The number of startups in the Brazilian market has been growing every year. According to the Brazilian Association of Startups (Abstartups), from 2015 to 2019, the number jumped from approximately 4,100 to 12,700 such companies, a growth of more than 200%. By the end of 2021, there were 14,000 Brazilian startups in operation. The year 2021 had a record amount of investment: Brazilian startups raised over $9.7 billion in investments until November. This phenomenon led Brazil to update its list of unicorns with 10 new startups in 2021 alone, bringing the total to 16. There are at least 7 more unicorn candidate startups in 2022.
The Brazilian Legal Framework for Startups (Law No. 182 of 2021), which recently completed one year since its enactment, brought significant achievements: typical investment modalities of the innovation ecosystem were acknowledged, increasing legal certainty for investors, and rules for differentiated treatment were defined, in order to contribute to the growth and expansion of these companies in the Brazilian market; also, the law encourages public agents to contract with startups, simplifies the rules applicable to corporations and promotes the creation of so-called “regulatory sandboxes”.
The Legal Framework for Startups (LFS) was born as a compilation of regulations and guidelines that aim to stimulate an entrepreneurial environment fostered by innovation, supporting the development of companies, specifically the so-called startups. The law features nineteen articles that move towards a single objective: the debureaucratization of the innovation market in Brazil.
The initial articles of the Law provide the relevant objectives, principles, and concepts, including the definitions of angel investor and regulatory sandbox. Besides the “recognition of entrepreneurship as a vector of economic, social and environmental development“, the Law demystifies the concept of startup, explaining that “business or corporate organizations, nascent or in recent operation, whose performance is characterized by innovation applied to the business model or products or services offered shall be considered startups“. To qualify as a startup, the company must have a maximum revenue of up to 16 million reais per year, and a maximum of ten years of registration with the Brazilian National Register of Legal Entities (CNPJ).
The forms of investment are also detailed, admitting the injection of capital by individuals or legal entities, which may be converted into equity participation at a future time. The framework also aims to facilitate the contracting of innovative and technological solutions by the State, dealing with specific bidding conditions, admitting the contracting of startups by the Public Administration on a trial basis, and admitting re-contracting – which has already been put into practice. Moreover, the LFS also changed some provisions of one of the most important legislation for the corporate scenario in Brazil, Law No. 6404 of 1976 (The Limited Liability Corporations Framework). As an example, the Legal Framework for Startups allowed, in some cases, the replacement of corporate books by electronic records.
The Legal Framework for Startups has already completed one year since its enactment, and soon – on August 31, 2022 – it will complete one year of being in force. Despite the optimistic goals set forth in the law, the downfall of the technology market in the first half of 2022 has made it difficult to pinpoint the real impact of the MLS in the Brazilian market. According to a survey carried out by Forbes Money, while investments in startups totaled R$27.7 billion in the first half of 2021, the following year’s figure showed a slight drop, totaling R$15.4 billion. It should be noted that the decline in investment in startups is not an exclusively Brazilian phenomenon, taking into account the turbulent post-pandemic global context. The good news is that, despite the shy numbers regarding the macro scenario of Brazilian startups, early-stage startups have shown better performance: while investment in early-stage startups in the first half of 2021 amounted to R$1.5, billion, in the same period of 2022 the funding was about R$7.4 billion, a significant monetary increase.
It is still a little early to link the numbers obtained to the new legal framework, but one cannot dismiss the fact that even with the moment of insecurity that has been shocking most sectors of the global market, most investors still seek startups to materialize the fusion between innovation and technology. At this point, it is worth remembering that the Brazilian Framework for Startups is emphatic on the importance of ensuring greater security for the investor. This focus on security has been an attraction factor for foreign investors, who are more active in the capitalization of Brazilian startups in 2022. This year, international investors were present in 39% of the 238 rounds that took place from January to April, according to data from the innovation platform Distrito. More than half of these investments were made jointly with Brazilian investors, while 15% were made solely by foreigners. The United States, Germany, and Japan are the countries that have invested the most in Brazilian startups when considering the number of rounds – together, the three countries were behind 700 deals in the last ten years.
It is also worth mentioning that adjusting the securities market to the new legal framework for startups is one of the priorities of the new president of the Brazilian Securities and Exchange Commission (CVM), João Pedro Nascimento. According to Nascimento, it is necessary to ” cut in line” of the priority topics to be regulated by CVM to include regulations for startups, “simplifying the way things are conducted in the business world”, making it simpler and less complicated.
We are aware that, despite all the proposed simplification and debureaucratization underlying the startups’ legal framework, the issue can still raise several questions, especially for those outside of Brazil. That is why, among our practice areas, we have Startup.OBA, which provides a service differentiated from the traditional Opice Blum Advogados operation, focusing on young companies and the main players of this ecosystem – entrepreneurs, investors, innovation hubs, and companies with open innovation initiatives.
Our team provides (i) legal viability analysis of business operations; (ii) tax planning and corporate structuring; (ii) investment and M&A operations; (iii) software, trademarks and other intellectual property issues; (iv) contracts such as NDA, POC (Proof of Concept) and Terms of Use; (v) Privacy by Design, Privacy Notices and data protection consulting; (vi) information security; (viii) regulatory advice on Open Finance, payment institutions, among others.
If you want to know more about the possibilities of investing in startups in Brazil, or have any questions about the particularities of the regulations on the subject, feel free to contact one of our specialists to schedule a meeting.
