A planned bill that seeks to streamline the sale of companies’ debt or equity in the country’s public market could become a funding alternative for startups struggling to raise fresh rounds.

The bill proposes changes to the country’s stock market and investment funds laws to allow companies to sell debt or equity to qualified investors in the public mark  et without needing approval from the National Banking and Securities Commission, said Alvaro Garcia, president of the Mexican Brokers Association (AMIB) and the bill’s main sponsor.

In Mexico, a qualified investor is considered as someone who owns investments worth at least MXN 11.5m (USD 608,000) or with a gross annual income of at least MXN 3.8m (USD 201,000).

The proposed legislation would allow companies to launch a public debt or equity sale in as little as two and a half months, according to a Mexico City-based lawyer who has seen a draft of the bill.

Companies in Mexico could raise as little as MXN 100m (USD 5.3m) through these so-called “simplified offerings,” said Maria Ariza, CEO of Mexico’s Institutional Stock Exchange (BIVA) and who is also promoting the bill.

The AMIB estimates that 32,000 companies could potentially sell debt in the public market through the simplified offerings — equivalent to 144A issuances in the US — and an additional 19,000 could use them as an alternative funding option. 

Amid a drastic pullback in venture capital funding, these simplified offerings could become an attractive funding option for startups, he noted.

Latin American startups raised USD 8.28bn in VC funding last year, or 79% less than in 2021, according to Crunchbase. In the last six months, at least seven Mexican startups have decided to delay their fundraising plans due to market conditions, as reported. 

According to Ariza, startups are prime candidates to launch simplified offerings as they’ve already raised capital from institutional investors, developed corporate governance regimes, and report financial information on a regular basis.

Ariza, who previously headed the Mexican Private Equity Association (Amexcap), is already in talks with several startups that could launch dual listings in Mexico and the US.

Kukun, a Mexico City-based property technology startup, and Get In, a Mexico City-based retail analytics solutions provider, could raise capital through these simplified offerings, their CEOs told Mergermaket.

Antonio Nuno, CEO of Mexico City-based apparel company Someone Somewhere, said he knew little about the simplified offerings, but warned that they could lose their appeal if it takes many months to launch them or if founders must cede control over key company decisions.

Legislative timing

The bill that would create the simplified offerings is being drafted by the head of the banking, securities, and savings unit at the Mexican Finance Ministry and could be submitted to the lower House of Congress in February, said Garcia, from AMIB.

The legislation must be approved by a simple majority in both the lower House of Congress and the Senate, said Carlos Ramirez, partner at Integralia Consultores, a Mexico City-based legislative investigative firm. President Andres Manuel Lopez Obrador’s National Regeneration Movement (Morena) party and its coalition partners control 55.2% of the 500 seats in the lower House of Congress and 59% of the 128 seats in the Senate.

However, a hard-left faction of Lopez Obrador’s cabinet, including Energy Minister Rocio Nahle and Manuel Bartlett, the head of state-owned electricity utility Comision Federal de Electricidad, could object to a piece of legislation that seeks to help the financial industry, said Israel Tello, partner at Analitica Parlamentaria, a Mexico City-based legislative intelligence firm.

If Congress approves the bill in 1H23, as expected, there could be between 10 and 20 simplified offerings in 2H23, according to Garcia, from AMIB.

Resurrecting Mexico’s public market

The simplified offerings bill is the latest attempt by Lopez Obrador’s government to reinvigorate Mexico’s lackluster public market. In 2019, it lowered taxes on proceeds from initial public offerings (IPOs). It was part of an eight-action plan that also eliminated a withholding tax for foreign buyers of corporate bonds.

Mergermarket reported that the move would do little to boost the country’s capital market. The last company to launch an IPO in Mexico was Cox Energy America [BIVA:COXA], a subsidiary of Spain’s renewable energy company Cox Energy, which listed its shares on BIVA in 2020. It was Mexico’s first public share sale in nearly three years.

In fact, since then, several publicly listed companies have chosen to go private, as reported. Only 150 companies trade their shares in the public market in Mexico, according to Ariza, from BIVA.

And while streamlining the public sale of debt and equity is a step in the right direction, Mexico must still find a way to expand its investor’s base, said Ariza. About half of planned IPOs fail to take off because there is not enough investor demand, she noted.

“Only one in every 500 Mexicans trades in the stock exchange (versus one in every 10 Americans),” Luis Cervantes, head of General Atlantic in Mexico, wrote in a 2019 blog post.