Bill of Law Proposes New Legal Instrument to Stimulate Investments in Startups

The Complementary Bill of Law No. 252, of 2023, authored by Senator Carlos Portinho, has been revisited in plenary sessions over the past few months. The goal of this bill is to amend Complementary Law No. 182, of June 1, 2021, which establishes the legal framework for startups, in order to create a new legal instrument that allows conversion into equity participation, the Convertible Investment Contract into Social Capital (CICC).

The proposal is that the CICC enables the investor, after a certain period, to choose whether or not to take equity participation in the company. Unlike the more commonly used contractual nature in current startup investment operations, the convertible notes, the CICC would not represent a debit for the startup, nor a liquid, certain, and enforceable credit for the investor, thereby providing greater legal security to the startup.

Additionally, the Complementary Bill of law No. 252, of 2023, also stipulates that the amount invested through the CICC will not be adjusted, nor will it accrue interest or any other form of remuneration to its holder, in order to characterize the reality faced by entrepreneurs and startup investors who currently aim for long-term operational sales and avoid the distribution of profits and dividends in the short to medium term.

Another significant change is the proposal to Article 5-A of the Bill, which addresses the tax issue on accounting gains resulting from the conversion of the CICC into equity participation in the startup. The justification is to avoid income tax on potential gains resulting from the conversion compared to the initial investment, in such way that the capital gain would only be calculated when the CICC or the equity participation in the startup is sold.

Currently, after being approved by the Economic Affairs Committee without changes, the bill received suggestions for improvement from the Ministry of Treasury and significant investors in the startup sector in the country. These contributions were deemed pertinent, leading to the presentation of a new report, which was submitted and approved by the Senate and now returns to the House of Representatives for approval of the updated text.

In summary, the Complementary Bill of law No. 252/2023 and its Substitute proposed by the Senate in recent months present important innovations to stimulate investment in startups, now attempting, with the proposed new text, to clarify any doubts, as well as reflect the social and economic realities experienced by startups and their investors.

If you would like to know more about Complementary Bill of law No. 252/2023 and other topics related to startups, please do not hesitate to contact our partner felipe.monteiro@kasznarleonardos.com.