Crowdfunding and Competition

Daniel Oliveira Andreoli and Venicio Pereira
TozziniFreire Advogados

On July 13 2017, the Securities and Exchange Commission of Brazil (CVM) issued the Instruction n. 588, which regulates the online offering of private companies’ securities, or “equity crowdfunding”, in Brazil. However, what is an equity crowdfunding and why is it important to competition?

According to the Instruction, an equity crowdfunding is an investment by means of a public offering of securities by small companies with no need of registration. The securities are distributed exclusively through an electronic platform of collective investment, in which several investors receive the offering and finance a project under the limits set forth in the regulation.

In other words, the equity crowdfunding works as an exchange. Investors transfer funds to a company through the internet, without the need for a public offering dully registered before the CVM. The company, in its turn, distributes securities in exchange for the investment. The central purpose of the crowdfunding is to enable social and economic activities by smaller companies, which, instead of electing a traditional mechanism of financing, prefer to use the internet. In the future, "investors" may become business partners.

Crowdfunding activity has been reaching more audience in recent years due to the power of the internet. In Brazil, this type of business is still new to many people, but is well known in other countries, such as the United States of America, Sweden and New Zealand.

It is noteworthy the power that this mechanism can present for competition. An idea spreads over the internet, captivating the interest of hundreds of users, who may eventually decide to invest, and then enabling a brand new business.

From the competition standpoint, the crowdfunding implies several benefits, because it may allow the entry of new players in the market, increasing rivalry with incumbents. For instance, with the collective funding, a disruptive company can come up with innovative ideas and revolutionary products (mavericks). The incumbent firms may feel compiled to react against the entry, reviewing industrial policies in order to continue in the market or, at least, to maintain market share.

This is one of the main goals of Competition Law; ensuring conditions for companies to be competitive, to invest in research and development, to seek innovation and to develop products and services of better quality and lower prices, for the benefit of consumers. In Brazil, the Administrative Council for Economic Defense (CADE) is the administrative authority in charge of ensuring a healthy competition environment. CADE is entitled to investigate abusive practices from an antitrust perspective (control of conduct) and also to prevent damages to competition that may be generated from mergers and acquisitions (control of structure). In this context, the CADE Horizontal Merger Guidelines, published in 2016, recognizes the importance of mavericks to society, because they can force prices down, moderating the behavior of dominant firms, besides of stimulating a continuous innovation in the market.

Despite the fact that crowdfunding is a novelty in Brazil, it may be more popular within the next years to the extent that the individuals become more familiar with this new mechanism of investment. Even so, at the outset, it is necessary to be careful about the competitive issues involved in the matter, for the benefit of both entrepreneurship and Brazilian consumers.