Financial Institutions and Markets (J)
Authors: Rubens Vidigal Neto, Allan Crocci de Souza, Fernanda Mary Sonoki, Rafaella Flores Lellis
The Brazilian Central Bank (BACEN) has recently opened a public consultation for a new ruling that will regulate the fintech credit segment in Brazil (Public Consultation No. 55/2017). The proposal sets two new types of financial institutions, the direct credit company (Sociedade de Crédito Direto – SCD) and the peer-to-peer (P2P) lending company (Sociedade de Empréstimo entre Pessoas – SEP). Even though the proposed regulation aims at the fintech credit segment, it may also have an impact on the securitization and the alternative payment methods segments.
In recent years, the Brazilian fintech credit market has grown exponentially. This growth can be explained by the improved client experience and the better terms and conditions offered by fintech credit providers to their clients, and also by the fact that such fintech firms aim at consumers that are not usually targeted by conventional financial institutions. Due to strict regulatory framework and legal limits on interest rates that can be charged by lenders that are not financial institutions, most fintech firms work with bank partners that provide loans to the firms’ customers. This business model, on one hand, helps fintech firms reduce legal risk; on the other, however, increases costs and creates inefficiencies.
Bressler, Amery & Ross, P.C. Principal Denver Edwards was quoted in the Bloomberg BNA article, “Equifax Data Breach May Prompt Shareholder Derivative Suit,” by Jimmy H. Koo on September 13. The article discusses the recent breach of Equifax customers’ data and the possibility of a shareholder derivative suit.
A derivative suit against Equifax will likely allege breach of fiduciary duty. The purpose of any derivative suit is to “redress damages done by directors and officers,” but it isn’t “easy to have the board take action as they need to look at what happened” and assess whether there were any red flags, Edwards said.
Securities are governed by a multi-layered framework of federal and state laws. When a security is sold, it must either be registered or be exempt from registration under federal and applicable state law. A state exemption is required in each state in which the security is offered for sale or sold. An issuer that offers to sell or sells an unregistered security that is not exempt from registration commits an illegal act that could result in civil and even criminal penalties.
Section 3(a)(11) of the Securities Act and Rule 147 have historically defined what is commonly known as the federal intrastate exemption, which required, among other things, that the issuer offer to sell and sell only to residents of the state where the company was organized and doing a significant amount of business. Effective April 20, 2017, Rule 147 was amended and Rule 147A was adopted.
As per the simplest definition, crowdfunding is an alternative financing method for funding projects and entrepreneurs. The Draft Law on Amendments to the Capital Market Law (“Draft Law”) regarding crowdfunding prepared by the government has been submitted to the Grand National Assembly of Turkey on 26 December 2016. By the enactment of the aforementioned Draft Law, it is aimed to achieve to keep the crowdfunding platforms in a free market, and simultaneously to bring protection mechanisms.
Since the turn of the millennium, there has been an increase in the variety and use of capital structures of a company. Under the well-known and widely accepted Modigliani and Miller theorem (“M-M theorem”), regulators would be able to achieve any particularly desirable mix of debt and equity in banks at negligible cost, since leverage (banks' debt: equity ratio) would then be irrelevant to lending and its pricing. Although it is proposed by the M-M theorem that the capital structure of a company, i.e. how the combination of debt and equity is managed, is irrelevant for the value of the firm, this classical theorem has been challenged by many other theorems, such as the ‘trade-off’ theory, the ‘agency costs’ theory, and ‘pecking-order’ theory (Ferran, pp. 54-56).