively for business development, including research, development and innovation expenses, marketing and sales expenses, personnel expenses, legal expenses and working capital, as long as they are indispensable to the main activity". SUFRAMA will publish its own manual with a list of mandatory activities and expense categories.
The rule allows up to 20% of these expenses to be incurred outside the Western Amazon and the state of Amapá, provided that the aim is to obtain knowledge, methods or technologies that are not available in this region or to expand the business to other locations.
Gross Revenue Limit: a step backwards and a missed opportunity
The gross revenue limit for the year prior to the technology-based company's FIP contribution was reduced from R$50 million to R$16 million or proportional to the number of months in business, but there is no longer a limit for the previous 3 years.
In our opinion, the reduction is a step backwards that will considerably limit the number of companies able to receive funds.
The figure adopted sounds anachronistic, since it corresponds to the revenue limit for companies targeted by FIP-Seed Capital in the previous regulation (CVM Instruction 578 of 2016), repealed in 2022 by CVM Resolution 175, which raised the gross revenue limit for "seed capital" to R$20 million.
Thus, if the regulator's intention was to limit investments under the Ordinance to "seed capital" operations - which, in our view, would no longer make sense - it should have adopted the current figure of R$20 million.
The prohibition on investing in companies that are controlled, directly or indirectly, by a company or group of companies, in fact or in law, that has total assets of more than R$80 million or annual gross revenue of more than R$100 million in the financial year immediately preceding the FIP's first contribution was maintained. The specific exception contained in the current rule was maintained (see §3 of Art. 6 of the new Ordinance).
Here, the regulator also missed the opportunity to update the amounts in Resolution 175, which increased them to R$100 million and R$150 million respectively for "seed capital" operations.
Requirements to be met by the Fund
As for the requirements to be met by the FIP that will receive the funds from the beneficiary companies for investment in technology-based companies, there are significant changes.
In addition to registration with the CVM, characterization as an investment entity and express mention in the regulations of the destination of the resources under the terms of Law 8.387, which are already required for the fund:
- cannot have its quotas traded on the secondary market;
- must be dedicated exclusively to the capitalization of technology-based companies, or with a dedicated class, as expressed in its regulations;
- shall ensure that the technology-based companies invested in comply with the obligations imposed by the Ordinance; and
- will have to rely on a list published online by the Superintendence of the Manaus Free Trade Zone (SUFRAMA), with a list of FIPs able to raise funds.
Inclusion on this list must be requested directly from SUFRAMA, with proof of compliance with the other requirements.
The prohibition on the FIP holding a majority stake in the share capital of the technology-based company invested in was maintained, as was the exceptional and temporary possibility of holding a majority stake in the event of a contribution to companies already invested in, which is necessary to enable them to continue operating.
There is now an express prohibition on investing in a FIP that has technology-based companies in its portfolio that are formally or de facto subordinate to the beneficiary company that is a shareholder of the fund.
The FIP's investment period has been reduced from 6 to 5 years, after which it will no longer be able to receive incentive funds. For investment periods in progress on this date, a maximum of 6 years is allowed.
As at present, investments must be made through the primary acquisition of shares, subscription warrants, simple debentures, other securities convertible into or exchangeable for shares issued by investee technology-based companies, as well as securities representing these holdings, with transfer or trading on secondary markets permitted.
One of the most welcome innovations of Resolution 175 was the possibility for the FIP's regulations to establish a deadline for investing the funds received from its shareholders, which also facilitated investments made under Ordinance 1753.
The new Ordinance limits this advantage, establishing a period of up to 6 months for the investment of the FIP's resources after each payment of quotas. Even so, this is already longer than the period previously provided for in Instruction 578.
With the rule having a regional development objective, investment in assets abroad remains prohibited, subject to the definition in Resolution 175. As this definition is a little broader than the previous one, there is a gain here.
It also remains forbidden for the beneficiary company to hold, directly or indirectly, assets that guarantee it a majority stake in the technology-based companies invested in by the FIP.
Investments in situations of conflict of interest are prohibited, regardless of approval by the FIP's shareholders' meeting.
Impacts for the Manager and Auditor
The changes affect the very structure of the manager, who must have a regional representative based in the Western Amazon region or in the state of Amapá, responsible for monitoring technology-based companies.
In the event of non-compliance with the Ordinance, the FIP may be prevented from investing in technology-based companies, in which case the funds received from the beneficiary companies must be fully repaid by the FIP to these companies through investment in one or more priority programs defined by the Committee for Research and Development Activities in the Amazon - Capda, chosen at the discretion of the respective beneficiary companies.
The standard establishes new reporting obligations, as well as the preparation by the FIP manager of a report on the investee companies containing:
1. demonstration that the technology-based companies invested in meet the conditions of the Ordinance;
2. an executive summary of the investment proposal and its details, containing an analysis of the background of the technology-based company invested in and details of the period of execution of the planned investment;
3. a history of the technology-based company invested in, its key people and its plan for technological innovation;
4. analysis of the market in which the invested technology-based company operates;
5. the main corporate and legal aspects of the technology-based company invested in; and
6. market evolution of the technology-based companies divested in the period.
The independent audit report of the investee company must contain a section evaluating compliance with the obligations set out in the new Ordinance, which could lead to questions and discussions with the auditors.
Other changes
The current rule prohibits technology-based companies from distributing more than 25% of their profits "during the period in which they receive funding from Equity Investment Funds". This wording left room for different interpretations and could compromise the company's attractiveness to new investors.
As of January 2025, the prohibition is clearer and will apply during the so-called "investment execution period", defined as "the period in which the technology-based company executes and spends the funds received as an investment from the Equity Investment Fund". Once this period has expired, which cannot exceed 5 years, the limitation will no longer apply.
Another novelty is the prohibition on the technology-based company hiring an individual who sits on the board or is a director of the beneficiary company that is a shareholder of the FIP, or who is related, collaterally or by affinity, up to the third degree.
As is currently the case, the beneficiary company's obligation to contribute is fulfilled by paying in the FIP's shares - mere subscription is not enough - and this payment must take place by December 31st of the respective calendar year. This should increase the flow of investments in these funds in the final months of each year.
Responsibilities
The Ordinance clarifies the responsibility of the agents, determining that the beneficiary company will be subject to a disallowance of the amounts applied in disagreement with the standard when it fails to comply with the requirements established in the Ordinance and for which it is responsible. This leads us to conclude that the beneficiary company will not be penalized for non-compliance for which it was not responsible.
Non-compliance by the FIP could prevent the fund, its managers and administrators from investing in technology-based companies with resources from Law No. 8.387 and they will be included on a public list published by SUFRAMA for 3 years, without prejudice to other penalties provided for in the regulations, including by the CVM.
Settlement of debts and investment of residual balance
Finally, one of the major innovations of MDIC/SUFRAMA Ordinance No. 1 is the provision for settling debts and investing the residual balance of investment obligations in research, development and innovation (RD&I) through investment in FIPs, as provided for in art. 2, § 10, of Law No. 8387, which deals with the investment of residual balances if investments in RD&I activities do not reach the minimums set out in the law in a given year. This investment may not be made in a FIP in which the beneficiary company is the majority shareholder or which effectively controls the fund.
Given the above, it can be said that the new regulation is considerably more restrictive, but it is clearer and should bring a greater level of legal certainty - a long-standing demand of the sector - since the current Ordinance never reached the potential of available resources.
Ricardo Vieira, partner at Barcellos Tucunduva Advogados (BTLAW)