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As filed with the Securities and Exchange Commission on November 15, 2019.

Registration No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

XP Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

The Cayman Islands   6211   N/A
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

Av. Chedid Jafet, 75, Torre Sul, 30th floor,

Vila Olímpia – São Paulo

Brazil 04551-065

+55 (11) 3075-0429

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

XP Investments US, LLC 55 West 46th Street, 30th floor

New York, NY 10036 (646) 664-0501

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Manuel Garciadiaz

Byron B. Rooney
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, NY 10017

(212) 450-4000

 

J. Mathias von Bernuth
Ryan Dzierniejko

Filipe Areno
Skadden, Arps, Slate, Meagher & Flom LLP

4 Times Square
New York, NY 10036

(212) 735-3000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging growth company  ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
 

Proposed

Maximum
Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee(3)

Class A common shares, par value US$                 per share(4)

  US$100,000,000   US$12,980

 

 

(1)

Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)

Includes Class A common shares to be sold by us and the selling shareholders.

(3)

Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

(4)

Include Class A common shares to be sold upon the exercise of the underwriters’ option to purchase additional shares. See “Underwriting (Conflicts of Interest).”

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We and the selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED                      , 2019

PRELIMINARY PROSPECTUS

Class A Common Shares

 

 

LOGO

XP Inc.

(incorporated in the Cayman Islands)

 

 

This is an initial public offering of the Class A common shares, US$        par value per share of XP Inc., or XP. XP is offering             of the Class A common shares to be sold in this offering. The selling shareholders identified in this prospectus are offering an additional              Class A common shares. We will not receive any proceeds from the sale of Class A common shares by the selling shareholders. Prior to this offering, there has been no public market for our Class A common shares. It is currently estimated that the initial public offering price per Class A common share will be between US$        and US$        . We have applied to list our Class A common shares on the Nasdaq Global Select Market, or Nasdaq, under the symbol “XP.”

Following this offering, our existing shareholders, XP Controle Participações S.A., or XP Controle, ITB Holding Brasil Participações Ltda., or Itaú, General Atlantic (XP) Bermuda, L.P., or GA Bermuda, and DYNA III Fundo de Investimento em Participações, or DYNA III, will beneficially own    % of our outstanding share capital, assuming no exercise of the underwriters’ option to purchase additional shares referred to below. The shares held by DYNA III are Class A common shares. The shares held by XP Controle are Class B common shares and the shares held by Itaú and GA Bermuda are Class A and B common shares, such Class B common shares carry rights that are identical to the Class A common shares being sold in this offering, except that (1) holders of Class B common shares are entitled to 10 votes per share, whereas holders of our Class A common shares are entitled to one vote per share; (2) holders of Class B common shares have certain conversion rights; (3) holders of Class B common shares are entitled to preemptive rights in the event that there is an increase in our share capital and additional common shares are issued in order to maintain their proportional ownership interest; and (4) Class B common shares shall not be listed on any stock exchange and will not be publicly traded. For further information, see “Description of Share Capital” and “Management—Shareholders’ Agreement.” As a result, XP Controle will control approximately    % of the voting power of our outstanding share capital following this offering, assuming no exercise of the underwriters’ option to purchase additional shares.

 

 

We are an “emerging growth company” under the U.S. federal securities laws as that term is used in the Jumpstart Our Business Startups Act of 2012 and will be subject to reduced public company reporting requirements. Investing in our Class A common shares involves risks. See “Risk Factors” beginning on page 23 of this prospectus.

 

     Per Class A common share      Total  

Initial public offering price

   US$                    US$                

Underwriting discounts and commissions

   US$        US$    

Proceeds, before expenses, to us(1)

   US$        US$    

Proceeds, before expenses, to the selling shareholders(1)

   US$        US$    

 

(1)

See “Underwriting (Conflicts of Interest)” for a description of all compensation payable to the underwriters.

The selling shareholders have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase up to                  additional Class A common shares at the initial public offering price, less underwriting discounts and commissions.

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the Class A common shares against payment in New York, New York on or about             , 2019.

 

 

Global Coordinators

 

Goldman Sachs & Co. LLC   J.P. Morgan   Morgan Stanley    XP Investments    Itaú BBA

Joint Bookrunners

 

BofA Securities    Citigroup        Credit Suisse    UBS Investment Bank

 

 

The date of this prospectus is                 , 2019.


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LOGO

 


Table of Contents

 

LOGO

 


Table of Contents

 

LOGO

 

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TABLE OF CONTENTS

 

 

 

     Page  

Glossary of Terms

     iii  

Summary

     1  

The Offering

     13  

Summary Financial Information

     18  

Risk Factors

     23  

Presentation of Financial and Other Information

     60  

Cautionary Statement Regarding Forward-Looking Statements

     65  

Use of Proceeds

     66  

Dividends and Dividend Policy

     67  

Capitalization

     68  

Dilution

     69  

Exchange Rates

     71  

Market Information

     73  

Selected Financial Information

     74  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     77  

Regulatory Overview

     114  

A Letter from The Founder

     138  

Business

     140  

Management

     177  

Principal and Selling Shareholders

     189  

Related Party Transactions

     192  

Description of Share Capital

     194  

Class A Common Shares Eligible for Future Sale

     211  

Taxation

     213  

Underwriting (Conflicts of Interest)

     218  

Expenses of The Offering

     229  

Legal Matters

     230  

Experts

     230  

Change in Registrant’s Certifying Accountant

     230  

Enforceability of Civil Liabilities

     231  

Where You Can Find More Information

     233  

Explanatory Note To The Financial Statements

     234  

Index to Financial Statements

     F-1  

 

 

We and the selling shareholders have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we may have referred you. We and the selling shareholders take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We, the selling shareholders and the underwriters have not authorized any other person to provide you with different or additional information. Neither we, the selling shareholders nor the underwriters are making an offer to sell the Class A common shares in any jurisdiction where the offer or sale is not permitted. This offering is being made in the United States and elsewhere solely on the basis of the information contained in this prospectus. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of the Class A common shares. Our business, financial condition, results of operations and prospects may have changed since the date on the front cover of this prospectus.

 

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For investors outside the United States: Neither we, the selling shareholders, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction, other than the United States, where action for that purpose is required. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of our Class A common shares and the distribution of this prospectus outside the United States.

We own or have rights to trademarks, service marks and trade names that we use in connection with the operation of our business, including our corporate name, logos and website names. Other trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners. Solely for convenience, some of the trademarks, service marks and trade names referred to in this prospectus are listed without the ® and symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks, service marks and trade names.

 

 

Unless otherwise indicated or the context otherwise requires, all references in this prospectus to “XP” or the “Company,” the “Issuer,” “we,” “our,” “ours,” “us” or similar terms refer to XP Inc., together with its subsidiaries, following the contribution of XP Brazil (as defined below) shares to us.

All references to “XP Brazil” refer to XP Investimentos S.A., our Brazilian principal non-operating holding company whose consolidated financial statements are included elsewhere in this prospectus.

 

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GLOSSARY OF TERMS

The following is a glossary of certain industry and other defined terms used in this prospectus:

“active clients” means the total number of retail clients served through our XP Investimentos, Rico, Clear, XP Investments and XP Private (Europe) brands, with an AUC above R$100.00 or that have transacted at least once in the last thirty days. For purposes of calculating this metric, if a client holds an account in more than one of the aforementioned entities, such client will be counted as one “active client” for each such account. For example, if a client holds an account in each of XP Investimentos and Rico, such client will count as two “active clients” for purposes of this metric.

“ANBIMA” means the Brazilian Association of Financial and Capital Markets Entities (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais).

“AUC” means the market value of all client assets invested through XP’s platform, including equities, fixed income securities, mutual funds (including those managed by XP Gestão de Recursos Ltda., XP Advisory Gestão Recursos Ltda. and XP Vista Asset Management Ltda., as well as by third-party asset managers), pension funds (including those from XP Vida e Previdência S.A., as well as by third-party insurance companies), exchange traded funds, COEs (Structured Notes), REITs, and uninvested cash balances (Floating Balances), among others.

“AUM” is the market value of retail client assets invested in mutual and pension funds managed by XP Gestão de Recursos Ltda. and XP Vista Asset Management Ltda., as well as assets from high net worth retail clients allocated in managed portfolios and exclusive funds managed by XP Advisory Gestão Recursos Ltda.

“Brazil” means the Federative Republic of Brazil.

“Brazilian government” means the federal government of Brazil.

“B3” means B3 S.A. – Brasil, Bolsa, Balcão, the São Paulo Stock Exchange.

“CAC” means customer acquisition cost, which we calculate by dividing all the costs spent on acquiring more clients by the number of clients acquired in the period the money was spent.

“CDI Rate” means the Brazilian interbank deposit (certificado de deposito interbancário) rate, which is an average of interbank overnight rates in Brazil.

“Central Bank” means the Brazilian Central Bank (Banco Central do Brasil).

“CMN” means the Brazilian National Monetary Council (Conselho Monetário Nacional).

“COPOM” means the Brazilian Monetary Policy Committee (Comitê de Política Monetária do Banco Central).

“CVM” means the Brazilian Securities Commission (Comissão de Valores Mobiliários).

“IFAs” means Independent Financial Agents (Agente Autônomo de Investimento) subject to CVM Instruction No. 497.

“Itaú Transaction” means the transaction with Itaú Unibanco S.A. which was consummated in August 2018 and pursuant to which Itaú Unibanco S.A. acquired 49.9% of the share capital of XP Brazil.

“LTV” means the lifetime value of our retail clients, which is the present value of the projected gross margin that a marginal new client would generate over a certain period of time. We calculate LTV based on the following key assumptions: (1) 14.2% per annum as the discount rate; (2) a 10 year fixed projection period; and (3) the average churn observed in the last 12 months’ monthly cohorts of clients.

 

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“net new money” means, during a given period, the sum of (1) the total cash sent by clients to XP; (2) total assets transferred by clients from other platforms to XP, net of (3) cash withdrawals by clients from XP; and (4) assets transferred by clients from XP to other platforms.

real,” “reais” or “R$” means the Brazilian real, the official currency of Brazil.

“SELIC rate” means the Brazilian base interest rate (Sistema Especial de Liquidação e Custódia).

“Shareholders’ Agreement” means the shareholders’ agreement to be entered into among XP Controle, GA Bermuda, Itaú, Itaú Unibanco S.A., XP Inc., XP Brazil and the companies that we control that are incorporated in Brazil.

“share of wallet” means the AUC of a given client at XP, divided by the declared net worth of such client invested in financial products and services (shown as a percentage).

“U.S. dollar,” “U.S. dollars” or “US$” means U.S. dollars, the official currency of the United States.

 

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SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary may not contain all the information that may be important to you, and we urge you to read this entire prospectus carefully, including the “Risk Factors,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and our consolidated financial statements and notes to those statements, included elsewhere in this prospectus, before deciding to invest in our Class A common shares.

Our Mission

Our mission is to transform the financial markets in Brazil to improve the lives of people in our country, which is the 6th largest economy in the world with over 200 million people and a Gross Domestic Product, or GDP, of nearly US$2 trillion. We believe the financial services industry in Brazil is generally inefficient, expensive by international standards and provides poor client experiences, because it is dominated by five traditional financial institutions with US$1.5 trillion in assets. We believe this concentration has enabled the incumbents to secure a large profit pool and restrict the market in Brazil by: (1) providing a more narrow selection of financial products than typically found in larger markets, such as the United States and Europe; (2) promoting inefficient financial products; (3) charging relatively high fees with low yields since the clients are captive and the products made available are often limited only to those created and controlled by each bank; and (4) providing poor customer service due to a low prioritization of the client experience, limited market competition, and a lack of alternative choices available to consumers. We are dedicated to disrupting this market and improving people’s lives by providing them with access to more financial products and services through multiple channels, at lower fees, with a strong emphasis on financial education and high-quality services delivered through a highly differentiated client-centric approach and innovative technology solutions.

Introduction to XP

XP is a leading, technology-driven financial services platform and a trusted provider of low-fee financial products and services in Brazil. We have developed a mission-driven culture and a revolutionary business model that we believe provide us with strong competitive advantages in our market. We use these to disintermediate the legacy models of traditional financial institutions by educating new classes of investors, democratizing access to a wider range of financial services, developing new financial products and technology applications to empower our clients, and providing what we believe is the highest-quality customer service and client experience in the industry in Brazil. We believe we have established ourselves as the leading alternative to the traditional banks, with a large and fast-growing ecosystem of retail investors, institutions, and corporate issuers, built over many years that accounted for 1.5 million active clients and R$125 billion in net in-flows of new money year-to-date as of September 2019, up 101% year-over-year and 148% year-over-year, respectively. We believe we are:

 

   

#1 Ranked Financial Investment Brand in Brazil with an NPS of 71 as of September 2019, the highest score in our market based on company filings according to a third party analyst research report;

 

   

#1 Independent Financial Investment Platform in Brazil with 3% market share of the R$7.9 trillion market for total AUC as of December 31, 2018, according to a report by Oliver Wyman;

 

   

#1 Independent Digital Platform for Investors in Brazil with three digital portals XP, Rico and Clear serving clients directly;

 

   

#1 Independent Financial Investment Network in Brazil with a range of proprietary XP Advisory Services and approximately 5,900 IFAs who on-board new clients onto the XP Platform;

 

   

#1 Financial Media Portal in Latin America with approximately 9 million monthly unique visitors to our Infomoney website as of September 30, 2019. Approximately 77% of our website traffic in this period was originated organically by viewers without being driven from a related site or advertisement according to third-party traffic data from Similarweb; and



 

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#1 Financial Services Event in Latin America with over 30,000 attendees at our annual EXPERT conference held in July 2019, which we believe ranks as the largest investment services event in Latin America and one of the largest in the world based on an internal analysis of third party data.

Our Founding & Evolution

We were founded in 2001 as a small, independent financial advisor partnership dedicated to improving the lives of people in our country. In order to build our business from the ground up, while competing against the incumbent traditional banks, we dedicated ourselves to the search for new ways to compete and to leverage next-generation technologies that enable us to differentiate ourselves and provide the operating efficiencies to scale. Over the years, we have been able to consistently innovate, develop our technology solutions, and evolve our proprietary business model in several integrated phases that have complemented each other and compounded our capabilities. We believe this evolution has enabled us to instill trust in the XP brand and begin a revolution in the way financial services are sold in Brazil. These integrated evolutionary phases include (1) providing financial education and empowerment; (2) democratizing access to financial products and services; (3) scaling of our ecosystem of users, distribution and media content; (4) diversification and enhancement of our direct digital channels and brands; and (5) empowerment of the client journey.

The Revolutionary XP Model

Our revolutionary XP Model has been developed over the course of our evolution and enables us to go to market in a very different way from the legacy models of the large traditional financial institutions. We believe our model provides us with a unique value proposition for our clients and partners, and it has begun to change the way investment services are accessed and sold in Brazil. Our differentiated approach incorporates a unique combination of proprietary capabilities, services and technologies to deliver a highly customized and integrated client experience, with significant operating efficiency advantages that have enabled us to scale and grow profitably. The key components of our model include:

 

   

A Mission-Driven Culture – our culture remains central to XP and we remain vigilant in preserving and nurturing it, so that it can continue to guide our firm by promoting (1) a strong collaborative environment within our company; (2) a clear focus on our mission to improve people’s lives by empowering them as investors; (3) a zero-fee pricing philosophy wherever possible; (4) a strong, long-term client-centric focus which we prioritize ahead of maximizing short-term gains; and (5) an energetic entrepreneurial spirit with a commitment to innovation and the continuous pursuit of improvement.

 

   

A Self-Reinforcing Ecosystem we have developed a valuable ecosystem of clients, distribution channels and media content that are a powerful lead-generation engine, continuously reinforce each other and help promote XP’s products and services as they grow. These include:

 

   

User Base of Clients which includes our: (1) over 1.5 million retail clients who buy and sell the financial products on our platform; and (2) over 400 institutional and corporate issuer clients (out of which over 200 are located in Brazil and over 200 are located outside Brazil), such as fund managers, private banks, corporate treasuries and insurance companies, who provide additional liquidity and unique financial products for our platform.

 

   

Omni-Channel Distribution Network which enables us to reach clients and deliver our products and services through a range of proprietary brands and channels, that includes: (1) XP Direct our fast-growing full-service offering for mass-affluent clients; (2) Rico our online-only solution for self-directed investors; (3) Clear our digital portal and electronic trading platform for retail active traders; and (4) our efficient distribution network of independent financial advisors.



 

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Proprietary Media & Digital Content which helps us democratize access to financial content in Brazil, empower Brazilians on how to make investment decisions more independently, and attract, retain and monetize clients. This lead-generation ecosystem of platforms includes: (1) Infomoney the largest investment portal in Latin America; (2) XP Educação a leading online financial education portal in Brazil; (3) XP Research a digital platform with over 500,000 monthly unique visitors; (4) EXPERT the largest investment event in Latin America; (5) our Digital Influencers program, with over 3 million followers on social media; and (6) Leadr an investment-focused social media network with over 465,000 downloads and over 150,000 monthly active users.

 

   

A Superior Product and Services Platform – we primarily provide our clients with two types of offerings, our financial advisory services and our open financial product platform. We have developed both of these solutions to provide our clients with significant differentiation and a superior value proposition versus the legacy offerings of the traditional banks. These include:

 

   

Suite of XP Advisory Services which are comprised of several services, such as (1) XP Investimentos for our retail clients in Brazil; (2) XP Private for our high-net-worth clients; (3) XP Investments® for our international clients; and (4) XP Issuer Services, for our corporate and institutional clients.

 

   

Open Product Platform which is our open product platform that provides our clients with the broadest access to over 600 investment products in the market without the protectionist barriers, conflicts and closed-loop restrictions of the traditional banks. These include investment products from XP, our partners and our competitors, such as equity and fixed income securities, mutual and hedge funds, structured products, life insurance, pension plans, real-estate investment funds (REITs) and others.

 

   

VIP Customer Service which is our premier customer service program and support organization, designed to provide our clients and partners with the highest quality client service.

 

   

A Differentiated, Advanced Technology Platform – we have developed a powerful, integrated suite of proprietary technology assets, technology applications, and technology development resources that enable us to differentiate XP in the market, manage all of our solutions, conduct all of our activities and operate with low-cost advantages and efficiencies. These include:

 

   

XP Genius which is our powerful, integrated, cloud-based technology platform built with a modular architecture that efficiently leverages a range of micro-services to help (1) connect our various portals, systems, technologies and environments; (2) power our solutions and applications across our organization; (3) manage our large, valuable and rapidly growing pools of proprietary data; (4) conduct our big data analytics and artificial intelligence initiatives; (5) provide us with proprietary information and market insights; and (6) extend our reach and capabilities into new areas,

 

   

XP Innovation Teams which is a dedicated innovation development program, comprised of approximately 500 people, who develop and support our solutions by using agile software development methods and leveraging the significant technology and data assets in our company.

 

   

XP Technology Apps which is an advanced suite of cloud-based and mobile technology applications, that complement our advisory services and provide powerful functionality across the user journey, enabling our clients and partners to better manage their various accounts, trading activities, and data queries.



 

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Our Operations

We operate an asset-light, highly scalable business model that emphasizes operational efficiency and profitability. We leverage the XP Model to serve a diverse group of retail and institutional clients in local and international markets, with offices in Brazil, New York, Miami, London and Geneva. We generate our revenues primarily by (1) providing our existing clients with a growing range of financial products and services in which to invest their existing AUC already on our platform; (2) attracting additional money onto our platform from existing investors to grow our total AUC; and (3) attracting new clients and money inflows onto our platform across a variety of channels to increase our total AUC. We generate a significant amount of our revenues from existing clients and AUC, which is recurring and predictable in nature.

Depending on the mix of products and services, we generate numerous forms of income from our AUC, including advisory fees, commissions, distribution fees from product manufacturers and asset management fees across various solution categories such as retail, institutional, issuer services, digital content and other. As a result of our business model and market position, we benefit from high visibility in most of our revenues and from a low correlation to macro-economic conditions. We have established a track record of delivering strong financial performance, even during difficult macroeconomic conditions in Brazil. For example, while Brazil GDP growth decelerated materially from 2014 to 2018 in one of the worst recessions in Brazilian history, our total AUC grew at a CAGR of 92% during the same period.

In 2018, we reported R$202 billion in AUC, R$3.2 billion in gross revenue, R$3.0 billion in net revenue, R$465.3 million in net income, and R$491 million in Adjusted Net Income, a year-over-year increase of 60%, 56%, 55%, 10% and 15%, respectively, versus 2017. In the nine months ended September 30, 2019, we reported R$350 billion in AUC, R$3.7 billion in gross revenue, R$3.4 billion in net revenue, R$699 million in net income and R$657 million in Adjusted Net Income, an increase of 93%, 64%, 66%, 99% and 75% year-over-year, respectively, versus the nine months ended September 30, 2018.

Our Cohorts and Client Economics

We believe that our strong value proposition and client-centric approach will continue to enhance our client loyalty and enable us to grow our share of wallet from our current customer base. As our clients add new money onto our platform and become more comfortable using our technologies and services, they may also purchase more products within their existing financial product categories or begin to explore new categories. For example, a customer with a portfolio of equity securities may purchase additional equities and equity products, such as futures, and also diversify into fixed income products.

Given our increasing amount of AUC from existing clients, illustrated by our net inflow cohort analysis, and our increasing cross-sell of complementary and adjacent products and services, illustrated by the average number of products per customer cohort analysis, and the relatively high switching costs in the financial services market, we believe the LTV of our customers is increasing. Our business model also has relatively low customer acquisition costs, or CAC, per client, due to our primarily digital business model, our self-reinforcing ecosystem, and our highly efficient omni-channel distribution network. We believe our marginal CAC will continue to benefit from scale efficiencies.

Our Market

Brazil is a large and attractive market for financial services and financial technology solutions. The country has the 5th largest population and the 6th largest economy in the world with 209 million people and a GDP of US$1.9 trillion in 2018. Brazil GDP growth decelerated materially from 2014 to 2018 in one of the worst recessions in Brazilian history. During this period, we established a track record of delivering strong financial performance, even during difficult macroeconomic conditions, and grew our total AUC at a CAGR of 92%.



 

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Brazil emerged from its recession in 2018 and is now expected to enter a more positive macroeconomic environment for the first time in several years, which we believe will create favorable tailwinds for our business.

Key Market Challenges

We believe the Brazil financial services industry faces several important market challenges that create market inefficiencies and opportunities for disruption, including: (1) a highly concentrated market that continues to be controlled by a small group of traditional financial institutions; (2) bureaucratic, asset-heavy infrastructures that encourage banks to focus more on managing the internal burdens of their operations, pushing their in-house products, and preserving the status quo; (3) a narrow selection of financial products which tend to drive high fees for the traditional banks, but severely limit choice for investors; (4) the promotion of inefficient financial products which provide a large number of the mass population of investors with very low returns and punitive redemption options, often at an attractive margin to the bank; (5) high-costs and spreads which we believe are too high, but unavoidable by many customers who lack choice of alternative services; (6) poor customer service; (7) underpenetrated debt capital and other financial markets for the issuance of fixed income products and corporate bonds, particularly when compared to larger markets such as the United States and Europe.

Key Market Trends

We believe our market will benefit from several trends that will help provide attractive tailwinds for disruption, including: (1) favorable and highly-aligned regulatory initiatives such as the Central Bank of Brazil’s various announced financial democratization and technological innovation promotion policies; (2) the increasing demand for financial education and information across a number of channels; (3) the increasing demand for more access to financial products as the Brazilian market expands to close the product selection gap with other large markets, such as the United States and Europe; (4) the increasing demand for technology to manage financial services similar to other trends in commerce; (5) the increasing demand for better UX experiences as customers engage in more digital channels and demand technology applications that provide intuitive, easy-to-use, yet powerful features, that can integrate and utilize all of their data, and empower them to do more across their client journeys, versus just siloed applications with one or two functions; (6) increasing number of independent financial advisors; and (7) the increasing demand for turn-key solutions and technology applications for IFAs to help them manage their operations more effectively.

Addressable Market Opportunities

We believe our XP Model will benefit from these key market trends and the favorable macroeconomic environment in Brazil, and has positioned us to continue to penetrate, grow and expand our large addressable market opportunity in Brazil, which is expected to reach nearly R$8.6 trillion in investment AUC and adjacent markets by the end of 2019, according to a report by Oliver Wyman. Given our leadership, scale, brand, and competitive advantages provided by our XP Model, we believe we will benefit from and continue to be a catalyst for:

 

   

Continued Growth of the Investment AUC Addressable Market – According to a report by Oliver Wyman published in 2019, the total addressable market of investment AUC in Brazil was R$7.9 trillion in 2018, up 105% since 2011.

 

   

Continued Shift of AUC from Banks to Independent Investment Firms According to the Oliver Wyman report, the market share of investment AUC for independent investment firms will grow from 7% in 2018 to 25% in 2024.

 

   

Shift from Fixed Income to More Effective Products Within the growth of AUC, we believe there is a long-term mix shift trend from lower yielding fixed income products to higher potential yielding products such as equities, managed funds, and structured products, such as derivatives.



 

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Continued Expansion of Our Addressable Market into New Areas According to the Oliver Wyman report, the total addressable market size including adjacent markets that could be complementary to XP, such as insurance brokerage, credit and debit cards and other loans currently is R$487 billion.

Our Competitive Strengths

Over the last 18 years, we have developed a differentiated set of capabilities and attributes in our business that we believe provide us with meaningful strategic advantages and have helped us to disintermediate the legacy models of traditional financial institutions. We believe these competitive strengths form the foundations of our business and drive value creation for our shareholders.

Mission-Driven Culture

Our culture remains central to XP and we believe it is the core strength of our company, enabling us to attract talent, unify our people, maintain the mindset to innovate and disrupt, guide our go-to-market-approach, develop powerful relationships with our clients and establish our identity in the marketplace. We remain vigilant in preserving and nurturing it, so that it can continue to guide our firm. We believe the key strengths of our culture are (1) a collaborative partnership model that fosters a collaborative environment within our company and an ownership mentality across our organization (2) our mission to empower which helps us maintain a clear and consistent message that our primary focus is to empower our clients and improve their lives; (3) a zero-fee pricing philosophy that seeks to eliminate expensive and unnecessary bank fees and reminds us to remain efficient; (4) a client-centric focus that prioritizes transparency, high-quality customer service and positive client experiences above short-term performance results; and (5) an entrepreneurial spirit that keeps us focused on the continuous pursuit of innovation across our firm to improve our operations and our client experiences.

Revolutionary XP Model

Our model incorporates a unique combination of proprietary capabilities, services and technologies to deliver a highly differentiated and integrated client experience that have enabled us to differentiate from our competitors. The XP Model has given us several strategic and operating advantages, including:

 

   

First-Disruptor Leadership – Since our founding in 2001, XP has established itself as a trusted provider of low-cost brokerage, investment advisory, and asset management services in Brazil, the largest independent investment platform and leading alternative to the banks;

 

   

Trusted Brand We have built a valuable, trusted brand in Brazil and received an NPS of 71 in September 2019, which is the highest score in the financial services industry;

 

   

Highly Efficient Financial Model – We believe our technology driven business model provides us with significant scale and operating efficiencies, including (1) large scale and recurring revenue; (2) attractive LTV / CAC; (3) asset-light, low cost structure; and (4) strong free cash flow generation;

 

   

Network Effects – As we grow our business, we believe our model demonstrates distinct self- reinforcing network effects that help compound our growth.

 

   

Powerful Combination of Attributes – The success of XP is due to the combination of capabilities, trusted brand, size and scalability of the XP Model that have been developed and nurtured over time.

Leadership and Structure

 

   

Experienced Management Team with Strong Track Record of Success – Our management team is comprised of our founders, who have help guide the success of XP over the last 18 years, and new partners who have joined the company along the way. This team has an established track record of delivering strong financial performance, even during difficult macroeconomic conditions in Brazil.



 

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Meritocratic Partnership Structure – We believe our partnership model is key to our long-term value creation. As of September 30, 2019, our partnership was made up of approximately 370 shareholders of XP Controle, which will continue to be our controlling shareholder immediately after this offering, and who are directors, officers and employees of the Company and/or its subsidiaries. Following completion of this offering, we expect to implement our new partnership model, pursuant to which existing or new partners may be entitled to share based compensation based on individual performance. For further information, please see “Management—Long-Term Incentive Plan.”

Our Growth Strategies

Despite our success to date, we believe our business is still in the early days of driving the disintermediation of traditional financial institutions in Brazil and offering better alternatives to their legacy models and practices. We believe there is a large addressable market opportunity remaining in our core business and significant market share to win from the traditional banks. We intend to leverage our competitive strengths and continue to enhance the strategic advantages we have created through the XP Model in order to continue to grow and expand our business. We intend to pursue these strategies organically and inorganically by:

 

   

Penetrating Our Base – We will continue to seek a greater share of the total AUC and trading volumes from our clients and we will seek to sell additional products and services to our clients. We believe that our strong value proposition and client-centric approach will continue to enhance our client loyalty and enable us to grow our share of wallet from our current customer base.

 

   

Expanding Our Ecosystem – We believe our self-reinforcing ecosystem provides a strong and highly differentiated advantage to XP, enabling us to reach, engage and empower clients across numerous channels. We intend to expand our ecosystem by (1) continuing to grow our base of active retail clients; (2) expanding our omni-channel distribution network by driving more users to our various online portals and expanding our network of IFA partners; and (3) growing our proprietary digital content to continue to build familiarity and trust with XP, educate Brazilians and make them more proficient in financial products and services, and convert students and audiences into new or more empowered clients.

 

   

Expanding Our Solutions – We believe there is a significant opportunity to leverage our trusted brand, high NPS scores, and strong client-experience across the XP Model to offer our clients and partners additional financial services solutions with a similar value proposition and disrupt the legacy models of traditional financial institutions in new areas. We intend to expand our solutions by: (1) growing our XP Platform offering through the development of new investment products in-house or through partners; (2) growing our XP Advisory services; (3) developing new investment solutions in new adjacent areas of the financial services industry; (4) entering into new financial sectors such as insurance brokerage, debit/credit cards, digital banking and asset-backed lending; and (5) entering into new geographies where we can leverage our expertise in financial education and financial empowerment to create new classes of investors and disintermediate bank services in other highly concentrated markets.

Our Corporate Structure

Our Corporate Reorganization

We are a Cayman Islands exempted company incorporated with limited liability on August 29, 2019 for purposes of effectuating our initial public offering. At the time of our incorporation, XP Controle, Itaú Unibanco S.A. (the predecessor-in-interest to ITB Holding Brasil Participações Ltda.), G.A. Brasil IV Fundo de Investimento em Participações (the predecessor-in-interest to GA Bermuda) and DYNA III held 2,036,988,542 shares (prior to giving effect to the Share Split (as defined below)) of XP Investimentos S.A., or XP Brazil, which are all of the shares of XP Brazil, our Brazilian principal non-operating holding company whose consolidated financial statements are included elsewhere in this prospectus.



 

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Prior to the consummation of this offering, XP Controle, Itaú, GA Bermuda and DYNA III will contribute all of their shares in XP Brazil to us. In return for this contribution, we will issue new Class B common shares to XP Controle, new Class A common shares and Class B common shares to Itaú, new Class A common shares and Class B common shares to GA Bermuda, and new Class A common shares to DYNA III in a one-to-one exchange for the shares of XP Brazil contributed to us, or the Share Contribution. In addition and following the Share Contribution, we will implement a four-to-one reverse share split (or consolidation), effective as of December     , 2019, or the Share Split. Until the Share Contribution and the Share Split, we will not have commenced operations and will have only nominal assets and liabilities and no material contingent liabilities or commitments.

After accounting for the new Class A common shares that will be issued and sold by us in this offering, we will have a total of                  common shares issued and outstanding immediately following this offering,                  of these shares will be Class B common shares beneficially owned by XP Controle, Itaú and GA Bermuda, and                  of these shares will be Class A common shares beneficially owned by Itaú, GA Bermuda, DYNA III and by investors purchasing in this offering. See “Principal and Selling Shareholders.”

Our Corporate Structure

Our group is currently composed of 26 entities, 16 of which are incorporated in Brazil and 10 of which are incorporated in other countries. Our material operating subsidiaries are:

XP Investimentos Corretora de Câmbio, Títulos e Valores Mobiliários S.A., or XP CCTVM

XP CCTVM is a Brazilian broker-dealer entity and the core entity of the group, with the highest concentration of the group’s employees. All retail clients of XP Investimentos (including XP Direct and through our IFA network), Clear and Rico brands onboard and access all the products in our investment platform through XP CCTVM. In addition, it provides brokerage and issuer services to institutional and corporate clients. XP CCTVM had assets of R$5,336 million (representing 44.3% of our combined assets) as of December 31, 2017 and R$14,050 million (representing 73.5% of our combined assets) as of December 31, 2018. XP CCTVM recorded total revenue and income of R$1,380 million during 2017 (representing 72.4% of our consolidated total revenue and income) and R$1,967 million during 2018 (representing 66.5% of our consolidated total revenue and income).

XP Gestão de Recursos Ltda., or XP Gestão

XP Gestão, founded in 2005, was the first asset management firm within the group. It manages mutual funds focused on stocks and macro strategies, which are distributed to our retail clients via XP CCTVM and to institutional clients. XP Gestão had assets of R$75 million (representing 0.6% of our combined assets) as of December 31, 2017 and R$105 million (representing 0.5% of our combined assets) as of December 31, 2018. XP Gestão recorded total revenue and income of R$70 million during 2017 (representing 3.7% of our consolidated total revenue and income) and R$71 million during 2018 (representing 2.4% of our consolidated total revenue and income).

XP Advisory Gestão de Recursos Ltda., or XP Advisory

XP Advisory is a Brazilian asset management firm focused on single client mandates, including managing exclusive funds and managed portfolios for our high-net-worth retail clients via XP CCTVM and managing proprietary treasury funds that constitute part of our Adjusted Gross Financial Assets. XP Advisory had assets of R$8 million (representing 0.1% of our combined assets) as of December 31, 2017 and R$19 million (representing 0.1% of our combined assets) as of December 31, 2018. XP Advisory recorded total revenue and income of R$11 million during 2017 (representing 0.6% of our consolidated total revenue and income) and R$21 million during 2018 (representing 0.7% of our consolidated total revenue and income).



 

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XP Vista Asset Management Ltda., or XP Vista

XP Vista, acquired in 2018, is a Brazilian asset management firm focused on managing passive mutual funds that track market indexes, and mutual and investment funds focused on fixed income, credit, real estate, infrastructure and other alternative strategies, which are distributed to our retail clients (via XP CCTVM) and institutional clients. XP Vista had assets of R$12 million (representing 0.1% of our combined assets) as of December 31, 2018. XP Vista recorded total revenue and income of R$20 million during 2018 (representing 0.7% of our consolidated total revenue and income).

XP Corretora de Seguros Ltda., or XP Seguros

XP Seguros, founded in 2008, is a Brazilian insurance broker focused on providing pension plans, both from our insurance company and from third-party insurance companies, and life insurance products from third-party insurance companies. XP Seguros provides such products to our retail clients through our platform. XP Seguros had assets of R$20 million (representing 0.2% of our combined assets) as of December 31, 2017 and R$48 million (representing 0.2% of our combined assets) as of December 31, 2018. XP Seguros recorded total revenue and income of R$27 million during 2017 (representing 1.4% of our consolidated total revenue and income) and R$61 million during 2018 (representing 2.1% of our consolidated total revenue and income).

XP Investments US, LLC, or XP Investments

XP Investments, founded in 2010, is a broker-dealer registered with the SEC and FINRA, as well as an interdealer broker member with the NFA. With offices in New York and Miami, its key businesses include providing securities brokerage services for institutional and retail investors (most of which are Brazilian) and interdealer brokerage services for institutional traders. XP Investments had assets of R$152 million (representing 1.3% of our combined assets) as of December 31, 2017 and R$253 million (representing 1.3% of our combined assets) as of December 31, 2018. XP Investments recorded total revenue and income of R$132 million during 2017 (representing 6.9% of our consolidated total revenue and income) and R$206 million during 2018 (representing 7.0% of our consolidated total revenue and income).

XPE Infomoney Educação Assessoria Empresarial e Participações Ltda., or XP Educação

XP Educação, founded in 2003, focuses on our digital content services, including developing and selling financial education courses and events online and in person to retail clients. XP Investments had assets of R$10 million (representing 0.1% of our combined assets) as of December 31, 2017 and R$40 million (representing 0.2% of our combined assets) as of December 31, 2018. XP Investments recorded total revenue and income of R$10 million during 2017 (representing 0.5% of our consolidated total revenue and income) and R$57 million during 2018 (representing 1.9% of our consolidated total revenue and income).



 

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The following chart shows our corporate structure, after giving effect to our corporate reorganization and this offering:

 

LOGO

 

(1)

Minority interest held by certain principal executives officers of the entity.

(2)

Minority interest held by certain principal executives officers of Infostocks.

(3)

Minority interest held by certain principal executives officers of XP.

(4)

Minority interest held by XP Brazil.

Summary of Risk Factors

An investment in our Class A common shares is subject to a number of risks, including risks relating to our business and industry, risks relating to Brazil and risks relating to the offering and our Class A common shares. The following list summarizes some, but not all, of these risks. Please read the information in the section entitled “Risk Factors” for a more thorough description of these and other risks.

Risks Relating to Our Business and Industry

 

   

If we cannot make the necessary investments to keep pace with rapid developments and change in our industry, the use of our services could decline, reducing our revenues.

 

   

Substantial and increasingly intense competition within our industry may harm our business.

 

   

Client attrition could cause our revenues to decline and the degradation of the quality of the products and services we offer, including support services, could adversely impact our ability to attract and retain clients and partners.

 

   

Our investment services to our retail clients subject us to additional risks.



 

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We do not have long-term contractual arrangements with most of our institutional brokerage clients, and our trading volumes and revenues could be reduced if these clients stop using our platform and solutions.

 

   

We have identified material weaknesses in our internal control over financial reporting and, if we fail to remediate such deficiencies (and any other ones) and to maintain effective internal controls over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations and/or prevent fraud.

Risks Relating to Brazil

 

   

The Brazilian federal government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement as well as Brazil’s political and economic conditions could harm us and the price of our Class A common shares.

 

   

Economic uncertainty and political instability in Brazil may harm us and the price of our Class A common shares.

 

   

Inflation and certain measures by the Brazilian government to curb inflation have historically harmed the Brazilian economy and Brazilian capital markets, and high levels of inflation in the future would adversely affect our business and the price of our Class A common shares.

 

   

Exchange rate instability may have adverse effects on the Brazilian economy, us and the price of our Class A common shares.

Risks Relating to the Offering and our Class A Common Shares

 

   

There is no existing market for our common shares, and we do not know whether one will develop to provide you with adequate liquidity. If the trading price of our Class A common shares fluctuates after this offering, you could lose a significant part of your investment.

 

   

XP Controle will own     % of our outstanding Class B common shares, which will represent approximately     % of the voting power of our issued share capital following this offering, and will, subject to the provisions of the Shareholders’ Agreement, control all matters requiring shareholder approval. This concentration of ownership and voting power limits your ability to influence corporate matters.

 

   

Our dual class capital structure means our shares will not be included in certain indices. We cannot predict the impact this may have on the trading price of our Class A common shares.

 

   

We are a Cayman Islands exempted company with limited liability. The rights of our shareholders, including with respect to fiduciary duties and corporate opportunities, may be different from the rights of shareholders governed by the laws of U.S. jurisdictions.

Corporate Information

Our principal executive offices are located at Av. Chedid Jafet, 75, Torre Sul, 30th floor, Vila Olímpia – São Paulo, Brazil 04551-065. Our telephone number at this address is +55 (11) 3075-0429.

Investors should contact us for any inquiries through the address and telephone number of our principal executive office. Our principal website is www.grupoxp.com.br. The information contained in, or accessible through, our website is not incorporated into this prospectus or the registration statement of which it forms a part.



 

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Implications of Being an Emerging Growth Company

As a company with less than US$1.07 billion in revenue during the last fiscal year of XP Brazil, we qualify as an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

   

a requirement to have only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosure;

 

   

an exemption from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, in the assessment of our internal control over financial reporting;

 

   

reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements and registration statements; and

 

   

exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute arrangements.

We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than US$1.07 billion in annual revenue, have more than US$700 million in market value of our Class A common shares held by non-affiliates or issue more than US$1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced burdens. We have not taken advantage of any of these reduced reporting burdens in this prospectus, although we may choose to do so in future filings and if we do, the information that we provide shareholders may be different than you might get from other public companies in which you hold equity.

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. Given that we currently report and expect to continue to report under IFRS as issued by the IASB, we will not be able to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required by the IASB.



 

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THE OFFERING

This summary highlights information presented in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all the information you should consider before investing in our Class A common shares. You should carefully read this entire prospectus before investing in our Class A common shares including “Risk Factors” and our consolidated financial statements.

 

Issuer

XP Inc.

 

Selling shareholders

XP Controle, GA Bermuda and DYNA III.

 

Class A common shares offered by us

             Class A common shares (or             Class A common shares if the underwriters exercise in full their option to purchase additional shares).

 

Class A common shares offered by the selling shareholders

             Class A common shares (or             Class A common shares if the underwriters exercise in full their option to purchase additional shares).

 

Offering price range

Between US$         and US$         per Class A common share.

 

Voting rights

The Class A common shares will be entitled to one vote per share, whereas the Class B common shares (which are not being sold in this offering) will be entitled to 10 votes per share, respectively.

 

If, at any time, the total number of votes of the issued and outstanding Class B common shares represents less than 10% of the voting share rights of the Company, the Class B common shares then in issue shall automatically and immediately be converted into Class A common shares and no Class B common shares shall be issued by the Company thereafter.

 

  In addition, each Class B common share will convert automatically into one Class A common share upon any transfer, except for certain transfers as described under “Management—Shareholders’ Agreement—Conversion of Shares” and “Description of Share Capital—Conversion Rights.”

 

  Holders of Class A common shares and Class B common shares will vote together as a single class on all matters unless otherwise required by law and subject to certain exceptions set forth in our amended and restated memorandum and articles of association dated                    , 2019, or the Articles of Association, as described under “Description of Share Capital—Voting Rights.”

 

 

Upon consummation of this offering, assuming no exercise of the underwriters’ option to purchase additional shares, (1) holders of Class A common shares will hold approximately     % of the combined voting power of our outstanding common shares and approximately     % of our total equity ownership and (2) holders of



 

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Class B common shares will hold approximately     % of the combined voting power of our outstanding common shares and approximately     % of our total equity ownership.

 

  If the underwriters exercise their option to purchase additional shares in full, (1) holders of Class A common shares will hold approximately     % of the combined voting power of our outstanding common shares and approximately     % of our total equity ownership and (2) holders of Class B common shares will hold approximately     % of the combined voting power of our outstanding common shares and approximately     % of our total equity ownership.

 

  The rights of the holders of Class A common shares and Class B common shares are identical, except that (1) holders of Class B common shares are entitled to 10 votes per share, whereas holders of our Class A common shares are entitled to one vote per share; (2) holders of Class B common shares have certain conversion rights; and (3) holders of Class B common shares are entitled to preemptive rights in the event that there is an increase in our share capital and additional common shares are issued in order to maintain their proportional ownership interest. Moreover, the Class B common shares shall not be listed on any stock exchange and will not be publicly traded. See “Description of Share Capital” for a description of the material terms of our common shares, and the differences between our Class A common shares and Class B common shares, and “Management—Shareholders’ Agreement” for a description of the material terms of our Shareholders’ Agreement which also impacts our Class A common shares and Class B common shares.

 

Option to purchase additional Class A common shares

The selling shareholders have granted the underwriters the right to purchase up to an additional              Class A common shares within 30 days of the date of this prospectus, at the public offering price, less underwriting discounts and commissions, on the same terms as set forth in this prospectus. We will not receive any proceeds from the sale of Class A common shares by the selling shareholders.

 

Listing

We have applied to list our Class A common shares on the Nasdaq Global Select Market, under the symbol “XP.”

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately US$         million (or US$         million if the underwriters exercise in full their option to purchase additional shares), assuming an initial public offering price of US$         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering to (1) meet our anticipated increased working capital requirements resulting from the expected growth in our business;



 

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(2) accelerate customer acquisition through increased investments in marketing and advertising; (3) invest in personnel that complement our existing business units; (4) invest in new financial services verticals that we plan to enter or have recently entered into, such as digital banking, payments and insurance; (5) fund potential future acquisition opportunities; and (6) fund other general corporate purposes. See “Use of Proceeds.”

 

  We will not receive any proceeds from the sale of Class A common shares by the selling shareholders.

 

Share capital before and after offering

As of the date of this prospectus, our authorized share capital is US$        , consisting of             shares of par value US$         each, after giving effect to the Share Split and the Share Contribution. Of those authorized shares, (1)             are designated as Class A common shares; (2)             are designated as Class B common shares; and (3)             are as yet undesignated and may be issued as common shares or shares with preferred rights.

 

  Immediately after this offering, we will have             Class A common shares outstanding, assuming no exercise of the underwriters’ option to purchase additional shares.

 

Dividend policy

We have not adopted a dividend policy with respect to future distributions of dividends. The amount of any distributions will depend on many factors, such as our results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by our board of directors and controlling shareholders. We may not pay any cash dividends in the foreseeable future. See “Dividends and Dividend Policy” and “Description of Share Capital—Dividends and Capitalization of Profits.”

 

Lock-up agreements

We have agreed with the underwriters, subject to certain exceptions, not to offer, sell, or dispose of any shares of our share capital or securities convertible into or exchangeable or exercisable for any shares of our share capital during the 180-day period following the date of this prospectus. Members of our board of directors and our executive officers, and all of our existing shareholders have agreed to substantially similar lock-up provisions, subject to certain exceptions. See “Underwriting (Conflicts of Interest).”

 

Conflicts of Interest

Our affiliate, XP Investments, is one of the underwriters of this offering. Since we own more than 10% of the common equity of XP Investments, a “conflict of interest” exists for XP Investments within the meaning of FINRA Rule 5121(f)(5)(B). Also, XP Investments and one or more of its affiliates, as defined in FINRA Rule 5121, including XP Controle, will have a conflict of interest as defined in Rule 5121(f)(5)(C)(ii) due to the receipt of more than 5% of the net offering proceeds. In addition, since one of our significant shareholders owns more than 10% of our common equity and more



 

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than 10% of the common equity of Itau BBA USA Securities, Inc., one of the underwriters of this offering, a “conflict of interest” exists for Itau BBA USA Securities, Inc. within the meaning of FINRA Rule 5121(f)(5)(B). Also, Itau BBA USA Securities, Inc. will have a conflict of interest as defined in Rule 5121(f)(5)(C)(ii) due to the receipt of more than 5% of the net offering proceeds by affiliates of Itau BBA USA Securities, Inc. Therefore, this offering will be conducted in compliance with the applicable requirements of FINRA Rule 5121. Pursuant to that rule, the appointment of a “qualified independent underwriter” is not required in connection with this offering as the underwriters primarily responsible for managing the public offering do not have a conflict of interest, are not affiliates of any underwriter that has a conflict of interest and meet the requirements of paragraph (f)(12)(E) of FINRA Rule 5121. Any underwriter with a conflict of interest under Rule 5121 will not confirm initial sales to any discretionary accounts over which it has authority without the prior specific written approval of the customer.

 

Risk factors

See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should consider before deciding to invest in our Class A common shares.

 

Cayman Islands exempted company with limited liability

We are a Cayman Islands exempted company with limited liability. The rights of shareholders and the responsibilities of members of our board of directors may be different from the rights of shareholders and responsibilities of directors in companies governed by the laws of U.S. jurisdictions. In particular, as a matter of Cayman Islands law, directors of a Cayman Islands company owe fiduciary duties to the company and separately a duty of care, diligence and skill to the company. Under Cayman Islands law, directors and officers owe the following fiduciary duties: (1) duty to act in good faith in what the director or officer believes to be in the best interests of the company as a whole; (2) duty to exercise powers for the purposes for which those powers were conferred and not for a collateral purpose; (3) directors should not improperly fetter the exercise of future discretion; (4) duty to exercise powers fairly as between different sections of shareholders; (5) duty to exercise independent judgment; and (6) duty not to put themselves in a position in which there is a conflict between their duty to the company and their personal interests. Our Articles of Association have varied this last obligation by providing that a director must disclose the nature and extent of his or her interest in any contract or arrangement, and following such disclosure and subject to any separate requirement under applicable law or the listing rules of the Nasdaq and unless disqualified by the chairman of the relevant meeting, such director may vote in respect of any transaction or arrangement in which he or she is interested and may be counted in the quorum at the meeting, provided that such disclosure does not modify the duty of interested directors to act bona fide in the best interests of the Company. In comparison, under the



 

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Delaware General Corporation Law, a director of a Delaware corporation owes fiduciary duties to the corporation and its stockholders comprised of the duty of care and the duty of loyalty. Such duties prohibit self-dealing by a director and mandate that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. See “Description of Share Capital—Principal Differences between Cayman Islands and U.S. Corporate Law.”

Unless we specifically state otherwise, all information in this prospectus, except for our historical financial statements included elsewhere in this prospectus, reflects the completion of the Share Split following the Share Contribution prior to the consummation of this offering.

Unless otherwise indicated, all information contained in this prospectus:

 

   

assumes the implementation of the Share Split, applied retroactively to all of the figures herein setting forth the number of our common shares and per common share data; and

 

   

assumes no exercise of the option granted to the underwriters to purchase up to additional             Class A common shares in connection with this offering.

The number of Class A common shares and Class B common shares to be outstanding after this offering is based on             common shares outstanding as of September 30, 2019 (after giving effect to the Share Contribution and the Share Split) and excludes             Class A common shares that may be issued following this offering under our Long-Term Incentive Plan. See “Management—Long-Term Incentive Plan.”

When the selling shareholders consummate sales of Class B common shares in this offering, the Class B common shares sold will, immediately prior to such sale, automatically convert into Class A common shares on a share-for-share basis. As a result, purchasers of our common shares in this offering will only receive Class A common shares, and only Class A common shares are being offered by this prospectus. Class B common shares that are not sold by the selling shareholders will remain Class B common shares unless otherwise converted into Class A common shares. See “Description of Share Capital.”



 

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SUMMARY FINANCIAL INFORMATION

The following tables set forth, for the periods and as of the dates indicated, our summary financial and operating data. This information should be read in conjunction with “Presentation of Financial and Other Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the notes thereto, included elsewhere in this prospectus.

The summary interim statements of financial position as of September 30, 2019 and the interim statements of income for the nine months ended September 30, 2019 and 2018 of XP Brazil have been derived from the unaudited interim condensed consolidated financial statements of XP Brazil included elsewhere in this prospectus, prepared in accordance with International Financial Reporting Standard IAS No. 34 “Interim Financial Reporting”, or IAS 34. The summary statements of financial position as of December 31, 2018 and 2017 and the statements of income for the years ended December 31, 2018, 2017 and 2016 have been derived from the audited consolidated financial statements of XP Brazil included elsewhere in this prospectus, prepared in accordance with IFRS, as issued by the IASB. The results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the results of operations that may be expected for the entire year ending December 31, 2019. The financial information for the years ended 2018 and 2016 have been restated from the Company’s initial Form F-1 dated September 13, 2019 and should be read in conjunction with our annual consolidated financial statements, included elsewhere else in this prospectus. Share and per share data in the table below has been retroactively adjusted to give effect to the Share Split.

Income Statement Data

 

     For the Nine Months Ended
September 30,
    For the Year Ended
December 31,
 
     2019     2019     2018     2018     2018     2017     2016  
     (US$)(1)     (R$)     (US$)(1)     (R$)  
     (in millions, except earnings per share)  

Gross revenue and income(2)

     887       3,695       2,259       772       3,216       2,065       1,347  

Sales tax(3)

     (62     (259     (186     (62     (258     (158     (95
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue and income

     825       3,437       2,073       711       2,958       1,907       1,252  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses

              

Operating costs

     (269     (1,119     (632     (226     (941     (580     (376

Selling expenses

     (20     (82     (64     (23     (96     (33     (24

Administrative expenses

     (311     (1,294     (828     (283     (1,177     (650     (471

Other operating expenses, net

     28       118       (19     (8     (31     (8     (6

Interest expense on debt

     (15     (63     (60     (17     (72     (61     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax

     239       997       470       154       641       576       374  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     (71     (298     (118     (42     (175     (152     (130

Net income for the period / year

     168       699       352       112       465       424       244  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to:

              

Owners of the Parent company

     166       692       350       111       461       414       189  

Non-controlling interest

     2       7       2       1       4       10       55  

Basic and Diluted earnings per common and preferred shares – R$(4)

     0.0816       0.3397       0.1796       0.05617       0.2339       0.2134       0.1360  

Pro forma Basic and Diluted earnings per common and preferred shares (after giving effect to the Share Split) – R$(5)

     0.3263       1.3588       0.7184       0.2247       0.9356       0.8536       0.5440  


 

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(1)

For convenience purposes only, amounts in reais for the nine months ended September 30, 2019 and for the year ended December 31, 2018 have been translated to U.S. dollars using an exchange rate of R$4.1638 to US$1.00, the commercial purchase rate for U.S. dollars as of September 30, 2019 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

(2)

The sum of (i) Revenues from services rendered; and (ii) Income from financial instruments, in each case gross of taxes and contributions on revenue.

(3)

The sum of (i) Sales taxes and contributions on revenue; and (ii) Taxes and contributions on financial income.

(4)

Restated for 2018 and 2016 as set forth in note 3(xx) of our annual consolidated financial statements included elsewhere in this prospectus.

(5)

The pro forma basic and diluted earnings per share are presented using our historical earnings per share recast using the number of common and preferred shares in issue immediately prior to completion of this offering, after giving effect to the Share Split.

Balance Sheet Data

 

     As of September 30,      As of December 31,  
         2019              2019          2018      2018      2017  
     (US$)(1)      (R$)      (US$)(1)      (R$)  
     (in millions)  

Assets

  

Cash

     17        70        16        68        153  

Securities purchased under agreements to resell

     3,231        13,453        1,578        6,571        935  

Securities trading and intermediation

     194        807        216        898        672  

Other securities and derivative financial instruments(2)

     5,547        23,095        2,122        8,834        4,339  

Property and equipment

     29        120        24        99        47  

Intangible assets

     125        521        121        505        483  

Other assets(3)

     262        1,090        180        749        507  

Total assets

     9,404        39,156        4,257        17,724        7,136  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

  

Securities sold under repurchase agreements

     4,712        19,618        1,595        6,641        514  

Securities trading and intermediation

     1,730        7,202        1,274        5,307        3,111  

Securities loaned and derivative financial instruments(4)

     1,361        5,667        541        2,251        1,037  

Borrowings, lease liabilities, and debentures(5)

     356        1,482        210        876        867  

Private pension liabilities

     413        1,722        4        16        —    

Other liabilities(6)

     164        684        130        542        456  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     8,736        36,374        3,754        15,633        5,984  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity

     668        2,782        502        2,092        1,152  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and equity

     9,404        39,156        4,257        17,724        7,136  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

For convenience purposes only, amounts in reais for the nine months ended September 30, 2019 for the year ended December 31, 2018 have been translated to U.S. dollars using an exchange rate of R$4.1638 to US$1.00, the commercial purchase rate for U.S. dollars as of September 30, 2019 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.



 

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(2)

The sum of (i) Fair value through profit or loss – Securities; (ii) Fair value through profit or loss – Derivative financial instruments; (iii) Fair value through other comprehensive income – Securities; and (iv) Evaluated at amortized cost – Securities.

(3)

The sum of (i) Evaluated at amortized cost – Accounts receivable; (ii) Evaluated at amortized cost – Other financial assets; (iii) Other assets; and (iv) Deferred tax expenses.

(4)

The sum of (i) Securities loaned; and (ii) Derivative financial instruments.

(5)

The sum of (i) Borrowings; (ii) Lease liabilities; and (iii) Debentures.

(6)

The sum of (i) Accounts payable; (ii) Other financial liabilities; (iii) Social and statutory obligations; (iv) Taxes and social security obligations; (v) Provisions and contingent liabilities; (vi) Other liabilities; and (vii) Deferred tax liabilities.

Non-GAAP Financial Measures

This prospectus presents our Floating Balance, Adjusted Gross Financial Assets, Adjusted EBITDA and Adjusted Net Income and their respective reconciliations for the convenience of investors, which are non-GAAP financial measures. A non-GAAP financial measure is generally defined as a numerical measure of historical or future financial performance, financial position, or cash flow that purports to measure financial performance but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. For further information on why our management chooses to use these non-GAAP financial measures, and on the limits of using these non-GAAP financial measures, please see “Presentation of Financial and Other Information—Special Note Regarding Non-GAAP Financial Measures.”

Floating Balance

 

     For the Nine Months Ended
September 30,
    For the Year Ended
December 31,
 
     (US$)(1)     (R$)     (US$)(1)     (R$)  
     (in millions)  
         2019             2019         2018     2018     2017  

(+) Securities trading and intermediation (Liabilities)

     1,730       7,202       1,274       5,307       3,111  

(-) Securities trading and intermediation (Assets)

     (194     (807     (216     (898     (672
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Floating Balance

     1,536       6,395       1,059       4,408       2,439  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

For convenience purposes only, amounts in reais for the nine months ended September 30, 2019 and for the year ended December 31, 2018 have been translated to U.S. dollars using an exchange rate of R$4.1638 to US$1.00, the commercial purchase rate for U.S. dollars as of September 30, 2019 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.



 

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Adjusted Gross Financial Assets

 

     For the Nine Months Ended
September 30,
    For the Year Ended
December 31,
 
     (US$)(1)     (R$)     (US$)(1)     (R$)  
     (in millions)  
         2019             2019         2018     2018     2017  

Cash and Financial Assets

          

(+) Cash

     17       70       16       68       153  

(+) Securities – Fair value through profit or loss

     3,880       16,158       1,511       6,291       3,780  

(+) Securities – Fair value through other comprehensive income

     188       782       167       696       —    

(+) Securities – Evaluated at amortized cost

     133       556       37       155       —    

(+) Derivative financial instruments (Assets)

     1,345       5,599       406       1,692       559  

(+) Securities purchased under agreements to resell

     3,231       13,453       1,578       6,571       935  

Financial Liabilities

          

(-) Securities loaned

     (86     (360     (303     (1,260     (713

(-) Derivative financial instruments (Liabilities)

     (1,275     (5,307     (238     (991     (324

(-) Securities sold under repurchase agreements

     (4,712     (19,618     (1,595     (6,641     (514

(-) Private pension liabilities(2)

     (413     (1,722     (4     (16     —    

Subtotal

     2,308       9,612       1,577       6,565       3,876  

(-) Floating Balance

     (1,536     (6,395     (1,059     (4,408     (2,439
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Gross Financial Assets

     772       3,216       518       2,157       1,438  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

For convenience purposes only, amounts in reais for the nine months ended September 30, 2019 and for the year ended December 31, 2018 have been translated to U.S. dollars using an exchange rate of R$4.1638 to US$1.00, the commercial purchase rate for U.S. dollars as of September 30, 2019 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

(2)

Relates to balances of retail clients invested in pension funds through XP VP. Those balances are identified in the financial statements as “Securities—Fair value through profit or loss,” with a corresponding balance in “Private Pension Liabilities.”

Adjusted EBITDA

 

     For the Nine Months
Ended September 30,
    For the Year Ended
December 31,
 
         2019             2019         2018     2018     2017     2016  
     (US$)(1)     (R$)     (US$)(1)     (R$)  
     (in millions)  

Net Income

     168       699       112       465       424       244  

(+) Income Tax

     71       298       42       175       152       130  

(+) Depreciation and Amortization

     15       62       13       53       27       23  

(+) Interest Expense on Debt

     15       63       17       72       61       —    

(-) Interest Revenue on Adjusted Gross Financial Assets(2)

     (26     (107     (25     (104     (99     (71
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     244       1,015       159       662       565       326  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

For convenience purposes only, amounts in reais for the nine months ended September 30, 2019 and for the year ended December 31, 2018 have been translated to U.S. dollars using an exchange rate of R$4.1638 to



 

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  US$1.00, the commercial purchase rate for U.S. dollars as of September 30, 2019 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.
(2)

Calculated as the average interest rate over the period (the CDI rate), multiplied by the average Adjusted Gross Financial Assets. The historical annual CDI rates are set forth in the table in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Factors Affecting our Results of Operations—Brazilian Macroeconomic Environment.” However, the calculation of this adjustment is performed on a daily basis.

Adjusted Net Income

 

     For the Nine Months
Ended September 30,
    For the Year Ended
December 31,
 
     2019     2019     2018     2018     2018     2017     2016  
     (US$)(1)     (R$)     (US$)(1)     (R$)  
     (in millions)  

Net Income

     168       699       352       112       465       424       244  

(+) Itaú Transaction and deal related expenses(2)

     —         —         36       9       39       6       —    

(-) One-time tax claim recognition (2010-2017)(3)

     (17     (71     —         —         —         —         —    

(-/+) Taxes

     7       28       (12     (3     (13     (2     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income

     158       657       376       118       491       428       244  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

For convenience purposes only, amounts in reais for the nine months ended September 30, 2019 and for the year ended December 31, 2018 have been translated to U.S. dollars using an exchange rate of R$4.1638 to US$1.00, the commercial purchase rate for U.S. dollars as of September 30, 2019 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

(2)

Expenses of R$6 million in 2017 related to the potential IPO process that was discontinued after the Itaú Transaction, including legal, auditing, advisory and travel, among others. In 2018, expenses of R$39 million related to the payment of fees and expenses in respect of the closing of the Itaú Transaction.

(3)

Income of R$71 million in the nine months ended September 30, 2019 related to the recognition of PIS/COFINS credits, following the final and non-appealable decision in connection with a claim to which XP CCTVM was the plaintiff.



 

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RISK FACTORS

An investment in our Class A common shares involves a high degree of risk. In addition to the other information in this prospectus, you should carefully consider the following risk factors in evaluating us and our business before purchasing our Class A common shares. In particular, you should consider the risks related to an investment in companies operating in Brazil and Latin America generally, for which we have included information in these risk factors to the extent that information is publicly available. In general, investing in the securities of issuers whose operations are located in emerging market countries such as Brazil, involves a higher degree of risk than investing in the securities of issuers whose operations are located in the United States or other more developed countries. If any of the risks discussed in this prospectus actually occur, alone or together with additional risks and uncertainties not currently known to us, or that we currently deem immaterial, our business, financial condition, results of operations and prospects may be materially adversely affected. If this were to occur, the value of our Class A common shares may decline and you may lose all or part of your investment. When determining whether to invest, you should also refer to the other information contained in this prospectus, including our financial statements, unaudited interim condensed consolidated financial statements and the related notes thereto. You should also carefully review the cautionary statements referred to under “Cautionary Statement Regarding Forward-Looking Statements.” Our actual results could differ materially and adversely from those anticipated in this prospectus.

Certain Risks Relating to Our Business and Industry

If we cannot make the necessary investments to keep pace with rapid developments and change in our industry, the use of our services could decline, reducing our revenues.

The financial services market in which we compete is subject to rapid and significant changes. This market is characterized by rapid technological change, new product and service introductions, evolving industry standards, changing client needs and the entrance of nontraditional competitors. In order to remain competitive and maintain and enhance customer experience and the quality of our services, we must continuously invest in projects to develop new products and features. These projects carry risks, such as cost overruns, delays in delivery, performance problems and lack of client adoption. There can be no assurance that we will have the funds available to maintain the levels of investment required to support our projects, and any delay in the delivery of new services or the failure to differentiate our services or to accurately predict and address market demand could render our services less desirable, or even obsolete, to our clients.

In addition, the services we deliver are designed to process highly complex transactions and provide reports and other information concerning those transactions, all at high volumes and processing speeds. Any failure to deliver an effective and secure service, or any performance issue that arises with a new service could result in significant processing or reporting errors or other losses. As a result of these factors, our development efforts could result in increased costs and/or we could also experience a loss in business that could reduce our earnings or could cause a loss of revenue if promised new services are not timely delivered to our clients or do not perform as anticipated. We also rely in part, and may in the future rely in part, on third parties, for the development of, and access to, new technologies. Our future success will depend in part on our ability to develop or adapt to technological changes and evolving industry standards. We cannot predict the effects of technological changes on our business. If we are unable to develop, adapt to or access technological changes or evolving industry standards on a timely and cost-effective basis, our business, financial condition and results of operations could be materially adversely affected.

Furthermore, our competitors may have the ability to devote more financial and operational resources than we can to the development of new technologies and services that provide improved functionality and features to their existing service offerings. If successful, their development efforts could render our services less desirable to clients, resulting in the loss of clients or a reduction in the fees we could generate from our service offerings.

 

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Substantial and increasingly intense competition within our industry may harm our business.

The financial services market is highly competitive. Our growth will depend on a combination of the continued growth of financial services and our ability to increase our market share. Our primary competitors include traditional financial services providers such as affiliates of financial institutions and well-established financial services companies in Brazil. We also face competition from non-traditional financial services providers that have significant financial resources and develop different kinds of services.

Many of our competitors have substantially greater financial, technological, operational and marketing resources than we do. Accordingly, these competitors may be able to offer more attractive fees to our current and prospective clients, especially our competitors that are affiliated with financial institutions. If competition causes us to reduce the fees we charge for our services, we will need to aggressively control our costs in order to maintain our profit margins and our revenues may be adversely affected. Moreover, we may not be successful in reducing or controlling costs and our margins may be adversely affected. In particular, we may need to reduce the fees we charge in order to maintain market share, as clients may demand more customized and favorable pricing from us. In addition, we may incur increased costs from incentive payments made to IFAs in order to gain or maintain market share. We may also decide to terminate client relationships which may no longer be profitable to us due to such pricing pressure. Competition could also result in a loss of existing clients, and greater difficulty in attracting new clients. One or more of these factors could have a material adverse effect on our business, financial condition and results of operations. For further information regarding our competition, see “Business—Competition.”

Client attrition could cause our revenues to decline and the degradation of the quality of the products and services we offer, including support services, could adversely impact our ability to attract and retain clients and partners.

We experience client attrition resulting from several factors, including, among others, client business closures, transfers of accounts to our competitors and lack of client satisfaction with our platform and overall user experience, including the reliability, performance, functionality and quality of our products and services and our high level of client support. We cannot predict the level of attrition in the future and our revenues could decline as a result of higher than expected attrition, which could have a material adverse effect on our business, financial condition and results of operations. In addition, our growth to date has been partially driven by the growth of our clients’ businesses. Should the rate of growth of our clients’ business slow or decline, this could have an adverse effect on our results of operations. Furthermore, should we not be successful in selling additional solutions to our active client base, we may fail to achieve our desired rate of growth.

Moreover, our clients expect a consistent level of quality on our platform and in the provision of our products and services. The support services that we provide are also a key element of the value proposition to our clients. If the reliability, performance or functionality of our products and services is compromised or the quality of those products or services is otherwise degraded, or if we fail to continue to provide a high level of support, we could lose existing clients and find it harder to attract new clients and partners. If we are unable to scale our support functions to address the growth of our client and partner network, the quality of our support may decrease, which could adversely affect our ability to attract and retain clients and partners.

Our investment services to our retail clients subject us to additional risks.

We provide investment services to our retail clients, including through IFAs. The risks associated with these investment services include those arising from possible conflicts of interest, unsuitable investment recommendations, inadequate due diligence on the issuer or the provider of the security, inadequate disclosure and fraud. Realization of these risks could lead to liabilities for client losses, regulatory fines, civil penalties and harm to our reputation and business.

 

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We do not have long-term contractual arrangements with most of our institutional brokerage clients, and our trading volumes and revenues could be reduced if these clients stop using our platform and solutions.

Our business largely depends on certain of our institutional brokerage clients using our solutions and trading on our platforms. A limited number of such clients can account for a significant portion of our trading volumes, which in turn, results in a significant portion of our transaction fees. Most of our institutional brokerage clients do not have long-term contractual arrangements with us and utilize our platform and solutions on a transaction-by-transaction basis and may choose not to use our platform at any time. These institutional brokerage clients buy and sell a variety of products within various asset classes using traditional methods, including by telephone, e-mail and instant messaging, and through other trading platforms. Any significant loss of these institutional brokerage clients or a significant reduction in their use of our platform and solutions could have a substantial negative impact on our trading volumes and revenues, and materially adversely affect our business, financial condition and results of operations.

Our institutional brokerage business depends on our key dealer clients providing us with liquidity and supporting our marketplaces by transacting with our other institutional and wholesale clients.

Our institutional brokerage business relies on its key dealer clients to provide liquidity on our trading platforms by posting prices on our platform and responding to client inquiries and this business has historically earned a substantial portion of its revenues from such dealer clients. Market knowledge and feedback from these dealer clients have been important factors in the development of many of our offerings and solutions. In addition, these dealer clients also provide us with data via feeds and through the transactions they execute on our trading platforms, which is an important input for our market data offerings.

Our dealer clients also buy and sell through traditional methods, including by telephone, e-mail and instant messaging, and through other trading platforms. Some of our dealer clients have developed electronic trading networks that compete with us or have announced their intention to explore the development of such electronic trading networks, and many of our dealer clients are involved in other ventures, including other trading platforms or other distribution channels, whether as trading participants and/or as investors. In particular, some of our dealer clients or their affiliates, as is typical for a large number of major banks, have their own single bank or other competing trading platform and frequently invest in such businesses and may acquire ownership interests in similar businesses, and such businesses may also compete with us. These competing trading platforms may offer some features that we do not currently offer or that we are unable to offer, including customized features or functions and solutions that are fully integrated with some of their other offerings. Accordingly, there can be no assurance that such dealer clients’ primary commitments will not be to one of our competitors or that they will not continue to rely on their own trading platforms or traditional methods instead of using our trading platforms.

Although we have established and maintain significant long-term relationships with our key dealer clients, we cannot assure you that all of these relationships will continue or will not diminish. Any reduction in the use of our trading platforms by our key dealer clients for any reason, and any associated decrease in the pool of capital and liquidity accessible across our marketplaces, could reduce the volume of trading on our platform, which could, in turn, reduce the use of our platform by their counterparty clients. In addition, any decrease in the number of dealer clients competing for trades on our trading platforms, could cause our dealer clients to forego the use of our platform and instead use platforms that provide access to more competitive trading environments and prices. The occurrence of any of the foregoing may have a material adverse effect on our business, financial condition and results of operations.

A significant part of our business depends on the B3

The B3 is the only public stock exchange in Brazil and a significant volume of our trading activities is conducted through the B3, for which we pay the B3 clearing, custody and other financial services fees. We cannot assure you that the B3 will not impose restrictions on trading, request additional guarantees or margin requirements, increase existing fees or introduce new fees, among other measures. The occurrence of any of the foregoing may have a material adverse effect on our business, financial condition and results of operations.

 

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XP CCTVM depends in part on the performance of its IFAs. If XP CCTVM is unable to hire, retain and qualify such IFAs, our business may be harmed.

XP CCTVM, one of our principal operating subsidiaries and securities broker, has a broad network of IFAs, and our business depends in part on such IFAs. Pursuant to CVM Instruction No. 497, IFAs may carry out the following activities on behalf of a broker dealer: (1) prospecting and acquiring customers; (2) receiving and registering orders and transmitting such orders to the appropriate trading or registration systems; and (3) providing information on the products offered and the services provided by XP CCTVM. XP CCTVM’s reliance on IFAs creates numerous risks.

As of September 30, 2019, XP CCTVM had approximately 5,900 individual IFAs organized into approximately 620 IFA entities, which were responsible for serving approximately 71% of XP CCTVM’s active clients. In addition, XP CCTVM’s 20 largest IFA entities comprised 1,577 individual IFAs and were responsible for serving approximately 9.5% of XP CCTVM’s active clients.

Pursuant to Article 15 of CVM Instruction No. 497, XP CCTVM is liable for the acts of its IFAs. As a result, XP CCTVM may be subject to claims, lawsuits, arbitration proceedings, government investigations and other legal and regulatory proceedings seeking to hold XP CCTVM liable for the actions of IFAs. We cannot give any assurances as to the outcome of any such claims, lawsuits, arbitration proceedings, government investigations or other legal or regulatory proceedings. Any claims against XP CCTVM, whether with or without merit, could be time-consuming, result in costly litigation, be harmful to its reputation and to “XP” brand, require significant management attention and divert significant resources, and the resolution of one or more such proceedings may result in substantial damages, settlement costs, sanctions, consent decrees, injunctions, fines and penalties that could adversely affect XP CCTVM’s business, financial condition and results of operations. In addition, no assurances can be given that these IFAs’ interests will continue to be aligned with the interests of XP CCTVM, that there will be no commercial disagreements between the IFAs and XP CCTVM, that such IFAs will not compete with XP CCTVM or that they will not engage in improper conduct (i.e. churning) in their role as IFAs. In Brazil, there is increased competition between financial institutions seeking to attract IFAs to increase their client base, assets under custody and business possibilities. No assurances can be given that XP CCTVM will be able to remain an attractive player to such IFAs or to retain such agents in its business platform. Furthermore, many clients have their commercial relationship directly with the IFA of their choice and trust and not with the employees of XP CCTVM. Accordingly, the loss of IFAs may result in loss of clients and assets under custody, which would affect XP CCTVM’s business.

Furthermore, the independent contractor status of the IFAs may be challenged in the courts of Brazil. For example, XP CCTVM has in the past been involved in, and successfully challenged, a number of legal proceedings claiming that IFAs should be treated as its employees rather than as independent contractors, and there can be no assurance that we will be successful in challenging any future claims. Changes to foreign, federal, state, and local laws governing the definition or classification of independent contractors, or judicial decisions regarding independent contractor classification, could require classification of IFAs as employees. If, as a result of legislation or judicial decisions, XP CCTVM is required to classify IFAs as employees, XP CCTVM would incur significant additional expenses for compensating IFAs, potentially retroactively to the past five years and including expenses associated with the application of wage and hour laws (including minimum wage, overtime, meal and rest period requirements), vacation, 13th monthly salary, FGTS, severance, employee benefits, social security contributions, taxes, and penalties (including collective moral damages).

Moreover, on July 1, 2019, the CVM issued Public Hearing Release SDM No. 03/19 (Edital de Audiência Pública SDM nº 03/19), or SDM 3/19, which aims to initiate discussions with financial market entities and IFAs in connection with potential amendments to CVM Instruction No. 497. Such amendments could include terminating the exclusivity provision set forth in CVM Instruction No. 497, among others. Although we cannot predict the impact of such potential amendments, they could result in increased competition for clients and qualified IFAs and reduced oversight of IFAs, and allow IFAs to work with other platforms or competitors, which may adversely affect us.

 

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Poor investment performance could lead to a loss of assets under management and a decline in revenues.

Distributing investment fund quotas managed by third parties or by our asset managers represents a relevant part of our business, which income is a percentage of the management and/or performance fee related to such funds. Moreover, a portion of our consolidated income is derived from management and performance fees collected by our three principal asset managers, XP Gestão, XP Advisory and XP Vista. Poor investment performance by the investment funds managed by third parties or by our asset managers could hinder our growth and reduce our revenues because (1) existing clients might withdraw funds in favor of better performing products, which would result in lower investment advisory and other fees; (2) our ability to attract capital from existing and new clients might diminish; and (3) the negative investment performance will directly reduce our managed assets and revenues base, which may have a material adverse effect on our business, financial condition, results of operations and the price of our Class A common shares.

Unauthorized disclosure, destruction or modification of data, through cybersecurity breaches, computer viruses or otherwise or disruption of our services could expose us to liability, protracted and costly litigation and damage our reputation.

Our business involves the collection, storage, processing and transmission of customers’ personal data, including names, addresses, identification numbers, bank account numbers and trading and investment portfolios data. An increasing number of organizations, including large clients and businesses, other large technology companies, financial institutions and government institutions, have disclosed breaches of their information technology systems, some of which have involved sophisticated and highly targeted attacks, including on portions of their websites, networks or infrastructure, or those of third parties who provide services to them. We could also be subject to breaches of security by hackers. Threats may derive from human error, fraud or malice on the part of employees, third-party service providers or IFAs, or may result from accidental technological failure. Concerns about security are increased when we transmit information. Electronic transmissions can be subject to attack, interception or loss. Also, computer viruses and malware can be distributed and spread rapidly over the internet and could infiltrate our systems or those of our associated participants, which can impact the confidentiality, integrity and availability of information, and the integrity and availability of our products, services and systems, among other effects. Denial of service or other attacks could be launched against us for a variety of purposes, including interfering with our services or creating a diversion for other malicious activities. These types of actions and attacks could disrupt our delivery of products and services or make them unavailable, which could damage our reputation, force us to incur significant expenses in remediating the resulting impacts, expose us to uninsured liability, subject us to lawsuits, fines or sanctions, distract our management or increase our costs of doing business.

In 2013 and 2014, XP CCTVM suffered security breaches, through which an individual improperly accessed a small portion of our customer records and obtained certain non-material customer registration information, such as name, address and email, and subsequently publicly disclosed such information in January 2017. The security breaches were identified and immediately remedied, did not result in the imposition of penalties or fines from the relevant regulatory authorities, and did not materially impact us. We assisted all affected customers and mitigated their damages.

In the scope of our activities, we share information with third parties, including thousands of IFAs, commercial partners, third-party service providers and other agents, who collect, process, store and transmit sensitive data, and we may be held responsible for any failure or cybersecurity breaches attributed to these third parties insofar as they relate to the information we share with them. The loss, destruction or unauthorized modification of data by us or such third parties or through systems we provide could result in significant fines, sanctions and proceedings or actions against us by governmental bodies or third parties, which could have a material adverse effect on our business, financial condition and results of operations. Any such proceeding or action, and any related indemnification obligation, could damage our reputation, force us to incur significant expenses in defense of these proceedings, distract our management, increase our costs of doing business or result in the imposition of financial liability.

 

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Our encryption of data and other protective measures may not prevent unauthorized access or use of sensitive data. A breach of our system or that of one of our associated participants may subject us to material losses or liability, including fines. A misuse of such data or a cybersecurity breach could harm our reputation and deter clients from using our products and services, thus reducing our revenues. In addition, any such misuse or breach could cause us to incur costs to correct the breaches or failures, expose us to uninsured liability, increase our risk of regulatory scrutiny, subject us to lawsuits, and result in the imposition of material penalties and fines under state and federal laws or regulations.

We cannot assure you that there are written agreements in place with every third-party or that such written agreements will prevent the unauthorized use, modification, destruction or disclosure of data or enable us to obtain reimbursement from such third-parties in the event we should suffer incidents resulting in unauthorized use, modification, destruction or disclosure of data. Any unauthorized use, modification, destruction or disclosure of data could result in protracted and costly litigation, which could have a material adverse effect on our business, financial condition and results of operations.

Cybersecurity incidents are increasing in frequency and evolving in nature and include, but are not limited to, installation of malicious software, unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and the corruption of data. Given the unpredictability of the timing, nature and scope of information technology disruptions, there can be no assurance that the procedures and controls we employ will be sufficient to prevent security breaches from occurring and we could be subject to manipulation or improper use of our systems and networks or financial losses from remedial actions, any of which could have a material adverse effect on our business, financial condition and results of operations.

Once Law No. 13,709/2018 (Lei Geral de Proteção de Dados, or the LGPD) comes into force in August 2020, cybersecurity incidents and data breach or leakage events may subject us to the following penalties: (1) warnings, with the imposition of a deadline for the adoption of corrective measures; (2) a one-time fine of up to 2% of gross sales of the company or a group of companies or a maximum amount of R$50,000,000 per violation; (3) a daily fine, up to a maximum amount of R$50,000,000 per violation; (4) public disclosure of the violation; (5) the restriction of access to the personal data to which the violation relates, until corrective measures are implemented; and (6) deletion of the personal data to which the violation relates.

Our business depends on well-regarded and widely known brands, including “XP Investimentos,” “Clear,” “Rico,” “XP Asset Management,” “Infomoney,” “XP Educação,” “XP Seguros” and “XP Investments,” and any failure to maintain, protect, and enhance our brands, including through effective marketing and communications strategies, would harm our business.

We have developed well-regarded and widely known brands, including “XP Investimentos,” “Clear,” “Rico,” “XP Asset Management,” “Infomoney,” “XP Educação,” “XP Seguros” and “XP Investments,” that have contributed significantly to the success of our business. Maintaining, protecting, and enhancing our brands are critical to expanding our client base, and other third-party partners, as well as increasing engagement with our products and services. This will depend largely on our ability to remain widely known, maintain trust, be a technology leader, and continue to provide high-quality and secure products and services. Any negative publicity about our industry or our company, the quality, reliability and performance of our products and services, our risk management processes, changes to our products and services, our ability to effectively manage and resolve client complaints, our privacy and security practices, litigation, regulatory activity, and the experience of clients with our products or services, could adversely affect our reputation and the confidence in and use of our products and services. Harm to our brands can arise from many sources, including failure by us or our partners to satisfy expectations of service and quality, inadequate protection of personal information, compliance failures and claims, litigation and other claims, third-party trademark infringement claims, administrative proceedings at the applicable national trademark offices, employee misconduct, and misconduct by our associated participants, partners, service providers, or other counterparties. If we do not successfully maintain well-regarded and widely known brands, our business could be materially and adversely affected.

 

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We have been from time to time in the past, and may in the future be, the target of incomplete, inaccurate, and misleading or false statements about our company, our business, and our products and services that could damage our brands and materially deter people from adopting our services. For example, over the past several years, certain persons or entities have fraudulently used the “XP” brand and/or presented themselves as part of or affiliated with the “XP” brand as IFAs carrying out activities on our behalf. Negative publicity about our company or our management, including about our product quality, reliability and performance, changes to our products and services, privacy and security practices, litigation, regulatory enforcement, and other actions, as well as the actions of our clients and other users of our services, even if inaccurate, could cause a loss of confidence in us. Our ability to respond to negative statements about us may be limited by legal prohibitions on permissible public communications by us during our initial public offering process or during future periods.

In addition, we believe that promoting our brands in a cost-effective manner is critical to achieving widespread acceptance of our products and services and to expand our base of clients. Our brand promotion activities may not generate customer awareness or increase revenue, and even if they do, any increase in revenue may not offset the expenses we incur in building our brands. If we fail to successfully promote and maintain our brands or if we incur excessive expenses in this effort, our business could be materially and adversely affected.

The introduction and promotion of new services, as well as the promotion of existing services, may be partly dependent on our visibility on third-party advertising platforms, such as Google, Facebook or Instagram. Changes in the way these platforms operate or changes in their advertising prices or other terms could make the maintenance and promotion of our products and services and our brands more expensive or more difficult. If we are unable to market and promote our brands on third-party platforms effectively, our ability to acquire new clients would be materially harmed.

An increase in volume on our systems or other errors or events could cause them to malfunction.

Most of our trade orders to buy or sell securities or invest in the broad range of asset classes we offer are received and processed electronically. This method of trading is heavily dependent on the integrity of the electronic systems supporting it. While we have never experienced a significant failure of our trading systems, heavy stress placed on our systems during peak trading times could cause our systems to operate at unacceptably low speeds or fail altogether. Any significant degradation or failure of our systems or the systems of third parties involved in the trading process (e.g., online and Internet service providers, the systems of the B3, record keeping and data processing functions performed by third parties, and third-party software), even for a short time, could cause customers to suffer delays in trading. In addition, systems errors, including as a result of human error, could occur. These delays or errors could cause substantial losses for customers and could subject us to claims from these customers for losses or other regulatory penalties or other sanctions. There can be no assurance that our network structure will operate appropriately in the event of a subsystem, component or software failure or error. Furthermore, we cannot assure you that we will be able to prevent an extended systems failure in the event of a power or telecommunications failure, an earthquake, terrorist attack, epidemic, fire or any act of God. Any systems failure that causes interruptions in our operations could have a material adverse effect on our business, financial condition and results of operations.

We rely on a number of external service providers for certain key market information and data, technology, processing and supporting functions.

We rely on a number of external service providers for certain key market information and data, technology, processing and supporting functions, such as Microsoft, SAP and Oracle, among others. These include trading platform, portfolio management and asset allocation services, account opening and management systems, communication systems, registration systems, data control systems, information security systems, anti-fraud systems, trading surveillance systems, exchanges, clearinghouses and others which are of critical importance for us in order to provide our services to our clients in a satisfactory manner. These service providers may face technical, operational and security risks of their own, including risks similar to those that we face as described

 

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herein. Any significant failures by them, including improper use or disclosure of our confidential customer, employee or company information, could interrupt our business, cause us to incur losses and harm our reputation. Particularly, we have contracted with Bloomberg, Reuters and certain other institutions to allow our clients to access real-time market information data, which are essential for our clients to make their investment decisions and take certain actions (such as making trades). Any failure of such information providers to update or deliver the data in a timely manner as provided in the agreements could lead to potential losses of our clients, which may in turn affect our business operations and reputation and may cause us to incur losses.

We cannot assure you that the external service providers will be able to continue to provide these services to meet our current needs in an efficient and cost-effective manner, or that they will be able to adequately expand their services to meet our needs in the future. Some external service providers may have assets and infrastructure that are important to the services they provide us that are located in or outside Brazil, and their ability to provide these services is subject to risks from unfavorable political, economic, legal or other developments, such as social or political instability, changes in governmental policies or changes in the applicable laws and regulations of the jurisdictions in which their assets and operations are located.

An interruption in or the cessation of service by any external service provider as a result of system failures, capacity constraints, financial constraints or problems, unanticipated trading market closures or for any other reason and our inability to make alternative arrangements in a smooth and timely manner, if at all, could have a material adverse effect on our business, financial condition and results of operations.

Further, disputes might arise in relation to the agreements that we enter into with our service providers or the performance of the service providers thereunder. To the extent that any service provider disagrees with us on the quality of the products or services, terms and conditions of the payment or other provisions of such agreements, we may face claims, disputes, litigations or other proceedings initiated by such service provider against us. We may incur substantial expenses and require significant attention of management in defending against these claims, regardless of their merit. We could also face damages to our reputation as a result of such claims, and our business, financial condition, results of operations and prospects could be materially and adversely affected.

We may not be able to ensure the accuracy of the third-party product information on our platform, and we have limited control over the performance of third-party financial products we offer.

We offer certain third-party financial products. The acceptance and popularity of our platform is partially premised on the reliability and performance of the relevant underlying products and information on our platform. We rely on the relevant third-party providers of the relevant products for the authenticity of their underlying products and the comprehensiveness, accuracy and timeliness of the related financial information. While the products and information from these third-party providers have been generally reliable, there can be no assurance that the reliability can be maintained in the future. If these third-party providers or their agents provide inauthentic financial products or incomplete, misleading, inaccurate or fraudulent information, we may lose the trust of existing and prospective investors. In addition, if our investors purchase the underlying products that they discover on our platform and they suffer losses, they may blame us and attempt to hold us responsible for their losses, even though we have made risk disclosures before they invest. Our reputation could be harmed and we could experience reduced user traffic to our platform, which would adversely affect our business and financial performance.

Furthermore, as investors access the underlying products through our platform, they may have the impression that we are at least partially responsible for the quality and performance of these products. Although we have established standards to screen product providers before distributing their products on our platform, we have limited control over the performance of the third-party financial products we offer. In the event that an investor is dissatisfied with underlying products or the services of a products provider, we do not have any means to directly make improvements in response to user complaints. If investors become dissatisfied with the

 

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underlying products available on our platform, our business, reputation, financial performance and prospects could be adversely affected.

We rely upon our systems and upon third-party data center service providers to host certain aspects of our platform and content, and any systems failure due to factors beyond our control or any disruption to, or interference with, our use of third-party data center services, could interrupt our service, increase our costs and impair our ability to deliver our platform, resulting in customer dissatisfaction, damaging our reputation and harming our business.

We utilize data center hosting facilities from third-party service providers to make certain content available on our platform. Our primary data centers are located in the cities of Barueri and Santana do Parnaíba, in the State of São Paulo, Brazil (which are located approximately 5 miles apart). Our operations depend, in part, on our providers’ ability to protect their facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts and similar events. The occurrence of spikes in user volume, traffic, natural disasters, acts of terrorism, vandalism or sabotage, or a decision to close a facility without adequate notice, or other unanticipated problems at our providers’ facilities could result in lengthy interruptions in the availability of our platform, which would adversely affect our business.

In addition, we depend on the efficient and uninterrupted operation of numerous systems, including our computer systems, software, data centers and telecommunications networks, as well as the systems of third parties. Our systems and operations or those of our third-party providers, could be exposed to damage or interruption from, among other things, fire, natural disaster, power loss, telecommunications failure, unauthorized entry and computer viruses. We do not maintain insurance policies specifically for property and business interruptions. Defects in our systems or those of third parties, errors or delays in the processing of transactions, telecommunications failures or other difficulties could result in:

 

   

loss of revenues;

 

   

loss of clients;

 

   

loss of client data;

 

   

loss of licenses or authorizations with the CVM, the Central Bank, the Superintendency of Private Insurance (Superintendência de Seguros Privados), or SUSEP, and/or any other applicable authority;

 

   

loss of our membership to the B3 and/or loss of access to the trading facilities of the B3;

 

   

fines imposed by applicable regulatory authorities and other issues relating to non-compliance with applicable financial services or data protection requirements;

 

   

a failure to receive, or loss of, Central Bank authorizations to operate as a financial services provider in Brazil;

 

   

fines or other penalties imposed by the Central Bank, as well as other measures taken by the Central Bank, including intervention, temporary special management systems, the imposition of insolvency proceedings, and/or the out-of-court liquidation of XP CCTVM and any of our subsidiaries to whom licenses may be granted in the future;

 

   

harm to our business or reputation resulting from negative publicity;

 

   

exposure to fraud losses or other liabilities;

 

   

additional operating and development costs; and/or

 

   

diversion of technical and other resources.

We are subject to risks in using prime brokers and custodians.

Our asset management division and its managed funds depend on the services of prime brokers, administrators and custodians to settle and report securities transactions. In the event of the insolvency of a prime

 

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broker, administrator or custodian, our funds might not be able to recover equivalent assets in whole or in part, as they will rank among the prime broker’s, the administrator’s and the custodian’s unsecured creditors in relation to assets that the prime broker, administrator or custodian borrows, lends or otherwise uses. In addition, cash held by our funds with the prime broker, administrator or custodian will not be segregated from the prime broker’s, administrator’s or custodian’s own cash, and the funds will therefore rank as unsecured creditors in relation thereto.

If we lose key personnel, our business, financial condition and results of operations may be adversely affected.

We are dependent upon the ability and experience of a number of key personnel, including Guilherme Benchimol, one of our founders and our chief executive officer, as well as a high-profile public figure and the face of the XP brand, and other members of senior management, who have substantial experience with our operations, the financial services industry and the markets in which we offer our products and services. Many of our key personnel have worked for us for a significant amount of time or were recruited by us specifically due to their industry experience. It is possible that the loss of the services of one or a combination of our senior executives or key managers, including our chief executive officer, could have a material adverse effect on our business, financial condition and results of operations.

The ability to attract, recruit, develop and retain qualified employees and continue to strengthen our existing infrastructure and systems is critical to our success and growth. If we are not able to do so, our business and prospects may be materially and adversely affected.

Our business functions at the intersection of rapidly changing technological, social, economic and regulatory developments that require a wide-ranging set of expertise and intellectual capital. In order for us to successfully compete and grow, we must attract, recruit, develop and retain the necessary personnel who can provide the needed expertise across the entire spectrum of our intellectual capital needs. While we have a number of our key personnel who have substantial experience with our operations, we must also develop our personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. However, the market for qualified personnel is competitive, and we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. We must continue to hire additional personnel to execute our strategic plans. Our effort to retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. We cannot assure you that our qualified employees will continue to be employed by us or that we will be able to attract and retain qualified personnel in the future. Failure to retain or attract key personnel could have a material adverse effect on our business, financial condition and results of operations.

In addition, in order to manage our growth effectively, we must continue to strengthen our existing infrastructure, develop and improve our internal controls, create and improve our reporting systems, and timely address issues as they arise. These efforts may require substantial financial expenditures, commitments of resources, developments of our processes, and other investments and innovations. Furthermore, we encourage employees to quickly develop and launch new features for our products and services. As we grow, we may not be able to execute as quickly as smaller, more efficient organizations. If we do not successfully manage our growth, our business will suffer.

We are subject to various risks associated with the securities industry, any of which could have a materially adverse effect on our business, cash flows and results of operations.

We are subject to uncertainties that are common across the securities industry. These uncertainties include:

 

   

the volatility of domestic and international financial, bond and stock markets, and the markets for funds and other asset classes;

 

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extensive governmental regulation;

 

   

litigation;

 

   

intense competition;

 

   

poor performance of investment products that our advisors recommend or sell or that are otherwise sold or distributed on our platform;

 

   

substantial fluctuations in the volume and price level of securities; and

 

   

dependence on the solvency of various third parties.

As a result, our revenues and earnings may vary significantly from quarter to quarter and from year to year. In addition, lower price levels of securities may result in reduced volumes of securities, options and futures transactions, with a consequent reduction in our commission revenues. In periods of low retail and institutional brokerage volume and reduced investment banking activity, profitability is impaired because certain expenses remain relatively fixed. Sudden sharp declines in market values of securities and the failure of issuers and counterparties to perform their obligations can result in illiquid markets which, in turn, may result in our having difficulty selling securities. In the event of a market downturn, our business could be adversely affected in many ways, potentially for a prolonged period of time. Our revenues are likely to decline in such circumstances and, if we are unable to reduce expenses at the same pace, our profit margins would erode, which could have a material adverse effect on our business, financial condition and results of operations.

We derive a significant portion of our revenues from one of our operating subsidiaries

A significant portion of our revenues is derived from one of our principal operating subsidiaries, XP CCTVM. For the years ended December 31, 2018, 2017 and 2016, the net revenue of XP CCTVM represented approximately 70% of our total consolidated net revenue for such periods. We expect that we will continue to depend on XP CCTVM for a significant portion of our revenues for the foreseeable future, and any decrease in the revenue of XP CCTVM or any other event significantly affecting XP CCTVM may have a material adverse effect on our financial condition and results of operations.

Our holding company structure makes us dependent on the operations of our subsidiaries.

We are a Cayman Islands exempted company with limited liability. As a holding company, our corporate purpose is to invest, as a partner or shareholder, in other companies, consortia or joint ventures in Brazil, where most of our operations are located, and outside Brazil. Accordingly, our material assets are our direct and indirect equity interests in our subsidiaries, and we are therefore dependent upon the results of operations and, in turn, the payments, dividends and distributions from our subsidiaries for funds to pay our holding company’s operating and other expenses and to pay future cash dividends or distributions, if any, to holders of our Class A common shares, and we may have tax costs in connection with any dividend or distribution. In addition, the payments, dividends and distributions from our subsidiaries to us for funds to pay future cash dividends or distributions, if any, to holders of our Class A common shares, could be restricted under financing arrangements that we or our subsidiaries may enter into in the future and we and such subsidiaries may be required to obtain the approval of lenders to make such payments to us in the event they are in default of their repayment obligations. Furthermore, we may be adversely affected if the Brazilian government imposes legal restrictions on dividend distributions by our Brazilian subsidiaries and exchange rate fluctuation will affect the U.S. dollar value of any distributions our subsidiaries make with respect to our equity interests in those subsidiaries. See “—Risks Relating to Brazil—Exchange rate instability may have adverse effects on the Brazilian economy, us and the price of our Class A common shares,” “Economic uncertainty and political instability in Brazil may harm us and the price of our Class A common shares” and “Dividends and Dividend Policy.”

 

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We are exposed to fluctuations in foreign currency exchange rates and enter into derivatives transactions to manage our exposure to exchange rate risk.

We hold certain funds in non-Brazilian real currencies, and will continue to do so in the future, including a portion of the proceeds from this offering, and our offshore operating subsidiaries generate revenue in non-Brazilian real currencies. Accordingly, our financial results are affected by the translation of these non-real currencies into reais. In addition, to the extent that we need to convert future financing proceeds into Brazilian reais for our operations, any appreciation of the Brazilian real against the relevant foreign currencies would materially reduce the Brazilian real amounts we would receive from the conversion, and any depreciation of the Brazilian real against the relevant foreign currencies could increase the amounts in Brazilian reais that we are require to convert into the relevant foreign currencies in order to service such relevant foreign currency financings. No assurance can be given that fluctuations in foreign exchange rates will not have a significant impact on our business, financial condition, results of operations and prospects. We may also have foreign exchange risk on any of our other assets and liabilities denominated in currencies, or with pricing linked to currencies, other than our functional currency, including certain contract assets. Fluctuations in the Brazilian real versus any of these foreign currencies may have a material adverse effect on our financial position and results of operations.

In addition, we enter into derivatives transactions to manage our exposure to exchange rate risk. Such derivatives transactions are designed to protect us against increases or decreases in exchange rates, but not both. If we have entered into derivatives transactions to protect against, for example, decreases in the value of the real and the real instead increases in value, we may incur financial losses. Such losses could materially and adversely affect us.

XP CCTVM is subject to liquidity risks.

XP CCTVM is subject to liquidity risks. Liquidity is the ability to meet current and future cash flow needs on a timely basis at a reasonable cost. XP CCTVM requires sufficient liquidity to meet customer and clearinghouse deposit maturities/withdrawals, payments on debt obligations as they become due and other cash commitments under both normal operating conditions and other unpredictable circumstances causing industry or general financial market stress. XP CCTVM’s access to funding sources in amounts adequate to finance its activities on terms that are acceptable to it could be impaired by factors that affect it specifically or the financial services industry or economy generally. To the extent XP CCTVM is unable to maintain adequate levels of liquidity, it may not be able to meet its payment obligations, which may have a material adverse effect on our business, financial condition and results of operations.

In addition, XP CCTVM invests funds held in customer accounts in fixed income financial instruments and securities that meet certain liquidity conditions. To the extent customers withdraw a substantial amount of their funds held in such customer accounts for other uses, XP CCTVM might experience liquidity constraints, requiring it to rapidly sell financial assets at a discounted price, and may be unable to obtain funding and default on its payment obligations to market counterparties and other customers, which may cause XP CCTVM to incur losses, and consequently harm our image and reputation and have a material adverse effect on our business, financial condition and results of operations.

We have identified material weaknesses in our internal control over financial reporting and, if we fail to remediate such deficiencies (and any other ones) and to maintain effective internal controls over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations and/or prevent fraud.

Prior to this offering, we were a private company with limited accounting personnel and other resources to address our internal control over financial reporting and procedures. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting and our independent registered

 

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public accounting firm has not conducted an audit of our internal control over financial reporting. In connection with the audit of our consolidated financial statements for the year ended December 31, 2018, we identified a number of material weaknesses in our internal control over financial reporting as of December 31, 2018. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

The material weaknesses identified relate to our insufficient accounting resources and processes necessary to comply with the reporting and compliance requirements of IFRS and the U.S. Securities and Exchange Commission, or the SEC. Specifically:

 

   

we identified material weaknesses related to (1) managing access to our systems, data and end-user computing (EUC) controls, and (2) computer operations controls, which were not designed or operating effectively;

 

   

we identified material weaknesses related to the recognition and measurement of revenues, which could result in a material misstatement of our revenues if not timely identified by us; and

 

   

we identified control deficiencies related to controls around the financial reporting closing process, including the calculation of EPS, the identification and disclosure of related party transactions, and the procedures existent to maintain formal accounting policies, processes and controls to analyze, account for and disclose complex transactions; such deficiencies, when considered in the aggregate, would be considered a material weakness.

These material weaknesses did not result in a misstatement to our consolidated financial statements.

We have adopted a remediation plan with respect to the material weaknesses identified above which include hiring several experienced personnel in our financial reporting organization and implementation of new processes and procedures, improving our internal controls to provide additional levels of review, implementation of new software solutions, training for staff and enhanced documentation.

In connection with the preparation of our unaudited interim condensed consolidated financial statements for the nine months ended September 30, 2019, we did not identify any additional material weaknesses in our internal control over financial reporting.

After this offering, we will be subject to the Sarbanes-Oxley Act, which requires, among other things, that we establish and maintain effective internal controls over financial reporting and disclosure controls and procedures. Under the current rules of the SEC we will be required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to assess the effectiveness of our internal controls. Our testing may reveal deficiencies in our internal controls that are deemed to be material weaknesses or significant deficiencies and render our internal controls over financial reporting ineffective. We expect to incur additional accounting and auditing expenses and to spend significant management time in complying with these requirements. If we are not able to comply with these requirements in a timely manner, or if we or our management identifies material weaknesses or significant deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our Class A common shares may decline and we may be subject to investigations or sanctions by the SEC, the Financial Industry Regulatory Authority, Inc., or FINRA, or other regulatory authorities.

In addition, these new obligations will also require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business. These cost increases and the diversion of management’s attention could materially and adversely affect our business, financial condition and operation results.

 

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Requirements associated with being a public company in the United States will require significant company resources and management attention.

After the completion of this offering, we will become subject to certain reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, and the other rules and regulations of the SEC and Nasdaq. We will also be subject to various other regulatory requirements, including the Sarbanes-Oxley Act. We expect these rules and regulations to increase our legal, accounting and financial compliance costs and to make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantial costs to maintain the same or similar coverage. New rules and regulations relating to information disclosure, financial reporting and controls and corporate governance, which could be adopted by the SEC, Nasdaq or other regulatory bodies or exchange entities from time to time, could result in a significant increase in legal, accounting and other compliance costs and make certain corporate activities more time-consuming and costly, which could materially affect our business, financial condition and results of operations. These rules and regulations may also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.

These new obligations will also require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business. Given that most of the individuals who now constitute our management team have limited experience managing a publicly traded company and complying with the increasingly complex laws pertaining to public companies, initially, these new obligations could demand even greater attention. These cost increases and the diversion of management’s attention could materially and adversely affect our business, financial condition and results of operations.

Our business is subject to complex and evolving regulations and oversight related to our provision of financial products and services and to costs and risks associated with other increased or changing laws and regulations affecting our business, including developments in data protection and privacy laws, which could harm our business, financial condition and results of operations.

As a financial services institution in Brazil, our business is subject to Brazilian laws and regulations relating to financial services in Brazil, comprising Federal Law No. 4,595/64, Federal Law No. 6,385/76 and related rules and regulations issued by the Central Bank, the CVM, the B3 and ANBIMA, among others. In addition, our insurance business is subject to various laws and regulations in Brazil, such as Federal Law No. 4,595/64, Decree Law No. 73/66 and certain other rules and regulations issued by the National Private Insurance Council (Conselho Nacional de Seguros Privados), or CNSP, and SUSEP, among others.

The laws, rules, and regulations that govern our business include or may in the future include those relating to banking, deposit-taking, cross-border and domestic money transmission, foreign exchange, payments services (such as payment processing and settlement services), consumer financial protection, tax, anti-money laundering and terrorist financing and escheatment (rules relating to unclaimed property). These laws, rules, and regulations are enforced by multiple authorities and governing bodies in Brazil, including the Central Bank and the CMN. In addition, as our business continues to develop and expand, we may become subject to additional rules and regulations, which may limit or change how we conduct our business.

We are subject to anti-money laundering and terrorist financing laws and regulations in multiple jurisdictions that prohibit, among other things, involvement in transferring the proceeds of criminal or terrorist activities. We could be subject to liability and forced to change our business practices if we were found to be subject to, or in violation of, any laws or regulations impacting our ability to maintain a bank account in the countries where we operate, including the United States, or if existing or new legislation or regulations applicable to banks in the countries where we maintain a bank account, including the United States, were to result in banks in those countries being unwilling or unable to establish and maintain bank accounts for us.

If any person in the Cayman Islands knows or suspects or has reasonable grounds for knowing or suspecting that another person is engaged in criminal conduct or money laundering or is involved with terrorism or terrorist

 

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financing and property and the information for that knowledge or suspicion came to their attention in the course of business in the regulated sector, or other trade, profession, business or employment, the person will be required to report such knowledge or suspicion to (i) the Financial Reporting Authority (“FRA”) of the Cayman Islands, pursuant to the Proceeds of Crime Law (2019 Revision) of the Cayman Islands if the disclosure relates to criminal conduct or money laundering, or (ii) a police officer of the rank of constable or higher, or the FRA, pursuant to the Terrorism Law (2018 Revision) of the Cayman Islands, if the disclosure relates to involvement with terrorism or terrorist financing and property. Such a report shall not be treated as a breach of confidence or of any restriction upon the disclosure of information imposed by any enactment or otherwise.

Certain of our subsidiaries are subject to regulation in the United States, such as our subsidiary, XP Investments US, LLC, which is registered with the SEC and FINRA as a broker-dealer and XP Advisory US, Inc., which is registered with the SEC as an investment advisor. We do not believe that we or any of our subsidiaries engage in any financial services activities in the United States that would require a license from any U.S. federal or state banking authorities or other financial regulators, except those licenses and registrations that have already been obtained. If we are found to have engaged in a banking or other financial services business in the United States without an appropriate registration or license, we could be subject to liability, or forced to cease doing such business, change our business practices, or to obtain the appropriate license or registration. If we or any of our subsidiaries obtain additional licenses or registrations in the United States, we could be subject to compliance with additional applicable laws and regulations, including anti-money laundering and terrorist financing laws and regulations, which could adversely affect our business, financial condition, or results of operations.

Although we have a compliance program focused on applicable laws, rules, and regulations (which currently is principally focused on Brazilian law) and are continually investing in this program, we may nonetheless be subject to fines or other penalties in one or more jurisdictions levied by federal, state or local regulators, as well as those levied by foreign regulators. In addition to fines, penalties for failing to comply with applicable rules and regulations could include significant criminal and civil lawsuits, forfeiture of significant assets, or other enforcement actions, including loss of required licenses or approvals in a given jurisdiction. We could also be required to make changes to our business practices or compliance programs as a result of regulatory scrutiny. In addition, any perceived or actual failure to comply with applicable laws, rules, and regulations could have a significant impact on our reputation as a trusted brand and could cause us to lose existing clients, prevent us from obtaining new clients, require us to expend significant funds to remedy problems caused by breaches and to avert further breaches, and expose us to legal risk and potential liability, and we could be (1) required to pay substantial fines and disgorgement of our profits; (2) required to change our business practices; or (3) subjected to insolvency proceedings such as an intervention by the Central Bank, as well as the out-of-court liquidation of XP CCTVM, and any of our subsidiaries to whom authorizations may be granted in the future. Any disciplinary or punitive action by our regulators or failure to obtain required operating authorizations could seriously harm our business and results of operations.

In addition, the Brazilian regulatory and legal environment exposes us to other compliance and litigation risks that could materially affect our results of operations. These laws and regulations may change, sometimes significantly, as a result of political, economic or social events. Some of the federal, state or local laws and regulations in Brazil that affect us include: those relating to consumer products, product liability or consumer protection; those relating to the manner in which we advertise, market or sell products; labor and employment laws, including wage and hour laws; tax laws or interpretations thereof; bank secrecy laws, data protection and privacy laws and regulations; and securities and exchange laws and regulations. For instance, data protection and privacy laws are developing to take into account the changes in cultural and consumer attitudes towards the protection of personal data (including as a result of the LGPD). There can be no guarantee that we will have sufficient financial and personnel resources to comply with any new regulations or successfully compete in the context of a changing regulatory environment.

The laws regulating privacy rights and data protection have considerably evolved over recent years, providing for more restrictive provisions on the means through which processing of personal data by

 

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organizations is regulated. As of August 2018, when the LGPD was enacted, practices involving the processing of personal data were ruled by certain sectorial laws, such as the Consumer Defense Code (Law No. 8,078/1990) and the Brazilian Civil Rights Framework for the Internet (Law No. 12,965).

On August 14, 2018, the President of Brazil approved the LGPD, a comprehensive personal data protection law establishing general principles and obligations that apply across multiple economic sectors and contractual relationships. The LGPD establishes detailed rules for the collection, use, processing and storage of personal data and will affect all economic sectors, including the relationship between customers and suppliers of goods and services, employees and employers and other relationships in which personal data is collected, whether in a digital or physical environment. The obligations established by LGPD will become effective starting in August 2020 (24 months from the date of its publication in August 2018), by which date all legal entities will be required to adapt their data processing activities to these new rules. Once LGPD becomes effective, the penalties and fines for violations include: (1) warnings, with the imposition of a deadline for the adoption of corrective measures; (2) a one-time fine of up to 2% of gross sales of the company or a group of companies or a maximum amount of R$50,000,000 per violation; (3) a daily fine, up to a maximum amount of R$50,000,000 per violation; (4) public disclosure of the violation; (5) the restriction of access to the personal data to which the violation relates, until corrective measures are implemented; and (6) deletion of the personal data to which the violation relates. Any additional privacy laws or regulations enacted or approved in Brazil or in other jurisdictions in which we operate could seriously harm our business, financial condition or results of operations.

We are subject to regulatory activity and antitrust litigation under competition laws.

We are subject to scrutiny from governmental agencies under competition laws in countries in which we operate. Some jurisdictions also provide private rights of action for competitors or consumers to assert claims of anticompetitive conduct. Other companies or governmental agencies may allege that our actions violate antitrust or competition laws, or otherwise constitute unfair competition. Contractual agreements with clients or companies, as well as our unilateral business practices, could give rise to regulatory action or antitrust investigations or litigation. Some regulators may perceive our business to have such significant market power that otherwise uncontroversial business practices could be deemed anticompetitive. Any such claims and investigations, even if they are unfounded, may be expensive to defend, involve negative publicity and substantial diversion of management time and effort, and could result in significant judgments against us.

In order to obtain antitrust regulatory approvals from Brazil’s Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica, or CADE), and the Central Bank for the Itaú Transaction, we entered into agreements with CADE and the Central Bank pursuant to which we agreed to certain restrictions on our ability to acquire interests in financial investment platforms.

Pursuant to our agreement with CADE, we agreed, among other measures, to: (1) adopt equal treatment practices in our relationships with suppliers of financial products; (2) refrain from entering into exclusive relationships with financial advisors (except as permitted by applicable regulations); (3) facilitate transferability of clients’ financial products to competing platforms; and (4) maintain a “no fee” policy for specific types of financial products. A breach by us of any of the aforementioned measures could result in financial penalties, antitrust investigations and the revision of the agreement with CADE.

Pursuant to our agreement with the Central Bank, we agreed, among other measures, to: (1) refrain from acquiring any interest in financial investment platforms; (2) prohibit Itaú Unibanco S.A. from exercising any influence over our business and operational decisions and strategies; and (3) refrain from selling any interest in our capital stock to any Itaú Unibanco S.A. group company. A breach by us of any of the aforementioned measures could result in financial penalties.

We are subject to anti-corruption, anti-bribery, anti-money laundering and sanctions laws and regulations.

We operate in jurisdictions that have a high risk of corruption and we are subject to anti-corruption, anti-bribery anti-money laundering and sanctions laws and regulations, including the Brazilian Federal Law

 

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No. 12,846/2013, or the Clean Company Act, the United States Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, and the Bribery Act 2010 of the United Kingdom, or the Bribery Act. Each of the Clean Company Act, the FCPA and the Bribery Act impose liability against companies who engage in bribery of government officials, either directly or through intermediaries. We have a compliance program that is designed to manage the risks of doing business in light of these new and existing legal and regulatory requirements. Violations of the anti-corruption, anti-bribery, anti-money laundering and sanctions laws and regulations could result in criminal liability, administrative and civil lawsuits, significant fines and penalties, forfeiture of significant assets, as well as reputational harm.

Regulators may increase enforcement of these obligations, which may require us to adjust our compliance and anti-money laundering programs, including the procedures we use to verify the identity of our clients and to monitor our transactions and transactions made through our platform. Regulators regularly reexamine the transaction volume thresholds at which we must obtain and keep applicable records, verify identities of customers, and report any change in such thresholds to the applicable regulatory authorities, which could result in increased costs in order to comply with these legal and regulatory requirements. Costs associated with fines or enforcement actions, changes in compliance requirements, or limitations on our ability to grow could harm our business, and any new requirements or changes to existing requirements could impose significant costs, result in delays to planned product improvements, make it more difficult for new customers to join our network and reduce the attractiveness of our products and services.

Changes in tax laws, tax incentives, benefits or differing interpretations of tax laws may adversely affect our results of operations.

Changes in tax laws, regulations, related interpretations and tax accounting standards in Brazil, the United States, the United Kingdom, or Switzerland (countries where we operate), or the Cayman Islands may result in a higher tax rate on our earnings, which may significantly reduce our profits and cash flows from operations. For example, in January 2019, the corporate income tax, or IRPJ, aggregate rate applicable to XP CCTVM was reduced from 45% to 40% on net profits. However, as of the date of this prospectus, government discussions to increase this tax rate back to 45% are ongoing. In addition, our financial condition and results of operations may decline if certain tax incentives are not retained or renewed. For example, Brazilian Law No. 11,196 currently grants tax benefits to companies that invest in research and development, provided that some requirements are met, which significantly reduces our annual corporate income tax expense. If the taxes applicable to our business increase or any tax benefits are revoked and we cannot alter our cost structure to pass our tax increases on to clients, our financial condition, results of operations and cash flows could be adversely affected. Our activities are also subject to a Municipal Tax on Services (Imposto Sobre Serviços), or ISS. Any increases in ISS rates could also harm our profitability.

Furthermore, Brazilian governmental authorities at the federal, state and local levels are considering changes in tax laws in order to cover budgetary shortfalls resulting from the recent economic downturn in Brazil. If these proposals are enacted they may harm our profitability by increasing our tax liabilities, increasing our tax compliance costs, or otherwise affecting our financial condition, results of operations and cash flows. Tax rules in Brazil, particularly at the local level, can change without notice. We may not always be aware of all such changes that affect our business and we may therefore fail to pay the applicable taxes or otherwise comply with tax regulations, which may result in additional tax assessments and penalties for our company.

At the municipal level, the Brazilian government enacted Supplementary Law No. 157/16, which imposed changes regarding the ISS collection applied to the rendering of part of our services. These changes created new obligations, as ISS will now be due in the municipality in which the acquirer of our services is located rather than in the municipality in which the service provider’s facilities are located. This obligation took force in January 2018, but has been delayed by Direct Unconstitutionality Action No. 5835, or ADI, filed by taxpayers. The ADI challenges the constitutionality of Supplementary Law No. 157/16 before the Supreme Court, arguing that the new legislation would adversely affect companies’ activities due to the increase of costs and bureaucracy related

 

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to the ISS payment to several municipalities and the compliance with tax reporting obligations connected therewith. As a result, the Supreme Court granted an injunction to suspend the enforcement of Supplementary Law No. 157/16. As of the date of this prospectus, a final decision on this matter is currently pending.

Moreover, we are subject to tax laws and regulations that may be interpreted differently by tax authorities and us. The application of indirect taxes, such as sales and use tax, value-added tax, or VAT, provincial taxes, goods and services tax, business tax and gross receipt tax, to businesses such as ours is complex and continues to evolve. We are required to use significant judgment in order to evaluate applicable tax obligations. In many cases, the ultimate tax determination is uncertain because it is not clear how existing statutes apply to our business. One or more states or municipalities, the federal government or other countries may seek to challenge the taxation or procedures applied to our transactions, which could impose the charge of taxes or additional reporting, record-keeping or indirect tax collection obligations on businesses like ours. New taxes could also require us to incur substantial costs to capture data and collect and remit taxes. If such obligations were imposed, the additional costs associated with tax collection, remittance and audit requirements could have a material adverse effect on our business and financial results.

The costs and effects of pending and future litigation, investigations or similar matters, or adverse facts and developments related thereto, could materially affect our business, financial position and results of operations.

We are, and may be in the future, party to legal, arbitration and administrative investigations, inspections and proceedings arising in the ordinary course of our business or from extraordinary corporate, tax or regulatory events, involving our clients, suppliers, customers, as well as competition, government agencies, tax and environmental authorities, particularly with respect to civil, tax and labor claims. Indemnity rights that we seek to negotiate in certain transactions may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. Furthermore, there is no guarantee that we will be successful in defending ourselves in pending or future litigation or similar matters under various laws. Should the ultimate judgments or settlements in any pending or future litigation or investigation significantly exceed any amounts we are able to recover under any indemnity arrangements, such judgments or settlements could have a material adverse effect on our business, financial condition and results of operations and the price of our Class A common shares. Further, even if we adequately address issues raised by an inspection conducted by an agency or successfully defend our case in an administrative proceeding or court action, we may have to set aside significant financial and management resources to settle issues raised by such proceedings or to those lawsuits or claims, which could adversely affect our business. See “Business—Legal Proceedings.”

We may not be able to successfully manage our intellectual property and may be subject to infringement claims.

We rely on a combination of contractual rights, trademarks and trade secrets to establish and protect our proprietary technology. Third parties may challenge, invalidate, circumvent, infringe or misappropriate our intellectual property, including at the administrative or judicial level, or such intellectual property may not be sufficient to permit us to take advantage of current market trends or otherwise to provide competitive advantages, which could result in costly redesign efforts, the discontinuance of certain service offerings or other competitive harm. Others, including our competitors, may independently develop similar technology, duplicate our services or design around our intellectual property, and in such cases, we could not assert our intellectual property rights against such parties. Further, our contractual arrangements may not effectively prevent disclosure of our confidential information or provide an adequate remedy in the event of unauthorized disclosure of our confidential information. We may have to litigate to enforce or determine the scope and enforceability of our intellectual property rights, trade secrets and know-how, which is expensive, could cause a diversion of resources and may not prove successful. Also, because of the rapid pace of technological change in our industry, aspects of our business and our services rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms or at all.

 

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The loss of intellectual property protection, the inability to obtain third-party intellectual property or delay or refusal by relevant regulatory authorities to approve pending intellectual property registration applications could harm our business and ability to compete. With respect to trademarks, loss of rights may result from term expirations, owner abandonment and forfeiture or cancellation proceedings before the Brazilian Patent and Trademark Office (Instituto Nacional da Propriedade Industrial, or the INPI). In addition, if we lose rights over registered trademarks, we would not be entitled to use such trademarks on an exclusive basis and, therefore, third parties would be able to use similar or identical trademarks to identify their products or services, which could adversely affect our business.

We may also be subject to costly litigation in the event our services and technology infringe upon or otherwise violate a third party’s proprietary rights. Third parties may have, or may eventually be issued, patents that could be infringed by our services or technology. Any of these third parties could make a claim of infringement against us with respect to our services or technology, and we have been subject to such claims in the past. We may also be subject to claims by third parties for breach of copyright, trademark, license usage or other intellectual property rights. Any claim from third parties may result in a limitation on our ability to use the intellectual property subject to these claims or could prevent us from registering our brands as trademarks. Additionally, in recent years, individuals and groups have been purchasing intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from companies like ours. Even if we believe that intellectual property related claims are without merit, defending against such claims is time-consuming and expensive and could result in the diversion of the time and attention of our management and employees. Claims of intellectual property infringement also might require us to redesign affected services, enter into costly settlement or license agreements, pay costly damage awards, change our brands, or face a temporary or permanent injunction prohibiting us from marketing or selling certain services or using certain brands. Even if we have an agreement for indemnification against such costs, the party providing such indemnification may be unwilling or unable to comply with its indemnification obligations. If we cannot or do not license the infringed technology on reasonable terms or substitute similar technology from another source, our revenues and earnings could be adversely impacted.

Our use of open source software could negatively affect our ability to sell our solutions and subject us to possible litigation.

Our solutions incorporate and are dependent to some extent on the use and development of open source software and we intend to continue our use and development of open source software in the future. Such open source software is generally licensed by its authors or other third parties under open source licenses and is typically freely accessible, usable and modifiable. Pursuant to such open source licenses, we may be subject to certain conditions, including requirements that we offer our proprietary software that incorporates the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and that we license such modifications or derivative works under the terms of the particular open source license. If an author or other third party that uses or distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from the use or sale of our solutions that contained or are dependent upon the open source software and required to comply with the foregoing conditions, which could disrupt the distribution and sale of some of our products and services. Litigation could be costly for us to defend, have a negative effect on our financial condition and results of operations or require us to devote additional research and development resources to change our platform. The terms of many open source licenses to which we are subject have not been interpreted by courts. As there is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses, the potential impact of these terms on our business is uncertain and may result in unanticipated obligations regarding our solutions and technologies.

Any requirement to disclose our proprietary source code, termination of open source license rights or payments of damages for breach of contract could be harmful to our business, financial condition or results of

 

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operations, and could make it easier for our competitors develop products and services that are similar to or better than ours.

In addition to risks related to license requirements, use of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties, controls on the origin or development of the software, or remedies against the licensors. Many of the risks associated with usage of open source software cannot be eliminated and could adversely affect our business.

Although we believe that we have complied with our obligations under the various applicable licenses for open source software, it is possible that we may not be aware of all instances where open source software has been incorporated into our proprietary software or used in connection with our solutions or our corresponding obligations under open source licenses. We do not have open source software usage policies or monitoring procedures in place. We rely on multiple software programmers to design our proprietary software and we cannot be certain that our programmers have not incorporated open source software into our proprietary software that we intend to maintain as confidential or that they will not do so in the future. To the extent that we are required to disclose the source code of certain of our proprietary software developments to third-parties, including our competitors, in order to comply with applicable open source license terms, such disclosure could harm our intellectual property position, competitive advantage, financial condition and results of operations. In addition, to the extent that we have failed to comply with our obligations under particular licenses for open source software, we may lose the right to continue to use and exploit such open source software in connection with our operations and solutions, which could disrupt and adversely affect our business.

We may face challenges in expanding into new geographic regions outside of Brazil.

We may face challenges in connection with our expansion through XP Investments and certain of our other subsidiaries into new geographic regions outside of Brazil, and we will face challenges associated with entering markets in which we have limited or no experience and in which we may not be well-known. Offering our services in new geographic regions requires substantial expenditures and takes considerable time, and we may not recover our investments in new markets in a timely manner or at all. For example, we may be unable to attract a sufficient number of clients, fail to anticipate competitive conditions or fail to adapt and tailor our services to different markets. In addition, the ongoing economic uncertainty and political instability in the countries in which we operate may adversely affect us.

The development of our products and services globally exposes us to risks relating to staffing and managing cross-border operations; increased costs and difficulty protecting intellectual property and sensitive data; tariffs and other trade barriers; differing and potentially adverse tax consequences; increased and conflicting regulatory compliance requirements, including with respect to privacy and security; lack of acceptance of our products and services; challenges caused by distance, language, and cultural differences; exchange rate risk; and political instability. Accordingly, our efforts to develop and expand the geographic footprint of our operations may not be successful, which could limit our ability to grow our business.

Any acquisitions, partnerships or joint ventures that we make or enter into could disrupt our business and harm our financial condition.

Acquisitions, partnerships and joint ventures are part of our growth strategy. From time to time, we pursue strategic acquisitions, such as our recent acquisitions of Clear Corretora de Títulos e Valores Mobiliários S.A., or Clear, in 2015, Rico Corretora de Títulos e Valores Mobiliários S.A., or Rico, in 2017, and XP Vista in 2018. We evaluate, and expect in the future to evaluate, potential strategic acquisitions of, and partnerships or joint ventures with, complementary businesses, services or technologies. We may not be successful in identifying acquisition, partnership and joint venture targets. In addition, we may not be able to successfully finance or integrate any businesses, services or technologies that we acquire or with which we form a partnership or joint venture, and we may lose clients as a result of any acquisition, partnership or joint venture. In addition, we may

 

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be unable to realize the expected benefits, synergies or developments that we may initially anticipate. Furthermore, the integration of any acquisition, partnership or joint venture may divert management’s time and resources from our core business and disrupt our operations.

Certain acquisitions, partnerships and joint ventures we make may prevent us from competing for certain clients or in certain lines of business and may lead to a loss of clients. For example, in order to obtain antitrust regulatory approvals from CADE and the Central Bank in connection with the Itaú Transaction, we entered into agreements with CADE and the Central Bank pursuant to which we agreed to certain restrictions on our ability to acquire interests in financial investment platforms.

In addition, we may spend time and money on projects that do not increase our revenue or profitability. To the extent we finance any acquisition or investment in cash, it would reduce our cash reserves, and to the extent the purchase price is paid with our common shares, it could be dilutive to our shareholders. To the extent we finance any acquisition or investment with the proceeds from the incurrence of debt, this would increase our level of indebtedness and could negatively affect our liquidity, credit rating and restrict our operations. Our competitors may be willing to pay more than us for acquisitions or investments, which may cause us to lose certain opportunities that we would otherwise desire to complete. Moreover, we may face contingent liabilities in connection with our acquisitions and joint ventures, including, among others, (1) judicial and/or administrative proceeding or contingencies relating to the company, asset or business acquired, including civil, regulatory, tax, labor, social security, environmental and intellectual property proceedings or contingencies; and (2) financial, reputational and technical issues, including with respect to accounting practices, financial statement disclosures and internal controls, as well as other regulatory or compliance matters, all of which we may not have identified as part of our due diligence process and that may not be sufficiently indemnifiable under the relevant acquisition or joint venture agreement. We cannot assure you that any acquisition, partnership, investment or joint venture we make will not have a material adverse effect on our business, financial condition and results of operations.

Our insurance policies may not be sufficient to cover all claims.

Our insurance policies may not adequately cover all risks to which we are exposed. A significant claim not covered by our insurance, in full or in part, may result in significant expenditures by us. Moreover, we may not be able to maintain insurance policies in the future at reasonable costs or on acceptable terms, which may adversely affect our business and the trading price of our Class A common shares.

Our risk management policies and procedures may not be fully effective in mitigating our risk exposure in all market environments or against all types of risks, which could expose us to losses and liability and otherwise harm our business.

We operate in a dynamic industry, and we have experienced significant change in recent years, including undertaking certain acquisitions and preparing for and conducting this offering, and the emergence of new risks within the industries in which we operate or may operate in the future. Accordingly, our risk management policies and procedures may not be fully effective in identifying, monitoring and managing our risks. Some of our risk evaluation methods depend upon information provided by others and public information regarding markets, clients or other matters that are otherwise inaccessible by us. In some cases, however, that information may not be accurate, complete or up-to-date. If our policies and procedures are not fully effective or we are not always successful in capturing all risks to which we are or may be exposed, we may suffer harm to our reputation or be subject to litigation or regulatory actions that could have a material adverse effect on our business, financial condition and results of operations.

We offer financial services and other products and services to a large number of clients, and we are responsible for vetting and monitoring these clients and determining whether the transactions we process for them are legitimate. When our products and services are used in connection with illegitimate transactions, and we settle those funds to clients and are unable to recover them, we suffer losses and liability. These types of

 

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illegitimate, as well as unlawful, transactions can also expose us to governmental and regulatory sanctions, including outside of Brazil (for example, U.S. anti-money laundering and economic sanctions violations). Our risk management policies, procedures, techniques, and processes may not be sufficient to identify all of the risks to which we are exposed, to enable us to mitigate the risks we have identified, or to identify additional risks to which we may become subject in the future. Furthermore, if our risk management policies and processes contain errors or are otherwise ineffective, we may suffer large financial losses, we may be subject to civil and criminal liability, and our business may be materially and adversely affected.

Holding large and concentrated positions may expose us to losses.

Concentration of risk may reduce revenues or result in losses in our institutional and retail investment business, our market-making activities and our underwriting businesses in the event of unfavorable market conditions, failed executions or settlements with respect to transactions that we underwrite, or in instances in which market conditions are more favorable to our competitors. We commit substantial amounts of capital to these businesses, which often results in our taking large positions in the securities of a particular issuer or issuers in a particular industry, country or region, and any losses in these large positions may have a material adverse effect on our financial condition and results of operations.

We may not be able to secure financing on favorable terms, or at all, to meet our future capital needs.

We have funded our operations since inception in part through equity financings, bank credit facilities and other financing arrangements. In the future, we may require additional capital to respond to business opportunities, refinancing needs, challenges, acquisitions, or unforeseen circumstances and may decide to engage in equity or debt financings or enter into credit facilities for other reasons, and we may not be able to secure any such additional debt or equity financing or refinancing on favorable terms, in a timely manner, or at all. Any debt financing obtained by us in the future could also include restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Our credit facilities contain restrictive covenants, including customary limitations on the incurrence of certain indebtedness and liens. Our ability to comply with these covenants may be affected by events beyond our control, and breaches of these covenants could result in a default under our credit facilities and any future financing agreements into which we may enter. If not waived, defaults could cause our outstanding indebtedness under our credit facilities and any future financing agreements that we may enter into under these terms to become immediately due and payable. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”

Some of our clients reach us on digital media platforms, leading to our difficulties in maintaining all the communication records.

Under the relevant laws and regulations of Brazil (including CVM Rule No. 505), we are generally required to keep the records of our communications with customers concerning our services for at least a period of 5 years, including from IFAs. To ensure all of our users and customers are best served, we occasionally provide customer service on popular digital media platforms in a similar way as other market participants in both our industry and other various industries. However, we cannot solve all the difficulties arising therefrom because the digital media platforms usually do not have functions that telephone or email operation systems use for the long-term storage of communication records, which, such difficulties, if questioned by the CVM, could have a material adverse effect on our business, financial condition and results of operations.

 

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If we are not able to respond to changes in user preferences for our financial products and services and provide a satisfactory user experience on our platform, or our existing and new products and services do not maintain or achieve sufficient market acceptance, we will not be able to maintain and expand our user base and increase user activities, and our financial results and competitive position will be harmed.

We believe that our user base is the cornerstone of our business. Our ability to maintain and expand our user base depends on a number of factors, including our ability to offer suitable financial products and services for our users, and our ability to provide relevant and timely products and services to meet changing user needs at a reasonable cost. If we are unable to respond to changes in user preference and deliver satisfactory and distinguishable user experience at a reasonable cost, our users may switch to competing platforms or, in relevant cases, obtain the relevant products and services directly from their providers. As a result, user access to and user activity on our platform will decline, our products and services will be less attractive to our users, and our business, financial performance and prospects will be materially and adversely affected.

We have devoted significant resources to, and will continue to emphasize, upgrading and marketing our existing financial products and services and enhancing their market awareness. We also incur expenses and expend resources upfront to develop, acquire and market new financial products and services that incorporate additional features, improve functionality or otherwise make our products more desirable to clients. New financial products and services must achieve high levels of market acceptance in order for us to recoup our investment in developing, acquiring and bringing them to market.

Our existing and new financial products and services could fail to attain sufficient market acceptance for many reasons, including:

 

   

investors are not willing to deploy their funds in a timely or efficient manner;

 

   

we may fail to predict market demand accurately and provide products and services that meet this demand in a timely fashion;

 

   

users may not like, find useful or agree with, any changes;

 

   

there may be defects, errors or failures on our platform;

 

   

there may be negative publicity about our financial products and services or our platform’s performance or effectiveness;

 

   

if new financial products and services or changes to our platform do not comply with Brazilian laws, regulations or rules applicable to us; and

 

   

there may be competing products and services introduced or anticipated to be introduced by our competitors.

If our existing and new financial products and services do not achieve adequate acceptance in the market, our competitive position, financial condition and results of operations could be adversely affected.

Our balance sheet includes significant amounts of intangible assets. The impairment of a significant portion of these assets would negatively affect our business, financial condition and results of operations.

As of September 30, 2019, our balance sheet includes intangible assets that amount to R$521 million. These assets consist primarily of identified intangible assets associated with our acquisitions. We also expect to engage in additional acquisitions, which may result in our recognition of additional intangible assets. Under current accounting standards, we are required to amortize certain intangible assets over the useful life of the asset, while certain other intangible assets are not amortized. On at least an annual basis, we assess whether there have been impairments in the carrying value of certain intangible assets. If the carrying value of the asset is determined to be impaired, then it is written down to fair value by a charge to operating earnings. An impairment of a significant portion of intangible assets could have a material adverse effect on our business, financial condition and results of operations.

 

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Certain Risks Relating to Brazil

The Brazilian federal government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement as well as Brazil’s political and economic conditions could harm us and the price of our Class A common shares.

The Brazilian federal government frequently exercises significant influence over the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, increases or decreases in interest rates, changes in fiscal policies, wage and price controls, foreign exchange rate controls, blocking access to bank accounts, currency devaluations, capital controls and import and export restrictions. We have no control over and cannot predict what measures or policies the Brazilian government may take in the future. We and the market price of our Class A common shares may be harmed by changes in Brazilian government policies, as well as general economic factors, including, without limitation:

 

   

growth or downturn of the Brazilian economy;

 

   

interest rates and monetary policies;

 

   

exchange rates and currency fluctuations;

 

   

inflation;

 

   

liquidity of the domestic capital and lending markets;

 

   

import and export controls;

 

   

exchange controls and restrictions on remittances abroad and payments of dividends;

 

   

modifications to laws and regulations according to political, social and economic interests;

 

   

fiscal policy, monetary policy and changes in tax laws;

 

   

economic, political and social instability, including general strikes and mass demonstrations;

 

   

labor and social security regulations;

 

   

energy and water shortages and rationing;

 

   

commodity prices; and

 

   

other political, diplomatic, social and economic developments in or affecting Brazil.

Uncertainty over whether the Brazilian federal government will implement reforms or changes in policy or regulation affecting these or other factors in the future may affect economic performance and contribute to economic uncertainty in Brazil, which may have an adverse effect on our activities and consequently our results of operations, and may also adversely affect the trading price of our Class A common shares. Recent economic and political instability has led to a negative perception of the Brazilian economy and higher volatility in the Brazilian securities markets, which also may adversely affect us and our Class A common shares. See “—Economic uncertainty and political instability in Brazil may harm us and the price of our Class A common shares” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Brazilian Macroeconomic Environment.”

Economic uncertainty and political instability in Brazil may harm us and the price of our Class A common shares.

Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic deceleration and heightened volatility in the securities offered by companies with significant operations in Brazil.

 

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The recent economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy as well as to a deteriorating political environment. In addition, various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor, including the largest such investigation, known as “Operação Lava Jato,” have negatively impacted the Brazilian economy and political environment. The potential outcome of these investigations is uncertain, but they have already had an adverse impact on the image and reputation of the implicated companies, and on the general market perception of the Brazilian economy. We cannot predict whether the ongoing investigations will result in further political and economic instability, or if new allegations against government officials and/or executives of private companies will arise in the future.

A failure by the Brazilian government to implement necessary reforms may result in diminished confidence in the Brazilian government’s budgetary condition and fiscal stance, which could result in downgrades of Brazil’s sovereign foreign credit rating by credit rating agencies, negatively impact Brazil’s economy, lead to further depreciation of the real and an increase in inflation and interest rates, adversely affecting our business, financial condition and results of operations.

Any of the above factors may create additional political uncertainty, which could harm the Brazilian economy and, consequently, our business, and could adversely affect our financial condition, results of operations and the price of our Class A common shares.

Inflation and certain measures by the Brazilian government to curb inflation have historically harmed the Brazilian economy and Brazilian capital markets, and high levels of inflation in the future would harm our business and the price of our Class A common shares.

In the past, Brazil has experienced extremely high rates of inflation. Inflation and some of the measures taken by the Brazilian government in an attempt to curb inflation have had significant negative effects on the Brazilian economy generally. Inflation, policies adopted to curb inflationary pressures and uncertainties regarding possible future governmental intervention have contributed to economic uncertainty and heightened volatility in the Brazilian capital markets.

According to the National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo, or IPCA), which is published by the Brazilian Institute for Geography and Statistics (Instituto Brasileiro de Geografia e Estatística, or IBGE), Brazilian inflation rates were 3.7%, 2.9% and 6.3% as of December 31, 2018, 2017 and 2016, respectively. Brazil may experience high levels of inflation in the future and inflationary pressures may lead to the Brazilian government intervening in the economy and introducing policies that could harm our business and the trading price of our Class A common shares. In the past, the Brazilian government’s interventions included the maintenance of a restrictive monetary policy with high interest rates that restricted credit availability and reduced economic growth, causing volatility in interest rates. For example, the official interest rate in Brazil decreased from 14.25% as of December 31, 2015 to 6.50% as of December 31, 2018, as established by the COPOM. On February 7, 2018, the COPOM reduced the SELIC rate to 6.75% and further reduced the SELIC rate to 6.50% on March 21, 2018. The COPOM reconfirmed the SELIC rate of 6.50% on May 16, 2018 and subsequently on June 20, 2018. As of December 31, 2018, the SELIC rate was 6.50%. The COPOM reconfirmed the SELIC rate of 6.50% on February 6, 2019, but reduced the SELIC rate to 6.00% on August 1, 2019 and further reduced the rate to 5.00% on October 30, 2019. Conversely, more lenient government and Central Bank policies and interest rate decreases have triggered and may continue to trigger increases in inflation, and, consequently, growth volatility and the need for sudden and significant interest rate increases, which could negatively affect us and increase our indebtedness.

Exchange rate instability may have adverse effects on the Brazilian economy, us and the price of our Class A common shares.

The Brazilian currency has been historically volatile and has been devalued frequently over the past three decades. Throughout this period, the Brazilian government has implemented various economic plans and used

 

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various exchange rate policies, including sudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system. Although long-term depreciation of the real is generally linked to the rate of inflation in Brazil, depreciation of the real occurring over shorter periods of time has resulted in significant variations in the exchange rate between the real, the U.S. dollar and other currencies. The real depreciated against the U.S. dollar by 32.0% at year-end 2015 as compared to year-end 2014, and by 11.8% at year-end 2014 as compared to year-end 2013. The real/U.S. dollar exchange rate reported by the Central Bank was R$3.9048 per U.S. dollar on December 31, 2015 and R$3.2591 per U.S. dollar on December 31, 2016, which reflected a 16.5% appreciation in the real against the U.S. dollar during 2016. The real/U.S. dollar exchange rate reported by the Central Bank was R$3.308 per U.S. dollar on December 31, 2017, which reflected a 1.5% depreciation in the real against the U.S. dollar during 2017. The real/U.S. dollar exchange rate reported by the Central Bank was R$3.8742 per US$1.00 on December 31, 2018, which reflected a 17.1% depreciation in the real against the U.S. dollar during 2018. As of September 30, 2019, the exchange rate for the purchase of U.S. dollars as reported by the Central Bank was R$4.1638 per US$1.00, which reflected a 7.5% depreciation in the real against the U.S. dollar during the first nine months of 2019. As of November 13, 2019, the exchange rate for the purchase of U.S. dollars as reported by the Central Bank was R$4.1761 per US$1.00.

A devaluation of the real relative to the U.S. dollar could create inflationary pressures in Brazil and cause the Brazilian government to, among other measures, increase interest rates. Any depreciation of the real may generally restrict access to the international capital markets. It would also reduce the U.S. dollar value of our results of operations. Restrictive macroeconomic policies could reduce the stability of the Brazilian economy and harm our results of operations and profitability. In addition, domestic and international reactions to restrictive economic policies could have a negative impact on the Brazilian economy. These policies and any reactions to them may harm us by curtailing access to foreign financial markets and prompting further government intervention. A devaluation of the real relative to the U.S. dollar may also, as in the context of the current economic slowdown, decrease consumer spending, increase deflationary pressures and reduce economic growth.

On the other hand, an appreciation of the real relative to the U.S. dollar and other foreign currencies may deteriorate the Brazilian foreign exchange current accounts. We and certain of our suppliers purchase services from countries outside Brazil, and thus changes in the value of the U.S. dollar compared to other currencies may affect the costs of services that we purchase. Depending on the circumstances, either devaluation or appreciation of the real relative to the U.S. dollar and other foreign currencies could restrict the growth of the Brazilian economy, as well as our business, results of operations and profitability.

Infrastructure and workforce deficiency in Brazil may impact economic growth and have a material adverse effect on us.

Our performance depends on the overall health and growth of the Brazilian economy. Brazilian GDP growth has fluctuated over the past few years, with growth of 3.0% in 2013 but decreasing to 0.5% in 2014, a contraction of 3.5% in 2015, a contraction of 3.3% in 2016, a growth of 1.1% in 2017 and a growth of 1.1% in 2018. Growth is limited by inadequate infrastructure, including potential energy shortages and deficient transportation, logistics and telecommunication sectors, general strikes, the lack of a qualified labor force, and the lack of private and public investments in these areas, which limit productivity and efficiency. Any of these factors could lead to labor market volatility and generally impact income, purchasing power and consumption levels, which could limit growth and ultimately have a material adverse effect on us.

Developments and the perceptions of risks in other countries, including other emerging markets, the United States and Europe, may harm the Brazilian economy and the price of our Class A common shares.

The market for securities offered by companies with significant operations in Brazil is influenced by economic and market conditions in Brazil and, to varying degrees, market conditions in other Latin American and emerging markets, as well as the United States, Europe and other countries. To the extent the conditions of

 

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the global markets or economy deteriorate, the business of companies with significant operations in Brazil may be harmed. The weakness in the global economy has been marked by, among other adverse factors, lower levels of consumer and corporate confidence, decreased business investment and consumer spending, increased unemployment, reduced income and asset values in many areas, reduction of China’s growth rate, currency volatility and limited availability of credit and access to capital. Developments or economic conditions in other emerging market countries have at times significantly affected the availability of credit to companies with significant operations in Brazil and resulted in considerable outflows of funds from Brazil, decreasing the amount of foreign investments in Brazil.

Crises and political instability in other emerging market countries, the United States, Europe or other countries, including increased international trade tensions and protectionist policies, could decrease investor demand for securities offered by companies with significant operations in Brazil, such as our Class A common shares. In June 2016, the United Kingdom held a referendum in which the majority voted for the United Kingdom to leave the European Union (so-called “Brexit”). The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations. The ongoing process of negotiations between the U.K. and the European Union will determine the future terms of the U.K.’s relationship with the European Union, including access to European Union markets, either during a transitional period or more permanently. We have no control over and cannot predict the effect of Brexit nor over whether and to which effect any other member state will decide to exit the European Union in the future. These developments, as well as potential crises and other forms of political instability or any other as of yet unforeseen development, may harm our business and the price of our Class A common shares.

Any further downgrading of Brazil’s credit rating could reduce the trading price of our Class A common shares.

We and the trading price of our Class A common shares may be harmed by investors’ perceptions of risks related to Brazil’s sovereign debt credit rating. Rating agencies regularly evaluate Brazil and its sovereign credit ratings, which are based on a number of factors including macroeconomic trends, fiscal and budgetary conditions, indebtedness metrics and the perspective of changes in any of these factors.

The rating agencies began to review Brazil’s sovereign credit ratings in September 2015. Subsequently, the three major rating agencies downgraded Brazil’s investment-grade status:

 

   

In 2015, Standard & Poor’s initially downgraded Brazil’s credit rating from BBB-negative to BB-positive and subsequently downgraded it again from BB-positive to BB, maintaining its negative outlook, citing a worse credit situation since the first downgrade. On January 11, 2018, Standard & Poor’s further downgraded Brazil’s credit rating from BB to BB-negative.

 

   

In December 2015, Moody’s placed Brazil’s Baa3’s foreign currency credit ratings under review for downgrade and subsequently downgraded them to below investment grade, at Ba2 with a negative outlook, citing the prospect of a further deterioration in Brazil’s debt indicators, taking into account the low growth environment and the challenging political scenario.

 

   

Fitch downgraded Brazil’s sovereign foreign credit rating to BB-positive with a negative outlook, citing the rapid expansion of the country’s budget deficit and the worse-than-expected recession. In February 2018, Fitch downgraded Brazil’s sovereign credit rating again to BB-negative, citing, among other reasons, fiscal deficits, the increasing burden of public debt and an inability to implement reforms that would structurally improve Brazil’s public finances.

Brazil’s sovereign credit rating is currently rated below investment grade by the three main credit rating agencies. Consequently the prices of securities offered by companies with significant operations in Brazil have been negatively affected. A prolongation or worsening of the current Brazilian recession and continued political uncertainty, among other factors, could lead to further ratings downgrades. Any further downgrade of Brazil’s sovereign foreign credit ratings could heighten investors’ perception of risk and, as a result, cause the trading price of our Class A common shares to decline.

 

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Certain Risks Relating to Our Class A Common Shares and the Offering

There is no existing market for our common shares, and we do not know whether one will develop to provide you with adequate liquidity. If the trading price of our Class A common shares fluctuates after this offering, you could lose a significant part of your investment.

Prior to this offering, there has not been a public market for our Class A common shares. If an active trading market does not develop, you may have difficulty selling any of our Class A common shares that you buy. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the Nasdaq, or otherwise or how liquid that market might become. The initial public offering price for the Class A common shares will be determined by negotiations between us, the selling shareholders and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our Class A common shares at prices equal to or greater than the price paid by you in this offering. In addition to the risks described above, the market price of our Class A common shares may be influenced by many factors, some of which are beyond our control, including:

 

   

announcements by us or our competitors of significant contracts or acquisitions;

 

   

technological innovations by us or competitors;

 

   

the failure of financial analysts to cover our Class A common shares after this offering or changes in financial estimates by analysts;

 

   

actual or anticipated variations in our results of operations;

 

   

changes in financial estimates by financial analysts, or any failure by us to meet or exceed any of these estimates, or changes in the recommendations of any financial analysts that elect to follow our Class A common shares or the shares of our competitors;

 

   

announcements by us or our competitors of significant contracts or acquisitions;

 

   

future sales of our shares; and

 

   

investor perceptions of us and the industries in which we operate.

In addition, the stock market in general has experienced substantial price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies affected. These broad market and industry factors may materially harm the market price of our Class A common shares, regardless of our operating performance. In the past, following periods of volatility in the market price of certain companies’ securities, securities class action litigation has been instituted against these companies. This litigation, if instituted against us, could adversely affect our financial condition or results of operations. If a market does not develop or is not maintained, the liquidity and price of our Class A common shares could be seriously harmed.

XP Controle will own     % of our outstanding Class B common shares, which will represent approximately     % of the voting power of our issued share capital following this offering, and will, subject to the provisions of the Shareholders’ Agreement, control all matters requiring shareholder approval. This concentration of ownership and voting power limits your ability to influence corporate matters.

Immediately following this offering, XP Controle will control our company and will not hold any of our Class A common shares, but will beneficially own     % of our issued share capital (or     % if the underwriters’ option to purchase additional Class A common shares is exercised in full) through its beneficial ownership of all of our outstanding Class B common shares, respectively, and consequently,     % of the combined voting power of our issued share capital (or     % if the underwriters’ option to purchase additional Class A common shares is exercised in full). Our Class B common shares are entitled to 10 votes per share and our Class A common shares, which are the common shares we are offering in this offering, are entitled to one vote per share. Our Class B common shares are convertible into an equivalent number of Class A common shares. As a result, XP Controle

 

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will, subject to the provisions of the Shareholders’ Agreement, control the outcome of all decisions at our shareholders’ meetings, and will be able to elect a majority of the members of our board of directors. They will also be able to direct our actions in areas such as business strategy, financing, distributions, acquisitions and dispositions of assets or businesses. For example, XP Controle may cause us to make acquisitions that increase the amount of our indebtedness or outstanding Class A common shares, sell revenue-generating assets or inhibit change of control transactions that may benefit other shareholders. The decisions of XP Controle on these matters may be contrary to your expectations or preferences, and they may take actions that could be contrary to your interests. They will, subject to the provisions of the Shareholders’ Agreement, be able to prevent any other shareholders, including you, from blocking these actions. For further information regarding shareholdings in our company, see “Principal and Selling Shareholders.” In addition, for so long as they beneficially own more than two-thirds of our issued share capital, XP Controle will also have the ability to unilaterally amend XP’s Articles of Association, which may be amended only by special resolution of shareholders (requiring a two-thirds majority vote of those shareholders attending and voting at a quorate meeting).

So long as XP Controle beneficially owns a sufficient number of Class B common shares, even if it beneficially owns significantly less than 50% of our outstanding share capital, it will be able to effectively control our decisions.

We have granted the holders of our Class B common shares preemptive rights to acquire shares that we may sell in the future, which may impair our ability to raise funds.

Under our Articles of Association and the Shareholders’ Agreement, the holders of our Class B common shares, XP Controle, Itaú and GA Bermuda, are entitled to preemptive rights to purchase additional common shares in the event that there is an increase in our share capital and additional common shares are issued, upon the same economic terms and at the same price, in order to maintain their proportional ownership interests, which will be approximately     %,     % and     % of our outstanding shares, respectively, immediately after this offering. The exercise by holders of our Class B common shares of their preemptive rights may impair our ability to raise funds, or adversely affect the terms on which we are able to raise funds, as we may not be able to offer to new investors the quantity of our shares that they may desire to purchase. For more information, see “Description of Share Capital—Preemptive or Similar Rights.”

Class A common shares eligible for future sale may cause the market price of our Class A common shares to drop significantly.

The market price of our Class A common shares may decline as a result of sales of a large number of our Class A common shares in the market after this offering or the perception that these sales may occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Following the completion of this offering, we will have outstanding                Class A common shares and                Class B common shares (or                 Class A common shares and                Class B common shares, if the underwriters exercise in full their option to purchase additional shares). Subject to the lock-up agreements described below, the Class A common shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act by persons other than our affiliates within the meaning of Rule 144 of the Securities Act.

Our shareholders or entities controlled by them or their permitted transferees will, subject to the lock-up agreements described below, be able to sell their Class A common shares in the public market from time to time without registering them, subject to certain limitations on the timing, amount and method of those sales imposed by regulations promulgated by the SEC. If any of our shareholders, the affiliated entities controlled by them or their respective permitted transferees were to sell a large number of their Class A common shares, the market price of our Class A common shares may decline significantly. In addition, the perception in the public markets that sales by them might occur may also cause the trading price of our Class A common shares to decline.

 

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We have agreed with the underwriters, subject to certain exceptions, not to offer, sell or dispose of any shares in our share capital or securities convertible into or exchangeable or exercisable for any shares in our share capital during the 180-day period following the date of this prospectus. Our directors, executive officers and all of our existing shareholders have agreed to substantially similar lock-up provisions. However, Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC, or the representatives for the underwriters, may, in their sole discretion and without notice, release all or any portion of the shares from the restrictions in any of the lock-up agreements described above. In addition, these lock-up agreements are subject to the exceptions described in “Underwriting (Conflicts of Interest),” including the right for our company to issue new shares if we carry out an acquisition or enter into a merger, joint venture or strategic participation.

Sales of a substantial number of our Class A common shares upon expiration of the lock-up agreements, the perception that such sales may occur, or early release of these lock-up periods, could cause our market price to fall or make it more difficult for you to sell your Class A common shares at a time and price that you deem appropriate.

Our Articles of Association contain, and the Shareholders’ Agreement will contain, anti-takeover provisions that may discourage a third-party from acquiring us and adversely affect the rights of holders of our Class A common shares.

Our Articles of Association contain, and the Shareholders’ Agreement will contain, certain provisions that could limit the ability of others to acquire our control, including a provision that grants authority to our board of directors to establish and issue from time to time one or more series of preferred shares and to determine, with respect to any series of preferred shares, the terms and rights of that series. These provisions could have the effect of depriving our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain our control in a tender offer or similar transactions.

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, the price of our Class A common shares and our trading volume could decline.

The trading market for our Class A common shares will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no or too few securities or industry analysts commence coverage of our company, the trading price for our Class A common shares would likely be negatively affected. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our Class A common shares or publish inaccurate or unfavorable research about our business, the price of our Class A common shares would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our Class A common shares could decrease, which might cause the price of our Class A common shares and trading volume to decline.

We may not pay any cash dividends in the foreseeable future.

The declaration, payment and amount of any future dividends will be made at the discretion of our board of directors and will depend upon, among other things, the results of operations, cash flows and financial condition, operating and capital requirements, and other factors as our board of directors considers relevant. In addition, our holding company structure makes us dependent on the operations of our subsidiaries. See “—Certain Risks Relating to Our Business and Industry—Our holding company structure makes us dependent on the operations of our subsidiaries.” There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend. See “Dividends and Dividend Policy” and “Description of Share Capital—Dividends and Capitalization of Profits.”

 

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Our dual class capital structure means our shares will not be included in certain indices. We cannot predict the impact this may have on the trading price of our Class A common shares.

In 2017, FTSE Russell, S&P Dow Jones and MSCI announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices to exclude companies with multiple classes of shares of common stock from being added to such indices. FTSE Russell announced plans to require new constituents of its indices to have at least five percent of their voting rights in the hands of public stockholders, whereas S&P Dow Jones announced that companies with multiple share classes, such as ours, will not be eligible for inclusion in the S&P 500, S&P MidCap 400 and S&P SmallCap 600, which together make up the S&P Composite 1500. MSCI also opened public consultations on their treatment of no-vote and multi-class structures and temporarily barred new multi-class listings from its ACWI Investable Market Index and U.S. Investable Market 2500 Index; however, in October 2018, MSCI announced its decision to include equity securities “with unequal voting structures” in its indices and to launch a new index that specifically includes voting rights in its eligibility criteria. We cannot assure you that other stock indices will not take a similar approach to FTSE Russell, S&P Dow Jones and MSCI in the future. Under the announced policies, our dual class capital structure would make us ineligible for inclusion in any of these indices and, as a result, mutual funds, exchange-traded funds and other investment vehicles that attempt to passively track these indices will not invest in our stock. It continues to be somewhat unclear what effect, if any, these policies will have on the valuations of publicly traded companies excluded from the indices, but in certain situations they may depress these valuations compared to those of other similar companies that are included. Exclusion from indices could make our Class A common shares less attractive to investors and, as a result, the market price of our Class A common shares could be adversely affected.

The dual class structure of our common stock has the effect of concentrating voting control with XP Controle, our controlling shareholder; this will limit or preclude your ability to influence corporate matters.

Each Class A common share, which are the shares being sold in this offering, will entitle its holder to one vote per share and each Class B common share will entitle its holder to ten votes per share, so long as the total number of votes of the issued and outstanding Class B common shares represents less than 10% of the voting share rights of the Company. The beneficial owners of our Class B common shares currently consist of XP Controle, Itaú and GA Bermuda, with XP Controle holding      % of the Class B common shares. Due to the ten-to-one voting ratio between our Class B and Class A common shares, our controlling shareholder, XP Controle, will continue to control a majority of the combined voting power of our common shares and therefore be able to, subject to the provisions of the Shareholders’ Agreement, control all matters submitted to our shareholders so long as the total number of the issued and outstanding Class B common shares is at least     % of the total number of shares outstanding and the total number of the issued.

In addition, our Articles of Association provide that at any time when there are Class A common shares in issue, additional Class B common shares may only be issued pursuant to (1) a share split, subdivision of shares or similar transaction or where a dividend or other distribution is paid by the issue of shares or rights to acquire shares or following capitalization of profits; (2) a merger, consolidation, or other business combination involving the issuance of Class B common shares as full or partial consideration; or (3) an issuance of Class A common shares, whereby holders of the Class B common shares are entitled to purchase a number of Class B common shares that would allow them to maintain their proportional ownership interests in XP (following an offer by us to each holder of Class B common shares to issue to such holder, upon the same economic terms and at the same price, such number of Class B common shares as would ensure such holder may maintain a proportional ownership interest in XP pursuant to our Articles of Association).

In light of the above provisions relating to the issuance of additional Class B common shares, as well as the ten-to-one voting ratio of our Class B common shares and Class A common shares, holders of our Class B common shares will in many situations continue to maintain control of all matters requiring shareholder approval. This concentrated control will limit or preclude your ability to influence corporate matters for the

 

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foreseeable future. For a description of our dual class structure, see “Description of Share Capital—Voting Rights.”

We are a Cayman Islands exempted company with limited liability. The rights of our shareholders, including with respect to fiduciary duties and corporate opportunities, may be different from the rights of shareholders governed by the laws of U.S. jurisdictions.

We are a Cayman Islands exempted company with limited liability. Our corporate affairs are governed by our Articles of Association and by the laws of the Cayman Islands. The rights of shareholders and the responsibilities of members of our board of directors may be different from the rights of shareholders and responsibilities of directors in companies governed by the laws of U.S. jurisdictions. In particular, as a matter of Cayman Islands law, directors of a Cayman Islands company owe fiduciary duties to the company and separately a duty of care, diligence and skill to the company. Under Cayman Islands law, directors and officers owe the following fiduciary duties: (1) duty to act in good faith in what the director or officer believes to be in the best interests of the company as a whole; (2) duty to exercise powers for the purposes for which those powers were conferred and not for a collateral purpose; (3) directors should not properly fetter the exercise of future discretion; (4) duty to exercise powers fairly as between different sections of shareholders; (5) duty to exercise independent judgment; and (6) duty not to put themselves in a position in which there is a conflict between their duty to the company and their personal interests. Our Articles of Association have varied this last obligation by providing that a director must disclose the nature and extent of his or her interest in any contract or arrangement, and following such disclosure and subject to any separate requirement under applicable law or the listing rules of the Nasdaq, and unless disqualified by the chairman of the relevant meeting, such director may vote in respect of any transaction or arrangement in which he or she is interested and may be counted in the quorum at the meeting. Conversely, under Delaware corporate law, a director has a fiduciary duty to the corporation and its stockholders (made up of two components) and the director’s duties prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. See “Description of Share Capital—Principal Differences between Cayman Islands and U.S. Corporate Law.”

New investors in our Class A common shares will experience immediate and substantial book value dilution after this offering.

The initial public offering price of our Class A common shares will be substantially higher than the pro forma net tangible book value per share of the outstanding Class A common shares immediately after this offering. Based on an assumed initial public offering price of $                per share (the midpoint of the price range set forth on the cover of this prospectus) and our net tangible book value as of September 30, 2019, if you purchase our common shares in this offering you will pay more for your shares than the amounts paid by our existing shareholders for their shares and you will suffer immediate dilution of approximately $                per share in pro forma net tangible book value, after giving effect to the Share Split. As a result of this dilution, investors purchasing shares in this offering may receive significantly less than the full purchase price that they paid for the shares purchased in this offering in the event of a liquidation. See “Dilution.”

We may need to raise additional capital in the future by issuing securities or may enter into corporate transactions with an effect similar to a merger, which may dilute your interest in our share capital and affect the trading price of our Class A common shares.

We may need to raise additional funds to grow our business and implement our growth strategy through public or private issuances of common shares or securities convertible into, or exchangeable for, our common shares, which may dilute your interest in our share capital or result in a decrease in the market price of our common shares. In addition, we may also enter into mergers or other similar transactions in the future, which may dilute your interest in our share capital or result in a decrease in the market price of our Class A common shares. Any fundraising through the issuance of shares or securities convertible into or exchangeable for shares,

 

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or the participation in corporate transactions with an effect similar to a merger, may dilute your interest in our capital stock or result in a decrease in the market price of our Class A common shares.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our Class A common shares. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, financial condition and results of operations. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. See “Use of Proceeds.”

As a foreign private issuer and an “emerging growth company” (as defined in the JOBS Act), we will have different disclosure and other requirements than U.S. domestic registrants and non-emerging growth companies.

As a foreign private issuer and emerging growth company, we will be subject to different disclosure and other requirements than domestic U.S. registrants and non-emerging growth companies. For example, as a foreign private issuer, in the United States, we are not subject to the same disclosure requirements as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports on Form 10-Q or to file current reports on Form 8-K upon the occurrence of specified significant events, the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules applicable to domestic U.S. registrants under Section 16 of the Exchange Act. In addition, we intend to rely on exemptions from certain U.S. rules which will permit us to follow Cayman Islands legal requirements rather than certain of the requirements that are applicable to U.S. domestic registrants.

We will follow Cayman Islands laws and regulations that are applicable to Cayman Islands companies. However, Cayman Islands laws and regulations applicable to Cayman Islands companies do not contain any provisions comparable to the U.S. proxy rules, the U.S. rules relating to the filing of reports on Form 10-Q or 8-K or the U.S. rules relating to liability for insiders who profit from trades made in a short period of time, as referred to above.

Furthermore, foreign private issuers are required to file their annual report on Form 20-F within 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information, although we will be subject to Cayman Islands laws and regulations having, in some respects, a similar effect as Regulation Fair Disclosure. As a result of the above, even though we are required to file reports on Form 6-K disclosing the limited information which we have made or are required to make public pursuant to Cayman Islands law, or are required to distribute to shareholders generally, and that is material to us, you may not receive information of the same type or amount that is required to be disclosed to shareholders of a U.S. company.

The JOBS Act contains provisions that, among other things, relax certain reporting requirements for emerging growth companies. Under this act, as an emerging growth company, we will not be subject to the same disclosure and financial reporting requirements as non-emerging growth companies. For example, as an emerging growth company we are permitted to, and intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Also, we will not have to comply with future audit rules promulgated by the U.S. Public Company Accounting Oversight Board, or PCAOB, (unless the SEC determines otherwise) and our auditors will not need to attest to our internal controls under Section 404(b) of the Sarbanes-Oxley Act. We may follow these reporting exemptions until we are no longer an emerging growth company. As a result, our shareholders may not have access to certain

 

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information that they deem important. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual revenues of at least US$1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Class A common shares that is held by non-affiliates exceeds US$700.0 million as of the prior June 30th, and (2) the date on which we have issued more than US$1.0 billion in non-convertible debt during the prior three-year period. Accordingly, the information about us available to you will not be the same as, and may be more limited than, the information available to shareholders of a non-emerging growth company. We could be an “emerging growth company” for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our Class A common shares held by non-affiliates exceeds $700 million as of any June 30 (the end of our second fiscal quarter) before that time, in which case we would no longer be an “emerging growth company” as of the following December 31 (our fiscal year end). We cannot predict if investors will find our Class A common shares less attractive because we may rely on these exemptions. If some investors find our Class A common shares less attractive as a result, there may be a less active trading market for our Class A common shares and the price of our Class A common shares may be more volatile.

Upon the listing of our common shares on the Nasdaq, we will be a “controlled company” within the meaning of the rules of the Nasdaq corporate governance rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to shareholders of companies that are subject to such requirements.

Immediately after the completion of this offering, XP Controle will beneficially own     % of our Class B common shares, representing     % of the voting power of our outstanding share capital (or     % if the underwriters exercise their option to purchase additional Class A common shares in full). As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the Nasdaq corporate governance rules. Under these rules, a company of which more than 50% of the voting power in the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements. For example, controlled companies, within one year of the date of the listing of their common shares:

 

   

are not required to have a board that is composed of a majority of “independent directors,” as defined under the rules of such exchange;

 

   

are not required to have a compensation committee that is composed entirely of independent directors; and

 

   

are not required to have a nominating and corporate governance committee that is composed entirely of independent directors.

Following this offering, we intend to utilize these exemptions. As a result, we do not expect a majority of the directors on our board will be independent upon the closing of this offering. In addition, we do not expect that any of the committees of the board will consist entirely of independent directors upon the closing of this offering. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the Nasdaq.

As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, including the requirement that a majority of an issuer’s directors consist of independent directors. This may afford less protection to holders of our Class A common shares.

Section 5605 of the Nasdaq equity rules requires listed companies to have, among other things, a majority of their board members be independent, and to have independent director oversight of executive compensation, nomination of directors and corporate governance matters. As a foreign private issuer, however, we are permitted to, and we will, follow home country practice in lieu of the above requirements. See “Description of Share Capital—Principal Differences between Cayman Islands and U.S. Corporate Law.”

 

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We may lose our foreign private issuer status which would then require us to comply with the Exchange Act’s domestic reporting regime and cause us to incur significant legal, accounting and other expenses.

In order to maintain our current status as a foreign private issuer, either (a) more than 50% of our Class A common shares must be either directly or indirectly owned of record by non-residents of the United States or (b)(i) a majority of our executive officers or directors may not be U.S. citizens or residents; (2) more than 50% of our assets cannot be located in the United States; and (3) our business must be administered principally outside the United States. If we lose this status, we would be required to comply with the Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We may also be required to make changes in our corporate governance practices in accordance with various SEC and Nasdaq rules. The regulatory and compliance costs to us under U.S. securities laws if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer may be significantly higher than the costs we will incur as a foreign private issuer.

Our shareholders may face difficulties in protecting their interests because we are a Cayman Islands exempted company.

Our corporate affairs are governed by our Articles of Association, by the Companies Law (as amended) of the Cayman Islands, or the Companies Law, and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as that from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less exhaustive body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fulsome and judicially interpreted bodies of corporate law than the Cayman Islands.

While Cayman Islands law allows a dissenting shareholder to express the shareholder’s view that a court sanctioned reorganization of a Cayman Islands company would not provide fair value for the shareholder’s shares, Cayman Islands statutory law does not specifically provide for shareholder appraisal rights in connection with a court sanctioned reorganization (by way of a scheme of arrangement). This may make it more difficult for you to assess the value of any consideration you may receive in a merger or consolidation (by way of a scheme of arrangement) or to require that the acquirer gives you additional consideration if you believe the consideration offered is insufficient. However, Cayman Islands statutory law provides a mechanism for a dissenting shareholder in a merger or consolidation to apply to the Grand Court of the Cayman Islands for a determination of the fair value of the dissenter’s shares if it is not possible for the company and the dissenter to agree on a fair price within the time limits prescribed.

Shareholders of Cayman Islands exempted companies (such as us) have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders. Our directors have discretion under our Articles of Association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

Subject to limited exceptions, under Cayman Islands’ law, a minority shareholder may not bring a derivative action against the board of directors. Class actions are not recognized in the Cayman Islands, but groups of shareholders with identical interests may bring representative proceedings, which are similar.

 

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United States civil liabilities and certain judgments obtained against us by our shareholders may not be enforceable.

We are a Cayman Islands exempted company and substantially all of our assets are located outside of the United States. In addition, the majority of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located outside of the United States. As a result, it may be difficult to effect service of process within the United States upon these persons. It may also be difficult to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors who are not resident in the United States and the substantial majority of whose assets are located outside of the United States.

Further, it is unclear if original actions predicated on civil liabilities based solely upon U.S. federal securities laws are enforceable in courts outside the United States, including in the Cayman Islands and Brazil. Courts of the Cayman Islands may not, in an original action in the Cayman Islands, recognize or enforce judgments of U.S. courts predicated upon the civil liability provisions of the securities laws of the United States or any state of the United States on the grounds that such provisions are penal in nature. Although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, courts of the Cayman Islands will recognize and enforce a foreign judgment of a court of competent jurisdiction if such judgment is final, for a liquidated sum, provided it is not in respect of taxes or a fine or penalty, is not inconsistent with a Cayman Islands’ judgment in respect of the same matters, and was not obtained in a manner which is contrary to the public policy of the Cayman Islands. In addition, a Cayman Islands court may stay proceedings if concurrent proceedings are being brought elsewhere.

Judgments of Brazilian courts to enforce our obligations with respect to our Class A common shares may be payable only in reais.

Most of our assets are located in Brazil. If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of our Class A common shares, we may not be required to discharge our obligations in a currency other than the real. Under Brazilian exchange control laws, an obligation in Brazil to pay amounts denominated in a currency other than the real may only be satisfied in Brazilian currency at the exchange rate, typically as determined by the Central Bank, in effect on the date the judgment is obtained, and such amounts are then typically adjusted to reflect exchange rate variations and monetary restatements through the effective payment date. The then-prevailing exchange rate may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under the Class A common shares.

Our Class A common shares may not be a suitable investment for all investors, as investment in our Class A common shares presents risks and the possibility of financial losses.

The investment in our Class A common shares is subject to risks. Investors who wish to invest in our Class A common shares are thus subject to asset losses, including loss of the entire value of their investment, as well as other risks, including those related to our Class A common shares, us, the sector in which we operate, our shareholders and the general macroeconomic environment in Brazil, among other risks.

Each potential investor in our Class A common shares must therefore determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should:

 

   

have sufficient knowledge and experience to make a meaningful evaluation of our Class A common shares, the merits and risks of investing in our Class A common shares and the information contained in this prospectus;

 

   

have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in our Class A common shares and the impact our Class A common shares will have on its overall investment portfolio;

 

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have sufficient financial resources and liquidity to bear all of the risks of an investment in our Class A common shares;

 

   

understand thoroughly the terms of our Class A common shares and be familiar with the behavior of any relevant indices and financial markets; and

 

   

be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.

There can be no assurance that we will not be a passive foreign investment company for any taxable year, which could subject United States investors in our Class A common shares to significant adverse U.S. federal income tax consequences.

Under the Internal Revenue Code of 1986, as amended, or the Code, we will be a passive foreign investment company, or PFIC, for any taxable year in which, after the application of certain look-through rules with respect to subsidiaries, either (1) 75% or more of our gross income consists of “passive income;” or (2) 50% or more of the average quarterly value of our assets consists of assets that produce, or are held for the production of, “passive income.” Passive income generally includes dividends, interest, certain non-active rents and royalties, and capital gains. Based on our current operations, income, assets and certain estimates and projections, including as to the relative values of our assets, including goodwill, which is based on the expected price of our Class A common shares, we do not expect to be a PFIC for our 2019 taxable year. However, there can be no assurance that the Internal Revenue Service, or the IRS, will agree with our conclusion. In addition, whether we will be a PFIC in 2019 or any future year is uncertain because, among other things, (1) we will hold a substantial amount of cash following this offering, which is categorized as a passive asset; and (2) our PFIC status for any taxable year will depend on the composition of our income and assets and the value of our assets from time to time (which may be determined, in part, by reference to the market price of our Class A common shares, which could be volatile). Accordingly, there can be no assurance that we will not be a PFIC for any taxable year.

If we are a PFIC for any taxable year during which a U.S. investor holds Class A common shares, we generally would continue to be treated as a PFIC with respect to that U.S. investor for all succeeding years during which the U.S. investor holds Class A common shares, even if we ceased to meet the threshold requirements for PFIC status. Such a U.S. investor may be subject to adverse U.S. federal income tax consequences, including (1) the treatment of all or a portion of any gain on disposition as ordinary income; (2) the application of a deferred interest charge on such gain and the receipt of certain dividends; and (3) compliance with certain reporting requirements. A “mark-to-market” election may be available that will alter the consequences of PFIC status if our Class A common shares are regularly traded on a qualified exchange. For further discussion, see “Taxation—U.S. Federal Income Tax Considerations.”

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

All references to “U.S. dollars,” “dollars” or “$” are to the U.S. dollar. All references to “real,” “reais,” “Brazilian real,” “Brazilian reais,” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “IFRS” are to International Financial Reporting Standards, as issued by the International Accounting Standards Board, or the IASB.

Financial Statements

XP, the company whose Class A common shares are being offered in this prospectus, was incorporated on August 29, 2019, as a Cayman Islands exempted company with limited liability duly registered with the Cayman Islands Registrar of Companies. Until the contribution of XP Brazil shares to it prior to the consummation of this offering, XP will not have commenced operations and will have only nominal assets and liabilities and no material contingent liabilities or commitments.

We maintain our books and records in Brazilian reais, the presentation currency for our financial statements and also the functional currency of our operations in Brazil. Our unaudited interim condensed consolidated financial statements were prepared in accordance with IAS 34 and our annual consolidated financial statements were prepared in accordance with IFRS, as issued by the IASB. Unless otherwise noted, XP Brazil’s financial information presented herein as of September 30, 2019 and for the nine months ended September 30, 2019 and 2018 and as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 is stated in Brazilian reais, its reporting currency. The consolidated financial information of XP Brazil contained in this prospectus is derived from XP Brazil’s unaudited interim condensed consolidated financial statements as of September 30, 2019 and for the nine months ended September 30, 2019 and 2018 and XP Brazil’s audited consolidated financial statements as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016, together with the notes thereto. All references herein to “our financial statements,” “our audited consolidated financial information,” “our audited consolidated financial statements” and “our unaudited interim condensed consolidated financial statements,” are to XP Brazil’s consolidated financial statements included elsewhere in this prospectus.

This financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the notes thereto, included elsewhere in this prospectus.

Following this offering, XP will begin reporting consolidated financial information to shareholders, and XP Brazil will not present consolidated financial statements. We also maintain our books and records in Brazilian reais and our consolidated financial statements will be prepared in accordance with IFRS, as issued by the IASB.

XP Brazil and our fiscal year ends on December 31. References in this prospectus to a fiscal year, such as “fiscal year 2018,” relate to our fiscal year ended on December 31 of that calendar year.

Our historical financial statements included elsewhere in this prospectus do not reflect the Share Split to be conducted following the Share Contribution and prior to the consummation of this offering.

Corporate Events

Our Incorporation

We are a Cayman Islands exempted company incorporated with limited liability on August 29, 2019 for purposes of effectuating our initial public offering. At the time of our incorporation, XP Controle, Itaú, GA Bermuda and DYNA III held 2,036,988,542 shares (prior to giving effect to the Share Split) of XP Brazil, which are all of the shares of XP Brazil, our Brazilian principal non-operating holding company whose consolidated financial statements are included elsewhere in this prospectus.

Itaú Transaction and 2022 Acquisition

In connection with the Itaú Transaction entered into on May 11, 2017, Itaú Unibanco shall purchase in 2022, subject to certain conditions precedent (including regulatory approval from the Central Bank), the equivalent of

 

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12.5% of XP’s total outstanding capital stock (pre-public offering), which stock is currently held by XP Controle, GA Bermuda and DYNA III, for a certain and adjusted price previously agreed in the relevant share purchase agreement relating to the Itaú Transaction.

Our Corporate Reorganization

Prior to the consummation of this offering, XP Controle, Itaú, GA Bermuda and DYNA III will contribute all of their shares in XP Brazil to us. In return for this contribution, we will issue new Class B common shares to XP Controle, new Class A common shares and Class B common shares to Itaú, new Class A common shares and Class B common shares to GA Bermuda and new Class A common shares to DYNA III in a one-to-one exchange for the shares of XP Brazil contributed to us. In addition and following the Share Contribution, we will implement a four-to-one reverse share split (or consolidation), effective as of December    , 2019, which we refer to herein as the Share Split. Until the Share Contribution and the Share Split, we will not have commenced operations and will have only nominal assets and liabilities and no material contingent liabilities or commitments.

After accounting for the new Class A common shares that will be issued and sold by us in this offering, we will have a total of                common shares issued and outstanding immediately following this offering,                of these shares will be Class B common shares beneficially owned by XP Controle, GA Bermuda and Itaú and                of these shares will be Class A common shares beneficially owned by Itaú, GA Bermuda and DYNA III and by investors purchasing in this offering. See “Principal and Selling Shareholders.”

The following chart shows our corporate structure, before giving effect to our corporate reorganization and this offering:

 

 

LOGO

 

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The following chart shows our corporate structure, after giving effect to our corporate reorganization but before this offering:

 

 

LOGO

Please read the information in the section entitled “Business—Our Corporate Structure” for a more thorough description of the operations of our material operating subsidiaries.

Financial Information in U.S. Dollars

Solely for the convenience of the reader, we have translated some of the real amounts included in this prospectus from Reais into U.S. dollars. You should not construe these translations as representations by us that the amounts actually represent these U.S. dollar amounts or could be converted into U.S. dollars at the rates indicated. Unless otherwise indicated, we have translated real amounts into U.S. dollars using a rate of R$4.1638 to US$1.00, the commercial purchase rate for U.S. dollars at September 30, 2019 as reported by the Central Bank. See “Exchange Rates” for more detailed information regarding translation of reais into U.S. dollars and for historical exchange rates for the Brazilian real.

Special Note Regarding Non-GAAP Financial Measures

This prospectus presents our Floating Balance, Adjusted Gross Financial Assets, Adjusted EBITDA and Adjusted Net Income information for the convenience of the investors.

We present Floating Balance because we believe this measure helps to understand the effect on our balance sheet from uninvested cash balances from retail clients’ investment accounts at XP companies. We calculate Floating Balance as the sum of securities trading and intermediation (liabilities), minus securities trading and intermediation (assets). It is a metric that our management tracks internally and that investors and analysts typically want to calculate. Unlike the portions of Retail AUC invested by clients in equities, fixed income, mutual funds and almost all our other asset classes, Floating Balance is accounted for on our balance sheet, resulting in a net increase in our liabilities, and is a source of funds that we allocate to securities and financial instruments, which generates interest revenues for us. Given the size of our current AUC and the pace of our growths, Floating Balance, despite being historically only in the range of 1% to 2% of total AUC, is material and therefore helps explain the variation of the assets and liabilities in our balance sheet.

We present Adjusted Gross Financial Assets because we believe this metric captures the liquidity that is in fact available to us, net of the portion of liquidity that is related to our Floating Balance (and therefore

 

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attributable to clients). We calculate Adjusted Gross Financial Assets as the sum of (1) Cash and Financial Assets (comprised of Cash plus Securities – Fair value through profit or loss, plus Securities – Fair value through other comprehensive income, plus Securities – Evaluated at amortized cost, plus Derivative financial instruments, plus Securities purchased under agreements to resell), less (2) Financial Liabilities (comprised of the sum of Securities loaned, Derivative financial instruments, Securities sold under repurchase agreements and Private pension liabilities), and (3) less Floating Balance. It is a measure that we track internally on a daily basis, and it more intuitively reflects the effect of the operational profits we generate and the variations between working capital assets and liabilities (cash flows from operating activities), investments in fixed and intangible assets (cash flows from investing activities) and inflows and outflows related to equity and debt securities in our capital structure (cash flows from financing activities). Our management treats all securities and financial instrument assets, net of financial instrument liabilities, as balances that compose our total liquidity, with sub line items (such as, for example, “securities at fair value through profit and loss” and “securities at fair value through other comprehensive income”) expected to fluctuate substantially from quarter to quarter as our treasury manages and allocates our total liquidity to the most suitable financial instruments.

We present Adjusted EBITDA because we believe this measure can provide useful information to investors and analysts regarding the operational results of the business, EBITDA being a fairly common metric that market participants are familiar with, in particular when understanding and analyzing service companies. Despite having two subsidiaries that are financial institutions in Brazil, we believe our business is primarily an asset light services and fees business. Accordingly, we track internally Adjusted EBITDA as a measure of profits before the impact of income taxes, net of non-cash charges of depreciation and amortization, and before the impact of our capital structure (which comprises interest expenses from debt and interest revenues from cash and liquidity available), since we believe the latter is ultimately a corporate finance choice of the equity holders and unrelated to the capacity of the business to generate operational results. We calculate Adjusted EBITDA as net income, plus income tax, plus depreciation and amortization, plus interest expense on debt, minus interest revenue on Adjusted Gross Financial Assets.

We present Adjusted Net Income because we believe this measure can provide useful information to investors and analysts regarding the net results of the business, excluding one-time revenues or expenses related to transactions or events that are not reflective of our core operating performance. We calculate Adjusted Net Income as net income, plus Itaú Transaction and deal related expenses, minus one-time tax claim recognition (2010-2017) plus/minus taxes.

The non-GAAP financial measures described in this prospectus are not a substitute for the IFRS measures of earnings. Additionally, our calculation of Adjusted EBITDA and Adjusted Net Income may be different from the calculation used by other companies, including our competitors in the financial services industry, and therefore, our measures may not be comparable to those of other companies. Adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments.

Market Share and Other Information

This prospectus contains data related to economic conditions in the market in which we operate. The information contained in this prospectus concerning economic conditions is based on publicly available information from third-party sources that we believe to be reasonable. Market data and certain industry forecast data used in this prospectus were obtained from internal reports and studies, where appropriate, as well as estimates, market research, publicly available information (including information available from the United States Securities and Exchange Commission website) and industry publications. We obtained the information included in this prospectus relating to the industry in which we operate, as well as the estimates concerning market shares, through internal research, a report dated September 2019 by management consulting company Oliver Wyman, public information and publications on the industry prepared by official public sources, such as the Brazilian Central Bank, the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or the IBGE, the Institute of Applied Economic Research (Instituto de Pesquisa Econômica

 

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Aplicada), or the IPEA, as well as private sources, such as B3, ANBIMA, Nielsen, consulting and research companies in the Brazilian financial services industry, the Brazilian Economic Institute of Fundação Getulio Vargas (Instituto Brasileiro de Economia da Fundação Getulio Vargas), or FGV/IBRE, among others.

Industry publications generally state that the information they include has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Although we have no reason to believe any of this information or these reports are inaccurate in any material respect and believe and act as if they are reliable, neither we, the selling shareholders, the underwriters, nor their respective agents have independently verified it. Governmental publications and other market sources, including those referred to above, generally state that their information was obtained from recognized and reliable sources, but the accuracy and completeness of that information is not guaranteed. In addition, the data that we compile internally and our estimates have not been verified by an independent source. Except as disclosed in this prospectus, none of the publications, reports or other published industry sources referred to in this prospectus were commissioned by us or prepared at our request. Except as disclosed in this prospectus, we have not sought or obtained the consent of any of these sources to include such market data in this prospectus.

Calculation of Net Promoter Score

Net Promoter Score, or NPS, is a widely known survey methodology that measures the willingness of customers to recommend a company’s products and services. It is used to gauge customers’ overall satisfaction with a company’s products and services and their loyalty to the brand, and it is typically based on customer surveys. NPS measures satisfaction using a scale of zero to 10 based on a customer’s response to the following question: “How likely is it that you would recommend XP to a friend or colleague?” Responses of nine or 10 are considered “Promoters.” Responses of seven or eight are considered neutral. Responses of six or less are considered “Detractors.” The NPS, a percentage expressed as a numerical value, is calculated by subtracting the percentage of respondents who are Detractors from the percentage who are Promoters and dividing that number by the total number of respondents, which means that the higher the number, the higher the measure of customer satisfaction. The NPS calculation gives no weight to customers who decline to answer the survey question. The NPS calculation as of a given date reflects the average of the answers in the previous 6 months, e.g. the NPS as of December 2018 reflects the average of answers from July 2018 to December 2018. Our NPS score as calculated by us as of December 2017, December 2018 and September 2019 was 58, 64 and 71, respectively.

Rounding

We have made rounding adjustments to some of the figures included in this prospectus. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains statements that constitute forward-looking statements. Many of the forward-looking statements contained in this prospectus can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others.

Forward-looking statements appear in a number of places in this prospectus and include, but are not limited to, statements regarding our intent, belief or current expectations. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements due to of various factors, including, but not limited to, those identified under the section entitled “Risk Factors” in this prospectus. These risks and uncertainties include factors relating to:

 

   

general economic, financial, political, demographic and business conditions in Brazil, as well as any other countries we may serve in the future and their impact on our business;

 

   

fluctuations in interest, inflation and exchange rates in Brazil and any other countries we may serve in the future;

 

   

competition in the financial services industry;

 

   

our ability to implement our business strategy;

 

   

our ability to adapt to the rapid pace of technological changes in the financial services industry;

 

   

the reliability, performance, functionality and quality of our products and services and the investment performance of investment funds managed by third parties or by our asset managers;

 

   

the availability of government authorizations on terms and conditions and within periods acceptable to us;

 

   

our ability to continue attracting and retaining new appropriately-skilled employees;

 

   

our capitalization and level of indebtedness;

 

   

the interests of our controlling shareholders;

 

   

changes in government regulations applicable to the financial services industry in Brazil and elsewhere;

 

   

our ability to compete and conduct our business in the future;

 

   

the success of operating initiatives, including advertising and promotional efforts and new product, service and concept development by us and our competitors;

 

   

changes in consumer demands regarding financial products, customer experience related to investments and technological advances, and our ability to innovate to respond to such changes;

 

   

changes in labor, distribution and other operating costs;

 

   

our compliance with, and changes to, government laws, regulations and tax matters that currently apply to us;

 

   

other factors that may affect our financial condition, liquidity and results of operations; and

 

   

other risk factors discussed under “Risk Factors.”

Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of                  shares of our Class A common shares in this offering will be approximately US$                million (or US$                million if the underwriters exercise in full their option to purchase additional shares), assuming an initial public offering price of US$                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each US$1.00 increase (decrease) in the assumed initial public offering price of US$                 per share would increase (decrease) the net proceeds to us from this offering by approximately US$                million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately US$                 million, assuming the assumed initial public offering price stays the same.

We expect to use the net proceeds from this offering as follows:

 

   

to meet our anticipated increased working capital requirements resulting from the expected growth in our business;

 

   

to accelerate customer acquisition through increased investments in marketing and advertising;

 

   

to invest in personnel that complement our existing business units;

 

   

to invest in new financial services verticals that we plan to enter or have recently entered into, such as digital banking, payments and insurance;

 

   

to fund potential future acquisition opportunities; and

 

   

to fund other general corporate purposes.

We do not have any current plans, arrangements or understandings to make any acquisitions. We will have broad discretion in allocating the net proceeds from this offering. Although we currently anticipate that we will use the net proceeds from this offering as described above, there may be circumstances where a reallocation of funds is necessary. The amounts and timing of our actual expenditures will depend upon numerous factors, including the factors described under “Risk Factors” in this prospectus. Accordingly, our management will have flexibility in applying the net proceeds from this offering. An investor will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use the proceeds.

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities. No assurance can be given that we will invest the net proceeds from this offering in a manner that produces income or that does not result in a loss in value.

We will not receive any proceeds from the sale of shares by the selling shareholders.

 

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DIVIDENDS AND DIVIDEND POLICY

We have not adopted a dividend policy with respect to future distributions of dividends. The amount of any distributions will depend on many factors such as our results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by our board of directors and, where applicable, our shareholders. For further information on dividends, see “Description of Share Capital—Dividends and Capitalization of Profits.”

On October 16, 2019, XP Brazil declared and paid dividends totaling R$60 million. On November 1, 2019, XP Brazil declared dividends totaling R$440 million, which will be paid by the end of 2019. For further information, see note 2 to our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus.

In 2018, 2017 and 2016, XP Brazil paid dividends totaling R$325 million, R$190 million and R$174 million, respectively. For further information regarding dividend payments by XP Brazil since January 1, 2016, see note 23(c) to our audited consolidated financial statements included elsewhere in this prospectus.

Certain Cayman Islands Legal Requirements Related to Dividends

Under the Companies Law and our Articles of Association, a Cayman Islands company may pay a dividend out of either its profit or share premium account, but a dividend may not be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. According to our Articles of Association, dividends can be declared and paid out of funds lawfully available to us, which include the share premium account. Dividends, if any, would be paid in proportion to the number of common shares a shareholder holds. For further information, see “Taxation—Cayman Islands Tax Considerations.”

Additionally, please refer to “Risk Factors—Certain Risks Relating to Our Business and Industry—Our holding company structure makes us dependent on the operations of our subsidiaries.” Our ability to pay dividends is directly related to positive and distributable net results from our subsidiaries. We depend on dividend distributions by our subsidiaries, and we may be adversely affected if the performance of our subsidiaries is not positive. If, for any legal reasons due to new laws or bilateral agreements between countries, they are unable to pay dividends to Cayman Islands companies, or if a Cayman Islands company becomes incapable of receiving them, we may not be able to make any dividend payments in the future.

 

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CAPITALIZATION

The table below sets forth our total capitalization (defined as long-term debt and total equity) as of September 30, 2019 (in each case, after giving effect to the Share Split), as follows:

 

   

historical financial information of XP Brazil, on an actual basis;

 

   

XP (after giving effect to the Share Contribution), as adjusted to give effect to the R$500 million in dividends payable by XP Brazil, of which R$60 million was declared and paid on October 16, 2019, and R$440 million was declared on November 1, 2019 and will be paid by the end of 2019;

 

   

XP, as further adjusted to give effect to the items listed in (2) and to the issuance and sale by XP of the Class A common shares in this offering, and the receipt of approximately US$                million (R$                million) in estimated net proceeds, considering an offering price of US$                 (R$                ) per Class A common share (the midpoint of the range set forth on the cover of this prospectus), after deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering, and the use of proceeds therefrom.

Investors should read this table in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus, with the sections of this prospectus entitled “Selected Financial Information,” with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with other financial information contained in this prospectus.

 

     As of September 30, 2019  
     XP Brazil, actual      XP (after giving effect to the
Share Contribution), as
adjusted for the
declared dividends
     XP, as further
adjusted for
this offering(2)
 
     (US$)(1)      (R$)          (US$)(1)              (R$)          (US$)(1)      (R$)  
     (in millions)  

Long-term debt, excluding current portion(3)

     227        943        227        943                                          

Total equity

     668        2,782        548        2,282        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total capitalization(4)

     895        3,725        775        3,225        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

For convenience purposes only, amounts in reais as of September 30, 2019 have been translated to U.S. dollars at the exchange rate of R$4.1638 to US$1.00. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” and “Presentation of Financial and Other Information” for further information about recent fluctuations in exchange rates.

(2)

Each US$1.00 increase (decrease) in the offering price per Class A common share would increase (decrease) our total capitalization and shareholders’ equity by R$                 million.

(3)

Consists of borrowings, lease liabilities and debentures.

(4)

Total capitalization consists of long-term debt (excluding current portion) plus total equity.

Other than as set forth above, there have been no material changes to our capitalization since September 30, 2019.

 

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DILUTION

Immediately prior to this initial public offering and after the Share Split and the Share Contribution, XP Controle, Itaú, GA Bermuda and DYNA III will hold all of our issued and outstanding shares, and we will hold all of the issued and outstanding shares in XP Brazil.

We have presented the dilution calculation below on the basis of XP Brazil’s net tangible book value as of September 30, 2019 because (1) until the contribution of XP Brazil shares to it, XP will not have commenced operations and will have only nominal assets and liabilities and no material contingent liabilities or commitments; and (2) the number of common shares of XP in issuance prior to this offering was the same as the number of shares of XP Brazil in issuance as of September 30, 2019, after giving effect to the Share Split.

As of September 30, 2019, XP Brazil had a net tangible book value of R$2,261 million, corresponding to a net tangible book value of R$                 per share, after giving effect to the Share Split. Net tangible book value per share represents the amount of our total assets less our total liabilities, excluding goodwill and other intangible assets, divided by                , the total number of XP Brazil shares outstanding as of September 30, 2019, after giving effect to the Share Split.

After giving effect to the Share Split and the sale of the Class A common shares offered by us in this offering, and considering an offering price of US$                per Class A common share (the midpoint of the range set forth on the cover of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value estimated as of September 30, 2019 would have been approximately US$                million, representing US$                per share. This represents an immediate increase in net tangible book value of US$                per share to existing shareholders and an immediate dilution in net tangible book value of US$                per share to new investors purchasing Class A common shares in this offering. Dilution for this purpose represents the difference between the price per Class A common shares paid by these purchasers and net tangible book value per Class A common share immediately after the completion of this offering.

If you invest in our Class A common shares, your interest will be diluted to the extent of the difference between the initial public offering price per Class A common share (when converted into reais) and the pro forma net tangible book value per Class A common share after accounting for the issuance and sale of new common shares in this offering.

Because the Class A common shares and Class B common shares of XP have the same dividend and other rights, except for voting and preemptive rights, we have counted the Class A common shares and Class B common shares equally for purposes of the dilution calculations below.

The following table illustrates this dilution to new investors purchasing Class A common shares in this offering.

 

Net tangible book value per share as of September 30, 2019 (after giving effect to the Share Split)

   US$                

Increase in net tangible book value per share attributable to new investors

   US$    

Pro forma net tangible book value per share immediately after this offering (after giving effect to the Share Split)

   US$    

Dilution per Class A common share to new investors

   US$    

Percentage of dilution in net tangible book value per Class A common share for new investors

         

Each US$1.00 increase (decrease) in the offering price per Class A common share, respectively, would increase (decrease) the net tangible book value immediately after this offering by US$                per Class A common share and the dilution to investors in this offering by US$                per Class A common share.

 

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The following table sets forth, on a pro forma basis, as of September 30, 2019, the number of common shares purchased from us, the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by the existing shareholders and by the new investors, at an assumed initial public offering price of $        per share, the midpoint of the range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average
Price
 
     Number      Percent     Amount      Percent     Per Share  

Existing shareholders

                                $                            

New investors

            

Total

        100   $          100  

The foregoing tables assume no exercise of the underwriters’ option to purchase additional shares.

Sales by the selling shareholders in this offering will cause the number of shares held by existing shareholders to be reduced to                shares, or     % of the total number of shares outstanding after this offering, and will increase the number of shares held by new investors to                shares, or     % of the total number of shares outstanding after this offering, excluding any shares purchased by any existing holders in this offering.

To the extent that we grant options in the future and those options are exercised or other issuances of common shares are made, there will be further dilution to new investors. See “Management—Long-Term Incentive Plan.”

 

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EXCHANGE RATES

The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer of reais by any person or legal entity, regardless of the amount, subject to certain regulatory procedures.

The real depreciated against the U.S. dollar from mid-2011 to early 2016. In particular, during 2015, due to the poor economic conditions in Brazil, including as a result of political instability, the real depreciated at a rate that was much higher than in previous years. Overall in 2015, the real depreciated 47.0%, reaching R$3.9048 per US$1.00 on December 31, 2015. In 2016, the real fluctuated significantly, primarily as a result of Brazil’s political instability, appreciating 16.5% to R$3.2585 per US$1.00 on December 31, 2016. In 2017, the real depreciated 1.5% against the U.S. dollar, ending the year at an exchange rate of R$3.3074 per US$1.00. In 2018, the real depreciated 17.1% against the U.S. dollar, ending the year at an exchange rate of R$3.8742 per US$1.00 mainly due to the result of lower interest rates in Brazil as well as uncertainty regarding the results of the Brazilian presidential elections, which were held in October 2018. The real/U.S. dollar exchange rate reported by the Central Bank was R$4.1638 per US$1.00 on September 30, 2019, which reflected a 7.5% depreciation in the real against the U.S. dollar during the first nine months of 2019. There can be no assurance that the real will not depreciate or appreciate further against the U.S. dollar. The Central Bank has previously intervened in the foreign exchange market to attempt to control instability in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to allow the real to float freely or will intervene in the exchange rate market by re-implementing a currency band system or otherwise. The real may depreciate or appreciate substantially against the U.S. dollar in the future. Furthermore, Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are serious reasons to foresee a serious imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. We cannot assure you that the Brazilian government will not place restrictions on remittances of foreign capital abroad in the future.

The following table sets forth, for the periods indicated, the high, low, average and period-end exchange rates for the purchase of U.S. dollars expressed in Brazilian reais per U.S. dollar. The average rate is calculated by using the average of reported exchange rates by the Central Bank on each business day during a monthly period and on the last day of each month during an annual period, as applicable. As of November 13, 2019, the exchange rate for the purchase of U.S. dollars as reported by the Central Bank was R$4.1761 per US$1.00.

 

Year

   Period-end      Average(1)      Low(2)      High(3)  

2014

     2.6556        2.3541        2.1968        2.7397  

2015

     3.9042        3.3381        2.5748        4.1942  

2016

     3.2585        3.4827        3.1187        4.1552  

2017

     3.3074        3.1919        3.0504        3.3756  

2018

     3.8742        3.6552        3.1380        4.1873  

 

Source: Central Bank.

(1)

Represents the average of the exchange rates on the closing of each business day during the year.

(2)

Represents the minimum of the exchange rates on the closing of each business day during the year.

(3)

Represents the maximum of the exchange rates on the closing of each business day during the year.

 

Month

   Period-end      Average(1)      Low(2)      High(3)  

May 2019

     3.9401        4.0009        3.9338        4.1050  

June 2019

     3.8316        3.8582        3.8228        3.8997  

July 2019

     3.7643        3.7787        3.7394        3.8558  

August 2019

     4.1379        4.0194        3.8290        4.1674  

September 2019

     4.1638        4.1209        4.0488        4.1821  

October 2019

     4.0035        4.0864        3.9786        4.1734  

November 2019 (through November 13, 2019)

     4.1761        4.0825        3.9780        4.1761  

 

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Source: Central Bank.

(1)

Represents the average of the exchange rates on the closing of each business day during the month.

(2)

Represents the minimum of the exchange rates on the closing of each business day during the month.

(3)

Represents the maximum of the exchange rates on the closing of each business day during the month.

 

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MARKET INFORMATION

Prior to this offering, there has been no public market for our Class A common shares. We cannot assure that an active trading market will develop for our Class A common shares, or that our Class A common shares will trade in the public market subsequent to this offering at or above the initial public offering price.

 

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SELECTED FINANCIAL INFORMATION

The following tables set forth, for the periods and as of the dates indicated, our summary financial and operating data. This information should be read in conjunction with “Presentation of Financial and Other Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the notes thereto, included elsewhere in this prospectus.

The summary interim statements of financial position as of September 30, 2019 and the interim statements of income for the nine months ended September 30, 2019 and 2018 of XP Brazil have been derived from the unaudited interim condensed consolidated financial statements of XP Brazil included elsewhere in this prospectus, prepared in accordance with IAS 34. The summary statements of financial position as of December 31, 2018 and 2017 and the statements of income for the years ended December 31, 2018, 2017 and 2016 have been derived from the audited consolidated financial statements of XP Brazil included elsewhere in this prospectus, prepared in accordance with IFRS, as issued by the IASB. The financial information for the years ended 2018 and 2016 have been restated from the Company’s initial Form F-1 dated September 13, 2019 and should be read in conjunction with annual and consolidated financial statements, included elsewhere else in this prospectus. The results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the results of operations that may be expected for the entire year ending December 31, 2019. Share and per share data in the table below has been retroactively adjusted to give effect to the Share Split.

Income Statement Data

 

     For the Nine Months Ended
September 30,
    For the Year Ended
December 31,
 
     2019     2019     2018     2018     2018     2017     2016  
     (US$)(1)     (R$)     (US$)(1)     (R$)  
     (in millions, except earnings per share)  

Gross revenue and income(2)

     887       3,695       2,259       772       3,216       2,065       1,347  

Sales tax(3)

     (62     (259     (186     (62     (258     (158     (95
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue and income

     825       3,437       2,073       711       2,958       1,907       1,252  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses

              

Operating costs

     (269     (1,119     (632     (226     (941     (580     (376

Selling expenses

     (20     (82     (64     (23     (96     (33     (24

Administrative expenses

     (311     (1,294     (828     (283     (1,177     (650     (471

Other operating expenses, net

     28       118       (19     (8     (31     (8     (6

Interest expense on debt

     (15     (63     (60     (17     (72     (61     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax

     239       997       470       154       641       576       374  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     (71     (298     (118     (42     (175     (152     (130

Net income for the period / year

     168       699       352       112       465       424       244  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to:

              

Owners of the Parent company

     166       692       350       111       461       414       189  

Non-controlling interest

     2       7       2       1       4       10       55  

Basic and Diluted earnings per common and preferred shares – R$(4)

     0.0816       0.3397       0.1796       0.05617       0.2339       0.2134       0.1360  

Pro forma Basic and Diluted earnings per common and preferred shares (after giving effect to the Share Split) – R$(5)

     0.3263       1.3588       0.7184       0.2247       0.9356       0.8536       0.5440  

 

(1)

For convenience purposes only, amounts in reais for the nine months ended September 30, 2019 and for the year ended December 31, 2018 have been translated to U.S. dollars using an exchange rate of R$4.1638 to US$1.00, the commercial purchase rate for U.S. dollars as of September 30, 2019 as reported by the Central

 

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  Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.
(2)

The sum of (i) Revenues from services rendered; and (ii) Income from financial instruments, in each case gross of taxes and contributions on revenue.

(3)

The sum of (i) Sales taxes and contributions on revenue; and (ii) Taxes and contributions on financial income.

(4)

Restated for 2018 and 2016 as set forth in note 3(xx) of our annual consolidated financial statements included elsewhere in this prospectus.

(5)

The pro forma basic and diluted earnings per share are presented using our historical earnings per share recast using the number of common and preferred shares in issue immediately prior to completion of this offering, after giving effect to the Share Split.

Balance Sheet Data

 

     For the Nine Months
Ended September 30,
     As of December 31,  
          2019                2019           2018      2018      2017  
     (US$)(1)      (R$)      (US$)(1)      (R$)  
     (in millions)  

Cash

     17        70        16        68        153  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial assets

     9,038        37,632        3,983        16,583        6,104  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Fair value through profit or loss

     5,225        21,757        1,917        7,983        4,339  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities

     3,880        16,158        1,511        6,291        3,780  

Derivative financial instruments

     1,345        5,599        406        1,692        559  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Fair value through other comprehensive income

     188        782        167        696        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities

     188        782        167        696        —    

Evaluated at amortized cost

     3,625        15,093        1,898        7,904        1,764  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities

     133        556        37        155         

Securities purchased under agreements to resell

     3,231        13,453        1,578        6,571        935  

Securities trading and intermediation

     194        807        216        898        672  

Accounts receivable

     61        253        53        219        130  

Other financial assets

     6        25        15        60        28  

Other assets

     152        631        76        317        123  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Recoverable taxes

     64        267        44        183        42  

Prepaid expenses

     23        97        23        97        65  

Right-of-use assets

     53        221        —          —          —    

Other

     11        46        9        37        15  

Deferred tax assets

     43        181        37        152        226  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Property and equipment

     29        120        24        99        47  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Intangible assets

     125        521        121        505        483  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     9,404        39,156        4,257        17,724        7,136  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     For the Nine Months
Ended September 30,
     As of December 31,  
          2019                2019           2018      2018      2017  
     (US$)(1)      (R$)      (US$)(1)      (R$)  
     (in millions)  

Financial liabilities

     8,209        34,181        3,654        15,216        5,606  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Fair value through profit or loss

     1,361        5,667        541        2,251        1,037  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities loaned

     86        360        303        1,260        713  

Derivative financial instruments

     1,275        5,307        238        991        324  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Evaluated at amortized cost

     6,848        28,514        3,114        12,965        4,569  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities sold under repurchase agreements

     4,712        19,618        1,595        6,641        514  

Securities trading and intermediation

     1,730        7,202        1,274        5,307        3,111  

Borrowings and lease liabilities

     155        646        113        470        867  

Debentures

     201        836        98        407        —    

Accounts payables

     50        206        32        135        72  

Other financial liabilities

     1        6        2        7        5  

Other liabilities

     520        2,166        97        404        372  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Social and statutory obligations

     66        276        60        252        295  

Taxes and social security obligations

     35        145        25        103        61  

Private pension liabilities

     413        1,722        4        16        —    

Provisions and contingent liabilities

     4        16        4        17        12  

Other liabilities

     2        9        4        16        4  

Deferred tax liabilities

     7        27        3        12        7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     8,736        36,374        3,754        15,633        5,984  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity attributable to owners of the Parent company

     667        2,778        501        2,085        1,144  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Share capital

     223        928        223        928        255  

Capital reserves

     129        536        129        536        535  

Revenue reserves

     99        412        99        412        150  

Carrying value adjustments

     51        211        50        209        203  

Retained Earnings

     166        692        —          —          —    

Non-controlling interest

     1        4        2        7        8  

Total equity

     668        2,782        502        2,092        1,152  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and equity

     9,404        39,156        4,257        17,724        7,136  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

For convenience purposes only, amounts in reais for the nine months ended September 30, 2019 and for the year ended December 31, 2018 have been translated to U.S. dollars using an exchange rate of R$4.1638 to US$1.00, the commercial purchase rate for U.S. dollars as of September 30, 2019 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited interim condensed consolidated financial statements as of September 30, 2019 and for the nine months ended September 30, 2019 and 2018, and our audited consolidated financial statements as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 and the notes thereto, included elsewhere in this prospectus, as well as the information presented under “Presentation of Financial and Other Information,” “Summary Financial Information” and “Selected Financial Information.”

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of events may differ materially from those expressed or implied in such forward-looking statements as a result of various factors, including those set forth in “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors.”

Overview

XP is a leading, technology-driven financial services platform and a trusted provider of low-fee financial products and services in Brazil. We have developed a mission-driven culture and a revolutionary business model that we believe provide us with strong competitive advantages in our market. We use these to disintermediate the legacy models of traditional financial institutions by educating new classes of investors, democratizing access to a wider range of financial services, developing new financial products and technology applications to empower our clients, and providing what we believe is the highest-quality customer service experience in the industry in Brazil. We believe we have established ourselves as the leading alternative to the traditional banks, with a large ecosystem of retail investors, institutions, and corporate issuers in local and international markets, with offices in Brazil, New York, Miami, London and Geneva.

Our revolutionary XP Model has been developed over the course of our evolution and enables us to go to market in a very different way from the legacy models of the large traditional financial institutions. We believe our model provides us with a unique value proposition for our clients and partners and has enabled us to instill trust in the XP brand and begin to change the way investment services are sold in Brazil. This proprietary approach incorporates a unique combination of capabilities, services and technologies to deliver a highly differentiated and integrated client experience, with significant operating efficiency advantages that have enabled us to scale and grow profitably.

Our technology-driven business model is asset-light and highly scalable. This enables us to generate scale efficiencies from increases in total AUC. We conduct most of our business online and through mobile applications and emphasize operational efficiency and profitability throughout our operations. These operating efficiencies enable us to generate strong cash flow in various market conditions, allowing us to continue investing in the growth of our business. Our business requires minimal capital expenditures to facilitate growth, with expenditures amounting to 4.6% of net revenues for the year ended December 31, 2018 and to 2.4% of net revenues for the nine months ended September 30, 2019.

 

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Key Business Metrics

The following table sets forth our key business metrics as of and for the periods indicated. These supplemental business metrics are presented to assist investors to better understand our business and how it operates.

 

     As of and for the Nine Months
Ended September 30,
    As of and for the Year
Ended December 31,
 
         2019             2018         2018     2017     2016  

Client Activity Metrics (unaudited)

          

Retail – AUC (in R$ billions)

     350       181       202       126       65  

Retail – active clients (in thousands)

     1,536       763       892       539       339  

Retail – gross total revenues (in R$ millions)

     2,516       1,686       2,351       1,485       934  

Institutional – gross total revenues (in R$ millions)

     497       341       484       345       261  

Issuer Services – gross total revenues (in R$ millions)

     286       104       178       106       55  

Digital Content – gross total revenues (in R$ millions)

     83       32       54       29       18  

Other – gross total revenues (in R$ millions)

     315       97       150       99       79  

Company Financial Metrics

          

Gross revenue and income (in R$ millions)

     3,695       2,259       3,216       2,065       1,347  

Total revenue and income (in R$ millions)

     3,437       2,073       2,958       1,907       1,252  

Gross Margin (%)(1)

     67.4     69.5     68.2     69.6     70.0

Adjusted EBITDA (in R$ millions)(2)

     1,015       491       662       565       326  

Adjusted Net Income (in R$ millions)(2)

     657       376       491       428       244  

Adjusted Net Margin (%)(3)

     19.1     18.1     16.6     22.4     19.5

 

(1)

Calculated as total revenue and income less operating costs, divided by total revenue and income.

(2)

For a reconciliation of our Adjusted EBITDA and Adjusted Net Income, see “Summary Financial Information—Non-GAAP Financial Measures.”

(3)

Calculated as Adjusted Net Income divided by total revenue and income.

Retail – Assets Under Custody (“AUC”)

Retail AUC is the market value of all retail client assets invested through XP’s platform, including equities, fixed income securities, mutual funds (including those managed by XP Gestão, XP Advisory and XP Vista, as well as by third-party asset managers), pension funds (including those from XP VP, as well as by third-party insurance companies), exchanged traded funds, COEs (Structured Notes), REITs (real estate investment funds), uninvested cash balances (Floating Balances), among others. We consider AUC to be indicative of our appeal in the marketplace. AUC varies from period to period based on (1) the amount of cash and assets transferred into, and out of, XP’s platform by clients and (2) fluctuation of market prices of securities and net asset values of mutual and pension funds. The part of the Retail AUC that is invested in funds managed by our asset management firms (XP Gestão, XP Advisory and XP Vista) is considered to be also AUM (assets under management).

Retail – Active Clients

Active clients are the number of total clients served through XP, Rico, Clear, XP Investments and Sartus/XP Private (Europe) brands, with an AUC above R$100.00 or that have transacted at least once in the last thirty days. The majority of clients are individuals, but we also include in retail, small and medium-sized enterprise clients and corporate clients that have investment accounts with us.

Retail – Gross Total Revenues

Retail gross total revenues include all types of revenue and income streams directly related to retail clients, including, but not limited to, (1) management and performance fees from funds managed by our asset managers,

 

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and rebates from management and performance fees from mutual funds managed by third-party asset managers, that are distributed to our retail clients; (2) rebates from management fees from pension funds issued by third-party insurance companies or XP VP that are distributed to our retail clients; (3) management fees from exclusive funds of high net worth retail clients; (4) brokerage commissions earned on trading of stock, futures and derivatives listed on the B3; (5) securities placement fees earned on COE sales to retail clients; (6) the distribution fee component from securities placement fees earned on the sale of fixed income and equity securities to retail clients; (7) net income from corporate, bank and government fixed income securities sold to retail clients; and (8) net income earned on Floating Balances, which allocate to overnight and other highly liquid investments. A portion of our management fees are calculated based on the performance of the mutual funds we manage or distribute.

Institutional – Gross Total Revenues

Institutional gross total revenues include all types of revenue and income streams directly related to Institutional clients – asset managers, pension fund managers, bank treasuries and private client desks, single and multi-family offices, corporate client treasuries, municipal and state pension fund managers, insurance companies, among others. These clients, across all regions such as Asia, Europe, the United States, and Latin America (principally Brazil), are served through our onshore and offshore trading desks and dedicated support teams in São Paulo, New York and London, both via electronic trading and voice platforms, and access a wide range of products and services, including products such as equities (cash, derivatives, stocks lending and index), fixed income government and corporate bonds, FX (spot, NDF, futures, derivatives), rates (futures, swap and derivatives), commodities, XP Gestão and XP Vista mutual funds, among others. Therefore, we include in this line (1) brokerage commissions on trades by Institutional clients; (2) the distribution fee component out of securities placement fees earned on the sale of fixed income and equity securities to Institutional clients; (3) management fees from funds managed by our asset managers and XP Vista and sold to Institutional clients; and (4) net income from corporate, bank and government fixed income securities sold to Institutional clients, among others. A portion of our management fees are calculated based on the performance of the mutual funds we manage or distribute.

Issuer Services – Gross Total Revenues

Issuer Services gross total revenues primarily include capital markets security placement fees earned from corporate clients that hire XP for structuring, underwriting or placement of debt (such as Debentures, Infrastructure Bonds, CRIs, CRAs, FIDCs, LFs) or equity securities (IPOs, follow-ons, block trades and tender offers), the majority of which are sold to our retail clients given the breadth and reach of out platform. In addition, we also provide complimentary Issuer Services such as M&A advisory and structured finance operations.

Digital Content – Gross Total Revenues

Digital Content gross total revenues primarily include revenues from (1) selling XP Educação educational courses and content to retail clients and to non-client individuals, and (2) selling branded content articles, direct media advertisements on websites or mobile sites, Infomoney TV insertions, and other advertising and digital content fees generated by Infomoney.

Other – Gross Total Revenues

We include in Other gross revenues and income not allocated to Retail, Institutional, Issuer Services and Digital Content solution categories, such as principal trading operations, which consists of investing our own net cash balances, which we refer to as our Adjusted Gross Financial Assets, in low risk securities, arbitrage transactions and other investments with limited exposure to market risk.

 

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Review of Results for the Nine Months Ended September 30, 2019

 

   

Retail – Our number of active clients increased by approximately 101% from 763 thousand as of September 30, 2018 to 1,536 thousand as of September 30, 2019, primarily through the growth of our XP Direct, Rico and Clear channels. Driven by the combined net inflow growth from both new and existing clients, our AUC increased by 93% from R$181 billion as of September 30, 2018 to R$350 billion as of September 30, 2019. Our AUM increased by 59%, from R$23.1 billion as of September 30, 2018 to R$36.7 billion as of September 30, 2019 (10.5% of our Retail AUC), comprising (i) R$27.6 billion from mutual and exclusive funds, (ii) R$4.1 billion from pension funds, (iii) R$4.0 billion from managed portfolios, and (iv) R$1.0 billion from investment clubs. The increase in AUM was driven by the expansion of the funds’ asset class in the platform and the good overall performance of XP Gestão, XP Vista and XP Advisory funds within their specific fund categories, and their increasing acknowledgement by the market and our client base. Retail Gross Total Revenues increased by 49% from R$1,686 million for the nine months ended September 30, 2018 to R$2,516 million for the nine months ended September 30, 2019, driven by the increase in AUC and by a slight decrease in retail revenues divided by average retail AUC, or Revenue Yield, from 1.5% per annum for the nine months ended September 30, 2018 to 1.2% per annum for the nine months ended September 30, 2019. The decrease in Revenue Yield was mainly due to changes in the revenue mix per asset class, as we have experienced (1) modest revenue from COE; (2) average revenue growth from equities and futures; and (3) robust growth in equities custody without a corresponding growth in equity brokerage commissions, that slightly diluted the revenue yield from this asset class. The weighted average management fee of our AUM decreased from 1.0% as of September 30, 2018 to 0.9% as of September 30, 2019, with the following breakdown of weighted average fees: (i) 0.9% for mutual and exclusive funds, (ii) 1.1% for pension funds, (iii) 1.1% for investment clubs, and (iv) 0.4% for managed portfolios.

 

   

Institutional – gross revenues totaled R$497 million for the nine months ended September 30, 2019, a 45% increase from R$341 million for the nine months ended September 30, 2018. This increase was primarily attributable to (1) the increase in trading volume of our Brazilian trading desks, mainly due to the improvement in the macroeconomic environment in Brazil, including a significant increase in the average daily traded volume in equities on the B3; (2) the increasing maturity and acknowledgement by the market of our value-added complementary services, such as political, equity and macroeconomic sell-side research and corporate access; (3) increase in securities placements, including IPOs in equity markets and the private placement of bonds; (4) the decrease in interest rates, which benefited our trading desks that trade in futures; (5) the expansion of our recently established offshore trading desks, which has benefited from an increasing number of local asset management firms executing trades offshore and vice-versa; and (7) the appreciation of the U.S. dollar against the real, impacting positively the translation of revenues recognized in U.S. dollars.

 

   

Issuer Services – gross revenues totaled R$286 million for the nine months ended September 30, 2019, a 176% increase from R$104 million for the nine months ended September 30, 2018. This increase was primarily attributable to the increase in mandates where we acted as placement agents or underwriters for third-party transactions in the domestic and international capital markets, from 65 transactions for the nine months ended September 30, 2018 to 119 transactions for the nine months ended September 30, 2019.

 

   

Digital Content – gross revenues totaled R$83 million, a 158% increase from R$32 million for the nine months ended September 30, 2018. This increase was primarily attributable to the increase in the sales of our online educational products through our XP Educação portal, not only in the individual courses category but also in the adult enrichment category, with the launch of three new flagship courses.

 

   

As a result, our total revenue and income increased 66% from R$2,073 million for the nine months ended September 30, 2018 to R$3,437 million for the nine months ended September 30, 2019. Gross margin contracted slightly from 69% to 67%, due to differences in revenue mix (with asset classes with

 

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higher commission payouts growing faster) and to increases in costs related to incentives paid to our IFA network to accelerate expansion. The nine months ended September 30, 2019 were also marked by an increase in investments in our brand and client acquisition, in technology solutions and infrastructure and in expanding our employee base. As a result, selling expenses increased 27% to R$82 million for the nine months ended September 30, 2019 and administrative expenses increased 56% to R$1,295 million for the same period. As expenses grew less than total revenue and income, a part of the impact in the gross margin compression was compensated, resulting in a 99% net income growth, from R$352 million for the nine months ended September 30, 2018 to R$699 million for the nine months ended September 30, 2019, and a net margin expansion from 17% to 20%, respectively.

Review of 2018 Results

 

   

Retail – Our number of active clients increased by approximately 66% from 539 thousand as of December 31, 2017 to 892 thousand as of December 31, 2018, primarily through the growth of our XP Direct, Rico and Clear channels. Driven by the combined net inflow growth from both new and existing clients, our AUC increased by 60% from R$126 billion as of December 31, 2017 to R$202 billion as of December 31, 2018. Our AUM increased by 78%, from R$14.4 billion as of December 31, 2017 to R$25.7 billion as of December 31, 2018 (12.7% of our Retail AUC), comprising (i) R$20.3 billion from mutual and exclusive funds, (ii) R$3.3 billion from managed portfolios, (iii) R$1.5 billion from pension funds, and (iv) R$0.6 billion from investment clubs. The increase in AUM was driven by the expansion of the funds’ asset class in the platform and the good overall performance of XP Gestão, XP Vista and XP Advisory funds within their specific fund categories. Retail Gross Total Revenues increased by 58% from R$1,485 million in 2017 to R$2,351 million in 2018, driven by the increase in AUC and by a slight decrease in retail revenues divided by average retail AUC, or Revenue Yield, from 1.5% per annum in 2017 to 1.4% per annum in 2018. The decrease in Revenue Yield was mainly due to changes in the revenue mix per asset class, as we have experienced (1) robust revenue growth from mutual funds; (2) average revenue growth from equities, futures and COE; (3) modest revenue growth from floating revenues which were impacted by interest rate decreases; and (4) flat revenues from fixed income securities year-over-year. Certain asset classes have lower Revenue Yield than other asset classes, such as mutual funds. For example, if mutual funds grow more than other assets classes, our total Revenue Yield decreases, and if mutual funds grow less than other asset classes, our total Revenue Yield increases. The weighted average management fee of our AUM decreased from 1.0% as of December 31, 2017 to 0.9% as of December 31, 2018, with the following breakdown of weighted average fees: (i) 1.0% for mutual and exclusive funds, (ii) 1.2% for pension funds, (iii) 0.9% for investment clubs, and (iv) 0.4% for managed portfolios.

 

   

Institutional – gross revenues totaled R$484 million in 2018, a 40% increase from R$345 million in 2017. This increase was primarily attributable to (1) the increase in trading volume of our Brazilian trading desks, mainly due to the positive market reaction to the outcome of the 2018 presidential elections; (2) market share gains as result of continuous improvement of value added complementary services such as political, equity and macroeconomic sell-side research and corporate access; and (3) the expansion of our recently established offshore trading desks.

 

   

Issuer Services – gross revenues totaled R$178 million in 2018, a 68% increase from R$106 million in 2017. This increase was primarily attributable to the increase in mandates where we acted as placement agents or underwriters for third-party transactions in the domestic and international capital markets, from 76 transactions in 2017 to 94 transactions in 2018.

 

   

Digital Content – gross revenues totaled R$54 million, an 86% increase from R$29 million in 2017. This increase was primarily attributable to the increase in the sales of our online educational products through our XP Educação portal.

 

   

As a result, our total revenue and income increased 55% from R$1,907 million in 2017 to R$2,958 million in 2018. Gross margin contracted slightly from 70% to 68%, due to differences in

 

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revenue mix (with asset classes with higher commission payouts growing faster) and to increases in costs related to incentives paid to our IFA network to accelerate expansion. 2018 was also marked by a disproportional increase in investments in our brand and client acquisition, in technology solutions and infrastructure and in expanding our employee base and office spaces. As a result, selling expenses grew 192% to R$96 million in 2018 and administrative expenses grew 81% to R$1,177 million in 2018, offsetting the majority of the positive impact from the 55% growth in revenues and resulting in a 10% net income growth, from R$424 million in 2017 to R$465 million in 2018 and a net margin contraction from 22.2% in 2017 to 15.7% in 2018. We expect to recover part of this margin contraction in the short term as part of the investments made return through new products, new services and improved technology platforms that lead to greater efficiency and scalability, higher operational leverage and lower operating costs.

Review of 2017 Results

 

   

Retail – Our number of active clients increased by approximately 59% from 339 thousand as of December 31, 2016 to 539 thousand as of December 31, 2017, primarily through the growth of our XP Direct, Rico and Clear channels. Driven by the combined effect of the net inflow from both new and existing clients, our AUC increased by 93% from R$65 billion in 2016 to R$126 billion in 2017. Our AUM increased by 156%, from R$5.6 billion as of December 31, 2016 to R$14.4 billion as of December 31, 2017 (11.4% of our Retail AUC), comprising (i) R$11.2 billion from mutual and exclusive funds, (ii) R$1.8 billion from managed portfolios, (iii) R$1.0 billion from pension funds, and (iv) R$0.4 billion from investment clubs. The increase in AUM was driven by the expansion of the funds’ asset class in the platform, the good overall performance of XP Gestão, XP Vista and XP Advisory funds within their specific fund categories and the strong growth in flagship funds launched more recently, such as XP Crédito Estruturado FIC FIM. Retail Gross Total Revenues increased by 60% from R$934 million in 2016 to R$1,494 million in 2017, driven by the increase in AUC and by a decrease in Revenue Yield, from 2.0% per annum in 2016 to 1.5% per annum in 2017. The decrease in Revenue Yield was mainly due to the decrease in average interest rates (which decreased from 14.1% to 10.1% and impacted the yield of our floating revenues and, to a smaller extent, the yield of our fixed income revenues) and to changes in the revenue mix per asset class, due to (1) robust revenue growth from mutual funds and COE; (2) average revenue growth from equities, futures, and floating revenues; and (3) modest revenue growth from fixed income securities year-over-year. The weighted average management fee of our AUM decreased from 1.1% as of December 31, 2016 to 1.0% as of December 31, 2017, with the following breakdown of weighted average fees: (i) 1.1% for mutual and exclusive funds, (ii) 1.3% for investment clubs, and (iii) 0.6% for managed portfolios.

 

   

Institutional – gross revenues totaled R$345 million in 2017, a 32% increase from R$261 million in 2016. This increase was primarily attributable to (1) increase in market share on several institutional trading desks; and (2) an overall increase on trading volume in B3, primarily due to the commencement of the reform agenda driven by former President Michel Temer in late 2016 and early 2017.

 

   

Issuer Services – gross revenues totaled R$106 million in 2017, a 92% increase from R$55 million in 2017. This increase was primarily attributable to the increase in number of mandates where we acted as placement agents or underwriters for third-party transactions in the domestic and international capital markets, from 30 transactions in 2016 to 76 transactions in 2017.

 

   

Digital Content – gross revenues totaled R$29 million, a 65% increase from R$18 million in 2016. This increase was primarily attributable to the increase in the sales of our online educational products through our XP Educação portal as well as content and media revenues from our Infomoney portal.

 

   

As a result, our total revenue and income increased 52% from R$1,252 million in 2017 to R$1,907 million in 2017. Gross margin experienced a slight contraction from 70% to 69%, due to differences in revenue mix (with asset classes with higher commission payouts growing faster) and increased growth incentives to IFAs. 2017 was also marked by operating leverage gains on selling

 

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expenses and administrative expenses and an increase in investments in technology infrastructure and development. As a result, selling expenses increased 34% to R$33 million in 2017 and administrative expenses increased 38% to R$580 million in 2017, thus leveraging the positive impact from the 52% growth in revenues and resulting in a 74% net income growth, from R$244 million in 2016 to R$424 million in 2017 and a net margin expansion from 19.5% in 2016 to 22.2% in 2017.

Our Cohorts and Client Economics

We believe that our strong value proposition and client-centric approach will continue to enhance our client loyalty and enable us to grow our share of wallet from our current customer base. We believe a simple cohort data analysis demonstrates this trend in our business and the significant opportunity in the future. For example, we measured the net new money invested with us over time across four cohorts, which were defined as new clients that became active on our platform in January 2016, January 2017, January 2018 and January 2019. We then eliminated the appreciation in the value of the invested assets so that we could calculate the accumulated net inflow of new money by each cohort.

We found that each cohort progressively began with a larger initial investment of AUC as our company was growing, our ecosystem was expanding, and our brand was getting stronger. For example, our January 2019 cohort began with an initial investment that was nearly 7x the size of our January 2016 cohort. However, more importantly, we found that each cohort demonstrated significant growth in their total AUC invested with XP over time, after adjusting out the net appreciation of assets in each cohort. This demonstrates that after making their initial investments, each cohort of clients was content enough with their XP client experience that they chose to continue adding new money into their XP accounts. We believe this illustrates our significant opportunity to continue to penetrate our existing customer base and win a greater share of wallet. For example, as shown in the following chart:

 

LOGO

 

 

   

January 2016 Cohort – This cohort began with an initial AUC investment of R$511 million and, after adjusting out the net appreciation of assets, the net balance of invested AUC increased 44% after 6 months, 76% after 12 months, 97% after 18 months, 109% after 24 months, and 109% after 30 months;

 

   

January 2017 Cohort – This cohort began with an initial AUC investment of R$1,678 million, up 228% over the January 2016 cohort. After adjusting out the net appreciation of assets, the net balance of invested AUC in this cohort increased 51% after 6 months, 78% after 12 months, and 101% after 18 months, 112% after 24 months, and 128% after 30 months;

 

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January 2018 Cohort – This cohort began with an initial AUC investment of R$2,135 million, up 27% over the January 2017 cohort. After adjusting out the net appreciation of assets, the net balance of invested AUC in this cohort increased 57% after 6 months, 75% after 12 months, and 92% after 18 months; and

 

   

January 2019 Cohort – This cohort began with an initial AUC investment of R$3,514 million, up 65% over the January 2018 cohort. After adjusting out the net appreciation of assets, the net balance of invested AUC in this cohort increased 57% after 6 months.

As our clients add new money onto our platform and become more comfortable using our technologies and services, they may also purchase more products within their existing financial product categories or begin to explore new categories. For example, a customer with a portfolio of equity securities may purchase additional equities and equity products, such as futures, and also diversify into fixed income products.

We believe a simple cohort data analysis demonstrates this trend in our business and the significant opportunity in the future. For example, we measured the average number of product categories per client invested with us (with declared net worth above R$50k) over time across four cohorts, which were defined as new clients that became active on our platform in January 2016, January 2017, January 2018 and January 2019. Product categories include equities and futures, fixed income securities, pension funds, XP Asset Management funds, third party mutual funds, structured notes and REITs, and the clients with a declared net worth above R$50k represent over 80% of our total AUC in the abovementioned periods.

We found that each cohort progressively began with a higher number of investment product categories as new products and services were added to the platform. For example, our January 2019 cohort began with an average number of product categories that was over 10% higher than our January 2016 cohort. Furthermore, more importantly, we found that each cohort demonstrated significant growth in the average number of product categories invested with XP over time. This demonstrates that after making their initial investments, each cohort of clients was content enough with their XP client experience that they chose to continue investing in new product categories. We believe this illustrates our significant opportunity to continue to penetrate our existing customer base with an increasing cross-sell of complementary and adjacent products and services. For example, as shown in the following chart:

Average Number of Product Categories per Client (#)

 

LOGO

 

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January 2016 Cohort – This cohort began with an initial 1.7 average number of product categories invested. This number increased 34% after 6 months, 38% after 12 months, 48% after 18 months, 53% after 24 months, 61% after 30 months, and 65% after 36 months;

 

   

January 2017 Cohort – This cohort began with an initial 1.8 average number of product categories invested. This number increased 30% after 6 months, 40% after 12 months, 49% after 18 months, 51% after 24 months, and 55% after 30 months;

 

   

January 2018 Cohort – This cohort began with an initial 1.9 average number of product categories invested. This number increased 31% after 6 months, 38% after 12 months and 44% after 18 months; and

 

   

January 2019 Cohort – This cohort began with an initial 1.9 average number of product categories invested. This number increased 32% after 6 months.

Given our increasing amount of AUC from existing clients, illustrated by our net inflow cohort analysis, and our increasing cross-sell of complementary and adjacent products and services, illustrated by the average number of products per customer cohort analysis, and the relatively high switching costs in the financial services market, we believe the LTV of our customers is increasing. Our business model also has relatively low customer acquisition costs, or CAC, per client, due to our primarily digital business model, our self-reinforcing ecosystem, and our highly efficient omni-channel distribution network. We believe our marginal CAC will continue to benefit from scale efficiencies.

Significant Factors Affecting Our Results of Operations

We believe that our results of operations and financial performance are driven by the following factors:

Growth of our Retail AUC

We generate a significant portion of our revenues from fees derived from our balance of Retail AUC, including advisory fees, commissions, distribution fees from product manufacturers and asset management fees across various solution categories. This income is primarily driven by:

 

   

Current Balance of Retail AUC from Existing Clients – We provide our existing clients with a large range of financial products and services in which to invest their existing AUC already on our platform. Depending on the mix of products and services that our clients choose, we generate numerous forms of income from our current balance of AUC. As our clients choose to diversify their portfolios and shift their investments from one product to another, we can generate new income from our current balance of AUC.

 

   

New AUC from Existing Clients – As our clients enjoy the XP client experience, many choose to add more money into their accounts. They may use these additional funds to acquire (1) a greater amount of their existing products and services or (2) diversify their portfolios by purchasing additional products and services in new categories. For example, a customer with a portfolio of equity securities may purchase additional equity products and diversify into fixed income products. As our clients add more money to their accounts, we generate additional income from the new balance of AUC introduced onto our platform.

 

   

New AUC from New Clients – As our omni-channel distribution and brands continue to grow, we attract and on-board new clients onto our platform who fund their accounts with new money. We generate additional income from the new balance of AUC introduced by these new clients.

 

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Given the size and economies of scale of our platform and the recurring nature of our revenues due to our business model, we generate a significant amount of our revenues from our current balance of AUC and new AUC from existing clients, as shown in the following chart.

% of Retail Revenue From New Clients vs Existing Clients

 

LOGO

The breakdown set forth in the chart above considers only the portion of retail revenues that we track on a client level that represents: (1) for 2016, 73% of total retail revenues; (2) for 2017, 78% of total retail revenues; (3) for 2018, 82% of total retail revenues; (4) for the nine months ended September 30, 2019, 86% of total retail revenues.

Adoption of our Retail Financial Products and Services

We grow our Retail AUC, in part, by providing an open platform that has a large and expanding base of retail financial products and services for our existing active clients to choose from. As our clients choose to diversify their portfolios and shift their investments from one product to another, we generate new income from their purchase of additional products and services. We drive the adoption of our retail financial products and services by:

 

   

Cross-Sale of Our Products and Services – Our existing clients represent a sizable opportunity to cross-sell products and services with relatively low incremental marketing and advertising expenses for us. We believe the breadth of our offerings represents an opportunity to further increase engagement with our existing clients. To the extent that we are able to cross-sell these products and services and develop and introduce new products and services to our existing clients and attract new clients, we expect our revenues and financial income to continue to grow and our margins to increase.

 

   

Development of New Products and Services – We strive to stay on the cutting edge of the financial technology solutions industry by developing and launching new products and services and intend to continue to invest in product development to build new products and services and to bring them to market. This allows us to continue to meet the needs of our clients, as these needs grow and change over time. We develop our products and services from: (1) our internal new product structuring initiatives; (2) our internal development of new services; (3) third-party vendors who provide complementary financial products and services that we do not provide ourselves; and (4) third-party vendors who provide competitive financial products and services that are similar to those that we offer or are in similar categories.

We plan to continue to invest in product development in order to maintain and increase the attractiveness of our products and services. We also plan to continue integrating value-added services, including the expansion of our asset management and wealth management services to improve the popularity of our platform, enhance

 

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customer stickiness and increase revenue streams. While we expect our total expenses to increase in the short term as we plan for growth, we expect our expenses to decline as a percentage of our total revenue and income over the medium term as these investments benefit our business and our business grows. In addition, in implementing new solutions, we expect to incur initial operational investments in periods prior to the realization of any future revenues associated with this upfront investment. With the deployment of new and better technologies, management processes and training, we expect the productivity of our solutions to improve over time.

Growth of our Active Retail Clients

We grow our Retail AUC, in part, by increasing the number of active clients who invest on our platform. We attract new active clients through our digital content initiatives, our direct online portals, such as XP Direct, Rico and Clear, and our IFA network.

The number of these clients depends on several factors, including but not limited to: (1) our brand awareness and reputation; (2) the usability and popularity of our platform; (3) the user experience across the client’s journey in our ecosystem and on our platform; (4) our offerings, including access to our broad range of existing products and services and potential new solutions that add value to our clients; (5) the level of customer service and support; and (6) our ability to continue to adapt and innovate.

Our ability to increase our Retail AUC from new clients who invest with us is an important lever of revenue growth, though it is decreasing in contribution due to the size and economies of scale of our platform and the recurring nature of our revenues due to our business model. New active clients accounted for 14% of our retail total gross revenues the nine months ended September 30, 2019, compared to 18% in 2018, 22% in 2017 and 27% in 2016.

Growth of our Commercial and Digital Content Services

We also generate a smaller portion of our revenues from our Issuer, Institutional and Digital Content services, which are complementary to our platform and enhance the value and liquidity (through the volume of unlisted securities traded through our platform in the secondary market) of our ecosystem. These include:

 

   

Issuer and Institutional Services – We provide a range of financial services to over 400 commercial clients, such as institutions and corporate issuers, that generate several revenue streams, including advisory, structuring and distribution fees from issuers and commissions and asset management fees from institutions. These revenues are based on the volume of investment and capital markets activity accessed through or transacted on our platform. We have developed tailored solutions for commercial customers and intend to (1) expand our service offerings to them; (2) foster long-term partnerships with them; and (3) increase the proportion of revenues generated from them.

 

   

Digital Content Services – We provide a range of digital content services to our ecosystem designed to promote financial awareness, increase the frequency of use of our products and services by our existing customers, and attract new customers. We generate income from our online financial education courses made available by our XP Educação service and from advertising fees generated by our Infomoney financial news portal.

As we increase our offerings of these products and services, we expect to attract more clients and in turn generate more revenues. We expect our operating cost and expenses to continue to increase as we provide more innovative and effective commercial and digital content products and services.

Management and Improvement of Our Technology Platform

Our technology platform is critical for us to offer high quality products and services as well as to retain and attract users and customers. We must continue to expand our platform capabilities for our users and customers

 

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and enhance our clients’ experience by improving existing, and developing, new and innovative, features and services. We intend to continue strengthening the innovation, security, efficiency and effectiveness of our services, including our user-friendly interfaces, comprehensive functionalities and customer service capabilities. With the continuous improvement of our technology infrastructure and compliance capabilities, we are able to serve more clients. Our ability to serve more clients, depends on, among other things, our ability to support all aspects of customer verification, record keeping and compliance functions using our technology and human resources.

In addition, our technology infrastructure and compliance capabilities also enable us to facilitate secure, fast and cost-efficient financial transactions on our platform. We must continue to upgrade our technology infrastructure and to strengthen our compliance system to keep pace with the growth of our business. In addition, we experience cyber-threats and attempted security breaches. If these were successful, these cyber security incidents could impact revenue and operating income and increase costs. We therefore continue to make investments, which may result in increased costs, to strengthen our cybersecurity measures.

Implementation of Our Marketing Strategy

Our marketing strategy is designed to grow our business and platforms by reinforcing brand recognition and confidence associated with the XP brand and our related brands. We will continue to build and maintain brand recognition and awareness, while generating demand for our products and services through a variety of marketing campaigns, including advertising through traditional media, such as television, magazines and newspapers, online advertising and advertising through digital media, such as social media accounts, social media influencers, online videos and sponsored blogs. Marketing initiatives that specifically aim to attract new customers currently focus on introducing them to our financial services and products through our platform, enhancing our brand awareness by connecting them to our history, and creating awareness of the poor services and low returns of the products offered by traditional banks.

We believe that introducing our financial services and products to potential customers is the most efficient and cost-effective strategy to sustain our growth, creating a “network effect” where existing customers recruit new customers for us through word-of-mouth recommendations. Given the nature of our revenue streams, our investments in marketing and advertising campaigns do not realize returns in the same period in which they are made but over subsequent periods, which could adversely affect our short-term results.

Our Ability to Compete Effectively

We and our competitors compete to attract new customers and increase volume of AUC, attract IFAs, increase returns on customer investments, offer a broad range of products and services at competitive prices, win mandates on capital markets transactions, and introduce innovations in online digital solutions and financial services. Our ability to compete is influenced by key factors such as (1) the performance of our products and their asset classes; (2) our ability to improve our platform and launch new products and services; (3) the liquidity we provide on transactions; (4) the transaction costs we incur in providing our solutions; (5) the efficiency in the execution of transactions on our platform and through our issuer services business; (6) our ability to hire and retain talent and IFAs; and (7) our ability to maintain the security of our platform and solutions. See “Business—Competition” for more detail on our competitors.

Brazilian Macroeconomic Environment

Our business is impacted by overall market activity and, in particular, trading volumes and market flows and volatility.

While our business is impacted by the overall activity of the market and market volatility, this impact is partially mitigated by the fact that customers do not typically withdraw the funds they invest with us, and instead

 

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allocate them to different products we offer depending on market and macroeconomic conditions. For example, during periods of high market volatility or high interest rates, our clients tend to allocate their funds in low risk, fixed income instruments, and during periods of low market volatility or low interest rates, they tend to allocate their funds to higher risk, high yield instruments such as equities. In addition, we are actively engaged in the further digitalization of our financial services and products, which will help further mitigate this impact as we believe secular growth trends can offset market volatility risk.

The vast majority of our operations are located in Brazil. As a result, our revenues and profitability are subject to political and economic developments and the effect that these factors have on the availability of credit, disposable income, employment rates and GDP growth in Brazil. Our results of operations are affected by levels of interest rates, the expansion or retraction of the capital markets, trading volumes and market inflows in Brazil, each of which impacts the number and overall volume of capital markets transactions and available overall liquidity. For more information, see “Risk Factors—Risks Relating to Brazil—Economic uncertainty and political instability in Brazil may harm us and the price of our Class A common shares.”

Brazil is the largest economy in Latin America, as measured by GDP. The following table shows data for real GDP, inflation and interest rates in Brazil and the U.S. dollar/real exchange rate at the dates and for the periods indicated.

 

     For the Nine Months Ended
September 30,
    For the Year Ended
December 31,
 
         2019             2018         2018     2017     2016  
     (in percentages, except as otherwise indicated)  

Real growth (contraction) in gross domestic product

     n.a.       1.1       1.1       1.1       (3.3

Inflation (IGP-M)(1)

     4.1       8.3       7.5       (0.5     7.2  

Inflation (IPCA)(2)

     2.5       3.3       3.7       2.9       6.3  

Long-term interest rates – TJLP (average)(3)

     6.6       6.8       6.7       7.1       7.5  

CDI interest rate (average)(4)

     4.6       4.8       6.5       10.1       14.1  

Period-end exchange rate – R$ per US$1.00

     4.1638       4.0033       3.8742       3.3074       3.2585  

Average exchange rate – R$ per US$1.00(5)

     3.8881       3.6049       3.6552       3.1919       3.4827  

Appreciation (depreciation) of the real vs. US$ in the period(6)

     (7.5     (21.0     (17.1     (1.5     16.5  

Unemployment rate(7)

     11.8       11.9       12.3       12.8       11.3  

 

Sources: FGV, IBGE, IPEA, Central Bank and Bloomberg.

 

(1)

Inflation (IGP-M) is the general market price index measured by the FGV.

(2)

Inflation (IPCA) is a broad consumer price index measured by the IBGE.

(3)

TJLP is the Brazilian long-term interest rate (average of monthly rates for the period).

(4)

The CDI (certificado de depósito interbancário) interest rate is an average of interbank overnight rates in Brazil (daily average for the period).

(5)

Average of the purchase exchange rate of each business day of the period.

(6)

Comparing the US$ closing purchase exchange rate as reported by the Central Bank at the end of the period’s last day with the day immediately prior to the first day of the period discussed.

(7)

Average unemployment rate for year as measured by the IBGE.

Inflation has a direct effect on our contracts with certain suppliers, such as telecommunications operators, whose costs are indexed to the IPCA, and data processors, whose labor costs are adjusted according to inflation. While inflation may cause our suppliers to increase their prices, we are generally able to offset this effect as higher inflation typically results in higher interest rates, increasing our spreads on certain transactions.

Our financial performance is also tied to fluctuations in interest rates, such as the CDI rate, because such fluctuations affect the value of the net interest margins we earn on financial investments we allocate customer

 

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funds to on an overnight basis, compounding our AUC base as well as the potential mix of products clients are willing to invest in.

Acquisitions and New Lines of Business

Lirios

On September 2, 2019, we incorporated Lirios Participações Ltda. (the legal name of which is expected to change to Spiti Análise Ltda.), our Brazilian subsidiary, to act as a provider of independent research reports to retail clients.

Banco XP

On October 11, 2019, the Central Bank authorized Banco XP to operate as a multi-purpose bank, with both commercial and investment banking activities, as well as to carry out transactions in the foreign exchange markets. On that same date, the share capital of Banco XP was increased from R$10 million to R$100 million.

XP Vida e Previdência

On December 11, 2017, we incorporated XP Controle 5 Participações S.A., a life insurance and private pension plans provider in Brazil. On September 5, 2018, the SUSEP granted XP Controle 5 Participações S.A. the Portaria No. 7200 authorization to operate as an insurance company in Brazil, and XP Controle 5 Participações S.A. changed its legal name to XP Vida e Previdência S.A.. In an effort to support our expansion strategy, XP VP increased its capital to R$17.5 million on September 24, 2018 and to R$22.5 million on July 24, 2019.

Following a transition period during which XP VP tested and integrated its systems and processes, XP VP began its operations in April 2019.

Rico

On August 10, 2017, following the approval of the Central Bank, we completed the acquisition of Rico Corretora de Títulos e Valores Mobiliários S.A., or Rico, for an aggregate purchase price of approximately R$405 million. At the time of the acquisition, Rico had approximately R$10.9 billion in assets under custody and approximately 129,000 clients. The Rico acquisition was in line with our growth strategy to accelerate the expansion of our retail customer base and the further positioning of our complementary brands, namely XP Investimentos, Clear and Rico, and was a key driver of the expansion of our business. On October 4, 2018, following the approval of the Central Bank, the entity Rico merged into XP CCTVM, but it remains as a brand. For further information on the marketing and positioning of our brands, see “Business.”

2016 Corporate Reorganization

During 2016, XP Brazil, through a series of transactions with G.A. Brasil IV Fundo de Investimento em Participações (the predecessor-in-interest to GA Bermuda), conducted a corporate reorganization with the objective of simplifying the organization of the group and eliminating non-controlling interests. For further information, see note 5(iii) to our audited consolidated financial statements included elsewhere in this prospectus.

Seasonality

We have experienced in the past, and expect to continue to experience, seasonal fluctuations in our revenues. Historically, our revenues have been strongest during the second and the last quarter of each year as a result of performance fees of mutual funds from both our own asset management business as well as third-party

 

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funds distributed through our platform. Adverse events that occur during those periods could have a disproportionate effect on our results of operations for the entire fiscal year. In addition, we are also impacted by the number of business days in each quarter, which affects our trading and brokerage businesses. As a result of quarterly fluctuations caused by these and other factors, comparisons of our results of operations across different fiscal quarters may not be accurate indicators of our future performance.

Description of Principal Line Items

Total revenue and income

Our total revenue and income consist of (1) net revenue from services rendered (2) net income from financial instruments.

Net revenue from services rendered. This is our main source of revenue, deriving mostly from services rendered and fees charged at daily transactions from customers and consisting of:

 

   

Brokerage commissions, which consist of (1) commissions earned on trading of stock, futures and derivatives listed on the B3 by our retail clients; (2) commissions earned on trading of stock, futures and derivatives listed on the B3 by our institutional clients; (3) commissions earned on intermediation of non-deliverable-forward and other over-the-counter contracts; and (4) commissions earned on trading of US equities, futures and derivatives by our international institutional clients.

 

   

Securities placements, which consist of (1) fees earned on COE sales to retail clients (we structure the COE based on perception of demand and attractiveness of a specific exposure under current and prospective macroeconomic scenarios, and a partner bank issues the COE); (2) structuring fees related to issuer services where we are hired by corporate clients placing fixed income, equity or exchange traded fund securities in the capital markets; (3) distribution fees on the sale of such securities to our retail and/or institutional clients; and (4) recurring fees we charge third-party financial institutions that regularly offer CDs or other bank fixed income securities to our retail clients.

 

   

Management fees, which consist of (1) fixed and performance-based management fees from mutual funds managed by our asset managers and sold to our retail clients; (2) fees from distributions (rebates from fixed and performance-based management fees) of funds managed by third-party asset managers to our retail clients; and (3) fixed management fees from XP Advisory managed portfolios and exclusive funds for high net worth retail clients. Fixed management fees are charged on a monthly basis and performance-based management fees for the majority of our funds are charged in June and December of each year.

 

   

Insurance brokerage fees, which consist of (1) management and performance fees, and rebates of such fees, from pension funds, managed by our assets managers or third-party asset managers, issued by XP Seguradora or third-party insurance companies, sold to our retail clients; and (2) rebates on Whole Life insurance products issued by third-party insurance companies, sold to our retail clients.

 

   

Educational services fees, which consist of fees we charge in connection with the financial education and investment related courses produced by XP Educação and sold to our retail clients and to non-clients, as part of our digital content offerings.

 

   

Other services, which consist of several small revenue streams, including (1) fees charged to retail clients with negative cash balances (typically as a result of margin calls related to equities and derivatives trading); (2) advertising and other digital content fees generated by Infomoney; (3) issuer services advisory fees from M&A and other financial advisory mandates; and (4) commissions on short selling equity trades by our retail clients.

 

   

Deduction from sales taxes and contributions on revenues, including taxes on services (ISS) and contributions on revenues (Social Integration Program – PIS, and Social Security Program – COFINS).

 

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Net income from financial instruments.

A portion of our total revenue and income we generate from our investment distribution platform to retail clients and our institutional brokerage business lines are accounted for not as net revenue from services rendered but as net income from financial instruments, including through (1) the difference between purchases and sales earned on sales of corporate, bank and government fixed income securities to our retail clients and institutional clients (some of which we purchase from the issuer and resell to the client instantaneously, and some of which we hold over short periods to leverage flow and add liquidity to the market); (2) sales of structured notes and more complex derivative instruments to our retail clients (in which we are the counterparty of the listed derivative that the client is buying to build the structured note, and we then hedge consolidated exposures in the market); and (3) interest earned on uninvested cash balances of our retail clients which we allocate to overnight and other highly liquid investments. In addition, a small portion of this revenue line (less than approximately 5% for the fiscal year ended December 31, 2018) is linked to our principal trading operations, which in general consist of investing our own net cash balances in conservative securities and arbitrage and other investments with little to no direct exposure. Income from financial instruments is deducted by taxes and contributions on financial income.

Operating costs and expenses

Operating costs. Operating costs primarily consist of (1) commission costs paid to IFAs based on the revenues they generate from the retail clients that they serve and additional incentives to accelerate business expansion; (2) clearing house, custody and other financial services fees paid, primarily to the B3; (3) operating losses related to our activities in the ordinary course of our business; and (4) provisions for bad debts.

Selling expenses. Selling expenses consist of advertising and publicity/marketing expenses, primarily in connection with our initiatives to promote our brands to retail clients.

Administrative expenses. Administrative expenses primarily consist of personnel related expenses, including fixed and variable compensation, benefits and social and payroll taxes. Administrative expenses also consist of expenses related to (1) data processing services; (2) technical services; (3) third-party services; (4) office rent; (5) depreciation and amortization; (6) communications; (7) travel; (8) legal and judicial; and (9) miscellaneous taxes.

Other operating expenses, net. Other operating expenses, net primarily consist of (1) incentives earned from B3 transactions as a result of marketing campaigns to increase our number of retail clients and AUC of certain asset classes; (2) recovery of charges and expenses; (3) reversal of operating provisions, and other income lines, net of expenses; (4) legal proceedings; (5) write-offs and losses on disposition of assets; (6) fines and penalties; and (7) other expenses.

Interest expenses. Interest expenses arising from the loans and debentures that we have borrowed and issued.

Income before income tax

Income before income tax consists of our net revenue and income minus our operating costs, selling and administrative expenses, other net other operating expenses and interest expenses.

Income tax expense

Our subsidiaries are subject to different income tax regimes and statutory rates: (1) XP CCTVM and XP Seguradora are taxed at a 40% income tax rate; (2) XP Gestão, XP Finanças and holding entities are taxed at a 34% income tax rate; (3) XP Vista, Infomoney, XP Educação and other operating entities are taxed at a 10.9%

 

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tax rate on revenues (34% rate on a presumed net margin of 32%); and (4) XP Investments, XP Investments UK LLP, XP Private Europe are taxed at US, UK, and Switzerland tax rates, respectively. Accordingly, the effective tax rate of our consolidated operations fluctuates over time according to the portion of our total net income that was generated in each of these entities. For 2018, 2017 and 2016 our effective tax rate was 27.4%, 26.4% and 34.8% respectively, and for the nine months ended September 30, 2019 and September 30, 2018, the effective tax rate was 29.9% and 25.2%.

Net income for the year

Net income for the year consists of our income before income tax minus our income taxes and social security obligations.

Results of Operations

Nine Months Ended September 30, 2019, Compared to the Nine Months Ended September 30, 2018

The following table sets forth our income statement data for the nine months ended September 30, 2019 and 2018:

 

     For the Nine Months Ended September 30,  
         2019             2018         Variation (%)  
     (R$ millions, except for percentages)  

Income Statement Data

      

Net revenue from services rendered

     2,341       1,452       61  

Net income from financial instruments at amortized cost and at fair value through other comprehensive income

     204       98       109  

Net income from financial instruments at fair value through profit or loss

     891       524       70  
  

 

 

   

 

 

   

 

 

 

Total revenue and income

     3,437       2,073       66  
  

 

 

   

 

 

   

 

 

 

Operating costs and expenses

      

Operating costs

     (1,119     (632     77  

Selling expenses

     (82     (64     27  

Administrative expenses

     (1,294     (828     56  

Other operating expenses, net

     118       (19     (721

Interest expense on debt

     (63     (60     5  
  

 

 

   

 

 

   

 

 

 

Income before income tax

     997       470       112  
  

 

 

   

 

 

   

 

 

 

Income tax expense

     (298     (118     152  

Net income for the period

     699       352       99  
  

 

 

   

 

 

   

 

 

 

Total revenue and income

Total revenue and income for the nine months ended September 30, 2019 was R$3,437 million, an increase of R$1,364 million, or 66%, from R$2,073 million for the nine months ended September 30, 2018. Net revenues from services rendered represented R$889 million of the increase in total revenue and income, driven by:

 

   

a R$311 million increase in brokerage commissions, as a result of the increase in the number of active retail clients (which grew 101% period over period) and the growth in gross total revenues from institutional trading during the period, driven by (1) the increase in trading volume of our Brazilian trading desks, mainly due to the improvement in the macroeconomic environment in Brazil, including a significant increase in the average daily traded volume in B3 in equities; and (2) the decrease in the interest rates, which benefited volumes in our trading desks related to futures trading;

 

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a R$239 million increase in management fees, as a result of the robust growth in our retail funds asset class, which was driven by the overall increase in total retail AUC of 93% in the period and in our AUM of 59%. For the nine months ended September 30, 2018, (1) 42% of management fees were attributable to funds managed by third parties (fees from distributions) and 58% were attributable to funds and portfolio managed by our asset managers; and (2) 17% of management fees were performance-based and 83% were non-performance-based (i.e., fixed annual fees);

 

   

a R$232 million increase in revenue from securities placements, primarily attributable to the increase in mandates where we acted as placement agents or underwriters for third-party transactions in the domestic and international capital markets, from 65 transactions for the nine months ended September 30, 2018 to 119 transactions for the nine months ended September 30, 2019. The increase in revenue from Issuer Services was partially offset by a decrease in revenues from COEs during the period;

 

   

a R$51 million increase in revenue from the sale of our online educational products through our XP Educação portal, not only in the individual courses category but also in the adult enrichment category, with the launch of three new flagship courses;

 

   

a R$32 million increase in insurance brokerage fees, driven by higher sale of pension funds to retail clients and the overall expansion of retail AUC by 93% over the period;

 

   

a R$104 million increase in other services, including R$33 million increase in financial advisory fees from Issuer Services mandates, a R$17 million increase in penalties collected from retail clients, a R$9 million increase in revenues from Expert events, and a R$31 million increase in other ancillary revenues related to the increase in trading operations, such as securities lending, third party trading platform fees and client’s margin coverage fees; and

 

   

net of a R$74 million increase in taxes and contributions on services.

Net income from financial instruments represented R$466 million of the increase in total revenue and income, driven by the growth in our retail investment distribution platform (whose retail clients grew 101% and retail AUC grew 93% period over period) in our institutional businesses and the increase in our Adjusted Gross Financial Assets balances.

Operating costs and expenses

Operating costs. Operating costs for the nine months ended September 30, 2019 were R$1,119 million, an increase of R$487 million, or 77%, from R$632 million for the nine months ended September 30, 2018. This increase was primarily attributable to a R$388 million increase in commission costs payable to our IFAs. In addition, clearinghouse fees increased by R$64 million, third parties’ services by R$22 million, operating losses and provisions by R$8 million and other costs by R$4 million. As a percentage of total revenue and income, our operating costs increased to 33% for the nine months ended September 30, 2019 from 30% for the nine months ended September 30, 2018.

Selling expenses. Selling expenses for the nine months ended September 30, 2019 were R$82 million, an increase of R$18 million, or 27%, from R$64 million for the nine months ended September 30, 2018, due to increases in advertising and publicity expenses in connection with our traditional, online and social media advertising initiatives, in line with our marketing strategy to increase brand awareness, attract new customers and increase our market share.

Administrative expenses. Administrative expenses for the nine months ended September 30, 2019 were R$1,294 million, an increase of R$466 million, or 56%, from R$828 million for the nine months ended September 30, 2018. This increase was primarily attributable to:

 

   

a R$361 million, or 72%, increase in personnel expenses related to an increase in total employee headcount from 1,490 employees as of September 30, 2018 to 2,091 employees as of September 30,

 

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2019, reflecting the fast growth of the company, the expansion of recently launched business lines and especially the accelerated expansion of our technology team;

 

   

a R$63 million, or 130%, increase in third parties’ services, mainly due to technology solutions related to online and social media;

 

   

a R$22 million, or 58% increase, in depreciation of property and equipment and right-of-use assets as a result of our adoption of IFRS 16; and

 

   

a R$37 million, or 42%, increase in data processing expenses, mainly related to consultancy services in connection with the operation and maintenance of our platform’s software.

Other operating expenses, net. Other operating expenses, net for the nine months ended September 30, 2019 amounted to an income of R$118 million, an increase of R$138 million from the R$19 million expenses for the nine months ended September 30, 2018, mainly due to (1) a R$70 million income related to recognition of PIS/COFINS credits after the final and non-appealable decision in connection with a claim to which XP CCTVM was the plaintiff; and (2) a R$42 million income related to incentives earned from B3 linked to our number of retail clients and AUC of certain asset classes.

Income before income taxes

As a result of the foregoing, income before income taxes for the nine months ended September 30, 2019 were R$997 million, an increase of R$527 million, or 112%, from R$470 million for the nine months ended September 30, 2018.

Income tax expense

Income tax expense for the nine months ended September 30, 2019 was R$298 million, an increase of R$180 million, or 152%, from R$118 million for the nine months ended September 30, 2018. This increase was primarily attributable to an increase in taxable income during the year and an increase in our effective tax rate to 29.9% for the nine months ended September 30, 2019 from 25.2% for the nine months ended September 30, 2018.

Net income for the period

As a result of the foregoing, net income for the nine months ended September 30, 2019 was R$699 million, an increase of R$347 million, or 99%, from R$352 million for the nine months ended September 30, 2018.

 

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Year Ended December 31, 2018, Compared to the Year Ended December 31, 2017

The following table sets forth our income statement data for 2018 and 2017:

 

     For the Year Ended December 31,  
         2018             2017         Variation (%)  
     (R$ millions, except for percentages)  

Income Statement Data

      

Net revenue from services rendered

     2,054       1,284       60  

Net income from financial instruments at amortized cost and at fair value through other comprehensive income

     114       79       44  

Net income from financial instruments at fair value through profit or loss and foreign exchange

     790       544       45  
  

 

 

   

 

 

   

 

 

 

Total revenue and income

     2,958       1,907       55  
  

 

 

   

 

 

   

 

 

 

Operating costs and expenses

      

Operating costs

     (941     (580     62  
  

 

 

   

 

 

   

 

 

 

Selling expenses

     (96     (33     192  

Administrative expenses

     (1,177     (650     81  

Other operating expenses, net

     (31     (8     306  

Interest expense on debt

     (72     (61     18  
  

 

 

   

 

 

   

 

 

 

Income before income tax

     641       576       11  
  

 

 

   

 

 

   

 

 

 

Income tax expense

     (175     (152     15  

Net income for the year

     465       424       10  
  

 

 

   

 

 

   

 

 

 

Total revenue and income

Total revenue and income in 2018 was R$2,958 million, an increase of R$1,052 million, or 55%, from R$1,907 million in 2017. Net revenues from services rendered represented R$770 million of the increase in total revenue and income, driven by:

 

   

a R$306 million increase in management fees, as a result of the robust growth in our retail mutual funds asset class, which gained share from other asset classes within our total retail AUC, which grew 60% year over year. For the year ended in December 31, 2018, (1) 43% of management fees were attributable to funds managed by third parties (fees from distributions) and 57% were attributable to funds and portfolio managed by our asset managers; and (2) 24% of management fees were performance-based and 76% were non-performance-based (i.e., fixed annual fees);

 

   

a R$231 million increase in revenue from securities placements, as a result of the increase in mandates in our issuer services (which increased from 76 to 94 transactions from 2017 to 2018) and the increase in retail COE revenues, also driven by the expansion of our total retail AUC, which grew 60% year over year;

 

   

a R$221 million increase in brokerage commissions, as a result of the increase in the number of active retail clients (which grew 66% year over year) and the growth in gross total revenues from institutional trading during the period, driven by (1) more trading volume in our Brazilian trading desks due to higher market volumes and market share gains; and (2) the expansion of our recently established offshore trading desks;

 

   

a R$28 million increase in insurance brokerage fees, driven by higher sale of pension funds to retail clients and the overall expansion of retail AUC by 60% year of year;

 

   

a R$ 24 million increase in educational services, due to higher sales of XP Educação investment courses;

 

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a R$49 million increase in other services, including a R$12 million increase in fines collected from retail clients, a R$10 million increase in financial advisory fees from Issuer Services mandates and a R$9 million increase in revenues from Expert events; and

 

   

net of a R$88 million increase in taxes and contributions on services.

Net income from financial instruments represented R$282 million of the increase in total revenue and income, driven by the growth in our retail investment distribution platform (whose retail clients grew 66% year over year and retail AUC grew 60% year over year) in our institutional businesses and the increase in our Adjusted Gross Financial Assets balances.

Operating costs and expenses

Operating costs. Operating costs in 2018 were R$941 million, an increase of R$361 million, or 62%, from R$580 million in 2017. This increase was primarily attributable to a R$295 million increase in commission costs payable to our IFAs. In addition, clearinghouse fees increased by R$19 million, third parties’ services by R$24 million, brokerage transfers by R$7 million, operating losses and provisions by R$3 million and other costs by R$14 million. As a percentage of total revenue and income, our operating costs increased to 31.8% in 2018 from 30.4% in 2017.

Selling expenses. Selling expenses in 2018 were R$96 million, an increase of R$63 million, or 192%, from R$33 million in 2017 due to the significant increase in advertising and publicity expenses in connection with our traditional, online and social media advertising initiatives, in line with our marketing strategy to increase brand awareness, attract new customers and increase our market share.

Administrative expenses. Administrative expenses in 2018 were R$1,177 million, an increase of R$527 million, or 81%, from R$650 million in 2017. This increase was primarily attributable to:

 

   

a R$283 million, or 66%, increase in personnel expenses related to an increase in total employee headcount, mainly in our technology teams, from 975 employees as of December 31, 2017 to 1,593 employees as of December 31, 2018;

 

   

a R$59 million, or 82%, increase in data processing expenses, mainly related to consultancy services in connection with the operation and maintenance of our platform’s software;

 

   

a R$49 million, or 183%, increase in technical services expenses, mainly related to consultancy, legal and financial advisory services in connection with the Itaú Transaction;

 

   

a R$25 million, or 93%, increase in depreciation and amortization expenses, mainly related to (1) the relocation of our principal executive offices to our current address in the city of São Paulo in 2018; and (2) accelerated depreciation expenses in connection with the planned discontinuation of the lease arrangements relating to our previous executive principal offices; and

 

   

a R$25 million, or 154%, increase in rent expenses, mainly related to expenses in connection with the relocation of our principal executive offices to our current address in the city of São Paulo in 2018.

Other operating expenses, net. Other operating expenses, net in 2018 were R$31 million, an increase of R$24 million from 2017, mainly due to (1) a R$5 million charitable donation to the Children’s Institute (IC), an non-governmental organization that manages an XP-backed project to support a group of low income elementary school children in underdeveloped cities in Brazil; and (2) a R$8 million write-off relating to internally developed software that was discontinued.

Interest expense on debt. Interest expenses in 2018 were R$72 million, an increase of R$11 million from 2017. This was a result of an increase in the average outstanding balance in loans and debentures during the period, due to (1) the R$325.4 million loan agreement entered into with the International Finance Corporation

 

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(IFC) on March 28, 2018; (2) the prepayment in full of the US$189.9 million loan with Itaú Unibanco – Nassau Branch (equivalent to approximately R$600 million) on August 31, 2018; and (3) the issuance of R$400 million in first series of non-convertible debentures in September 2018.

Income before income taxes

As a result of the foregoing, income before income taxes for 2018 were R$641 million, an increase of R$65 million, or 11.3%, from R$576 million in 2017.

Income tax expense

Income tax expense for 2018 was R$175 million, an increase of R$23 million, or 15.4%, from R$152 million in 2017. This increase was primarily attributable to an increase in taxable income during the year and an increase in our effective tax rate to 27.4% in 2018 from 26.4% for 2017.

Net income for the year

As a result of the foregoing, net income for 2018 was R$465 million, an increase of R$42 million, or 9.9%, from R$424 million in 2017.

Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016

The following table sets forth our income statement data for 2017 and 2016:

 

     For the Year Ended December 31,  
         2017             2016         Variation (%)  
     (R$ millions, except for percentages)  

Income Statement Data

      

Net revenue from services rendered

     1,284       690       86  

Net income from financial instruments at amortized cost and at fair value through other comprehensive income

     79       43       83  

Net income from financial instruments at fair value through profit or loss and foreign exchange

     544       519       5  
  

 

 

   

 

 

   

 

 

 

Total revenue and income

     1,907       1,252       52  
  

 

 

   

 

 

   

 

 

 

Operating costs and expenses

      

Operating costs

     (580     (376     54  
  

 

 

   

 

 

   

 

 

 

Selling expenses

     (33     (24     34  

Administrative expenses

     (650     (471     38  

Other operating expenses, net

     (8     (6     25  

Interest expense on debt

     (61           n.m.