On June 1, 2021, Brazilian President Jair Bolsonaro signed into law a new legal framework for startups and innovative entrepreneurship (Marco Legal das Startups or the “Framework”). The Framework establishes measures to encourage the creation of new innovative companies and incentives for investing in startups. It also facilitates the Brazilian federal government’s ability to enter into contracts with entities providing innovative solutions and provides greater legal environment to entrepreneurs and investors.
The new law seeks to create a favorable environment for the creation and growth of startups. The stated purpose of the Framework is to transform Brazil into a country of startups by improving the business environment, simplifying legal requirements and removing certain bureaucratic impediments, reducing costs, increasing legal certainty, and increasing investments in these companies.
For purposes of the Framework, a “startup” is considered to be a business or corporate organization that provides innovative ideas in its business model or in the products and services that it offers. To be considered a startup, a company must have annual gross revenue not to exceed R$16 million and must be registered under the Brazilian National Register of Legal Entities (Cadastro Nacional da Pessoa Jurídica, or CNPJ) for a period of up to ten years. The company must also declare in its articles of incorporation that its activities will include an innovative business model such as business models focusing on financial institutions and fintech solutions.
Facilitating Investments in Innovation
The Framework will allow startups to receive investments from individuals or companies, and depending on the modality chosen by the parties, the investments may or may not result in an interest in the startup’s capital stock.
An investor that makes a capital contribution without becoming a shareholder will not be considered a partner or have the right to manage or vote in the management of the invested company. This measure removes any such investor’s liability, meaning that there will be no liability for any of the startup’s debts, except in the case of a willful, illicit, or bad faith conduct on the part of the investor.
Another way for startups to receive funds is through companies that have investment obligations in research, development, and innovation arising from grants provided by regulatory agencies such as the Brazilian National Agency of Petroleum, Natural Gas and Biofuels (Agência Nacional do Petróleo, Gás Natural e Biocombustíveis - ANP) and the Brazilian Electricity Regulatory Agency (Agência Nacional de Energia Elétrica - ANEEL). This allows companies to contribute their obligations in Equity Funds or Equity Investment Funds (FIP) that invest in startups, or in programs or other means aimed at financing and accelerating the growth of startups managed by public institutions runned by the Brazilian federal government. Directing investment obligations to startups will not only promote their growth but also provide business solutions to various sectors of the Brazilian economy.
Experimental Regulatory Environment
The Framework also provides for the possibility of experimental regulatory programs, the so-called regulatory sandbox, in which governmental bodies or agencies may, solely or jointly, monitor experiments by innovative companies that include innovative business models and test new methods and technologies.
The applicable governmental bodies and agencies are responsible for defining the selection criteria for companies participating in the regulatory sandbox, as well as the rules regarding the duration of a company’s participation in the program. These programs have the purpose of providing greater legal security for startups and companies to focus on innovation, while preserving and supporting the modernization of the applicable regulatory framework.
The Framework also created a special bidding method that authorizes the Brazilian federal government to employ innovative solutions. Unlike traditional contracting, the scope of the bid may be restricted to indicating the problem(s) to be addressed and the results expected by the Brazilian federal government, including the technological challenges to be overcome, without the need to describe any previously mapped technical solution and the related technical specifications. In addition, it is up to the bidders discretion to propose different solutions to the problem in question.
This bidding method created the Public Contract for Innovative Solutions (Contrato Público de Soluções Inovadoras or CPSI), in which the Brazilian federal government may pay for the development and testing of the selected solution, up to a total amount of R$1.6 million.
If the solution is considered satisfactory, the Brazilian federal government may sign, without a new bidding process, a contract to supply the product, the process, or the solution resulting from the CPSI or, as the case may be, to integrate the solution to a technological infrastructure maintained by the Brazilian federal government, up to a total amount of R$8 thousand.
Authored by Isabel Costa Carvalho, David Contreiras Tyler, and Ana Laura Pongeluppi.