Guilherme Bueno Malouf, Marcela Maldonado Romeu, Paulo Henrique Carvalho Pinto and Paula Soncini    In late 2016, Complementary Law No. 155 (LC 155) was passed, providing, among other rules, a new financing alternative for micro and small businesses, which do not need to give up on the benefits conferred by the Simples Nacional....

In late 2016, Complementary Law No. 155 (LC 155) was passed, providing, among other rules, a new financing alternative for micro and small businesses, which do not need to give up on the benefits conferred by the Simples Nacional.

In order to foster innovation and productive investments, LC 155 enables such companies to receive contributions that do not become a part of the capital stock of the invested company and may be formalized through participation agreements between the invested company and the angel investor. The parties may negotiate the terms and conditions of these contracts, subject to certain conditions, such as the form of payment of angel investor and the term of the investment (which may not exceed seven years). The law also requires that the participation contract stipulate the form of payment of the angel investor, but limits the receipt of payment to a maximum period of five years. LC 155 does not establish clearly whether, once this period has elapsed, the angel investor will be required to redeem the amount contributed or may, for example, convert it into an equity interest in the invested company. One should note that, after a minimum period of two years (which may be extended under the contract), the investor may request redemption of its investment, in which case the calculation of the amount due to the angel investor will be in accordance with Article 1031 of the Brazilian Civil Code, which provides that this calculation is done based on the net worth of the company recorded in a balance sheet prepared specifically for this purpose, though different provisions in the articles of association are allowed. LC 155, however, is not clear about the possibility of different provisions for calculating the angel investor’s investment.

LC 155 differentiates angel investors from equity holders and stipulates that any liability for debts of the invested company may not fall on the angel investor, even in cases of bankruptcy or piercing the corporate veil, on which occasions the individual assets of that investor are not affected. Even though the law expressly distinguishes angel investors from equity holders, the text of LC 155 is not clear regarding the legal nature of the angel investor, that is, whether he is a creditor, shareholder, or some new legal form. It is, thus, impossible to determine what class of creditors angel investors would fall in in the event of bankruptcy of the invested company.

It seems that LC 155 has created an unusual, hybrid type of investor. Note that, on the one hand, the law expressly states that the angel investor is not an equity holder of the company, but, on the other hand, it assures him typical protections for equity holder, especially in the event of sale of the regular shareholders’ stakes to a third party. In this respect, LC 155 gives an angel investor a right of first refusal in the acquisition of the stake of regular shareholders and a right to tag along of his stake (equivalent to the amount of the investment, under the same conditions of sale offered to regular shareholders of the company. LC 155 also provides for the possibility of transfer of ownership of the angel investor’s investments, with the consent of the shareholders (in order to prevent the invested company from having a relationship with a third party that is not in the interest of the shareholders).

Despite having a certain similarity to corporate rules on certain issues, LC 155 seems to go in the opposite direction of market practice by stipulating that the angel investor does not have any right to manage or vote in the invested company. In practice, the term “angel investor" has been used to designate those investors who contribute resources to newly established companies with growth potential (startups), acting effectively in the management in order to contribute to the development of the company’s growth. By denying the angel investor the option to participate in the invested company's management, LC 155 subtracts from the angel investor that typical feature and causes the angel investor to be more like a mere financier.

Although LC 155 has introduced innovative points, its legal text is not complete, thus making it essential to monitor how the gaps will be handled and whether this initiative will, in fact, be embraced in practice.