INTERNATIONAL GAMBLING LAWS AND REGULATIONS REVIEW

PLACE YOUR BETS: BRAZIL FORTHCOMING REGULATION

In Brazil’s recent history, the exploration of sports betting and other forms of betting (except for federal lotteries and horseracing) in Brazil was long considered a misdemeanor under Decree-Law 3.688, enacted in 1941.

In subsequent decades, legislators have made attempts to alter this legal landscape, with various bills proposed to regulate different forms of gambling, including casinos, bingos, online gaming, and lotteries.

Meaningful changes began to take place in 2018 with the enactment of Federal Law No. 13,756/2018, legalising sports betting activities under the oversight of the Ministry of Finance. Subsequently, in December 2023, the Federal Law No. 14,790/2023 known as the “Sports Betting Law” brought forth new regulations and amendments aimed at refining the landscape of sports betting and iGaming in the country, focusing particularly on aspects such as taxation, compliance, advertising, and oversight of sports betting and iGaming operators.

As of June 2024, when this piece was written, the regulatory framework surrounding sports betting and iGaming in Brazil remains incomplete. The Ministry of Finance’s Secretary of Prizes and Bets (“SPB”) has disclosed a timeline for the full implementation of regulations (called “ordinances”) pertaining to the Sports Betting Law by the end of July 2024.

Now that the regulation is close to its conclusion, it is necessary to provide an overview of the existing rules and the general background of the provision of the services. More in depth, we anticipate some of the rules related to sports betting / online games, highlighting some key issues.

The Brazilian shareholder

asOne major step for those seeking authorization to legally operate a sports betting or iGaming company is to incorporate a Brazilian legal entity, which will hold the authorization issued by SPB. However, one significant hurdle that international investors had to face was how to interpret the requirement for a Brazilian national to hold a minimum 20% ownership stake in a Brazilian sports betting or iGaming company.

In response to those advocating for the idea that the ultimate beneficiary of the 20% participation should be a Brazilian national, SPB has recently launched a FAQ section on its website to clarify doubts regarding the regulation. It has been clarified that any company incorporated in Brazil – regardless of the nationality of the ultimate controller – would be eligible to hold the 20% ownership stake to comply with the aforementioned rule.

ConstitutionSPB’s response complies with article 5 of the Brazilian Constitution, which establishes the “isonomy principle” by stating that “everyone is equal before the law, without distinction of any kind, and Brazilians and foreigners residing in the country are guaranteed the inviolability of the right to life, liberty, equality, security and property”.

While the original text of the Brazilian Constitution allowed for distinctions between Brazilian companies controlled by nationals and foreigners, Constitutional Amendment No. 6 of August 15, 1995, eliminated this difference to attract foreign investment into the country.

More recently, the principle of equalising Brazilian companies, whether controlled by Brazilian nationals or foreigners, reinforced by Law No. 14,286/2021, which article 9, sets forth that foreign capitals must have the same legal treatment as domestic capitals, on equal terms, confirming the principle of isonomy provided by the Brazilian Constitution Article 5.

Brazil’s Supreme Court, the last-instance court for constitutional matters, and the Superior Court of Justice, the last-instance court for federal law matters, share the same understanding and have decided against restrictions to foreign capital unless there are justified reason for such limitations, such as risks to national sovereignty, national security, or the economic order.

Evidently, none of these circumstances apply to a company licensed to operate sports betting in Brazil.

International companies seeking Brazilian authorization may utilize specific corporate and contractual structures to meet the legal requirement of having a minority Brazilian Página 3 de 23 shareholder while retaining full control over a Brazilian sportsbooks and maximizing the dividend receipts.

The most basic corporate structure would involve the incorporation of at least two legal entities: one to apply for the authorization and another to hold the minority ownership in the applicant.

These entities may be organised either as a “Limitada” or “Sociedade Anônima” (known by its acronym “S.A.”), which are respectively equivalent to limited liability companies and corporations in other jurisdictions.

The share capital of both Limitada and S.A. may be formed by units – called quotas in a Limitada and shares in a S.A.; for ease of reference quotas will also be referred to as shares in the document – without voting rights, called preferred shares as opposed to the common or ordinary shares, to which voting rights is mandatorily attributed. Preferred shares shall be limited to 50% of

the total shares of the company (second paragraph of article 15 of Brazilian Corporations Law), and may have the following benefits for its holders, as per article 17: (i) dividend distribution priority, (ii) capital reimbursement priority, with premium or not, in case of bankruptcy, or (iii) both benefits of the items I and II combined. Moreover, the preferred shares may have or not right to vote or have restrictions to exercise the right to vote, subject to what is provide for in the company’s bylaws. Each common share may correspond to one (1) vote in the resolutions of the shareholders’ general meeting (article 110), and the article of association may establish a limitation to the number of votes to each shareholder. On the other hand, the bylaws may confer on preferred shares some rights recognised for common shares, including the voting rights, or confer them with restrictions (article 111).

Having said that and to the extent that the Sports Betting Law does not specify that the 20% participation must include voting rights, the minority shareholder could potentially hold only preferred shares.

But even if the minority shareholder holds voting rights, the majority shareholder would have the ability to keep full control of the Brazilian sports betting company, provided that its bylaws regulate that all decision is taken by the majority of the company’s capital thus making the percentage of shares of the minority shareholder become irrelevant for such resolutions.

However, certain rights connected to the shares cannot be fully eliminated. As per Brazilian Corporations Law article 109, shareholders always have the right to (i) participate on the company’s profits, (ii) participate in the company’s assets, in case of liquidation, (iii) supervise the management of the company’s affairs, and (iv) the preference for the subscription of shares, beneficiary shares convertible into shares, debentures convertible into shares and subscription warrants. Shareholders may not be deprived of these rights, not even by the company’s bylaws or the shareholders’ general meeting.

Nonetheless, the preferred shares without voting rights shall acquire such right, and the preferred shares with restricted voting rights shall have suspended such restriction, if the company fails to pay the fixed or minimum dividends to which they are entitled for the period provided for in the articles of association at a maximum of three (3) consecutive exercises, which right they shall retain until full payment, if such dividends are not cumulative, or until the cumulative dividends in arrears are paid (first and second paragraphs of article 111).

Regarding the calculation of dividends to be distributed, according to the set forth in article 202 of Law No. 6,404, the shareholders shall receive as mandatory dividends, in each exercise, the portion of profits established in the bylaws or, in case such document is silent, the amount determined in accordance with the rules provided by the article 202.

The general meeting may, provided there is no opposition from any shareholder present, decide on the distribution of a dividend lower than the mandatory dividend or the retention of all net profit, if it is a (i) listed company exclusively raising funds through debentures not convertible into shares, or (ii) private company, which controller meets the requirement of item (i) above.

Although the right of the minority shareholder to receive dividends cannot be fully eliminated or abolished, it would be possible to, through a contractual arrangement, provide for an obligation to the minority shareholder to transfer any dividend received to the majority shareholder. Please note however that there will be tax impact and therefore the majority shareholder would receive dividends net of applicable taxes.

Understanding how and when to limit political (right to vote) and economic (right to receive dividends) rights and potentially reducing them to a minimal level, is often a critical factor to consider when establishing joint ventures, something that international companies may want to explore before seeking SPB authorization.

Sports betting and online gaming as a public service

Brazilian law establishes that sports betting and online gaming are fixed-odds bets and are considered a public service. The designation as a public service entails some relevant implications regarding the legal framework applicable to sports betting and online gaming.

One consequence of the public service regime is the restriction on service provision, as the Brazilian Constitution reserves this responsibility for the government. If the government delegates service provision to a private entity, it must do so through concession or authorisation. Therefore, free enterprise is limited by government authorisation, which is also responsible for supervising and monitoring the provision of public services.

The Constitution stipulates that companies responsible for public services will operate under a specific regime. Moreover, the terms of service provision, including conditions for termination and supervision, are unique. Additionally, the Constitution mandates that the law must establish users’ rights and service providers’ obligations to maintain adequate service standards.

The Constitution then establishes the groundwork for the ongoing regulation of sports betting, which has led to the formulation of rules that outline specific conditions for sports betting operators, such as the requirement to be a Brazilian company incorporated in the country and subject to Brazilian laws. Furthermore, these constitutional foundations inform the regulations that dictate the criteria for obtaining authorisation to offer sports betting and online games. These criteria include mandatory compliance policies, data privacy, punters’ rights, and payment for the right to operate.

A public service regime is particularly relevant due to the control exerted by the government over service provision, which includes validating the authorities’ prerogatives and powers. For example, this regime enables the Ministry of Finance to issue orders for the removal of advertisements from unauthorised operators. It also grants the prerogative to instruct the takedown of websites operated by these entities.

The Ministry of Finance regulates, monitors, inspects, and sanctions online sports betting and iGaming. However, other authorities are also empowered to perform these tasks under the public service regime. This situation is due to the Brazilian system’s provision for many internal and external control bodies, which authorise various entities and authorities to supervise the performance of regulated services.

With the start of operations, we may expect the involvement of bodies such as the Public Prosecutor’s Office and the Federal Court of Auditors (or State Court of Auditors, if the license is granted by a state authority), as they have the competence for such oversight. Understanding these bodies’ functioning and inspection procedures will be essential for the operation, particularly to mitigate potential sanctions risks. It is important to

remember that sports betting and online gaming are complex sectors still relatively unknown to regulatory authorities, which may lead to measures prompted solely by a lack of understanding of the operation’s circumstances.

Although the public service regime is often associated with government-imposed restrictions and obligations for providers, its primary objective remains to provide efficient service. Thus, the government’s concern for adequate service guides its actions in regulating and supervising public services. Therefore, it is important to emphasise that regulations should not burden the provider excessively, as this could compromise the quality and continuity of the service.

For this reason, any requirement that does not prove relevant to the quality of the service or the protection of users is inappropriate. Operators can challenge such obligations by demonstrating that the regulator’s requirement is unreasonable or, at the very least, not the best alternative from a cost-benefit perspective.

Another critical aspect is that the public service regime empowers operators to request government intervention in situations that endanger the service. Consequently, licensed operators have the right to seek government action against illegal operators or third parties whose actions jeopardise the continuity and efficiency of operations.

Therefore, the public service regime needs to be sufficiently comprehensive to mitigate the risks of inspection and monitoring. On the other hand, understanding how the public service regime can act in favour of the operation is essential for operators to prepare themselves for possible adverse situations.

Key points of the current regulation

Below are the main points of the regulation – as in force in May 2024, when this piece was written:

1. a) Only authorised legal entities incorporated in Brazil may provide sports betting and iGaming.
2. b) Sports betting operators can only offer bets in actual sport events.
3. c) iGaming operators can only offer bets in virtual online gaming event, which is defined as “an event, competition, or online gaming act whose outcome is unknown at the time of the bet”.
4. d) The Brazilian operator must be a have a Brazilian shareholder owning at least 20% of the shares.
5. e) Federal license’s fee is up to BRL 30 million, which grants the company the right to operate up to three brands for up to five years – the authorisation may be renewed after such a period.
6. e) Federal license’s fee is BRL 30 million, which grants the company the right to operate up to three brands for up to five years – the authorization may be renewed after such a period.
7. f) 12% of GGR will be deducted and allocated to several social actions (vg. Sports, education, tourism).
8. g) An accredited entity must certify the operator’s systems.
9. f) Ordinance No. 615/2024 only authorizes payments made through Instant Payment (PIX), Wire Transfer (TED, in Portuguese), debit or prepaid card, and book transfer, in the case of accounts held in the same institution.

Final remarks

The federal government has made significant progress in regulating sports betting and online gaming. Today, we have an institutional framework already remarkably close to the final model, which allows us to anticipate Brazil’s primary obligations and operating conditions. The expectation is that the completion of the main regulation, scheduled for July, will enable the Ministry of Finance to commence the formal issuance of authorisations.

The first important step is completing the regulation and commencing the issuance of licenses. Subsequently, the topic’s novelty and complexity will continue to prompt extensive discussions and potentially lead to the establishment of new standards or adaptations to existing ones.

Regardless, there is much to celebrate. Brazil represents a significant market, and proper regulation has the potential to create a favourable environment for further market development. Thus far, the government has exercised the necessary caution and implemented regulations effectively. The challenge lies in anticipating opposing movements and adverse situations to address distortions and preemptively safeguard the regulated market.