Convertible debentures are debt instruments that convert into equity stakes, and an SME structured as a closely held S.A. (“sociedade anônima,” the Brazilian equivalent of a corporation) can issue them to raise capital from multiple investors with fewer governance constraints than a bilateral convertible loan.
1. The fundraising round that needed more than one investor
A logistics company with annual revenue of R$60 million needed R$8 million to expand its fleet of refrigerated vehicles. The company had already been operating as a closely held S.A. for two years and had audited financial statements.
The first option considered was equity crowdfunding — but the company’s revenue exceeded the R$40 million threshold set by CVM (Comissão de Valores Mobiliários, Brazil’s securities regulator) Resolution 88/2022 for this type of fundraising. The second option was a convertible loan with a single venture capital fund. The fund accepted the financial terms but conditioned the investment on veto rights over hires above a certain salary threshold, equipment purchases, and the opening of new branches — restrictions that would have compromised the company’s operational autonomy for a round that was, essentially, about expanding physical assets.
The third path was issuing convertible debentures through a restricted-efforts offering, distributed to four professional investors. The transaction took four months from drafting the issuance deed to financial settlement. Governance clauses were limited to what is reasonable in a debt structure: acceleration of maturity in case of default, restrictions on dividend distribution while debentures remained outstanding, and quarterly information rights.
This case illustrates the central logic of this article: convertible debentures are not just an instrument for early-stage startups. For SMEs with an established corporate structure, they open access to the capital markets with less friction than equity financing and with more governance flexibility than a bilateral convertible loan.
2. What a convertible debenture is and how conversion works
A “debênture” (debenture) is a debt instrument issued by a corporation (“sociedade anônima”), governed by Articles 52 to 74 of Law 6,404/1976 (Brazil’s Corporations Law). Whoever purchases a debenture lends money to the issuing company and is entitled to a return — usually indexed to the CDI (Brazil’s interbank interest rate), IPCA (Brazil’s official inflation index), or a fixed rate — plus repayment of the principal at maturity.
A convertible debenture adds an option: at maturity (or under previously established conditions), the holder can convert the value of the instrument into shares of the issuer instead of receiving cash back. The conversion terms — number of shares per debenture, conversion price, exercise period, and whether the option belongs to the investor, the company, or both — are set out in the issuance deed and cannot be unilaterally altered after issuance.
There are two common conversion profiles for SMEs:
| Type | Who decides on conversion | When it occurs |
|---|---|---|
| Convertible at the debenture holder’s discretion | The investor | At maturity or within defined windows |
| Convertible at the issuer’s discretion | The company | Upon liquidity events (IPO, sale) |
| Automatic (trigger-based) | None — automatic | Upon a defined condition (e.g., new funding round above X) |
In all three cases, the deed must set the conversion price or an objective criterion for calculating it — for example, based on a valuation report to be prepared at the time, or a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization) for the fiscal year preceding conversion.
What changes in the capital structure upon conversion. Once converted, the debenture holder ceases to be a creditor and becomes a shareholder. This dilutes existing shareholders. That’s why, before issuing convertible debentures, the company needs to calculate the potential dilution impact based on a full-conversion scenario — and decide whether to cap conversion at a percentage of capital or set an issuance ceiling.
3. Restricted-efforts offering vs. public offering: two paths, two obligation profiles
CVM Resolution 160/2022 regulates public offerings of securities, including debentures. For SMEs, the most relevant distinction is between a restricted-efforts offering and a broad public offering.
Restricted-efforts offering (CVM Resolution 160/2022, Art. 3, §1)
Under this arrangement, the issuer may forgo CVM registration, provided that:
- The offering is directed exclusively at professional investors (net worth above R$10 million, per CVM Resolution 30/2021);
- Distribution is carried out through an intermediary that is part of the distribution system (a licensed brokerage or dealer);
- The limits on the number of investors and sales efforts established under the rule are observed.
This route is the most common for SMEs raising between R$2 million and R$30 million: it can dispense with CVM registration and, depending on the structure, reduce time and costs compared to a broad public offering — without eliminating other structuring costs.
Public offering with registration
Aimed at a broader universe of investors (including qualified investors and the general public). It requires prior CVM registration, a full prospectus, independent audits, and compliance with a series of periodic disclosure obligations. Cost and timeline are significantly higher — in practice, this route is suited to offerings above R$50 million or to companies in a pre-IPO stage.
Summary comparison table:
| Criterion | Restricted-efforts offering | Registered public offering |
|---|---|---|
| CVM registration | Waived | Mandatory |
| Target audience | Professional investors | Qualified investors and general public |
| Typical timeline | 60 to 120 days | 6 to 12 months |
| Approximate cost (fees + structuring) | Typically lower than a broad public offering (varies by structure and counsel) | Significantly higher — includes prospectus and ongoing disclosure obligations |
| Ongoing disclosure obligations | Reduced | Extensive |
4. What the issuance deed needs to contain
The issuance deed (“escritura de emissão”) is the central document of any debenture issuance. It functions like a detailed loan agreement, with additional clauses specific to the nature of the instrument. Article 61 of Law 6,404/1976 lists the minimum requirements; for convertible debentures, the points that deserve extra attention are:
- Total issuance amount and unit value of each debenture. Defines the size of the raise and the granularity of the lots.
- Return/yield. Indexing rate (CDI, IPCA, fixed rate), spread, interest payment frequency (monthly, semi-annual, at maturity), and payment criteria.
- Term and maturity. Fixed or tranche-based maturity. It must align with the company’s projected cash flow.
- Conversion terms. Conversion price, number of shares per debenture, exercise period, share type (common or preferred), and maximum permitted dilution percentage.
- Acceleration of maturity. Events that authorize immediate redemption by the debenture holder: default, change of control without consent, deterioration of pre-established financial indicators (covenants).
- Guarantees/collateral. Debentures can be unsecured (“quirografárias”), floating-charge (“flutuantes” — priority over assets but without a specific lien), secured by real collateral (mortgage, pledge), or subordinated. This choice affects the cost of capital and the debenture holders’ position in the event of judicial reorganization (“recuperação judicial,” Brazil’s court-supervised restructuring proceeding).
- Debenture holders’ meeting. Rules for calling meetings, quorum, and matters requiring collective resolution.
- Fiduciary agent (“agente fiduciário”). Identification, powers, and duties.
The deed must be recorded with the Registry of Deeds and Documents (“cartório de títulos e documentos”) or the Commercial Registry (“Junta Comercial”), depending on the chosen registration method.
5. The fiduciary agent: what it’s for and how to choose one
The fiduciary agent (“agente fiduciário”) is mandatory in public debenture offerings and strongly recommended in restricted-efforts offerings. Its role is governed by Articles 66 to 70 of Law 6,404/1976 and CVM rules: it represents the interests of the debenture holders vis-à-vis the issuer — it is not the company’s lawyer, nor an individual investor’s, but represents the debenture holders collectively.
In practice, the fiduciary agent:
- Monitors the issuer’s compliance with its obligations (interest payments, covenant compliance, delivery of periodic information);
- Notifies debenture holders of material events;
- Calls and presides over debenture holders’ meetings;
- Takes protective measures in the event of default — including filing enforcement proceedings, if necessary.
How to choose one. In the Brazilian market, fiduciary agents are typically financial institutions (banks, dealers) or specialized firms licensed by the CVM. For SME issuances with restricted efforts, the fiduciary agent’s cost varies according to the issuance size and clause complexity. The practical evaluation criteria are:
- Experience with transactions of similar size;
- Capacity for ongoing (not merely formal) monitoring;
- Clarity about proactive communication duties in the event of deteriorating indicators.
In smaller issuances, it’s common for the investing funds themselves to waive a formal fiduciary agent, replacing it with contractual clauses granting equivalent powers to a representative appointed by the debenture holders. This alternative is possible in restricted-efforts offerings but requires case-by-case analysis.
6. SME as a closely held S.A.: requirements and how it differs from a convertible loan
To issue debentures, the company must be a corporation (“sociedade anônima”) — a “Ltda.” (limited liability company, Brazil’s most common private company form) cannot issue debentures. This is the first practical requirement: if the SME still operates as a Ltda., the corporate conversion must take place before issuance.
Additional requirements for issuance:
- Corporate resolution: Issuing debentures requires approval at an extraordinary general shareholders’ meeting (“AGE”), with a qualified quorum as set out in the bylaws. The bylaws may delegate this authority to the board of directors, provided a board is in place.
- Issuance limit: Law 6,404/1976 establishes that the total value of outstanding debentures cannot exceed the company’s share capital (with exceptions for debentures backed by real collateral or in specific situations). This limit must be checked before defining the size of the raise.
- Registration and bookkeeping: Debentures and the debenture holders’ registry books must be recorded as required by law.
Differences compared to a convertible loan:
| Aspect | Convertible loan | Convertible debentures |
|---|---|---|
| Number of investors | Typically 1 | Multiple (up to the regulatory limit) |
| Governance | Bilaterally negotiated clauses — can be invasive | Standardized clauses in the deed — more predictable |
| Instrument liquidity | None (private contract) | Possible transfer between qualified investors |
| CVM registration | Not required | Can be waived (restricted-efforts offering) |
| Structuring cost | Typically lower (no fiduciary agent or public deed) | Higher — includes fiduciary agent, registration, and public deed |
| Corporate form | Works for both Ltda. and S.A. | S.A. only |
A convertible loan is simpler and cheaper for early rounds with a single investor. For raises above R$3 million with multiple investors, or when an investor’s governance demands are too restrictive, convertible debentures may represent a more flexible alternative from a governance standpoint — suitability for any specific case depends on individual analysis.
FAQ
1. Can a closely held S.A. with less than two years of existence issue convertible debentures?
Yes — Law 6,404/1976 does not require a minimum period of existence for issuing debentures. What determines the practical feasibility of the issuance is not the company’s age, but its ability to present reliable financial information to investors. In a restricted-efforts offering, professional investors conduct their own due diligence; therefore, audited financial statements (even for just one fiscal year), detailed cash flow projections, and well-structured bylaws matter more than the company’s age. Very young companies may find it harder to price debentures competitively, because investors perceive higher risk — which is reflected in the required yield spread.
This is general information and does not replace consulting a lawyer for analysis of your specific case.
2. What happens if the company can’t pay interest at maturity and the debenture holders want to convert?
Conversion and default are legally distinct events and must be addressed separately in the deed. If the company fails to pay interest on the due date, it falls into default — and the deed typically provides for acceleration of the outstanding balance in that scenario. Conversion, on the other hand, is a right exercised under the conditions and timeframes set out in the deed, regardless of interest payment. In practice, a well-drafted deed needs to define: (a) whether interest default suspends or extinguishes the conversion right; (b) whether unpaid interest is included in the amount to be converted into shares; and (c) what powers the fiduciary agent has in this scenario. These clauses are frequently overlooked in standardized drafts — and become the main point of conflict between issuers and debenture holders in situations of financial distress.
This is general information and does not replace consulting a lawyer for analysis of your specific case.
3. Do convertible debentures issued through a restricted-efforts offering allow an investor to resell the instrument to another investor?
Yes, with restrictions. CVM Resolution 160/2022 establishes that debentures distributed through a restricted-efforts offering can only be traded among professional investors during a lock-up period (generally 18 months from issuance). After this period, trading is possible on the secondary market, provided the buyer is also a qualified or professional investor, as applicable. The issuance deed may broaden these restrictions — for example, by requiring the issuer’s prior consent for any transfer. For the company, this point matters because it defines who can become a debenture holder without the company having direct control over it: a well-structured transfer restriction in the deed prevents the instrument from ending up in the hands of an investor whose profile is incompatible with the company’s operations.
This is general information and does not replace consulting a lawyer for analysis of your specific case.
Disclaimer
The information in this article is general and educational in nature. It does not constitute legal advice for any specific situation and does not replace a lawyer’s analysis of your particular case.
Are you considering raising funds through convertible debentures, or want to understand whether this structure makes sense for your case? Tell us what’s going on.
Alessandra De Paula Souza — OAB/PR 31.133