The Brazilian Legal Framework for Startups

The Brazilian Legal Framework for Startups defines a startup as a business or corporate organization that provides innovative ideas in its business model or in the products or services that it offers. To qualify, companies must not have annual gross revenue exceeding R$16 million (approx $3.2 million) and are required to register under the Brazilian National Register of Legal Entities for a maximum period of ten years.  

Companies that meet this description and register as a startup benefit from the legislation in several key ways that can be broadly split into five categories: facilitating investment; allowing regulatory sandboxes; easier access to government procurement; allowing convertible loan agreements; and removing bureaucracy.  

Facilitating investments in Innovation 

The legislation defines the role of Angel Investors - which may be individuals or legal entities – as contributing investment towards startups without necessarily holding equity interest or being involved in the startups management or decision-making process. Crucially this allows startups to receive funding without being forced to exchange equity and cede control within their organisation.  

In addition to this, to provide security to investors, the framework provides that they are not liable with their own assets in instances where startups run into financial or legal difficulties.   

Startups are also provided a legal route to receive funding from companies that have obligations to invest in research, development and innovation due to grants they have received from regulatory agencies.  

Regulatory sandbox 

Innovative companies will have the opportunity to test business models, techniques and technologies in experimental regulatory environments under the supervision of the relevant regulator. The regulators will be responsible for defining the selection criteria for companies participating in the regulatory sandbox, as well as the length of participation.  

Government procurement 

A special bidding process will enable public administrators to hire startups to provide innovative solutions. Startups that bid will required to propose different means of solving problems and map out how public entities can use technology and innovation to solve them. These contracts will last for one year with the possibility for extension and the maximum amount available to startups will be R$1.6 million (approx $320K).  

Convertible loan agreements 

The legislation also allows for startups to secure convertible loan agreements. This means investors provide a loan to startups under a deal where – after a period of time set by the investor – the capital contributed converts to shares in the startup.  

Removing bureaucracy 

The law also amends the Corporations Law in order to simplify procedures for corporations with annual revenues of less than R$78 million (approx $15.5 million), in particular it allows for more complex corporate structures. Management can now be composed by a single officer, eliminating the previous requirement that corporations must have a Board of Officers comprised of at least two members. It also allows for corporations to make publication electronically, and replace corporate books with mechanized or electronic records.