Alfaro-Abogados and Bruchou, Fernández Madero & Lombardi Abogados
1) In your jurisdiction, which sectors do venture capital funds typically invest in?
Key sectors attracting venture capital (VC) investments in Argentina include information technology, e-commerce, healthcare, consumer, financial services (including mobile wallets and digital payment solutions), education, biotechnology, and agribusiness.
2) Do venture capital funds require any approvals before investing in your jurisdiction?
Foreign venture capital investment vehicles are required to obtain a registration with the public registry of commerce if they intend to participate and vote in shareholders’ meetings (or a similar corporate body) in privately held companies. This registration must be obtained prior to the investment. So, in Argentina there is a lot of flexibility to consummate VC investments. Of course, depending on the regulatory framework applicable to the industry of the target of the investment, other government approvals or registrations may apply. But none of those regulations are aimed specifically at VC funds.
3) Are there any legal limitations to an offshore venture capital fund acquiring control or influencing the business, operations, or governance of an investee entity?
There are no restrictions on a foreign VC fund acquiring control or influencing operations of a private company, other than (I) if the target is the owner of rural land or land in a frontier zone, or (II) in certain sectors of media communications.
In case of a listed target, once an investor acquires control it has to make a mandatory tender offer to acquire the rest of the capital from public shareholders of the target. These mandatory tender offer requirements apply to any party achieving such a position, regardless of being a foreign investor.
4) Would an investor be required to undertake an antitrust analysis prior to investment? When would such a requirement be triggered?
The antitrust mandatory notification is required when the combined aggregate overall domestic turnover (net of discounts, VAT and any other taxes directly related to the turnover) of the acquiring group (including purchaser and affiliates) and the targeted business for the preceding fiscal year exceeds 100 million Economic Units (as of the submission date, equivalent to approx. USD 52.9 million). Generally, early stage VC transactions in Argentina rely on a statutory exemption from mandatory merger notification requirements under the merger control regime. Currently, merger control regulations allow for an exemption from notification where both the assets of the target and the price being paid do not exceed 20 million Economic Units (as of this submission, equivalent to approx. USD 10.5 million). Alternatively, if the investor has no prior activity or assets in Argentina (including no significant exports to our country in the last 36 months), the acquisition of only one company by only one foreign company without any assets or shares of other companies in Argentina is exempt under the so-called “first landing” exemption.
5) What are the preferred structures for investment in venture capital deals? What are the primary drivers for each of these structures?
Typically, VCs acquire equity stakes. Depending on the investment strategy of the fund it may entail a minority stake or a co-controlling stake. It is not usual to resort to preferred stock or convertible debt.
Subject to tax implications and foreign-exchange regulations analysis, most funds would rather invest in a holding company outside the country than directly in the local entity.
More recently, the Federal Congress passed law 27,349 aimed at fostering entrepreneurship in the country. Under this regime, certain tax advantages are contemplated for investment in small- to medium-sized entrepreneurship projects. Also, a government sponsored fund (FONCDE) was set up to finance entrepreneurs and even partially match the investment made by a VC fund. It also created a new corporate body called SAS (acronym of “sociedad anónima simplificada”, or simplified corporation), a type of corporation that may be easily set up and where parties have significant leeway to build in the bylaws that would otherwise be only included in a shareholders’ agreement. Please note that lately the new federal administration has taken a step back with respect to SAS as a desired legal form for investments and changed some of the features of its advantageous regime.
6) Is there any restriction on rights available to venture capital investors in public companies?
No. Securities regulations in Argentina apply uniformly to all investors and shareholders of a public company, regardless of domicile.
7) What protections are generally available to venture capital investors in your jurisdiction?
Aside from standard contractual protections, the investors shall have the rights set forth in the by-laws of the issuer of the equity or otherwise be subject to the terms of the General Companies Act 19,550. Our corporate law provides shareholders with certain information rights, preemptive and accretion (super pro rata preemptive rights), rights in the context of issuance of new securities, a mechanism to elect board members that allows in certain cases the minority to multiply its voting power, etc.
8) Is warranty and indemnity insurance common in your jurisdiction? Are there any legal or practical challenges associated with obtaining such insurance?
The use of warranty & indemnity insurance is not developed at all in Argentina. Parties rely on the contractual arrangements, including price adjustment mechanisms or typical reps. & warranties tied with indemnity provisions.
9) What are common exit mechanisms adopted in venture capital transactions, and what, if any, are the risks or challenges associated with such exits?
All US-style exit strategies that a VC fund would bargain for elsewhere may be used in Argentina at the contractual level, including drag-along rights or forcing an entity to go public (registration rights). Please note that the latter, while always negotiated, is seldom used as the level of maturity of Argentina’s capital market is quite low. So, it is not a real exit alternative.
With respect to buybacks, Argentina’s company law and securities regulations impose certain limitations to such an alternative and it is used for public companies in very limited cases (generally not linked to an investment of a VC) and almost never in the case of privately held companies.
10) Do investors typically opt for a public market exit via an IPO? Are there any specific public market challenges that need to be addressed?
While it is common for most VC deals to provide an exit via an IPO, it has only been used in very limited cases. As indicated above, the low level of volume and interest of equity traded in Argentina’s capital market is certainly a very difficult burden to overcome in order for such a mechanism to be worth trying.
Sebastian C. Rodrigo
Bruchou, Fernández Madero & Lombardi Abogados
Estanislao H. Olmos
Want to Learn More?
The objective of this publication is to serve as a Q&A-style multi-jurisdictional guide to venture capital law in countries where WLG member firms have offices. The guide intends to provide a high level overview of the venture capital market, including key sectors, preferred investment structures, regulatory approval requirements, limitations on acquisition of control in portfolio companies, restrictions on investment, investor protection, and exits; and hopes to provide readers the benefit of the shared global knowledge and local insights among the WLG member firms.