MEXICO: An Introduction to Capital Markets

Capital Markets: Mexico 

In the last few years, the Mexican securities markets have suffered from a lack of new equity offerings as well as a number of de-listings of important Mexican issuers. The main reason for this has been the perceived lack of liquidity and depth of the Mexican securities markets, which eventually led some Mexican companies to seek capital outside of Mexico without looking at the internal markets.

Late December 2023, an amendment to the Mexican Securities Market Law was enacted with the intention of bolstering the Mexican securities markets by simplifying the registration and public offering process in Mexico for small and mid-sized companies, easing certain governance restrictions on Mexican public companies, and providing new solutions to provide liquidity (ie, through the creation of hedge funds). We believe that these amendments will bring important opportunities not only for companies seeking capital from Mexican investors (including Mexican pension funds), but also for investors seeking to finance Mexican public companies through private investments or other solutions that were challenging prior to the enactment of the amendment.

Simplified Registration Process 

A simplified registration process was created to enable mid and small cap companies to tap the Mexican securities markets in a timely and cost-efficient manner. Under this new process, the Mexican securities regulator, the Comisión Nacional Bancaria y de Valores, will not be in charge of reviewing and authorising a public offering of securities, and the participating Mexican broker dealers will retain the obligation to verify compliance with the public offering requirements under Mexican law, including fair and accurate disclosure in the offering materials. The licensed Mexican securities exchanges (where the securities are listed) will oversee compliance with applicable reporting requirements and disclosure.

The securities offered under a simplified registration process may only be offered and sold to qualified investors (ie, high net worth individuals) and institutional investors (including Mexican pension funds and insurance companies), although the securities will be registered in the Mexican National Securities Registry and will be listed in a licensed Mexican securities exchange.

Although certain details related to the simplified registration process were left open by the legislator to be addressed in secondary regulation, including the definition of medium and small sized companies, we believe that the creation of this process will generate renewed interest in the Mexican securities markets for those seeking capital from Mexican investors, either through direct listings or, if further liquidity and depth is required, through dual offerings (comprised of a public or private offering outside of Mexico coupled with a simplified registration process in Mexico) which may afford certain tax benefits for shareholders of Mexican companies that are publicly listed.

Changes to Corporate Governance 

The amendment now allows Mexican publicly listed companies to issue different classes or series of shares that grant different rights, including limited or no voting rights, veto rights, or differentiated economic rights. This is a relevant change from the prior regime, which only allowed companies to issue shares with limited or no voting rights as an exception with the prior approval of the Mexican securities regulator, and only to the extent the limited shares did not exceed 25% of the total outstanding shares of the issuer.

In addition, the shareholders meeting of a Mexican public issuer is now expressly authorised to delegate onto the board of directors the authority to issue new shares and to determine the terms of the issuance, including the applicability (or not) of the statutory preferential right of existing shareholders to participate in the offering.

We believe that these two changes combined open the possibility of new financing opportunities for Mexican public issuers, including through private investments with private equity type mechanisms (such as carried interest and preferred exits) through the issuance of different classes of shares, which previously were structurally challenging to implement. They also allow for faster and more efficient follow-on offerings for registered issuers.

Of note is that existing Mexican public companies may need to amend their by-laws to take advantage of these benefits.

Hedge Funds 

In order to add a new institutional investor that could bring liquidity to the Mexican securities markets alongside Mexican pension funds and insurance companies, the amendments introduce for the first time in Mexico the concept of hedge funds (fondos de inversión de cobertura). As opposed to mutual funds (known as fondos de inversión) which have existed in Mexico since 2001 and are subject to very stringent regulation, Mexican hedge funds are being designed to be more flexible and versatile. While mutual funds are required to be managed by a fund operator subject to significant regulatory requirements (including required capitalisation), hedge funds may be managed by fund operators or registered investments advisors, which are less regulated than fund operators and require a registration with the Mexican securities regulator. Hedge funds are also intended to have a more flexible investment regime which may change over time without requiring further authorisations, subject to appropriate disclosures in the respective prospectus. Because of the risk associated with such flexibility, hedge funds may only be offered to institutional and qualified investors in Mexico.

The legislator left the details around the operation of hedge funds to be defined by secondary regulation, which we view as a positive decision that will allow the Mexican Banking and Securities Commission to tweak the hedge fund regulation as necessary without requiring a change in law (which requires congressional approval) so that hedge funds can achieve their full potential and bring liquidity to the Mexican securities markets.

Although a lot of the final success of the amendments to the Mexican Securities Market law hinges on the secondary regulation to be published by the Mexican securities regulator (note that the regulator has 365 days from the effectiveness of the amendment to publish the secondary regulation), we believe that this is a significant step in the right direction. The author will continue to update this article as new information becomes available, but in the meantime, Mexican issuers and investors can start thinking about the opportunities already created by the amendment, such as private investments in public companies, preferred equity schemes, and fast track follow on equity raises.