Member firms of the World Law Group recently collaborated on a global guide to venture capital that covers over 30 jurisdictions on investment approval processes, typical investment sectors and investment structures on corporate transactions. venture capital (and more!).
The guide does not claim to be exhaustive and the laws in this area are evolving rapidly. In particular, it is not a substitute for professional and detailed legal advice, as facts and circumstances vary from case to case and country specific regulations may change.
This chapter covers Uruguay. Check out the full guide.
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In your jurisdiction, what industries do venture capital funds typically invest in?
Key sectors attracting venture capital (CV) Investments in Uruguay include financial services (including FinTech companies, mobile wallets and digital payment solutions), e-commerce, consumer products and information technology.
Do venture capital funds require approvals before investing in your jurisdiction?
Generally, investments in Uruguay do not require prior approval. However, some regulated industries require prior authorization to make an investment or transfer the investment, such as some media companies, rural real estate, transportation, software, some financial services companies, insurance, cannabis, etc. . Most venture capital deals are done. in industries where no prior authorization is required.
Are there any legal limitations on an offshore venture capital fund to acquire control or influence the activities, operations or governance of an issuing entity?
See the answer to question 2.
Would an investor be required to conduct an antitrust analysis before investing? When would such a requirement be triggered?
Yes. A venture capitalist will need to perform antitrust analysis at an early stage of the transaction.
Since April 12, 2020, a pre-merger control regime has been in effect in Uruguay. Under this regime, an application for authorization is required for transactions in which the buyer and the target jointly have a gross income in Uruguayan territory of approximately USD 70,000,000.
Transactions concluded before April 12, 2020 only required pre-merger notification if certain thresholds were reached.
What are the preferred structures for investing in venture capital operations? What are the main drivers of each of these structures?
Typically, venture capital firms acquire a 10-15% minority stake in seed investments through equity (common stock) or, in some cases, non-voting preferred stock. The classic legal structure consists of paid-up capital increases (capital contributions) or transfers of shares. The target venture capital company is usually a Uruguayan company (sociedad anónima), although we expect to see more target companies in the future taking the form of an SAS (sociedad por acciones simplificadas). The investors are sometimes Uruguayan holding companies, sometimes American or European holding companies.
In these cases, it is common for the parties to enter into a shareholders’ agreement in which the investor and the founders can agree on certain commitments, veto and corporate governance issues. Typically, founders retain control of the business, and venture capitalists impose restrictions and conditions. The parties sometimes also negotiate puts and calls.
Other possible investment structures that we have seen consist of loans (in the form of notes issued by the target company) convertible into shares.
When determining the preferred structure, taxation is usually the key factor. Intellectual property also plays an important role in some venture capital transactions related to FinTech, software and information technology.
Are there any restrictions on the rights available to venture capitalists in public companies?
No. Uruguayan securities regulations apply uniformly to all investors and shareholders of a public company, regardless of their domicile.
What protections are generally available to venture capitalists in your jurisdiction?
Uruguay’s investment law offers general protections to all investors, stipulating that foreign investors enjoy at least the same protections as Uruguayan investors. The law also specifies that as a general rule, investments do not require any prior authorization or registration, and that there is also no exchange control.
Investors can distribute the dividends they get from the venture capital company and transfer them outside of Uruguay without any restrictions, except for the completion of corporate law formalities and payment of applicable taxes. .
Legal protections available to minority shareholders of a Uruguayan company include certain rights to information, the right to sue the board of directors for breach of duty of care and loyalty, as well as the right to sue majority shareholders. in the event that they abuse their right to vote.
Is warranty and indemnity insurance common in your jurisdiction? Are there any legal or practical challenges associated with obtaining such insurance?
No, this is not common. Typically, in venture capital investments, there is no escrow or collateral account and there is no (or limited) recourse to founding or other controlling shareholders.
A guarantee and indemnity insurance market has not yet been developed in Uruguay although registered insurance companies could potentially offer this product.
What are the common exit mechanisms adopted in venture capital transactions and what, if any, are the risks or challenges associated with such exits?
The most common exit strategy is to negotiate exit rights, exit rights, and puts when investing. As a rule, these obligations are stipulated in a shareholders ‘agreement and in Uruguay it is common for shareholders’ agreements to be secured by a pledge of shares of the shareholders concerned.
Do investors generally opt to exit the public market via an IPO? Are there specific public market challenges that need to be addressed?
There is no IPO market in Uruguay although there are regulations permitting IPOs.
*Guyer & Rules