This document is designed for Searchers who have recently completed their fundraising or are nearing its conclusion (with at least 80% of capital committed at a steady pace).
Establishing a Search Fund in Brazil is a complex process that requires careful planning and a significant time investment. Navigating these bureaucratic and time-consuming processes efficiently is an essential part of the Search Fund journey.
Access to comprehensive, well-organized resources is invaluable, offering crucial guidance to help you overcome obstacles more efficiently, ultimately saving time and resources for everyone involved in the Search Fund ecosystem.
This guide aims to educate Searchers on the legal and bureaucratic aspects of launching a Search Fund—from securing investor commitments to making the funds available in Brazil. Additionally, it provides an overview of the local private equity fund (“FIP”) formation process, which becomes relevant when a Searcher acquires a company.
We would like to thank Victor Park and Felipe Demori for their generous collaboration throughout the preparation of this guide. Their practical input was especially helpful in refining the content and making it more useful for future Searchers.
To set up a Search Fund in Brazil, Searchers are required to create two investment vehicles: a local entity (the “Local Search Vehicle”), which will serve as the primary vehicle during the search phase, and a foreign entity incorporated in Delaware, which will aggregate international investments and later transfer them to Brazil.
Although not a mandatory part of the Search Fund creation process, it is also advisable for the Searcher to establish a separate local company (the “Initial Service Provider Vehicle”), wholly owned by the Searcher. This company will provide services to the Local Search Vehicle and receive the Searcher’s compensation during the initial search phase. While the whole process itself is not complex, some steps can be very bureaucratic.
As a reference, if followed correctly, 26 workdays should suffice to establish your initial Search Fund structure. Additionally, total costs should ideally be below US$13,000 with around 80-90% of the costs associated with hiring local and foreign law firms.
Figure 1 – Total Search Fund formation costs (USD thousands)
In the figure above, the total costs associated with establishing a Search Fund in Brazil are estimated. The highest expenses are generally related to the LLC formation. However, significant savings can be achieved, as demonstrated by Searcher #1, who reduced costs by shifting part of the workload from the foreign law firm to the local one.
This white paper aggregates the workflow in 5 main steps:
A. Formation of the Brazilian investment vehicle (Limitada)
B. Formation of the LLC – Delaware investment vehicle
C. Review and validation of documents with investors
D. Onboarding LLC investors in the Limitada
E. Incorporating the Initial Service Provider Vehicle
Figure 2 – Timeline overview of the whole process (number of workdays)
The steps are not necessarily dependent on one another. The timeline is represented in workdays (with 5 days representing a week). The timeline is available at this link. Special thanks to Marcos Barboza from LTP Capital for creating the initial timeline and sharing it with the community. In this link, a FAQ is also available, providing useful information about the process.
Everyone with access to the link can edit the FAQ document. As you progress, please input your insights about the process. There are several hacks and shortcuts in these bureaucratic flows, so please share your findings with the community – this will help future Searchers and ensure that learnings are consolidated in an organized manner, outside of WhatsApp chats or individual meetings.
Lastly, Felipe Demori Claudino, a partner at the law firm Demori Claudino, helped us create several standard documents used in the process.
Search Funds usually form a Limitada to launch the operation, since its establishment and maintenance are generally simpler and less costly compared to other corporate structures. Below is a step-by-step process to open the Limitada:
Figure 3 – Timeline overview of the Limitada formation (number of workdays)
A1) Choosing your local law firm
This is the critical path of the process. Choosing a local law firm is a highly personal decision. Seek recommendations from trusted sources. Research potential attorneys’ backgrounds and track record. Some law firms with expertise in Search Funds include:
• Demori Claudino (felipe@demoriclaudino.com)
• Lobo de Rizzo (guilherme.menegassi@ldr.com.br)
• MBC Advogados (fbecker@mbcadvs.com.br)
• FM Derraik (andre.fabri@fmderraik.com.br)
• Nankran Mourão (vitormassoli@nankranemourao.com.br)
• Freitas Ferraz (adriano.ferraz@freitasferraz.com.br)
A2) Contrato Social
The Contrato Social lays out the essential elements of the company’s existence, governance, and operations. A template reflecting this document tailored for Brazilian Search Funds is available at this link.
A recurring complaint of the current Searchers is the lack of a structured process visibility by the local law firms. This issue causes rework and delays in the process. When starting the documentation process, ask for a Q&A or a guide from your local law firm. As a reference, foreign law firms already provide these types of resources.
Some Searchers had issues with the lack of coordination among the law firm, paralegal service providers, accountants. It is recommended that the Searcher demands the law firm to centralize the process to enhance efficiency.
A3) Junta Comercial Registration
The Junta Comercial, a state-level agency responsible for the registration and regulation of commercial enterprises, handles this crucial step. This process is typically managed by a paralegal, whose expertise ensures smooth navigation of the requirements. Those who attempted to cut costs by not hiring a paralegal often faced significant challenges and delays.
A4) CNPJ registration at Receita Federal
The Cadastro Nacional da Pessoa Jurídica (“CNPJ”) is the Brazilian federal taxpayer identification number for businesses. Every business operating in Brazil, regardless of its size or structure, must obtain a CNPJ to conduct legal and financial transactions. It is recommended that the Searcher ask for the law firm to centralize the paralegal registration process, ensuring greater efficiency and minimizing potential delays.
A5) Other registrations and licenses
When establishing a business, several registrations and licenses are essential to ensure legal compliance and smooth operations. Three critical components in this process are the Cadastro de Contribuintes Mobiliários (CCM), the Fundo de Garantia do Tempo de Serviço (FGTS), and the licensing requirements mandated by the Prefeitura Municipal de São Paulo (PMSP). These elements are crucial for adhering to tax obligations, ensuring employee benefits, and meeting local regulatory requirements, respectively.
A6) Opening a local bank account
Research and choose a bank that offers services tailored to the needs of your business. Consider factors such as fees, customer service, online banking options, and additional services. Some recommendations from previous Searchers are:
• Banco Inter
• Santander
• C6
• BTG
The Searcher often represents a significant banking relationship for financial institutions, making it advantageous to negotiate favorable terms. Some Searchers have successfully secured premium deals by leveraging their position and negotiating with banks. Additionally, Brazilian Searchers can take advantage of the country’s high-interest rates by investing in the Brazilian prime rate (CDI) and similar instruments, which can help extend their search period using the generated yields.
Important tip: to avoid bureaucratic complications, open the local bank account before onboarding foreign investors. The process is significantly simpler without their involvement.
A7) Choosing your local accountant
The same guideline used to find your law firm is recommended: Seek recommendations from trusted sources. Research potential accountants’ backgrounds, including their experience, reputation, and track record. Some recommendations from previous Searchers:
• SKZ (contato@gruposkz.com.br)
• Thomé (contato@thomecontabilidade.com.br)
• Fiscotec (https://fiscotec.com.br/contato/)
• Contabilizei (https://www.contabilizei.com.br/)
When doing business in Brazil, founders will face several challenges, such as spam attempts and misleading invoices. A reliable accountant is important to help Searchers to distinguish between legitimate and fraudulent bills, saving them money and allowing them to stay focused on their search.
Forming a Limited Liability Company (“LLC”) in Delaware is a popular choice for many businesses due to the comfort of the US-based investors, state’s favorable business laws, tax benefits, and flexible structure. For Brazilian Searchers with an international cap table, establishing an offshore vehicle in Delaware allows for i) raising funds from foreign investors and ii) transferring those resources to Brazil.
The transfer of funds raised offshore to Brazil is typically carried out through the subscription and payment of quotas of the Local Search Vehicle. However, there are alternative legal structures that may be more convenient and liability-free for the investor, such as loans or service agreements, among others. We recommend that Searchers discuss these options with their lawyer. Loan or service-based structures may be safer for the foreign investors, regarding liabilities, but they may have unfavorable tax implications and incur additional costs.
Below is a step-by-step guide to establishing the LLC, along with specific details:
Figure 4 – Timeline overview of the LLC formation (number of workdays)
B1) Choosing your foreign law firm
Selecting your foreign law firm is a critical step, much like choosing your local law firm (step A1). Both decisions should be made simultaneously, as they are crucial to the success of your process. It’s important to complete this step as quickly as possible to avoid delays.
A couple of recommendations are:
• Holland & Knight (ethan.Seery@hklaw.com | kevin.Christmas@hklaw.com)
• Sidley Austin (https://www.sidley.com/en/contact-us)
• Kleinberg, Kaplan, Wolff & Cohen, P.C. (Christian Gloger cgloger@kkwc.com)
• Akin Gump (Ira Kustin ikustin@akingump.com)
B2) Hiring a service provider (agent)
A service provider or registered agent is an individual or business entity designated to receive official documents on behalf of a company. The registered agent must have a physical address in the state where the business is registered and must be available during normal business hours.
Important note: many current Searchers overlook this critical step. Without a registered agent, Searchers may miss important communications, such as invoices for payment in Delaware. Failing to pay bills on time due to missed notifications can result in unnecessary fees for the Search Fund. It’s essential to ensure that a registered agent is appointed to avoid these issues.
Suggestions of registered agents:
TMF Group
Alexandre Spadeto
alexandre.spadeto@tmf-group.com
Phone/WhatsApp: 11-98872-1808
The Delaware Divisions of Corporations provides a list of registered agents at: https://corp.delaware.gov/agents/
B3) Certificate of Formation
The Certificate of Formation is a crucial document required to legally establish an LLC in Delaware. It serves as the official record of the LLC’s creation and includes essential details about the business, such as the company’s name, registered agent, and the purpose of the LLC. This document must be filed with the Delaware Division of Corporations to officially form the LLC and ensure it is recognized under state law.
B4) Choosing your foreign accountant
The same principles for choosing an accountant in Brazil apply here. The main recommendation from Brazilian Searchers is Mark Batcho (mbatcho@ustax.com.br | mmartin@ustax.com.br)
B5) Getting the Tax ID number (EIN)
An Employer Identification Number (EIN) is a unique nine-digit number used to identify a business for tax purposes in the United States, similar to a CNPJ in Brazil.
It’s important to note that some Brazilian Searchers have encountered difficulties with this step, so proper preparation is crucial. For non-U.S. residents, obtaining a Tax ID number involves calling the IRS at the designated phone number during business hours. Although the process to obtain an EIN typically takes just one day, it is subject to the availability of the IRS.
A Social Security Number (SSN) is required to obtain the EIN. If you do not have an SSN or encounter issues, your accountant can provide support and guidance through this process.
B6) Opening a foreign bank account
Lastly, an American bank account should be opened. Some recommendations from Searchers:
• Mercury
• Chase
This step can become a bottleneck in creating a Search Fund, as it heavily relies on the responsiveness of investors. To minimize delays and ensure a smooth process, it’s important for the Searcher to prepare all documents thoroughly and anticipate any concerns or questions that may arise.
A crucial factor for increasing speed in this step is to designate lead investors (at least one local and one foreign) to work closely with the Searcher, validating and reviewing the documents before other investors. These lead investors should be respected in the community, recognized for their diligence and attention to detail. With this initial validation in place, the approval process by other investors is likely to proceed more quickly and smoothly.
Some complexity may arise with local investors, due to specific fund’s guidelines that will require adjustments to the documents. Therefore, it is recommended that the Searcher prioritizes local investors first, expediting the entire process.
Here is a step-by-step process for the validation of documents with investors:
Figure 5 – Timeline overview of the alignment with investors (number of workdays)
C1) Confirmation and commitment of units
In this step, the Searcher should get formal confirmation from investors about the investment details and the # of units acquired. An email should suffice.
C2) Document draft received from lawyers: LLC Agreement, Subscription Agreement, and Accredited Investor Questionnaire
Once a law firm is chosen, they should send the three main documents for the formation of the LLC. The documents are mostly standardized, so ideally, they should send the files as quickly as possible. Each one of the following documents has its importance:
a) LLC Agreement: The LLC Agreement is the foundational document that outlines the governance, operations, and management structure of the Limited Liability Company. A template from Stanford is available here.
b) Subscription Agreement: This document serves as a contract between the LLC and the investors, outlining the terms under which the investors will purchase membership interests in the LLC. It includes details such as the amount of investment, payment terms, and any conditions associated with the investment. A template from Stanford is available here.
c) Accredited Investor Questionnaire: each investor is required to complete an Accredited Investor Questionnaire, certifying that the investor meets one or more criteria that allows him or her to be considered an accredited investor. A template from Stanford is available here.
C3-C9) Sending and reviewing documents
In these steps, the Searcher is required to validate the documents with investors – starting with the lead investors. The documents are standardized, so not adding unnecessary variability is welcomed to facilitate discussions.
Once all investors are comfortable with the terms and onboard, they should sign the documents and transfer the funds.
Below is a step-by-step process to onboard LLC investors into the Limitada:
Figure 6 – Timeline overview of the LLC investors onboarding in the Limitada (number of workdays)
D1) Certified copy of Certificate of Formation
The Certified copy of Certificate of Formation (cópia autenticada em cartório) is used to demonstrate the LLC’s existence to Brazilian authorities and financial institutions. It’s required that the document shows the Searcher as the manager of the entity.
D2) Sworn Translation
Once you have the certified copy of the Certificate of Formation, it must be translated into Portuguese by a sworn translator (tradução juramentada), together with the LLC Agreement.
Suggestions of public sworn translators:
Littera Traduções
Dayse Boechat
litteratraducoes@yahoo.com.br
Phone/whatsapp: 21-99139-8701
Lersch Traduções
Tamires Sales
tamires@lerschtraducoes.com
Phone: 11-3285-3509 11-93449-6999
Três Soluções
Tr3ssolucoes@gmail.com
Phone: 21-96451-8537
D3) Obtaining a CNPJ for the LLC
Although the LLC is a foreign company, it is required to obtain CNPJ to transfer funds to Brazil.
D4) Obtaining the Certificado Digital
A digital certificate is an electronic document used to identify individuals and organizations securely and to sign electronic documents.
D5) Minuta de Alteração do Contrato Social (ACS)
To accommodate incoming foreign investment and reflect any changes in the company’s structure or capital, it is necessary to draft an amendment to the Limitada’s Contrato Social. This document, known as the Minuta de Alteração do Contrato Social (“ACS”), outlines changes to the company’s governance, ownership, and capital structure.
D6-D8) ACS review by local lead investor | Send ACS to Limitada investors | Review and approval from investors
The lead investor’s review ensures that the document aligns with the investment agreement.
Once all investors have reviewed the ACS, their approval is required to move forward. This step involves collecting formal confirmations from each investor.
D9) Signing the Contrato Social
The next step is to sign the amended Contrato Social. This document must be signed by all legal representatives of the Limitada.
D10) Capital contribution by local investors
Following the signing of the Contrato Social, the Brazilian investors will make their capital contributions to the Limitada.
D11) Junta Comercial registration
The amended Contrato Social and the details of the capital contributions must be registered with the Junta Comercial.
D12) RDE at Banco Central
To formalize the foreign investment, it is necessary to register the investment with the Central Bank of Brazil through the RDE-IED (Registro Declaratório Eletrônico – Investimento Estrangeiro Direto) system.
The registration can be done by an attorney or by an exchange broker. A recommendation for this step is Anderson, from DASCAM (anderson.navarro@dascam.com.br).
D13) Transferring resources from LLC to Limitada
The Searcher can choose to transfer all the funds or keep some amount abroad. Some trade-offs the Searcher should consider include:
• FX rates may fluctuate
• Transfer fees may apply
• Some expenses will be incurred in USD, so keeping some funds abroad might be necessary
• Money in Brazilian banks can be invested at Brazilian CDI rates
In order to receive monthly payments, the Searcher should establish a Limitada to receive the funds. The process to create this vehicle is simple but will require the assistance of an accountant.
The Searcher will pay 16,33% on income tax from all the funds received by this Limitada.
Below is the step-by-step process to incorporate the Service Provider Vehicle:
Figure 7 – Timeline overview of the Incorporating the Initial Service Provider Vehicle (number of workdays)
When the Searcher identifies the right company, they will likely choose to establish a FIP as the investment vehicle for the acquired business. A FIP is a versatile and effective investment structure that facilitates the pooling of capital from both local and foreign investors, and offers favorable tax treatment for all parties involved:
• Local investors are required to pay a 15% income tax on capital gains
• Foreign investors who are not based in tax havens are exempt from paying tax on capital gains
Due to its costly structure, the FIP is created only after deal negotiations are complete – therefore, this structure is not needed to launch a Search Fund but to acquire a company. While alternative structures, such as SAs, are available, they are not as tax efficient as the FIP. The Searcher should discuss these alternatives with their law firm to select the best structure.
In this section, we will focus exclusively on how to form a FIP:
Figure 8 – Timeline overview of the FIP formation (number of workdays)
1) Selecting an Administrator and a Managing Partner
The first step in forming a FIP involves selecting both an administrator and manager. The administrator is responsible for the fund’s legal and administrative management, while the manager oversees the investment decisions and portfolio management.
For Brazilian Search Funds, usually the administrator and manager are the same firm.
Some recommendations:
• Kanastra (maira.pincerato@kanastra.com.br)
• TMF (alexandre.spadeto@tmf-group.com)
• Noronha Trust (felipe.macedo@noronhatrust.com
2) Investor’s step-up
In a traditional Search Fund, investors who provide the initial search capital are compensated for their early risk through a “step-up” mechanism. This typically means that for every unit of capital invested during the search phase, investors receive a 50% premium at the time of the acquisition. For example, if an investor contributed $100,000 in search capital, they would receive $150,000 worth of equity in the acquired company when the acquisition takes place. Alternatively, if an investor chooses not to participate in the acquisition, they may receive their original investment plus the 50% premium in cash. This step-up is designed to reward investors for the uncertainty and risk they bear during the search phase, which often lasts up to two years and may not result in a successful acquisition.
At the fundraising stage, the fund’s legal documents and agreements must clearly define the step-up terms, including the premium rate, whether investors can choose between equity or cash, and their rights to participate in future capital rounds. These decisions directly impact how much capital needs to be raised for the acquisition, as the fund must be prepared to pay out the step-up in cash to those investors who opt for liquidity, while also ensuring sufficient equity is available for those who wish to roll over their investment. If, for example, a significant portion of investors unexpectedly chooses the cash payout, the fund must have arranged for additional financing to cover these obligations without compromising the acquisition’s financial stability.
Furthermore, investors are typically given a specific window-often after the signing of the Letter of Intent (LOI)-to decide whether they will convert their search capital into equity at the step-up premium, take the cash payout, or invest further in the acquisition. This timeline makes it even more important that all parties understand the mechanics and implications of the step-up from the outset, as last-minute changes can create delays or even jeopardize the transaction.
Legal and tax considerations also play a significant role, as the structure of the step-up (equity versus cash) can have different tax implications for investors and may require regulatory compliance depending on the jurisdiction.
In summary, although the step-up is implemented at the time of acquisition, its success depends on thorough planning during the fund’s formation. By clearly outlining all terms, modeling various investor scenarios, and ensuring legal and financial preparedness, Search Fund managers can align interests, avoid liquidity issues, and facilitate a seamless acquisition process. Neglecting this upfront planning can lead to disputes, financing shortfalls, and potentially the failure to close the deal.
3) Specialized Consultancy Agreement
In a search FIP structure, to optimize tax efficiency, the Searcher will act as a Consultant to the fund. Monthly and performance fees will be paid for their role as a Consultor Especializado. The agreement, available at this link, should detail the compensation structure, including fees, payment schedules, and any operational performance-based incentives.
Investors and Searchers should converge to a fair payment, based on market data and company’s financial situation. The salary shouldn’t be too low, to ensure the executive is fully focused on the operation. The salary also shouldn’t be too high, to ensure the company is investing its funds to grow and become more efficient.
Additional to the financial compensation, the Searcher can also be awarded Class P Units (equity ownership of the company), by achieving pre-established goals in the Equity Incentive Plan or similar.
While P1 is earned at the acquisition closing, P2 and P3 are subject to requirements and could be only partially earned by the Searcher.
4) Operational Agreement
The operational agreement should outline all the details of the relationship among the FIP, the manager and the administrator. This agreement should clearly define the specific roles, responsibilities, and expectations of both the manager and the administrator.
In practice, the Searcher acts as the manager of the fund, managing its resources and capital allocation. However, there are several CVM (Brazilian SEC equivalent) requirements that most Searchers do not formally meet to be officially designated as the manager of the fund. Therefore, the administrator is also assigned as the formal manager of the fund. This structure is well accepted by the regulators and investors, facilitating the creation of the FIP.
5) Establishing the FIP’s By-Laws (Regulamento)
The by-laws generally governs the FIP’s operations. This document outlines the fund’s investment objective and strategy, providing a clear understanding of the fund’s purpose and goals. It details the roles and responsibilities of the administrator, manager, consultant, investment committee and quotaholders’ meetings, establishing the governance structure of the fund.
It is important to include a comprehensive fee structure, detailing the management fees charged by the administrator and manager as well as the management and performance fees charged by the consultant. The fee arrangements shall mirror the provisions of the Operation Agreement outlined above to avoid inconsistencies and conflicts.
The methodology for valuing the fund’s assets should be clearly outlined in the by-laws to ensure transparency and consistency in asset valuation. The FIP’s setup process is usually led by the administrator, who is responsible for registering the fund with the CVM and tax authorities.
A template reflecting this document tailored for Brazilian Search Funds is available here.
6) FIP registration
Registering the FIP is a quick step handled by the administrator. This process involves preparing and submitting an application to the CVM, along with all necessary documentation. The required documents typically include the fund’s by-laws, operational agreement, and consultancy contracts, as well as any other relevant legal documents.
7) Getting the FIP’s CNPJ
Obtaining a Brazilian taxpayers’ number or CNPJ is also handled by the administrator. The application process requires detailed information about the fund and its administrators, including their identification documents and proof of address.
8) Creating the Equityholders’ Agreement
A key document in the fund formation phase is the Equityholders’ Agreement. It governs the relationship among the investors and serves as a foundation for defining the rights, obligations, and protections for both investors and Searcher(s).
The agreement outlines the fund’s purpose, governance structure, and restriction on quotas’ transfers, ensuring that all parties are aligned. It specifies the initial and additional capital contributions required from each investor, along with their voting rights and participation in distributions.
A central element of the agreement is the governance framework, including the powers of the Equityholders and Board meetings. The Equityholders’ meeting is the higher-level decision-making instance of the fund while the Board meeting has specific powers on strategic matters of the fund.
The Equityholders’ Agreement shall be consistent with the fund’s by-laws, since both documents will have provisions related to governance, compensation of service providers, restriction on transfer of quotas, among other key aspects.
Sample Equityholders’ Agreement: A template tailored for a Brazilian Search Fund’s FIP is available here.
