22 Jun Venezuelan Capitals Market
Venezuela had a vibrant capitals market from the early 1970s until 2005, when the exchange control and the economic policies of the Chavez Administration took their serious toll. During the last three decades of the previous century, the legislation and regulations evolved incorporating international standards. During the last decade, there have not been any substantial activity in the local capitals market nor major changes in its regulations.
Venezuela first adopted a Capitals Market Law in 1973. Prior to the 1973 law, public offering of securities (stocks and bonds) was governed by the rules of the Caracas and Miranda Stock Exchange and the Venezuelan Commercial Code. The 1973 law was amended in 1975 and was superseded by an all new Capitals Market Act in 1998. On August 17, 2010, the Securities Market Act (Ley de Mercado de Valores, hereinafter “LMV”) was enacted, repealing the 1998 Act. The LMV was amended on November 5, 2010 and was repealed by a new LMV enacted on December 30, 2015.
The LMV regulates the public offering of securities, the establishment and operation of stock exchanges, procedure for the registration of foreign securities, insider trading and investment advisory services. The LMV is supplemented on the subjects of transfer agents and Venezuelan mutual funds by special laws that regulate the matters (Ley de Cajas de Valores and Ley de Entidades de Inversión Colectiva).
The National Securities Superintendency (Superintendencia Nacional de Valores, “SNV”) has broad regulatory powers, based on which it has issued regulations on various topics, including the National Securities Registry, the organization and functioning of the securities custody and transfer agents, the information that regulated entities must provide to the SNV, the administrative intervention and liquidation of such entities and the public offering and placement of securities. Some of the regulations issued by the National Securities Commission (Comisión Nacional de Valores, “CNV”), predecessor of SNV, continue in effect.
- Public offering of securities.
A public offering of securities is subject to prior registration before the SNV. Excluded from this registration requirement are offerings of public debt and banks’ instruments (LMV, Article 1).
Under the LMV, an offer is public if it uses any form of advertisement or publicity for the purpose of reaching the public at large (LVM, Article 54). The public nature of an offer is not defined by the number of recipients of the offer, but rather by the means used to make the offer.
Under the LMV, “securities” is a term with a broad meaning, that includes stocks, bonds, derivatives and any other type of investment instruments, such as participation certificates or any other form of financial instrument representing a direct or indirect interest in an asset (LMV, Article 52). The LMV also regulates options, futures, and other derivatives.
On October 24, 2019, the SNV issued the Rules Relating to Public Offering, Placement and Publication of Securities Issues, which included a new type of security named the Exchange Note (Pagaré Bursatil), which is defined as a debt instrument issued to the order of an investor and destined for public offering.
- American Depository Receipts (ADRs) / General Depository Receipts (GDRs).
Under the LMV, and following the 1992 rules of the CNV, Venezuelan companies can package shares in the form of depository receipts for sale on foreign securities markets. Prior to completing an offer of depository receipts (ADRs or GDRs), the company must obtain the approval of the SNV (LMV, Article 98 (5)).
- Regulation of Brokers.
Brokers cannot hold or negotiate Venezuelan public debt securities without a special authorization from SNV (LMV, Article 4). A special authorization is also required for them to act as portfolio managers. They are subject to SNV accounting rules and minimum ratios. Traditionally, these rules have been very similar to the rules applicable to commercial banks under the Basel Rules. This does not, however, mean that brokerage companies are banks, nor that they can take sight deposits or issue checkbooks.
- Securities Exchanges.
There are public and private securities exchanges. The former are not subject to the LMV but to the regulations issued by SNV. The latter cannot negotiate Venezuelan public debt securities, without a special authorization from SNV (LMV, Article 26). The Bicentennial Public Securities Exchange, created in November of 2010, is one of the former and the Caracas Stock Exchange, created in May of 1976, is one of the latter.
On April 25, 2011, the SNV issued the Bicentennial Public Securities Exchange Regulations, which establish the internal structure and operational rules of such entity, in which securities issued by public entities, State corporations, collective or social property corporations and mixed companies, among others, will be negotiated.
- Tax rules applicable to traded stock.
Under the Venezuelan Income Tax Law, gross income generated from the sale of publicly traded stocks (acciones), when traded on a stock exchange in Venezuela, is subject to a flat tax of 1% (Income Tax Law, Article 74). This tax is withheld at the stock exchange when the security is traded. This flat tax substitutes any tax on capital gains earned on the transaction. The tax applies to the gross income regardless of whether the stock is sold at a profit or at a loss. Capital losses from trading securities cannot be applied to other income. Tax on capital gains is also subject to special provisions in all of the tax treaties entered into by Venezuela (for the countries that have treaties with Venezuela, please see our newsletter on Tax Treaties). There are no special tax rules regarding interest payments made on publicly traded debt securities.
- Rules for protection of stockholders.
(a) Insider trading.
The LMV establishes criminal and administrative sanctions for any person that profits from trading with privileged information (LMV, Articles 129 and 149). Privileged information is pricing sensitive information not available to the public (e.g. information obtained because of a person’s profession, job or office at the issuing entity) (LMV, Article 70).
(b) Minimum dividends.
The LMV provides that companies whose stocks are publicly traded must determine their dividend policy in their bylaws (LMV, Article 62). The shareholders meeting shall decide upon the amount, frequency and payment method of the dividends. At least 25% of the dividends must be paid in cash (LMV, Article 63). The administrators can only approve a payment of up to 10% of the annual net profit for themselves (LMV, Article 64).
(c) Takeovers and tender offers.
The LMV sets out rules governing tender offers and takeovers of publicly traded companies (LMV, Article 69). In addition, tender offers are governed by the Takeover Regulations (Normas sobre Ofertas Públicas de Adquisición, de Intercambio y Toma de Control de Sociedades que hacen Oferta Pública de Acciones y Otros Derechos Sobre las Mismas, September 2000). A takeover is the acquisition, in one or in successive purchases, of a sufficient quantity of shares that would result in the buyer obtaining a significant participation (10% or more of the voting equity) in the capital of a company whose shares are publicly traded (Takeover Regulations, Article 4). The Takeover Regulations apply to any taking over of a significant participation in the voting stock of a company whose shares are traded publicly, regardless of the fact that the purchase is made privately or through a tender offer. All takeovers must be implemented by a tender offer (Takeover Regulations, Article 6), that is, by a public offer to purchase the shares. Prior to making the tender offer, buyer must notify the SNV. Competitive offers are allowed (Takeover Regulations, Article 15).
On November 18, 2011, the SNV and the Superintendency of the Banking Sector Institutions issued a joint Resolution in which they established the Takeover Regulations for the Banking Sector Institutions (Norma que Regula la Adquisición de Acciones a través de Oferta Pública de Acciones (OPA), Oferta Pública de Toma de Control (OPTC) y Oferta Pública de Intercambio (OPI)). Such Resolution indicates that the takeover requires prior authorization of the Superintendency of the Banking Sector Institutions (Takeover Regulations of the Banking Sector Institutions, Article 2).
(d) Treasury stock.
The LMV imposes restrictions on the purchase of treasury stock (LMV, Article 72). Treasury stock is the stock issued by the company which is later reacquired by the issuer (LMV, Article 71). An issuing company may only purchase treasury stock, whether directly or indirectly, if this has been approved at a shareholder’s meeting, the amount does not exceed the sum of retained earnings and it is not more than 15% of the paid capital (LMV, Article 72).
- Reporting requirements.
The LMV has standard reporting requirements, including the presentation of financial statements. In addition, companies whose securities are publicly traded must make public announcements of any information that could affect the value of the securities (LMV, Article 61).
Special regulations of the SNV cover information requirements, the type of information that must be sent to SNV and the times for and required form of presentation (Normas Relativas a la Información Económica y Financiera que deben suministrar las Personas Sometidas al Control de la SNV, December 2010).
- Anti-money laundering (“AML”).
Issuers and intermediaries participating in the capitals market must establish systems to prevent money laundering and terrorism financing (LMV, Article 43). On May 19, 2011, the SNV issued Resolution 110, containing AML Regulations, which, as most AML regulations, establish due diligence duties such as know your investor, profiling clients, verifying identities, training employees, keeping records and reporting suspicious activities to the SNV.
- Investment advisory services.
Under the LMV, in order to act as an investment advisor, perform studies on securities and issuers, and prepare opinions on the purchase of securities, one requires an Investment Advisor’s license issued by the SNV (LMV, Article 16).
- Transfer agents/use of depository arrangements.
The LMV (Article 32), the Law of Security Registries (Ley de Cajas de Valores) of 1996 and Regulations issued by the SNV on December 15, 2010 regulate depository, custodial and transfer services. To be a registered transfer agent (Caja de Valores), a special license must be obtained. Registered transfer agents are special-purpose companies which may not perform services other than those of a transfer agent. There is, at this time, only one transfer agent working in Venezuela, the Caja Venezolana de Valores (“CVV”), which is governed by a Regulation approved in 1996.
- Mutual funds.
Mutual funds and other forms of investment companies are not governed by the LMV but rather by the Collective Investment Entities Law (Ley de Entidades de Inversión Colectiva) of 1996. Collective investment entities (which are basically mutual funds) are defined as institutions that invest their shareholders’ monies into a diversified portfolio of assets (Collective Investment Entities Law, Article 2). The Collective Investment Entities Law aims to protect the investor and it also regulates the management of investment companies.
May 7, 2020