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Filed: 29 Jun 20, 4:04pm
Table of Contents

As filed with the Securities and Exchange Commission on June 29, 2020.

RegistrationNo. 333-                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORMF-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

Brazil04551-065

+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

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
 

Amount To Be
Registered(1)

 

Proposed

Maximum

Offering Price
Per Share (2)

 

Proposed Maximum
Aggregate Offering
Price (2)

 

Amount Of

Registration Fee(3)

Class A common shares, par value US$0.00001 per share

 22,465,733 $45.05 $1,012,081,271.65 $131,368.15

 

 

(1)

Includes Class A common shares granted pursuant to the underwriters’ option to purchase additional shares. See “Underwriting.”

(2)

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

(3)

Calculated pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based upon the average of the high and low sales prices of the Class A common shares as reported on the Nasdaq Global Select Market on June 26, 2020.

 

 

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.

 

 

 


Table of Contents

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 prospect us 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 JUNE 29, 2020

PRELIMINARY PROSPECTUS

19,535,420 Class A Common Shares

 

 

LOGO

XP Inc.

(incorporated in the Cayman Islands)

 

 

This is an offering by XP Controle Participações S.A. and General Atlantic (XP) Bermuda, L.P., or the selling shareholders, of an aggregate of 19,535,420 Class A common shares, US$0.00001 par value per share of XP Inc., or XP. We will not receive any proceeds from the sale of Class A common shares by the selling shareholders. Our Class A common shares are currently listed on the Nasdaq Global Select Market, or Nasdaq, under the symbol “XP.” On June 26, 2020, the last reported sale price of our Class A common shares on Nasdaq was US$43.88.

Following this offering, our principal shareholders, XP Controle Participações S.A., or XP Controle, ITB Holding Brasil Participações Ltda., or Itaú, and General Atlantic (XP) Bermuda, L.P., or GA Bermuda, will beneficially own 79.49% of our outstanding share capital, assuming no exercise of the underwriters’ option to purchase additional shares referred to below. 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 additional Class A 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 53.57% of the voting power of our outstanding share capital following this offering, assuming no exercise of the underwriters option to purchase additional shares.

 

 

Investing in our Class A common shares involves risks. See “Risk Factors” beginning on page 26 of this prospectus.

 

   Per Class A common share   Total 

Offering price

  US$                        US$                          

Underwriting discounts and commissions

  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 2,930,313 additional Class A common shares at the 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                 , 2020.

 

 

Global Coordinators

 

XP Investimentos Morgan Stanley Goldman Sachs & Co. LLC J.P. Morgan

 

 

The date of this prospectus is                 , 2020.


Table of Contents

 

 

LOGO

 


Table of Contents

 

LOGO

 


Table of Contents

 

LOGO


Table of Contents

TABLE OF CONTENTS

 

 

 

   Page 

Glossary of Terms

   iii 

Summary

   1 

The Offering

   17 

Summary Financial Information

   21 

Risk Factors

   26 

Presentation of Financial and Other Information

   64 

Cautionary Statement Regarding Forward-Looking Statements

   69 

Use of Proceeds

   70 

Dividends and Dividend Policy

   71 

Capitalization

   72 

Exchange Rates

   73 

Selected Financial Information

   75 

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

   78 

Regulatory Overview

   117 

Business

   143 

Management

   179 

Principal Shareholders and Selling Shareholders

   193 

Related Party Transactions

   196 

Description of Share Capital

   199 

Class A Common Shares Eligible for Future Sale

   217 

Taxation

   219 

Underwriting (Conflicts of Interest)

   224 

Expenses of The Offering

   236 

Legal Matters

   237 

Experts

   237 

Enforceability of Civil Liabilities

   238 

Where You Can Find More Information

   240 

Index to Financial Statements

   F-1 

 

 

Neither we and the selling shareholders, nor the underwriters, nor any of their respective affiliates or agents, have 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. Neither we and the selling shareholders, nor the underwriters, nor any of their respective affiliates or agents, take responsibility for, and can provide any assurance as to the reliability of, any other information that others may give you. Neither we, the selling shareholders nor the underwriters, nor any of their respective affiliates or agents, have authorized any other person to provide you with different or additional information. Neither we, the selling shareholders nor the underwriters, nor any of their respective affiliates or agents, 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 and the selling shareholders, nor the underwriters, nor any of their respective affiliates or agents, have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering 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 or any such free writing 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 and any such free writing prospectus outside the United States and in their jurisdiction (including Brazil). However, we may make offers and sales outside the United States in circumstances that do not constitute a public offer or distribution under applicable laws and regulations.

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 and all references to “XP Brazil” refer to XP Investimentos S.A., our Brazilian principalnon-operating holding company.

 

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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, hedge and private equity funds (including those managed by XP Gestão de Recursos Ltda., XP Advisory Gestão Recursos Ltda., XP LT Gestão de Recursos Ltda., XP PE Gestão de 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 (real estate investment funds), and uninvested cash balances (Floating Balances), among others.

“AUM” is the market value of retail client assets invested in mutual, hedge, private equity and pension funds managed by XP Gestão de Recursos Ltda., XP LT Gestão de Recursos Ltda., XP PE 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” meansB3 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 and Exchange 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.

 

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“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.

“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 Brazilianreal, 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 (as defined under “Presentation of Financial and Other Information”) 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 9th largest economy in the world with over 210 million people and a Gross Domestic Product, or GDP, of nearly US$2 trillion in 2019. We believe the financial services industry in Brazil is generally inefficient, expensive by international standards and provides poor client experiences. Brazil’s financial services industry is concentrated around five traditional financial institutions with US$1.5 trillion in assets that account for approximately 93% of retail assets under custody, according to a report by Oliver Wyman published in 2019, and 80% of all consumer loans and 79% of all deposits, according to the Central Bank of Brazil.

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, such as savings accounts called Poupança, which provide investors with relatively low returns, at times below the inflation rate, and come with highly restrictive and punitive redemption options; (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 oflow-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 reached 2.2 million active clients. Based on data from the sources indicated below, we believe we are:

 

  

#1 Ranked Financial Investment Brand in Brazil with an NPS of 71 as of May 2020, 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 AUC of R$412 billion as of May 31, 2020, or 5% market share of the R$8.6 trillion market for total AUC estimated for December 31, 2019, according to a report by Oliver Wyman commissioned by us;



 

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#1 Independent Digital Platform for Investors in Brazil with three digital portalsXP, Ricoand Clearserving clients directly.XP has the largest number of followers on Instagram (over 1 million as of May 31, 2020) among investment firms in Brazil, and our three brands combined accounted for 54% of all Google searches for investment keywords for the month ended May 31, 2020 and 41% of responses to “the first brand in investments” according to Google Analytics and a consumer survey as of December 31, 2019;

 

  

#1 Independent Financial Investment Network in Brazil with a range of proprietary XP Advisory Services and approximately 7,000 IFAs whoon-board new clients onto the XP Platform;

 

  

#1 Financial Media Portal in Latin America with approximately 15 million monthly unique visitors to ourInfomoneywebsite as of May 31, 2020. Approximately 71% 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

 

  

#1 Financial Services Event in Latin America with over 30,000 attendees at our annualEXPERT 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 upcoming EXPERT event in 2020 will be conducted virtually.

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 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 RevolutionaryXP Model

Our revolutionaryXP Modelhas 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) azero-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.



 

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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 2.2 million retail clients who buy and sell the financial products on our platform as of May 31, 2020; and (2) over 400 institutional and corporate issuer clients as of May 31, 2020, 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) Ricoour 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.

 

  

Proprietary Media & Digital Content which helps us democratize access to financial content in Brazil, empower Brazilians on how to take 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) EXPERT phygital content platform with over 1,000,000 monthly unique visitors as of May 31, 2020 andin-person events, such as theEXPERT conference, the largest investment event in Latin America; (4) our Digital Influencers program, with over 4.5 million followers on social media as of May 31, 2020; (5)Leadr an investment-focused social media network with over 980,000 downloads and over 200,000 monthly active users as of May 31, 2020; and (6) Spiti a digital platform which provides investment research to retail clients.

 

  

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 Serviceswhich are comprised of several services, such as (1) XP Investimentos for our retail clients in Brazil; (2) XP Privatefor ourhigh-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 as of May 31, 2020, 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 withlow-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



 

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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 630 people as of May 31, 2020, 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.

Our Operations

We operate an asset-light, highly scalable business model that emphasizes operational efficiency and profitability. We leverage theXP 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 2019 in one of the worst recessions in Brazilian history, our total AUC grew at a CAGR of 94% 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 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 2019, we reported R$409 billion in AUC, R$5.5 billion in gross revenue, R$5.1 billion in net revenue, R$1,089 million in net income, and R$1,074 million in Adjusted Net Income, a year-over-year increase of 103%, 72%, 73%, 134% and 119%, respectively, versus 2018. In the three months ended March 31, 2020, we reported R$366 billion in AUC, R$1,856 million in gross revenue, R$1,735 million in net revenue, R$398 million in net income and R$415 million in Adjusted Net Income, an increase of 58%, 84%, 86%, 89% and 147% year-over-year, respectively, versus the three months ended March 31, 2019.

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



 

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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 6th largest population and the 9th largest economy in the world with 210 million people and a GDP of nearly US$2 trillion in 2019. Brazil GDP growth decelerated materially from 2014 to 2019 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 94%. We believe the global crisis and market volatility due toCOVID-19, will help accelerate the transformation in the way Brazilians invest, initiated by us, also as a result of record low interest rates (the benchmark SELIC rate is currently at 2.25% per annum), incentivizing retail investors to seek better investment products.

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 theirin-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 relatively 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



 

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financial advisors; (7) the increasing demand forturn-key solutions and technology applications for IFAs to help them manage their operations more effectively; and (8) greater access to information and technology, which are making Brazilians increasingly aware and inclined to look for alternatives outside the traditional retail banks for investment products and services.

Addressable Market Opportunities

We believe ourXP 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. According to a report by Oliver Wyman published in 2019, five banks, Itaú Unibanco, Bradesco, Banco do Brasil, Caixa Economica Federal and Santander, collectively accounted for 93% of the R$8.6 trillion in investment assets under custody. Given our leadership, scale, brand, and competitive advantages provided by ourXP 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 estimated to reach R$8.6 trillion in 2019, up 123% since 2011.

 

  

Continued Shift of AUC from Banks to Independent Investment FirmsAccording to the Oliver Wyman report, in September 2019 the market share of investment AUC for independent investment firms was estimated to grow from 7% in 2018 to 25% in 2024. However, these estimates may be affected by economic changes related to theCOVID-19 pandemic.

 

  

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.

 

  

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 was R$487 billion in revenues in 2018.

Our Competitive Strengths

Over the last 19 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 ourgo-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.



 

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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. TheXP 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 oflow-cost brokerage, investment advisory, and asset management services in Brazil, the largest independent investment platform and leading alternative to the banks;

 

  

Trusted BrandWe have built a valuable, trusted brand in Brazil and received an NPS of 71 in May 2020, 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 theXP 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 19 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.

 

  

Meritocratic Partnership Structure –We believe our partnership model is key to our long-term value creation. As of March 31, 2020, our partnership was made up of approximately 350 shareholders of XP Controle, our controlling shareholder, and who are mostly directors, officers and employees of the Company and/or its subsidiaries. In December 2019, we implemented 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



 

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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 ourXP Platform offering through the development of new investment productsin-house or through partners; (2) growing ourXP 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.

Recent Developments

Preliminary Estimated Results for Second Quarter 2020

The second quarter of 2020 has not ended yet and therefore our financial results for the three months ending June 30, 2020 are not yet finalized. The following information reflects our preliminary estimated results for this period:

Gross Revenue (in R$ million)

 

LOGO  Gross revenue for the three months ending June 30,
2020 is expected to be between R$1,850 million and
R$1,980 million, compared with R$1,236 million for
the same period of 2019, representing a period over
period expected growth of between 50% and 60%.

Adjusted Net Margin

 

LOGO  Adjusted Net Margin for the three months ending June 30, 2020 is expected to be between 24% and 28%, compared to 20% for the same period of 2019. Adjusted Net Margin is calculated by taking Adjusted Net Income divided by net revenue.


 

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Adjusted Net Income (in R$ million)

 

LOGO  Adjusted Net Income for the three months ending June 30, 2020 is expected to be between R$420 million and R$520 million compared to R$228 million for the same period of 2019.

Net Inflow (in R$ billion)

 

LOGO  Net inflow for June 2020 is expected to be between R$10.0 billion and R$12.0 billion compared to R$8.3 billion in May 2020 and R$6.9 billion in April 2020.

Reconciliation of Adjusted Net Income

 

   For the Three Months Ending June 30, 
   2020
(Estimated)
  2019
(Actual)
   Variation(%) 
   (R$ millions)     

Net Income

   391 - 491   228    72 - 115 

(+) Share-based Plan(1)

   47   —      n.m. 

(-/+) Taxes

   (19  —      n.m. 
  

 

 

  

 

 

   

 

 

 

Adjusted Net Income(2)

   420 - 520   228    84 - 128 
  

 

 

  

 

 

   

 

 

 

 

(1)

In December 2019, we implemented 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.”

(2)

For further information on why our management chooses to use thisnon-GAAP financial measure, and on the limits of using thisnon-GAAP financial measure, please see “Presentation of Financial and Other Information—Special Note RegardingNon-GAAP Financial Measures.”



 

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Cautionary Statement Regarding Preliminary Estimated Results

The preliminary estimated results for the three months ending June 30, 2020 are preliminary, unaudited and subject to completion. They reflect our management’s current views and may change as a result of our management’s review of results and other factors, including a wide variety of significant business, economic and competitive risks and uncertainties. Such preliminary results for the three months ending June 30, 2020 are subject to the finalization and closing of our accounting books and records (which have yet to be performed), and should not be viewed as a substitute for full quarterly financial statements prepared in accordance with IFRS. We caution you that these preliminary estimated results for the three months ending June 30, 2020 are not guarantees of future performance or outcomes and that actual results may differ materially from those described above. For more information regarding factors that could cause actual results to differ from those described above, please see “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements”. We do not undertake any obligation to update publicly or to revise any forward-looking statements because of new information, future events or other factors. You should read this information together with the sections included in this prospectus entitled “Selected Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our audited consolidated financial statements and unaudited interim condensed consolidated financial statements included elsewhere in this prospectus.

These preliminary estimated results assume that operations will continue through June 30, 2020 on a basis similar to the rest of the quarter with no significant unusual events in relation to exchange rates, interest rates, trading activities, security prices, legal and tax obligations and recovery of assets.

These preliminary estimated results have been prepared by, and is the responsibility of, XP Inc. management. PricewaterhouseCoopers Auditores Independentes has not audited, reviewed, compiled, or applied agreed-upon procedures with respect to the preliminary estimated financial results. Accordingly, PricewaterhouseCoopers Auditores Independentes does not express an opinion or any other form of assurance with respect thereto.

COVID-19 and Market Update

On June 23, 2020, we disclosed to the market our May 2020 KPIs and provided a business update amid theCOVID-19 pandemic. Driven by a R$32 billion market appreciation and R$15 billion net inflow, AUC reached R$412 billion on May 31, 2020, increasing 13% from R$366 billion on March 31, 2020 (R$409 billion on December 31, 2019). Active Clients totaled 2,222 thousand on May 31, 2020, increasing 9% from 2,039 thousand on March 31, 2020 (1,702 thousand on December 31, 2019). Our NPS was 71 in May 2020, compared to an NPS of 72 in March 2020. In May 2020, we reached 25% and 57% market share in retail equity custody and trading volume over the month of May, respectively. In the last quarter of 2019, we had an average of 1,121 thousand daily trades on our platform compared to an average of 1,744 thousand daily trades in the first quarter of 2020. This increase continued in April and May 2020, with an average of 2,550 thousand daily trades, or a 128% increase when compared to the last quarter of 2019.

As a result of theCOVID-19 pandemic, most of our workforce is working remotely from home and with increased levels of productivity. On June 11, 2020, based on detailed assessments of the well-being and performance of our workforce, management announced the permanent and company-wide adoption of the work-from-home model. Additionally, we announced our intention to establish new corporate headquarters outside the city of São Paulo (Villa XP), with an innovative architecture comprising workstations, meeting rooms and common areas. We believe that this new model can be transformational and enhance the productivity and quality of life of our employees, and we intend to announce further details about Villa XP in the coming months.



 

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Creation of ESG (Environmental, Social and Governance) Department

On June 12, 2020, we announced the creation of an ESG (Environmental, Social and Governance) department to focus onESG-related products, services, content and recommendations, in addition to further leveraging our internal standards and practices. We are aiming to lead discussions on ESG topics in the Brazilian financial markets, democratizing access to content and quality products to customers. Early initiatives include the production of exclusive content, analysis of platform assets, education of the partners’ network, adoption of governance best practices and developing partnerships with ESG initiatives, amongst others. In parallel, we will continue to expand internal activities related to diversity, inclusion and community support, in addition to environmental issues. In the coming months, we plan to build a strategic model to guide our next steps and implement initiatives related to ESG best practices at a global level.

Duagro Joint Venture

On June 23, 2020, we announced the launch of Duagro, a joint venture with VERT, the largest Brazilian securitization company focused on agribusiness. Duagro is our first initiative in the agribusiness sector and aims at accelerating the access of rural producers to credit lines through the capital markets. Through an automated process and the electronic issuance of receivables(e-CPR), Duagro will enable agricultural input financing for small and medium producers that face credit constraints due to banking concentration and focus on large producers.

Appointment of CEO of Banco XP S.A.

On June 15, 2020, we announced the hiring of José Berenguer to lead the expansion of our wholesale banking business. Mr. Berenguer will assume the position of CEO of Banco XP S.A. after a garden leave period and his main objective will be to expand our wholesale activities through the development of innovative products and services, with a focus on generating value through long-term and transparent relationships with customers.

Fliper Acquisition

On June 8, 2020, we announced the acquisition of a majority ownership stake in Carteira Online Controle de Investimentos Ltda., or Fliper, an automated investment consolidation platform that offers its users connectivity and tools to perform intuitive and intelligent financial self-management. When completed, this transaction will allow us to offer customers additional resources to manage their investments. The acquisition value of Fliper is not material based on the financial statements of the company taken as a whole and the consummation of the acquisition is pending the approval of the Central Bank.

DM 10 Acquisition

On June 10, 2020, we announced the acquisition of DM10 Corretora de Seguros e Assessoria Ltda., or DM10, a marketplace that connects hundreds of independent distributors with a curated selection of life insurance and pension plan products, adding value through technology and education. When completed, this transaction will enhance our distribution network in the insurance segment. The acquisition value of DM 10 is not material based on the financial statements of the company taken as a whole and the consummation of the acquisition is pending the approval of the Central Bank.

Our Corporate Structure

We are a Cayman Islands exempted company incorporated with limited liability on August 29, 2019. Our legal and commercial name is XP Inc. Our group is currently composed of 29 entities, 20 of which are incorporated in Brazil and 9 of which are incorporated in other countries. Our material operating subsidiaries are:



 

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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, R$14,050 million (representing 73.5% of our combined assets) as of December 31, 2018, R$29,316 million (representing 60.9% of our combined assets) as of December 31, 2019 and R$39,025 million (representing 64.0% of our combined assets) as of March 31, 2020. XP CCTVM recorded total revenue and income of R$1,380 million during 2017 (representing 72.4% of our consolidated total revenue and income), R$1,967 million during 2018 (representing 66.5% of our consolidated total revenue and income), R$3,322 million during 2019 (representing 74.3% of our consolidated total revenue and income) and R$1,202 million for the period ended March 31, 2020 (representing 83.0% 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, R$146 million (representing 0.3% of our combined assets) as of December 31, 2019 and R$24,6 million (representing 0.04% of our combined assets) as of March 31, 2020.XP Gestão recorded total revenue and income of R$70 million during 2017 (representing 3.7% of our consolidated total revenue and income), R$71 million during 2018 (representing 2.4% of our consolidated total revenue and income), R$175 million during 2019 (representing 3.9% of our consolidated total revenue and income) and R$25 million for the period ended March 31, 2020 (representing 1.7% 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 ourhigh-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, R$19 million (representing 0.1% of our combined assets) as of December 31, 2018 and R$18 million (representing 0.1% of our combined assets) as of December 31, 2019 and March 31, 2020 XP Advisory recorded total revenue and income of R$11 million during 2017 (representing 0.6% of our consolidated total revenue and income), R$21 million during 2018 (representing 0.7% of our consolidated total revenue and income), R$35 million during 2019 (representing 0.8% of our consolidated total revenue and income) and R$11.5 million for the period ended March 31, 2020 (representing 0.8% of our consolidated total revenue and income).

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, R$41 million (representing 0.1% of our combined assets) as of December 31, 2019 and R$31 million (representing 0.03% of our combined assets) as of March 31, 2020. XP Vista recorded total revenue and income of R$20 million during 2018 (representing 0.7% of our consolidated total revenue and income) and R$93 million during 2019 (representing 2.1% of our consolidated total revenue and income) and R$27 million for the period ended March 31, 2020 (representing 1.9% of our consolidated total revenue and income).



 

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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, R$48 million (representing 0.2% of our combined assets) as of December 31, 2018, R$127 million (representing 0.3% of our combined assets) as of December 31, 2019 and R$130 million (representing 0.2% of our combined assets) as of March 31, 2020. XP Seguros recorded total revenue and income of R$27 million during 2017 (representing 1.4% of our consolidated total revenue and income), R$61 million during 2018 (representing 2.1% of our consolidated total revenue and income), R$130 million during 2019 (representing 2.9% of our consolidated total revenue and income) and R$29 million for the period ended March 31, 2020 (representing 2.0% 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, R$253 million (representing 1.3% of our combined assets) as of December 31, 2018, R$407 million (representing 0.8% of our combined assets) as of December 31, 2019 and R$638 million (representing 1.0% of our combined assets) as of March 31, 2020. XP Investments recorded total revenue and income of R$132 million during 2017 (representing 6.9% of our consolidated total revenue and income), R$206 million during 2018 (representing 7.0% of our consolidated total revenue and income), R$302 million during 2019 (representing 6.7% of our consolidated total revenue and income) and R$90 million for the period ended March 31, 2020 (representing 6.2% 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 Educação 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, R$117 million (representing 0.2% of our combined assets) as of December 31, 2019 and R$121 million (representing 0.2% of our combined assets) as of March 31, 2020. XP Educação recorded total revenue and income of R$10 million during 2017 (representing 0.5% of our consolidated total revenue and income), R$57 million during 2018 (representing 1.9% of our consolidated total revenue and income), R$112 million during 2019 (representing 2.5% of our consolidated total revenue and income) and R$22 million for the period ended March 31, 2020 (representing 1.5% of our consolidated total revenue and income).

XP Vida e Previdência S.A., or XP VP

XP VP was founded in 2017 as a life insurance and private pension plans provider in Brazil. On September 5, 2018, the Superintendency of Private Insurance (Superintendência de Seguros Privados), or SUSEP, granted it the authorization to operate as an insurance company in Brazil, and it became operational in April 2019. XP VP had assets of R$3,856 million (representing 8% of our combined assets) as of December 31, 2019 and R$5,210 million (representing 8.5% of our combined assets) as of March 31, 2020. XP VP recorded total revenue and income of R$2 million during 2019 (representing 0.05% of our consolidated total revenue and income) and R$2.7 million for the period ended March 31, 2020 (representing 0.2% of our consolidated total revenue and income).



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Banco XP S.A., or Banco XP

Banco XP was founded in 2019 as a financial institution in Brazil. 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 market. Banco XP had assets of R$134 million (representing 0.3% of our combined assets) as of December 31, 2019 and R$494 million (representing 0.8% of our combined assets) as of March 31, 2020.

The following chart shows our corporate structure as of the date hereof:

 

 

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.

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.



 

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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.

 

  

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.

 

  

TheCOVID-19 pandemic has had, and is expected to continue to have a negative impact on global, regional and national economies, and we would be materially adversely affected by a protracted economic downturn.

Risks Relating to the Offering and our Class A Common Shares

 

  

An active trading market for our common shares may not be sustainable. If an active trading market is not maintained, investors may not be able to resell their shares at or above offering price and our ability to raise capital in the future may be impaired.

 

  

XP Controle will own 63.60% of our outstanding Class B common shares after this offering, which will represent approximately 53.57% of the voting power of our issued share capital, and, subject to the provisions of the Shareholders’ Agreement, will continue to 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 are not 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.



 

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Corporate Information

Our principal executive offices are located at Av. Chedid Jafet, 75, Torre Sul, 30th floor, Vila Olímpia – São Paulo, Brazil04551-065. 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.xpinc.com. 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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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 and GA Bermuda.

 

Class A common shares offered by the selling shareholders

19,535,420 Class A common shares (or 22,465,733 Class A common shares if the underwriters exercise in full their option to purchase additional shares).

 

Offering price

US$                 per Class A common share.

 

Voting rights

The Class A common shares are entitled to one vote per share, whereas the Class B common shares (which are not being sold in this offering) are 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 November 30, 2019, or the Memorandum and 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 15.8% of the combined voting power of our outstanding common shares and approximately 65.2% of our total equity ownership and (2) holders of Class B common shares will hold approximately 84.2% of the combined voting power of our outstanding common shares and approximately 34.8% of our total equity ownership.


 

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 If the underwriters exercise their option to purchase additional shares in full, (1) holders of Class A common shares will hold approximately 15.9% of the combined voting power of our outstanding common shares and approximately 65.3% of our total equity ownership and (2) holders of Class B common shares will hold approximately 84.1% of the combined voting power of our outstanding common shares and approximately 34.7% 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 and voting 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 2,930,313 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

Our Class A common shares are listed on the Nasdaq under the symbol “XP.”

 

Use of proceeds

We will not receive any proceeds from the sale of Class A common shares by the selling shareholders. See “Use of Proceeds.”

 

Share capital before and after offering

As of the date of this prospectus, our authorized share capital is US$35,000, consisting of 3,500,000,000 shares of par value US$0.00001. Of those authorized shares, (1) 2,000,000,000 are designated as Class A common shares; (2) 1,000,000,000 are designated as Class B common shares; and (3) 500,000,000 are as yet undesignated and may be issued as common shares or shares with preferred rights.

 

 

Immediately after this offering, we will have 359,681,346 Class A common shares and 192,118,980 Class B common shares outstanding,



 

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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 the90-day period following the date of this prospectus. Members of our board of directors and our executive officers and the selling shareholders have agreed to substantially similarlock-up provisions, subject to certain exceptions. See “Underwriting (Conflicts of Interest).”

 

Conflicts of Interest

As described in “ Underwriting (Conflicts of Interest),” our affiliate, XP Investments, is participating as an agent in 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 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 its affiliates. 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 because the securities offered have a bona fide public market, as defined in Rule 5121. Any underwriter or agent 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



 

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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 Memorandum and 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 actbona fide in the best interests of the Company. In comparison, under the 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 prohibitself-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 otherwise indicated, all information contained in this prospectus assumes no exercise of the option granted to the underwriters to purchase up to additional 2,930,313 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 551,800,326 common shares outstanding as of March 31, 2020 and excludes Class A common shares that may be issued under our Long-Term Incentive Plan. See “Management—Long-Term Incentive Plan.”

When XP Controle consummates 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 XP Controle 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 March 31, 2020 and the interim statements of income for the three months ended March 31, 2020 and 2019 have been derived from our unaudited interim condensed consolidated financial statements 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, 2019 and 2018 and the statements of income for the years ended December 31, 2019, 2018 and 2017 have been derived from our audited consolidated financial statements included elsewhere in this prospectus, prepared in accordance with the International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. 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 our consolidated financial statements included elsewhere in this prospectus. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results of operations that may be expected for the entire year ending December 31, 2020. 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 Three Months Ended
March 31,
  For the Year Ended
December 31,
 
   2020  2020  2019  2019  2019  2018  2017 
   (US$)(1)  (R$)  (US$)(1)  (R$) 
   (in millions, except amounts per share) 

Gross revenue and income(2)

   357   1,856   1,006   1,061   5,518   3,216   2,065 

Sales taxes(3)

   (23  (121  (72  (75  (390  (258  (158
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue and income

   334   1,735   934   986   5,128   2,958   1,907 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating costs and expenses

        

Operating costs

   (111  (579  (308  (309  (1,606  (941  (580

Selling expenses

   (5  (28  (25  (30  (155  (96  (33

Administrative expenses

   (111  (578  (368  (364  (1,891  (1,177  (650

Other operating expenses, net

   (3  (14  85   29   153   (31  (8

Interest expense on debt

   (4  (19  (15  (16  (84  (72  (61
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income before income tax

   99   517   303   297   1,544   641   576 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income tax expense

   (23  (119  (93  (87  (455  (175  (152
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income for the period / year

   76   398   210   210   1,089   465   424 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income attributable to:

        

Owners of the Parent company

   76   397   209   208   1,080   461   414 

Non-controlling interest

   0   1   1   2   9   4   10 

Basic earnings per share(4)

   0.1383   0.7192   0.4108   0.4064   2.1125   0.9358   0.8535 

Diluted earnings per share(4)

   0.1373   0.7139   0.4108   0.4062   2.1115   0.9358   0.8535 

 

(1)

For convenience purposes only, amounts inreais for the three months ended March 31, 2020 and for the year ended December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$5.1987 to



 

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 US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 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)

The basic and diluted earnings per share have been retroactively adjusted to give effect to reverse share split which occurred on November 30, 2019.

Balance Sheet Data

 

   As of March 31,   As of December 31, 
       2020           2020       2019   2019   2018 
   (US$)(1)   (R$)   (US$)(1)   (R$) 
   (in millions) 

Assets

  

Cash

   48    250    21    110    68 

Securities purchased under agreements to resell

   2,869    14,917    1,825    9,490    6,571 

Securities trading and intermediation

   195    1,016    97    505    898 

Other securities and derivative financial instruments(2)

   7,650    39,771    6,042    31,411    8,834 

Property and equipment

   30    155    27    142    99 

Intangible assets

   108    560    106    553    505 

Other assets(3)

   265    1,379    271    1,410    749 

Total assets

   11,165    58,046    8,391    43,623    17,724 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

  

Securities sold under repurchase agreements

   4,061    21,111    3,008    15,638    6,641 

Securities trading and intermediation

   2,565    13,334    1,753    9,115    5,307 

Securities loaned and derivative financial instruments(4)

   1,586    8,247    1,010    5,251    2,251 

Borrowings, lease liabilities, and debentures(5)

   286    1,489    283    1,472    876 

Private pension liabilities

   992    5,155    723    3,759    16 

Other liabilities(6)

   212    1,103    237    1,231    542 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

   9,702    50,439    7,015    36,467    15,633 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

   1,463    7,607    1,376    7,156    2,092 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   11,165    58,046    8,391    43,623    17,724 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

For convenience purposes only, amounts inreais as of March 31, 2020 and December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$5.1987 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 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) 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.



 

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(3)

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

(4)

The sum of (i) Fair value through profit or loss – Securities; and (ii) Derivative financial instruments.

(5)

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

(6)

The sum of (i) Accounts payable; (ii) Structured operations certificates (iii) Other financial liabilities; (iv) Social and statutory obligations; (v) Taxes and social security obligations; (vi) Provisions and contingent liabilities; (vii) Other liabilities; and (viii) 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 arenon-GAAP financial measures. Anon-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 thesenon-GAAP financial measures, and on the limits of using thesenon-GAAP financial measures, please see “Presentation of Financial and Other Information—Special Note RegardingNon-GAAP Financial Measures.”

Floating Balance

 

   As of March 31,  As of December 31, 
       2020          2020      2019  2019  2018 
   (US$)(1)  (R$)  (US$)(1)  (R$) 
   (in millions) 

(+) Securities trading and intermediation (Liabilities)

   2,565   13,334   1,753   9,115   5,307 

(-) Securities trading and intermediation (Assets)

   (195  (1,016  (97  (505  (898
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Floating Balance

   2,369   12,318   1,656   8,610   4,408 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

For convenience purposes only, amounts inreais as of March 31, 2020 and December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$5.1987 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 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 Three Months Ended
March 31,
   For the Year Ended
December 31,
 
   2020      2020       2019  2019  2018 
   (US$)(1)  (R$)   (US$)(1)  (R$) 
   (in millions) 

Cash and Financial Assets

       

(+) Cash

   48   250    21   110   68 

(+) Securities – Fair value through profit or loss

   4,827   25,092    4,317   22,443   6,291 

(+) Securities – Fair value through other comprehensive income

   942   4,896    503   2,616   696 

(+) Securities – Evaluated at amortized cost

   244   1,268    436   2,267   155 

(+) Derivative financial instruments (Assets)

   1,638   8,515    786   4,085   1,692 

(+) Securities purchased under agreements to resell

   2,869   14,917    1,825   9,490   6,571 

Financial Liabilities

       

(-) Securities loaned

   (139  (721   (389  (2,022  (1,260

(-) Derivative financial instruments

   (1,448  (7,526   (621  (3,229  (991

(-) Securities sold under repurchase agreements

   (4,061  (21,111   (3,008  (15,638  (6,641

(-) Private pension liabilities(2)

   (992  (5,155   (723  (3,759  (16

Subtotal

   3,929   20,424    3,148   16,363   6,565 

(-) Floating Balance

   (2,369  (12,318   (1,656  (8,610  (4,408
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Adjusted Gross Financial Assets

   1,559   8,106    1,491   7,753   2,157 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

 

(1)

For convenience purposes only, amounts inreais as of March 31, 2020 and December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$5.1987 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 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 Three Months Ended
March 31,
  For the Year Ended
December 31,
 
   2020  2020  2019  2019  2019  2018  2017 
   (US$)(1)  (R$)  (US$)(1)  (R$) 
   (in millions) 

Net Income

   76   398   210   210   1,089   465   424 

(+) Income Tax

   23   119   93   87   455   175   152 

(+) Depreciation and Amortization

   6   32   15   18   91   53   27 

(+) Interest Expense on Debt

   4   19   15   16   84   72   61 

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

   (14  (72  (31  (29  (150  (104  (99
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted EBITDA

   95   495   303   302   1,569   662   565 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

For convenience purposes only, amounts inreais for the three months ended March 31, 2020 and for the year ended December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$5.1987 to



 

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 US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 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 Three Months Ended
March 31,
  For the Year Ended
December 31,
 
   2020  2020  2019  2019  2019  2018  2017 
   (US$)(1)  (R$)  (US$)(1)  (R$) 
   (in millions) 

Net Income

   76   398   210   210   1,089   465   424 

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

   —     —     —      —     39   6 

(+) Share-based Plan(3)

   5   28   —     2   8   —     —   

(+) IPO expenses(4)

   —     —     —     4   22   —     —   

(-)One-time tax claim recognition (2010-2018)(5)

   —     —     (71  (14  (71  —     —   

(-/+) Taxes

   (2  (11  28   7   25   (13  (2
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted Net Income

   80   415   168   207   1,074   491   428 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

For convenience purposes only, amounts inreais for the three months ended March 31, 2020 and for the year ended December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$5.1987 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 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)

In December 2019, we implemented 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.”

(4)

Expenses of R$22 million in 2019 related to the IPO. We incurred in a total amount of R$44 million regarding other offering expenses out of, which R$22 million was recognized directly in income statement and the amount of R$22 million in equity as transaction cost in our consolidated financial statements, included elsewhere in this prospectus.

(5)

Income of R$71 million in 2019 related to the recognition of PIS/COFINS credits.



 

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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 fromnon-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. 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. In addition, increased market volatility may result in unexpected losses in equities, derivatives and other products which may lead to questions regarding the accuracy of our suitability procedures and our advisory services. 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, this could adversely affect our reputation and the confidence in and use of our products and services, and we could lose existing clients and find it harder to attract new clients and partners. If we are unable to scale our support functions and our suitability procedures to address the growth of our client and partner network, the quality of our products and services 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,

 

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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. The realization of these risks may be heightened during periods of increased market volatility which may result in unexpected losses in the products provided to our retail clients.

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 atransaction-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. Increased market volatility and market declines can cause our key dealer clients to experience reduced liquidity or to decrease their use of our platform. 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, including increased market volatility, 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.

 

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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.

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 May 31, 2020, XP CCTVM had approximately 7,000 individual IFAs organized into approximately 680 IFA entities, which were responsible for serving approximately 25% of XP CCTVM’s active clients. In addition, XP CCTVM’s 20 largest IFA entities comprised 2,092 individual IFAs and were responsible for serving approximately 7% 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 in case of a collective lawsuit).

 

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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.

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 for a number of reasons, including the overall market declines and increased volatility due to theCOVID-19 pandemic, could hinder our growth and reduce our revenues because (1) existing clients might withdraw funds in favor of better performing products or fixed income products, such as government debt, 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 certainnon-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.

 

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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.

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.

As of the date of this prospectus, Law No. 13,709/2018 (Lei Geral de Proteção de Dados), or the LGPD, is scheduled to come into effect on May 3, 2021 pursuant to provisional measure No. 959/2020, the approval of which remains pending by the Brazilian Congress in order to become a definitive federal law. If that provisional measure is not approved by the Brazilian Congress, then the LGPD will come into effect is August 2020, as originally expected. However, the administrative sanctions provisions of LGPD would only become enforceable as of August 1, 2021, pursuant to Law No. 14,010/2020. Once the administrative sanctions of the LGPD become enforceable, 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) aone-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. The postponement of the administrative sanctions does not prevent the competent authorities to begin supervision procedures and enactment of additional rules to be complied with prior to such effectiveness date, nor does it prevent individual or collective lawsuits based on violation of data subject’s rights and subject to civil liability.

Further, as a result of theCOVID-19 pandemic, we have rapidly increased the number of employees working remotely. This may cause increases in the unavailability of our systems and infrastructure, interruption

 

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of telecommunication services, generalized system failures and heightened vulnerability to cyberattacks. Accordingly, our ability to conduct our business may be adversely impacted.

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 suitability, risk management and business continuity policies and 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, for example as a result of overall market declines and increased market volatility due to theCOVID-19 pandemic, 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.

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.

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,

 

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heavy stress placed on our systems during peak trading times could cause our systems to operate at unacceptably low speeds or fail altogether, such as in periods of increased market volatility. 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 or increased settlement disbursements. 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, epidemics or pandemics such asCOVID-19, 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 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.

 

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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 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;

 

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loss of licenses or authorizations with the CVM, the Central Bank, 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 tonon-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 theout-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 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 Dias Fernandes 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

 

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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, in particular in the current context of theCOVID-19 pandemic;

 

  

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, including poor performance of investment portfolios as a result of strategies or other trading actions;

 

  

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, for example as a result of the impact of overall market declines and increased market volatility due to theCOVID-19 pandemic on our equity and equity funds’ position and on the fair value of our AUC, which could lead to reduced demand for the asset class. 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 three months ended March 31, 2020, the net revenue of XP CCTVM represented approximately

 

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69% of our total consolidated net revenue for such period. For the years ended December 31, 2019, 2018 and 2017, the average net revenue of XP CCTVM represented approximately 67% 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 fluctuations will affect the U.S. dollar value of any distributions our subsidiaries make with respect to our equity interests in those subsidiaries.

On May 29, 2020, in response to the ongoing uncertainty relating to the economic effects of theCOVID-19 pandemic, the Central Bank issued CMN Resolution No. 4,820/2020, or CMN Resolution No. 4,820. CMN Resolution No. 4,820 prohibits financial institutions and other institutions authorized to operate by the Central Bank, including XP CCTVM and Banco XP, to, until December 31, 2020, make dividend distributions beyond the minimum legal requirement or the minimum threshold established in such institutions’ bylaws. Under CMN Resolution No. 4,820, the anticipated distribution of profits relating to 2020 must be made in a conservative, consistent and manner compatible with the uncertainties of the current economic scenario. CMN Resolution No. 4,820 also temporarily prohibits financial institutions from making other related payments, pay interest on equity, effect stock repurchases, and, as a general rule, effect capital stock reductions.

For further information, 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,” “—Risks Relating to Brazil—Economic uncertainty and political instability in Brazil may harm us and the price of our Class A common shares” and “Dividends and Dividend Policy.”

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 innon-Brazilianrealcurrencies, and will continue to do so in the future, and our offshore operating subsidiaries generate revenue innon-Brazilianreal currencies. Accordingly, our financial results are affected by the translation of these non-realcurrencies intoreais. In addition, to the extent that we need to convert future financing proceeds into Brazilianreais for our operations, any appreciation of the Brazilianreal against the relevant foreign currencies would materially reduce the Brazilianreal amounts we would receive from the conversion, and any depreciation of the Brazilianreal against the relevant foreign currencies could increase the amounts in Brazilianreais 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

 

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liabilities denominated in currencies, or with pricing linked to currencies, other than our functional currency, including certain contract assets. Fluctuations in the Brazilianreal versus any of these foreign currencies may have a material adverse effect on our financial position and results of operations, for example as a result of overall market declines and increased market volatility due to theCOVID-19 pandemic.

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 or increased volatility, such as due to theCOVID-19 pandemic. 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.

The material weaknesses identified relate to our insufficient 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 managing access to our systems, data andend-user computing (EUC) controls; and

 

  

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.

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 includes the implementation of new processes and procedures, including additional levels of review to improve our internal controls procedures, implementation of new software solutions, additional training for our staff and enhanced our documentation. Other additional measures are already being adopted in connection with the project preparing the company for the upcoming reporting under Section 404 of the Sarbanes-Oxley Act in 2020. Some

 

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of these measures have already been implemented and we will be working on implementing the remaining measures during 2020. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control.” However, we cannot assure you that our efforts will be effective or prevent any future material weakness or significant deficiency in our internal controls over financial reporting.

In connection with the preparation of our unaudited interim condensed consolidated financial statements for the three months ended March 31, 2020, we did not identify any additional material weaknesses in our internal control over financial reporting.

We are subject to theSarbanes-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 are 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 has revealed, and may in the future 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 additional 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, as well as result in litigation.

In addition, these obligations also require substantial attention from our senior management and could divert their attention away from theday-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.

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

We are 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 are 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 obligations also require substantial attention from our senior management and could divert their attention away from theday-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.

 

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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 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 Regulatory 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.

 

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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 theout-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 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. 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) aone-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.

The obligations established by the LGPD would initially become effective in August 2020 (24 months from the date of its publication in August 2018), by which date all legal entities would be required to adapt their data processing activities to these new rules. However, due to the recent developments regarding theCOVID-19 pandemic, the President of Brazil has issued provisional measure No. 959/2020 which postpones the effectiveness of the LGPD. As a result, the LGPD will only become effective on May 3, 2021. This provisional

 

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measure is effective for 60 days, extendable for an additional period of a single equal term. In order to become effective after such term, the provisional measure must be approved by the Brazilian Congress.

In the meantime, the President recently sanctioned Bill No. 1,179/2020, converted into Law No. 14,010/20, to implement the emergency and transitory legal regime applicable in Brazil during theCOVID-19 pandemic. Among other matters indicated in such law, the enforceability of administrative sanctions (including fines) to companies that fail to comply LGPD rules was postponed to August 1, 2021.

Although the provisional measure No. 959/2020 is yet to be approved by the Brazilian congress and subject to the necessary legislative proceedings to be converted into law, we must stress that compliance with the LGPD will be required immediately once it becomes effective, and even though the enforceability of administrative fines and sanctions was postponed to August 1, 2021 by Law No. 14,010/20, it does not prevent other means of enforcing the LGPD, as data subjects, the public prosecutor’s offices and private associations, for example, will still be able to file lawsuits in courts to enforce the provisions of the LGPD and seek redress. Moreover, the fact that the administrative sanctions of the LGPD will become enforceable only in August 2021 does not preclude the enforcement of administrative sanctions set forth in other laws dealing with privacy and data protection matters, such as the consumer protection code and the Brazilian Internet Law (Marco Civil da Internet). These administrative sanctions could be enforced by other public authorities, such as the public prosecutor’s offices and consumer protection agencies.

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. As of the date of this prospectus, the LGPD is likely to come into effect on May 3, 2021 pursuant to provisional measure No. 959/2020, the approval of which remains pending by the Brazilian Congress in order to become a definitive federal law. If that provisional measure is not approved by the Brazilian Congress, then the LGPD will come into effect is August 2020, as originally expected. However, the administrative sanctions provisions of LGPD would only become enforceable as of August 1, 2021, pursuant to Law No. 14,010/2020.

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.

 

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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 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, Portugal 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, as of January 2019, the corporate income taxes, or IRPJ/CSLL, aggregate rate applicable to XP CCTVM was reduced from 45% to 40% on net profits. The aggregate income tax rate applied to financial institutions in Brazil (more specifically, to banks of any nature, which does not include XP CCTVM) was increased to 45% as of March 1, 2020. 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

 

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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 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. In June 2020, the ADI was included in the judgment agenda of Supreme Court but, as of the date of this prospectus, a final decision on this matter is currently pending.

On February 18, 2020, it was announced that the Cayman Islands has been placed on the list ofnon-cooperative jurisdictions published by the European Council of the European Union, or EU, for tax purposes. The Cayman Islands government issued a press release on February 18, 2020 affirming that the jurisdiction introduced appropriate legislative changes on February 7, 2020 relating to the EU’s criteria, but that the listing appears to stem from such legislation not being enacted by February 4, 2020, which was the date of the EU’s Code of Conduct Group meeting to advise the EU Finance Ministers prior to the Finance Ministers’ decision regarding the listing on February 18, 2020. The Cayman Islands government press release states that the Cayman Islands government remains fully committed to cooperating with the EU, and will continue to constructively engage with them with the view for the Cayman Islands to be delisted as soon as possible, but there can be no assurance that the Cayman Islands will be removed from such list. The EU has encouraged its members to apply certain measures on transactions with jurisdictions on the list ofnon-cooperative jurisdictions from January 1, 2021, including, among other things, limiting certain tax deductions on payments to entities innon-cooperative jurisdictions and imposing withholding taxes on payments. We have businesses located in, and that do business in, European markets. It is unclear as to whether the Cayman Islands being placed on such list will have a significant, or any, effect on us. As each EU member state may implement its own laws and regulations in connection with the listing, the tax and other implications to us and our shareholders may differ on acountry-by-country andinvestor-by-investor basis. Any reputational harm associated with us having a Cayman Islands holding company structure could potentially have an adverse impact on our business, financial condition and results of operations if that status continues for an extended period of time.

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.

 

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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, investors, 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. Also, we currently are, and may in the future be, party to one or more securities class actions regarding our registration statement on FormF-1 in connection with our initial public offering and other related reports. 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 andknow-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. 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

 

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the past. Also, we currently are, and may in the future be, party to one or more 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 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

 

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be certain that our programmers have not incorporated open source software licensed under copyleft license or similar provisions 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, XP Vista in 2018, and Fliper, DM10 and a joint-venture with VERT, creating Duagro, all in June 2020. 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 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 regulatory approvals from 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

 

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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. As of the date of this prospectus, there were no indicators of a potencial impairment in our intangible assets.

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 conducting our initial public 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 orup-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 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

 

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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.

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.

 

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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;

 

  

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

 

  

there may be changes in our clients’ preferences towards low risk investments within traditional banks due to market declines and increased volatility caused by theCOVID-19 pandemic, which could decrease our net inflows from both new and existing clients.

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 March 31, 2020, our balance sheet includes intangible assets that amount to R$560 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.

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

 

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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;

 

  

public health crises, such as the ongoingCOVID-19 pandemic;

 

  

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.

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

 

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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. In addition, the Brazilian Supreme Court is currently investigating Brazil’s current President in connection with allegations made by the former Minister of Justice. 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 or will result in additional investigations.

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 4.3%, 3.7% and 2.9% as of December 31, 2019, 2018 and 2017, 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 4.50% 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 4.50% on December 12, 2019. On February 5, 2020, the COPOM reduced the SELIC rate to 4.25% and further reduced the rate to 3.75% on March 18, 2020, to 3.00% on June 5, 2020 and to 2.25% on June 17, 2020. As of the date of this prospectus, the SELIC rate is 2.25%. 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 various exchange rate policies, including sudden devaluations, periodicmini-devaluations (during which the

 

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frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system. Althoughlong-term depreciation of thereal is generally linked to the rate of inflation in Brazil, depreciation of thereal occurring over shorter periods of time has resulted in significant variations in the exchange rate between thereal, the U.S. dollar and other currencies. Thereal depreciated against the U.S. dollar by 32.0% atyear-end 2015 as compared toyear-end 2014, and by 11.8% atyear-end 2014 as compared toyear-end 2013. Thereal/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 thereal against the U.S. dollar during 2016. Thereal/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 thereal 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 thereal against the U.S. dollar during 2018. The real/U.S. dollar exchange rate reported by the Central Bank was R$4.0307 per US$1.00 on December 31, 2019, which reflected a 4.0% depreciation in the real against the U.S. dollar during 2019. The real/U.S. dollar exchange rate reported by the Central Bank was R$5.1987 per US$1.00 on March 31, 2020, which reflected a 29.0% depreciation in the real against the U.S. dollar during the first quarter of 2020. As of June 26, 2020, the exchange rate for the purchase of U.S. dollars as reported by the Central Bank was R$5.4629 per US$1.00.

A devaluation of thereal 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 thereal 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 thereal 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 thereal 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, a growth of 1.1% in 2018 and a growth of 1.1% in 2019. 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. Additionally, despite the business continuity and crisis management policies currently in place, travel restrictions or potential impacts on personnel due to theCOVID-19 pandemic may disrupt our business, our IFAs and the expansion of our client base. 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.

 

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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 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 had a referendum in which the majority voted 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 United Kingdom formally left the European Union on January 31, 2020, at which point a transition period began. The United Kingdom is expected to continue to follow certain European Union rules during the transition period; however, the ongoing process of negotiations between the United Kingdom and the European Union will determine the future terms of the United Kingdom’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 United Kingdom’s exit from European Union 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 forms of political instability arising therefrom or any other as of yet unforeseen development, may harm our business and the price of our Class A common shares.

TheCOVID-19 pandemic has had, and is expected to continue to have a negative impact on global, regional and national economies, and we would be materially adversely affected by a protracted economic downturn.

TheCOVID-19 pandemic has had, and is expected to continue to have a negative impact on global, regional and national economies and to disrupt supply chains and otherwise reduce international trade and business activity. Reflecting this, theCOVID-19 pandemic caused levels of equity and other financial markets to decline sharply and to become more volatile since February 2020, and such effects may continue or worsen in the future. This may in turn lead to changes in fair value of assets and liabilities that are recognized in our income statement. The economic slowdown and market downturn could also negatively impact specific portfolios through negative ratings migration and higher than expected losses, potentially leading clients to redirect investments away from us and to more traditional financial institutions, as well as reduced management fees from our asset management businesses, which are required to meet certain criteria to earn performance fees.

The market declines and volatility could negatively impact the value of such financial instruments causing us to incur losses as well as result in the postponement or cancellation of several public offering and mergers and acquisitions thereby reducing our issuer services advisory fees, among others. The currentCOVID-19 pandemic and its potential impact on the global economy may affect our ability to meet our financial targets. While it is too early for us to predict the impacts on our business or our financial targets that the expanding pandemic, and the governmental responses to it, may have, we would be materially adversely affected by a protracted downturn in local, regional or global economic conditions.

 

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

We 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 rating in September 2015. Subsequently, the three major rating agencies downgraded Brazil’sinvestment-grade status:

 

  

In 2015, Standard & Poor’s initially downgraded Brazil’s credit rating fromBBB-negative toBB-positive and subsequently downgraded it again fromBB-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 toBB-negative, and on December 11, 2019, the agency affirmed the rating atBB- and revised the outlook on Brazil to positive. In the last update, on April 7, 2020, the rating was reaffirmed asBB- with stable outlook, reflecting uncertainties stemming from the coronavirus pandemic, along with how extraordinary government spending will adversely affect the fiscal performance in 2020.

 

  

In December 2015, Moody’s placed Brazil’s Baa3’s issue and bond ratings under review for downgrade and subsequently downgraded the issue and bond ratings 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. On April 9, 2018, Moody’s revised the outlook to stable, reaffirming the Ba2 rating.

 

  

Fitch downgraded Brazil’s sovereign credit rating toBB-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 toBB-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 credit ratings could heighten investors’ perception of risk and, as a result, cause the trading price of our Class A common shares to decline.

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

An active trading market for our common shares may not be sustainable. If an active trading market is not maintained, investors may not be able to resell their shares at or above offering price and our ability to raise capital in the future may be impaired.

Although our Class A common shares are listed and traded on Nasdaq, an active trading market for our shares may not be maintained. If an active market for our Class A common shares is not maintained, it may be difficult for you to sell shares you have purchased without depressing the market price for the shares or at all. An active trading market may also impair our ability to raise capital to acquire other companies or technologies by using our shares as consideration.

 

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XP Controle will own 63.60% of our outstanding Class B common shares after this offering, which will represent approximately 53.57% of the voting power of our issued share capital, and, subject to the provisions of the Shareholders’ Agreement, will continue to control all matters requiring shareholder approval. This concentration of ownership and voting power limits your ability to influence corporate matters.

XP Controle will continue to control our Company and will not hold any of our Class A common shares, but will beneficially own 22.14% of our issued share capital after this offering (or 21.99% if the underwriters’ option to purchase additional Class A common shares is exercised in full) through its beneficial ownership of 63.60% of our outstanding Class B common shares, respectively, and consequently, 53.57% of the combined voting power of our issued share capital (or 53.38% 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 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, subject to the provisions of the Shareholders’ Agreement, controls the outcome of all decisions at our shareholders’ meetings, and is able to elect a majority of the members of our board of directors. XP Controle is also 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, sellrevenue-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 are, 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 Shareholders and Selling Shareholders.” In addition, for so long as they beneficially own more thantwo-thirds of our issued share capital, XP Controle will also have the ability to unilaterally amend XP’s Memorandum and Articles of Association, which may be amended only by special resolution of shareholders (requiring atwo-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 Memorandum and 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 22.14%, 46.05% and 11.30% of our outstanding shares, respectively, immediately after this offering, assuming no exercise of the underwriters’ option to purchase additional shares. 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.

 

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Following the completion of this offering, we will have 359,681,346 Class A common shares and 192,118,980 Class B common shares outstanding (or 360,506,346 Class A common shares and 191,293,980 Class B common shares outstanding, if the underwriters exercise in full their option to purchase additional shares). Subject to thelock-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 thelock-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.

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 the90-day period following the date of this prospectus. Our directors, executive officers and the selling shareholders have agreed to substantially similarlock-up provisions. However, XP Investimentos Corretora de Câmbio, Títulos e Valores Mobiliários S.A., Morgan Stanley & Co. LLC, Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC, or the Lead Global Coordinators, may, in their sole discretion and without notice, release all or any portion of the shares from the restrictions in any of thelock-up agreements described above. In addition, theselock-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 thelock-up agreements, the perception that such sales may occur, or early release of theselock-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 Memorandum and Articles of Association and the Shareholders’ Agreement containanti-takeover provisions that may discourage athird-party from acquiring us and adversely affect the rights of holders of our Class A common shares.

Our Memorandum and Articles of Association, and the Shareholders’ Agreement 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 depends in part on the research and reports that securities or industry analysts publish about us or our business. 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.

 

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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. 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 “—Certain Risks Relating to Our Business and Industry—Our holding company structure makes us dependent on the operations of our subsidiaries,” “Dividends and Dividend Policy,” “Description of Share Capital—Dividends and Capitalization of Profits.”

Our dual class capital structure means our shares are not 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, such as ours, 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 ofno-vote andmulti-class structures and temporarily barred newmulti-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 is not eligible 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 shares 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 entitles its holder to one vote per share and each Class B common share entitles 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 at least 10% of the voting shares 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 63.60% of the Class B common shares immediately after the completion of this offering. Due to theten-to-one voting ratio between our Class B and Class A common shares, our controlling shareholder, XP Controle, controls and will continue to control a majority of the combined voting power of our common shares and therefore is and will continue to 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 10% of the voting shares rights of the Company.

In addition, our Memorandum and 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

 

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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 and voting 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 and voting interest in XP pursuant to our Memorandum and Articles of Association).

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

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, 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.

 

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As a foreign private issuer, we have different disclosure and other requirements than U.S. domestic registrants.

As a foreign private issuer, we are be subject to different disclosure and other requirements than domestic U.S. registrants. 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 onForm 10-Q or to file current reports onForm 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 andshort-swing profit rules applicable to domestic U.S. registrants under Section 16 of the Exchange Act. In addition, we rely on exemptions from certain U.S. rules which permit us to follow Cayman Islands legal requirements rather than certain of the requirements that are applicable to U.S. domestic registrants.

We 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 onForm 10-Q or8-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 onForm 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 onForm 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 are 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 onForm 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.

We are a “controlled company” within the meaning of the rules of the Nasdaq corporate governance rules and, as a result, qualify for, and 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 63.60% of our Class B common shares, representing 53.57% of the voting power of our outstanding share capital (or own 63.44% of our Class B common shares, representing 53.38% of the voting power of our outstanding share capital if the underwriters exercise their option to purchase additional Class A common shares in full). As a result, we are and will continue to 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.

We currently rely on these exemptions. As a result, the majority of the directors on our board are not independent. In addition, none of the committees of our board consist entirely of independent directors.

 

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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 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 follow, and we do 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.”

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 bynon-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 Memorandum and 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, 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.

 

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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 Memorandum and 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.

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 thereal. Under Brazilian exchange control laws, an obligation in Brazil to pay amounts denominated in a currency other than thereal 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. Thethen-prevailing exchange rate may not affordnon-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.

 

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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;

 

  

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, certainnon-active rents and royalties, and capital gains. Based on our operations, income, assets and certain estimates and projections, including as to the relative values of our assets, including goodwill, which is based on the market price of our Class A common shares, we do not believe we were 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 2020 or in any future year is uncertain because, among other things, (1) we hold and expect to continue to hold a substantial amount of cash 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 “$” are to the U.S. dollar. All references to “real,” “reais,” “Brazilianreal,” “Brazilianreais,” or “R$” are to the Brazilianreal, 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 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 our initial public offering of Class A common shares completed on December 13, 2019 (the “initial public offering” and the “Share Contribution”), XP had not commenced operations and had 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, our consolidated statement of financial position information presented herein as of March 31, 2020 and as of December 31, 2019 and 2018 and the consolidated statements of income for the three months ended March 31, 2020 and 2019 and for the years ended December 31, 2019, 2018 and 2017 is stated in Brazilian reais, its reporting currency. Our consolidated financial information contained in this prospectus is derived from our unaudited interim condensed consolidated financial statements as of March 31, 2020 and for the three months ended March 31, 2020 and 2019 and our audited consolidated financial statements as of December 31, 2019 and 2018 and statements of income for the years ended December 31, 2019, 2018 and 2017, 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 our 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.

Our fiscal year ends on December 31. References in this prospectus to a fiscal year, such as “fiscal year 2019,” relate to our fiscal year ended on December 31 of that calendar year.

Our historical financial statements included elsewhere in this prospectus reflect the Share Split conducted following the Share Contribution and prior to the consummation of our initial public 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 Fundo de Investimento em Participações Multiestratégia, or DYNA III, held 2,036,988,542 shares (prior to giving effect to the Share Split, as defined herein) of XP Brazil, which are all of the shares of XP Brazil. All references to “XP Brazil” refer to XP Investimentos S.A., our Brazilian principalnon-operating holding company.

 

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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 12.5% of XP’s total outstanding capital stock(pre-initial 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

On November 29, 2019, XP Controle, Itaú, GA Bermuda and DYNA III contributed all of their shares in XP Brazil to us. In return for this contribution, we issued 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 aone-to-one exchange for the shares of XP Brazil contributed to us. In addition and following the Share Contribution, we implemented afour-to-one reverse share split (or consolidation), effective as of November 30, 2019, which we refer to herein as the Share Split.

After accounting for the new Class A common shares that will be sold by XP Controle in this offering, we will have a total of 551,800,326 common shares issued and outstanding immediately following this offering, 192,118,980 of these shares will be Class B common shares beneficially owned by XP Controle, GA Bermuda and Itaú and 359,681,346 of these shares will be Class A common shares beneficially owned by Itaú, GA Bermuda and public holders as well as by investors purchasing in this offering, assuming no exercise of the underwriters’ option to purchase additional shares. See “Principal Shareholders and Selling Shareholders.”

The following chart shows our corporate structure as of the date hereof:

 

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.

 

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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 translatedrealamounts into U.S. dollars using a rate of R$5.1987 to US$1.00, the commercial selling rate for U.S. dollars at March 31, 2020 as reported by the Central Bank. See “Exchange Rates” for more detailed information regarding translation ofreais into U.S. dollars and for historical exchange rates for the Brazilianreal.

Special Note RegardingNon-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 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 ofnon-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,

 

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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, excludingone-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, plus IPO process related expenses, plus our share-based plan expenses, minusone-time tax claim recognition (2010-2018) plus/minus taxes.

Thenon-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 commissioned by us, 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 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 affiliates or 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 ten are

 

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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, December 2019 and May 2020 was 58, 64, 73 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;

 

  

public health crises, such as the ongoingCOVID-19 pandemic;

 

  

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, the investment performance of investment funds managed by third parties or by our asset managers and the quality, reliability and performance of our suitability, risk management and business continuity policies and processes;

 

  

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 will not receive any proceeds from the sale of shares by the selling shareholders. The selling shareholders are selling all of the Class A common shares in this offering, including from any exercise by the underwriters of their option to purchase additional shares.

 

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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. Pursuant to the Shareholders’ Agreement, any dividend payment that exceeds 50% of our net income for the year is subject to a veto right by Itaú. 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 were paid in December 2019. For further information, see note 23 to our consolidated financial statements included elsewhere in this prospectus.

In 2019, 2018 and 2017, XP Brazil paid dividends totaling R$500 million, R$325 million and R$190 million, respectively. For further information regarding dividend payments by XP Brazil since January 1, 2017, see note 13(c) to our unaudited interim condensed consolidated financial statements and note 23(c) to our consolidated financial statements included elsewhere in this prospectus.

On May 29, 2020, in response to the ongoing uncertainty relating to the economic effects of theCOVID-19 pandemic, the Central Bank issued CMN Resolution No. 4,820/2020, or CMN Resolution No. 4,820. CMN Resolution No. 4,820 prohibits financial institutions and other institutions authorized to operate by the Central Bank, including XP CCTVM and Banco XP, to, until December 31, 2020, make dividend distributions beyond the minimum legal requirement or the minimum threshold established in such institutions’ bylaws. Under CMN Resolution No. 4,820, the anticipated distribution of profits relating to 2020 must be made in a conservative, consistent and manner compatible with the uncertainties of the current economic scenario. CMN Resolution No. 4,820 also temporarily prohibits financial institutions from making other related payments, pay interest on equity, effect stock repurchases, and, as a general rule, effect capital stock reductions. We do not expect the temporary prohibitions established by CMN Resolution No. 4,820 to have a material impact on our business, financial condition or results of operations.

Certain Cayman Islands Legal Requirements Related to Dividends

Under the Companies Law and our Memorandum and 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 Memorandum and 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 aslong-term debt, excluding current portion, and total equity) as of March 31, 2020, on an actual basis.

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 March 31, 2020 
   (US$)(1)   (R$) 
   (in millions) 

Long-term debt, excluding current portion(2)

   123    639 

Total equity

   1,463    7,607 
  

 

 

   

 

 

 

Total capitalization(3)

   1,586    8,246 
  

 

 

   

 

 

 

 

(1)

For convenience purposes only, amounts inreais as of March 31, 2020 have been translated to U.S. dollars at the exchange rate of R$5.1987 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)

Consists of borrowings, lease liabilities and debentures.

(3)

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

There have been no material changes to our capitalization since March 31, 2020.

 

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EXCHANGE RATES

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

Thereal depreciated against the U.S. dollar frommid-2011 to early 2016. In particular, during 2015, due to the poor economic conditions in Brazil, including as a result of political instability, thereal depreciated at a rate that was much higher than in previous years. Overall in 2015, thereal depreciated 47.0%, reaching R$3.9048 per US$1.00 on December 31, 2015. In 2016, thereal 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, thereal 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, thereal 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$4.0307 per US$1.00 on December 31, 2019, which reflected a 4.0% depreciation in the real against the U.S. dollar in 2019. Thereal/U.S. dollar exchange rate reported by the Central Bank was R$5.1987 per US$1.00 on March 31, 2020. There can be no assurance that thereal 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 thereal to float freely or will intervene in the exchange rate market byre-implementing a currency band system or otherwise. Thereal 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 andperiod-end exchange rates for the purchase of U.S. dollars expressed in Brazilianreais 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 June 26, 2020, the exchange rate for the purchase of U.S. dollars as reported by the Central Bank was R$5.4629 per US$1.00.

 

Year

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

2015

   3.9048    3.3387    2.5754    4.1949 

2016

   3.2585    3.4833    3.1193    4.1558 

2017

   3.3074    3.1925    3.0510    3.3807 

2018

   3.8742    3.6558    3.1391    4.1879 

2019

   4.0307    3.9456    3.6513    4.2596 

 

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) 

January 2020

   4.2689    4.1489    4.0207    4.2689 

February 2020

   4.4987    4.3410    4.2381    4.4987 

March 2020

   5.1987    4.8839    4.4883    5.1987 

April 2020

   5.5683    5.3959    5.0779    5.8365 

May 2020

   5.4263    5.6434    5.2992    5.9372 

June 2020 (through June 26, 2020)

   5.4629    5.1690    4.8894    5.4629 

 

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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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SELECTED FINANCIAL INFORMATION

The following tables set forth, for the periods and as of the dates indicated, our selected 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 selected interim statements of financial position as of March 31, 2020 and the interim statements of income for the three months ended March 31, 2020 and 2019 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus, prepared in accordance with IAS 34. The summary statements of financial position as of December 31, 2019 and 2018 and the statements of income for the years ended December 31, 2019, 2018 and 2017 have been derived from our audited consolidated financial statements included elsewhere in this prospectus, prepared in accordance with IFRS, as issued by the IASB. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results of operations that may be expected for the entire year ending December 31, 2020. 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 Three Months Ended
March 31,
  For the Year Ended
December 31,
 
   2020  2020  2019  2019  2019  2018  2017 
   (US$)(1)  (R$)  (US$)(1)  (R$) 
   (in millions, except amounts per share) 

Gross revenue and income(2)

   357   1,856   1,006   1,061   5,518   3,216   2,065 

Sales taxes(3)

   (23  (121  (72  (75  (390  (258  (158
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue and income

   334   1,735   934   986   5,128   2,958   1,907 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating costs and expenses

        

Operating costs

   (111  (579  (308  (309  (1,606  (941  (580

Selling expenses

   (5  (28  (25  (30  (155  (96  (33

Administrative expenses

   (111  (578  (368  (364  (1,891  (1,177  (650

Other operating expenses, net

   (3  (14  85   29   153   (31  (8

Interest expense on debt

   (4  (19  (15  (16  (84  (72  (61
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income before income tax

   99   517   303   297   1,544   641   576 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income tax expense

   (23  (119  (93  (87  (455  (175  (152

Net income for the period / year

   76   398   210   210   1,089   465   424 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income attributable to:

        

Owners of the Parent company

   76   397   209   208   1,080   461   414 

Non-controlling interest

   0   1   1   2   9   4   10 

Basic earnings per share(4)

   0.1383   0.7192   0.4108   0.4064   2.1125   0.9358   0.8535 

Diluted earnings per share(4)

   0.1373   0.7139   0.4108   0.4062   2.1115   0.9358   0.8535 

 

(1)

For convenience purposes only, amounts inreais for the three months ended March 31, 2020 and for the year ended December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$5.1987 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 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.

 

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(3)

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

(4)

The basic and diluted earnings per share have been retroactively adjusted to give effect to reverse share split which occurred on November 30, 2019.

Balance Sheet Data

 

   As of March 31,   As of December 31, 
        2020             2020        2019   2019   2018 
   (US$)(1)   (R$)   (US$)(1)   (R$) 
   (in millions) 

Cash

   48    250    21    110    68 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial assets

   10,814    56,217    8,058    41,889    16,583 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value through profit or loss

   6,464    33,607    5,103    26,528    7,983 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities

   4,827    25,092    4,317    22,443    6,291 

Derivative financial instruments

   1,638    8,515    786    4,085    1,692 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value through other comprehensive income

   942    4,896    503    2,616    696 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities

   942    4,896    503    2,616    696 

Evaluated at amortized cost

   3,407    17,714    2,451    12,744    7,904 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities

   244    1,268    436    2,267    155 

Securities purchased under agreements to resell

   2,869    14,917    1,825    9,490    6,571 

Securities trading and intermediation

   195    1,016    97    505    898 

Accounts receivable

   82    425    89    462    219 

Loan operations

   12    64    0    0    —   

Other financial assets

   5    25    4    20    60 

Other assets

   116    603    124    644    317 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoverable taxes

   44    227    47    243    183 

Prepaid expenses

   20    105    17    90    97 

Right-of-use assets

   45    236    44    227    —   

Other

   7    35    16    83    37 

Deferred tax assets

   50    262    55    285    152 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment

   30    155    27    142    99 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intangible assets

   108    560    106    553    505 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   11,165    58,046    8,391    43,623    17,724 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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   As of March 31,   As of December 31, 
        2020             2020        2019   2019   2018 
   (US$)(1)   (R$)   (US$)(1)   (R$) 
   (in millions) 

Financial liabilities

   8,584    44,628    6,125    31,842    15,216 

Fair value through profit or loss

   1,586   ��8,247    1,010    5,251    2,251 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities

   139    721    389    2,022    1,260 

Derivative financial instruments

   1,448    7,526    621    3,229    991 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Evaluated at amortized cost

   6,998    36,381    5,115    26,591    12,965 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities sold under repurchase agreements

   4,061    21,111    3,008    15,638    6,641 

Securities trading and intermediation

   2,565    13,334    1,753    9,115    5,307 

Borrowings and lease liabilities

   124    644    123    637    470 

Debentures

   162    844    161    835    407 

Accounts payables

   51    265    51    267    135 

Structured operations certificates

   29    150    4    19    —   

Other financial liabilities

   6    31    15    79    7 

Other liabilities

   1,118    5,811    889    4,620    404 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Social and statutory obligations

   53    275    95    493    252 

Taxes and social security obligations

   33    170    66    345    103 

Private pension liabilities

   992    5,155    723    3,759    16 

Provisions and contingent liabilities

   3    15    3    15    17 

Other liabilities

   38    196    1    7    16 

Deferred tax liabilities

   —      —      1    5    12 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

   9,702    50,439    7,015    36,467    15,633 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity attributable to owners of the Parent company

   1,463    7,605    1,376    7,153    2,085 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Issued capital

   —      —      —      —      —   

Capital reserve

   1,340    6,967    1,336    6,943    1,876 

Other comprehensive income

   46    241    40    210    209 

Retained Earnings

   76    397    —      —      —   

Non-controlling interest

   —      2    —      3    7 

Total equity

   1,463    7,607    1,376    7,156    2,092 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   11,165    58,046    8,391    43,623    17,724 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

For convenience purposes only, amounts inreais as of March 31, 2020 and December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$5.1987 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 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 March 31, 2020 and for the three months ended March 31, 2020 and 2019, and our audited consolidated financial statements as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017 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 oflow-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 revolutionaryXP Modelhas 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 3.1% of net revenues for the year ended December 31, 2019 and to 2.3% of net revenues for the three months ended March 31, 2020.

 

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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 Three Months
Ended March 31,
  As of and for the Year Ended
December 31,
 
      2020          2019          2019          2018          2017     

Client Activity Metrics (unaudited)

     

Retail – AUC (in R$ billions)

  366   232   409   202   126 

Retail – active clients (in thousands)

  2,039   1,126   1,702   892   539 

Retail – gross total revenues (in R$ millions)

  1,254   700   3,676   2,351   1,485 

Institutional – gross total revenues (in R$ millions)

  331   147   802   484   345 

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

  132   56   507   178   106 

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

  27   16   112   54   29 

Other – gross total revenues (in R$ millions)

  113   88   420   150   99 

Company Financial Metrics

     

Gross revenue and income (in R$ millions)

  1,856   1,006   5,518   3,216   2,065 

Total revenue and income (in R$ millions)

  1,735   934   5,128   2,958   1,907 

Gross Margin (%)(1)

  66.6  67.0  68.7  68.2  69.6

Adjusted EBITDA (in R$ millions)(2)

  495   302   1,569   662   565 

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

  415   168   1,074   491   428 

Adjusted Net Margin (%)(3)

  23.9  18.0  20.9  16.6  22.4

 

(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 FinancialInformation—Non-GAAP Financial Measures.”

(3)

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

 

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The following table sets forth additional business metrics as of and for the years indicated, related to Retail AUM (as defined herein). These supplemental business metrics are presented to assist investors to better understand our business and how it operates.

 

   As of and for the
Three Months Ended
March 31,
  As of and for the
Year Ended
December 31,
 
     2020      2019      2019      2018      2017   

Retail – AUM (in R$ billions)

   44.7   28.1   44.7   25.7   14.4 

Mutual and Hedge Funds

   21.2   17.0   21.6   14.8   7.7 

Hedge Funds (Fundo de Investimento Multimercado)

   10.4   8.7   9.8   7.8   4.4 

Equity Funds (Fundo de Investimento em Ações)

   1.9   2.5   3.2   2.1   1.1 

Fixed Income Funds (Fundo de Investimento Renda Fixa)

   8.7   5.8   8.5   4.9   2.1 

Other Funds

   0.3      0.1       

Private Equity Funds

   1.1             

Exclusive Funds

   11.7   4.4   11.3   5.5   3.5 

Pension Funds

   5.3   1.8   4.6   1.4   1.0 

Investment Clubs

   1.0   0.9   1.4   0.6   0.4 

Managed Portfolios

   5.4   4.1   5.8   3.3   1.8 

Total Retail – AUM as a % of Retail AUC (%)

   12.2  12.1  10.9  12.7  11.4

 

 

Retail – AUM Weighted Average Management Fee (% p.a.)

   0.7  0.9  0.8  0.9  1.0

Mutual and Hedge Funds

   1.0  1.1  1.1  1.3  1.4

Hedge Funds (Fundo de Investimento Multimercado)

   1.4  1.3  1.4  1.6  1.6

Equity Funds (Fundo de Investimento em Ações)

   1.7  1.9  1.8  2.1  2.2

Fixed Income Funds (Fundo de Investimento Renda Fixa)

   0.4  0.4  0.4  0.5  0.5

Other Funds

   0.6  0.8  0.7  0.8  n.a. 

Exclusive funds

   0.3  0.3  0.3  0.3  0.3

Pension Funds

   1.0  1.1  1.0  1.2  1.1

Private Equity Funds

   0.5            

Investment Clubs

   1.2  1.0  1.2  1.0  1.0

Managed Portfolios

   0.4  0.4  0.4  0.5  0.6

 

 

Total management fees, gross of taxes (in R$ millions)(1)

   255   141   1,035   528   222 

From funds and portfolios managed by our asset managers

   118   70   538   302   138 

% of total management fees

   54  49  52  57  62

From third party funds (distribution fees)

   137   71   497   226   84 

% of total management fees

   46  51  48  43  38

 

(1)

Consist of (i) fixed and performance-based management fees from mutual funds managed by our asset managers and sold to our retail clients; (ii) fees from distributions (rebates from fixed and performance-based management fees) of funds managed by third-party asset managers to our retail clients; and (iii) fixed management fees from XP Advisory managed portfolios and exclusive funds for high net worth retail clients.

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, hedge and private equity funds (including those managed by XP Gestão, XP Advisory, XP LT Gestão de Recursos Ltda., XP PE Gestão de Recursos Ltda., 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

 

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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.

Retail – Assets Under Management (“AUM”)

Retail AUM is a component of Retail AUC, and represents the market value of (i) retail client assets invested in mutual, hedge, private equity and pension funds managed by XP Gestão, XP LT Gestão de Recursos Ltda., XP PE Gestão de Recursos Ltda. and XP Vista, (ii) high net worth retail clients allocated in managed portfolios and exclusive funds managed by XP Advisory, and (iii) investment clubs. AUM varies from period to period based on (1) the amount of cash and assets transferred into, and out of, these assets; and (2) fluctuation of net asset values of funds and market prices of securities within portfolios.

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 andmedium-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, 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 (although we charge zero commissions on self-directed trading of equities on Clear and of futures on the three brands); (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 and from derivatives sold to retail clients; (8) net income earned on Floating Balances, which allocate to overnight and other highly liquid investments and (9) interest income from loans. 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 and from derivatives 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.

 

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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 tonon-client individuals, (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, and (3) selling research reports and educational courses to retail clients and othernon-client subscribers originated by Spiti.

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.

Review of Results for the Three Months ended March 31, 2020

Retail – Our number of active clients increased by approximately 81% from 1,126 thousand as of March 31, 2019 to 2,039 thousand as of March 31, 2020, primarily due to the expansion of our direct and B2B channels and our three retail brands, particularly Clear, following the increased number of individual investors trading on the stock market. This increased equitization in our market (being an increased penetration of equities as an asset class for retail investors in Brazil), derived from the continued reductions in the SELIC rate coupled with the equity market decrease and subsequent volatility triggered by the currentCOVID-19 pandemic, drove an acceleration of the number of clients and trades flowing through our platform, including stocks, REITs, options and futures. The combined number of trades for the three months ended March 31, 2020 was 108 million, or a daily average of 1,744 thousand, which represents an increase of 95% and 92% respectively, compared with the three months ended March 31, 2019, during which the total number of trades was 55 million, or a daily average of 909 thousand. Driven by a monthly average net inflow of R$12 billion and despite the market depreciation which occurred in March 2020, our AUC increased by 58% from R$232 billion as of March 31, 2019 to R$366 billion as of March 31, 2020. Our AUM increased by 63%, from R$28 billion as of March 31, 2019 to R$45 billion as of March 31, 2020 (12.2% of our Retail AUC), comprising (i) R$33 billion from mutual and exclusive funds, (ii) R$1.1 billion from private equity funds, (iii) R$5 billion from pension funds, (iv) R$5 billion from managed portfolios, and (v) R$1 billion from investment clubs. The increase in AUM during the period was driven by initiatives and new products in our asset management business, such as our recently launched private equity fund, the development of the pension funds business through XP Vida & Previdência and further expansion in the private banking business through exclusive funds. Retail Gross Total Revenues increased by 79% from R$700 million for the three months ended March 31, 2019 to R$1,254 million for the three months ended March 31, 2020, driven by (1) equity brokerage reflecting record retail trading volumes; (2) rising management fees from funds due to AUC growth; (3) REITs; and (4) fixed income. The weighted average management fee of our AUM decreased from 0.9% as of March 31, 2019 to 0.7% as of March 31, 2020, driven mainly by (1) the change in mix, given (i) above average growth of 191.0% in pension funds and the launch of the private equity fund, which are classes with lower fees (0.3% and 0.5%, respectively) than average (0.7%), and (ii) below average growth of 19.0% in hedge funds and equity funds, which are classes with higher fees (1.4% and 1.7% respectively) than average (0.7%); and (2) decreases in the average fee in pension funds, from

 

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1.1% to 1.0%, and in equity funds and from 1.9% to 1.7%. The weighted average management fee of the third-party funds that we distribute through our platform (of which we typically receive a portion as distribution fees) increased from 1.2% as of March 31, 2020 and to 1.3% as of March 31, 2020 with equity funds growing faster than average, fixed income growing slower than average, and a stable mix of hedge funds.

Institutional – gross revenues totaled R$331 million for the three months ended March 31, 2020, a 126% increase from R$147 million for the three months ended March 31, 2019. This increase was primarily attributable to the increase in trading volume of our Brazilian trading desks following the overall increase in trading volumes on the B3 (a 74% increase in equities average daily trading volume, or ADTV, and a 61% increase in listed derivatives when compared to the three months ended March 31, 2019).

Issuer Services – gross revenues totaled R$132 million for the three months ended March 31, 2020, a 137% increase from R$56 million for the three months ended March 31, 2019. This increase was primarily attributable to the strong deal flow in January and February in REITS, debt capital markets and equity capital markets.

Digital Content – gross revenues totaled R$27 million, a 70% increase from R$16 million for the three months ended March 31, 2019. This increase was primarily attributable to the increase in students accessing our online courses and MBA programs.

As a result, our total revenue and income increased 86%, from R$934 million for the three months ended March 31, 2019 to R$1,735 million for the three months ended March 31, 2020. Gross margin contracted slightly from 67.0% to 66.6%, due to revenue mix coming from our channels. The three months ended March 31, 2020 were also marked by an increase in technology solutions and infrastructure and in expanding our employee base. As a result, selling expenses increased 16% to R$28 million for the three months ended March 31, 2020 and administrative expenses increased 57% to R$578 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 89% net income growth, from R$210 million for the three months ended March 31, 2019 to R$398 million for the three months ended March 31, 2020, and a net margin expansion from 22.5% to 22.9%, respectively.

Review of 2019 Results

Retail – Our number of active clients increased by approximately 91% from 892 thousand as of December 31, 2018 to 1,702 thousand as of December 31, 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 103% from R$202 billion as of December 31, 2018 to R$409 billion as of December 31, 2019. Our AUC from third party funds increased by 54%, from R$57.7 billion (31.9% of our Retail AUC) as of December 31, 2018 to R$108.3 billion as of December 31, 2019 (21.8% of our Retail AUC), driven by the increase in the number of funds offered in the platform and net inflows towards this asset class. Our AUM increased by 74.2%, from R$25.7 billion (12.7% of our Retail AUC) as of December 31, 2018 to R$44.7 billion as of December 31, 2019 (10.9% of our Retail AUC), 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 56% from R$2,351 million for the year ended December 31, 2018 to R$3,676 million for the year ended December 31, 2019, driven by the increase in AUC and by a slight decrease in retail revenues divided by average retail AUC, or Revenue Yield, from 1.4% per annum for the year ended December 31, 2018 to 1.2% per annum for the year ended December 31, 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 0.9% as of December 31, 2018 to 0.8% as of December 31, 2019, driven mainly by (1) the change in mix, given (i) below average growth of 26% in hedge funds and 51% in equity mutual funds, which are classes with higher fees (1.4% and 1.8%, respectively) than

 

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average (0.8%), and (ii) above average growth of 84.8% in fixed income mutual funds, which is a class with lower fees (0.5%) than average (0.8%); and (2) decreases in the average fee in pension funds, from 1.2% to 1.0%, equity funds, from 2.1% to 1.8% and hedge funds, from 1.6% to 1.4%. The weighted average management fee of the third-party funds that we distribute through our platform (of which we typically receive a portion as distribution fees) was 1.2% as of December 31, 2018 and remained stable as of December 31, 2019 with offsetting effects coming from a change in mix, with equity funds and pension funds growing faster than fixed income funds and hedge funds.

Institutional – gross revenues totaled R$802 million for the year ended December 31, 2019, a 66% increase from R$484 million for the year ended December 31, 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) increase in securities placements, including IPOs in equity markets and the private placement of bonds; (3) the decrease in interest rates, which benefited our trading desks that trade in futures; (4) 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 (5) the appreciation of the U.S. dollar against thereal, impacting positively the translation of revenues recognized in U.S. dollars.

Issuer Services – gross revenues totaled R$507 million for the year ended December 31, 2019, a 185% increase from R$178 million for the year ended December 31, 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 94 transactions for the year ended December 31, 2018 to 207 transactions for the year ended December 31, 2019.

Digital Content – gross revenues totaled R$112 million for the year ended December 31, 2019, a 108% increase from R$54 million for the year ended December 31, 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 72% from R$2,958 million for the year ended December 31, 2018 to R$5,128 million for the year ended December 31, 2019. Gross margin expanded slightly from 68.2% to 68.7%, due to differences in 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. The year ended December 31, 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 61% to R$155 million for the year ended December 31, 2019 and administrative expenses increased 61% to R$1,891 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 134% net income growth, from R$465 million for the year ended December 31, 2018 to R$1,089 million for the year ended December 31, 2019, and a net margin expansion from 15.7% to 21.2%, 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 AUC from third party funds increased by 107%, from R$27.9 billion (22.1% of our Retail AUC) as of December 31, 2017 to R$57.7 billion as of December 31, 2018 (28.6% of our Retail AUC), driven by the increase in the number of funds offered in the platform and net inflows towards this asset class. Our AUM increased by 78%, from R$14.4 billion as of December 31, 2017 (11.4% of our Retail AUC) to R$25.7 billion as

 

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of December 31, 2018 (12.7% of our Retail AUC), 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, driven mainly by a mix more concentrated in fixed income funds, that grew 135% in the period and increased from 15% to 19% of Retail AUM, and have lower than average fees at 0.5% per annum. The weighted average management fee of the third-party funds that we distribute through our platform (of which we typically receive a portion as distribution fees) was 1.2% as of December 31, 2017 and remained stable at 1.2% as of December 31, 2018, with offsetting effects coming from (1) an increase in the average management fees in hedge funds from 1.5% to 1.6%, and from (2) a change in mix, with pension, fixed income and equity funds growing faster than hedge funds.

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 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.

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

 

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data analysis demonstrates this trend in our business and our 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:

 

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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, 109% after 30 months, 116% after 36 months, 127% after 42 months and, 138% after 48 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, 128% after 30 months and 143% after 36 months;

 

  

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, 92% after 18 months, and 122% after 24 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 and 79% after 12 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.

 

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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$50 thousand) 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$50 thousand 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 (#)

 

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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, 65% after 36 months, 66% after 42 months, and 69% after 48 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, 55% after 30 months, and 60% after 36 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, 44% after 18 months, and 50% after 24 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 and 46% after 12 months.

 

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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. Nevertheless, overall market declines and increased volatility may reduce the desirability of our products and services to both new and existing clients, such as in connection with the ongoingCOVID-19 pandemic.

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 andon-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

 

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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 2017, 78% of total retail revenues; (2) for 2018, 82% of total retail revenues; (3) for 2019, 84% of total retail revenues; and (4) for the three months ended March 31, 2020, 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 customer stickiness and increase revenue streams. While we expect our total expenses to increase in the short

 

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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 solutionsto 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 asXP Direct,Rico andClear, 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 three months ended March 31, 2020, compared to 16% in 2019, 18% in 2018 and 22% in 2017.

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, from advertising fees generated by ourInfomoney financial news portal and from Spiti, our digital platform which provides investment research to retail clients. 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 and enhance our clients’ experience by improving existing, and developing, new and innovative, features and

 

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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 throughword-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 allocate them to different products we offer depending on market and macroeconomic conditions. For example,

 

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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. Nevertheless, there may be changes in our clients’ preferences towards low risk investments within the traditional banks due to market declines and increased volatility caused byCOVID-19, which could decrease our net inflows from both new and existing clients.

The vast majority of our operations are located in Brazil. As a result, our revenues and profitability are subject to political and economic developments, such as the currentCOVID-19 pandemic, 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 Three months ended
March 31,
  For the Year Ended
December 31,
 
       2020          2019  ��   2019  2018  2017 
   (in percentages, except as otherwise indicated) 

Real growth (contraction) in gross domestic product

   (0.3  N/A   1.1   1.1   1.1 

Inflation(IGP-M)(1)

   6.8   2.2   7.3   7.5   (0.5

Inflation (IPCA)(2)

   3.3   1.5   4.3   3.7   2.9 

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

   5.7   7.0   5.6   6.7   7.1 

CDI interest rate (average)(4)

   5.4   6.4   4.5   6.5   10.1 

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

   5.1987   3.897   4.0307   3.8742   3.3074 

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

   4.8839   3.784   3.9456   3.6552   3.1919 

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

   29.0   (0.6  (4.0  (17.1  (1.5

Unemployment rate(7)

   N/A   N/A   11.9   12.3   12.8 

 

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 Brazilianlong-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 exchange rate on each business day of the period.

(6)

Comparing the US$ closing selling 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.

 

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Our financial performance is also tied to fluctuations in interest rates, such as the Brazilian interbank deposit (certificado de deposito interbancário) rate, which is an average of interbank overnight rates in Brazil (“CDI”), because such fluctuations affect the value of the net interest margins we earn on financial investments we allocate customer 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

Duagro Joint Venture

On June 23, 2020, we announced the launch of Duagro, a joint venture with VERT, the largest Brazilian securitization company focused on agribusiness. Duagro is our first initiative in the agribusiness sector and aims at accelerating the access of rural producers to credit lines through the capital markets. Through an automated process and the electronic issuance of receivables(e-CPR), Duagro will enable agricultural input financing for small and medium producers that face credit constraints due to banking concentration and focus on large producers.

Fliper Acquisition

On June 8, 2020, we announced the acquisition of a majority ownership stake in Fliper, an automated investment consolidation platform that offers its users connectivity and tools to perform intuitive and intelligent financial self-management. When completed, this transaction will allow us to offer customers additional resources to manage their investments. The acquisition value of Fliper is not material based on the financial statements of the company taken as a whole and the consummation of the acquisition is pending the approval of the Central Bank.

DM 10 Acquisition

On June 10, 2020, we announced the acquisition of DM10, a marketplace that connects hundreds of independent distributors with a curated selection of life insurance and pension plan products, adding value through technology and education. When completed, this transaction will enhance our distribution network in the insurance segment. The acquisition value of DM 10 is not material based on the financial statements of the company taken as a whole and the consummation of the acquisition is pending the approval of the Central Bank.

XP Portugal

In September 2019, we incorporated Chamaleon Bravery, Unipessoal, LDA, or XP Portugal. XP Portugal is an investment advisory company. We expect XP Portugal to become operational in the second half of 2020. As of the date of this prospectus, we are in the process of obtaining the applicable regulatory approvals, as required by the Portuguese Securities and Exchange Commission (Comissão do Mercado de Valores Mobiliários), or the CMVM.

Spiti

On September 2, 2019, we incorporated Spiti Análise Ltda. (formerly known as Lírios Participações Ltda.), our Brazilian subsidiary, to act as a provider of research reports to retail clients. In an effort to support our expansion strategy, Spiti increased its capital to R$5.2 million on October 10, 2019 and to R$10.2 million on March 25, 2020.

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.

 

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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.. Following a transition period during which XP VP tested and integrated its systems and processes, XP VP began its operations in April 2019. In an effort to support our expansion strategy, XP VP increased its capital to R$17.5 million on September 24, 2018, to R$22.5 million on July 24, 2019, to R$27.5 million on December 30, 2019 and to R$44.5 million on April 20, 2020.

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.”

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 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 ofnon-deliverable-forward and otherover-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

 

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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 funds managed by our asset managers and sold to our clients; (2) fees from distributions (rebates from fixed and performance-based management fees) of mutual and hedge funds managed by third-party asset managers to our 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) fees from distributions (rebates from fixed and performance-based management fees) of pension funds managed by third-party asset managers 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 tonon-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).

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); (3) interest income on loans to our retail clients; and (4) 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 year ended December 31, 2019) 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.

 

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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 the Brazilian Treasury Bonds (Tesouro Direto) and 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 and agreements with customers; (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) Banco XP is taxed at a 45% income tax rate; (2) XP CCTVM and XP Seguradora are taxed at a 40% income tax rate; (3) XP Gestão, XP Finanças and holding entities are taxed at a 34% income tax rate; (4) XP Vista, Infomoney, XP Educação, Spiti and other operating entities are taxed at a 10.9% tax rate on revenues (34% rate on a presumed net margin of 32%); and (5) XP Investments, XP Investments UK LLP, XP Private Europe, XP Portugal are taxed at US, UK, Switzerland and Portugal 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 2019, 2018 and 2017 our effective tax rate was 29.4%, 27.4% and 26.4%, respectively, and for the three months ended March 31, 2020 and March 31, 2019, the effective tax rate was 23.03% and 30.60%, respectively.

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.

 

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Results of Operations

Three Months Ended March 31, 2020, Compared to the Three Months Ended March 31, 2019

The following table sets forth our income statement data for the three months ended March 31, 2020 and 2019:

 

   For the Three Months Ended March 31, 
       2020          2019      Variation (%) 
   (R$ millions, except for percentages) 

Income Statement Data

    

Net revenue from services rendered

   1,152   599   92 

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

   202   66   208 

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

   380   269   41 
  

 

 

  

 

 

  

 

 

 

Total revenue and income

   1,735   934   86 
  

 

 

  

 

 

  

 

 

 

Operating costs and expenses

    

Operating costs

   (579  (308  88 

Selling expenses

   (28  (25  16 

Administrative expenses

   (578  (368  57 

Other operating income expenses, net

   (14  85   n.m. 

Interest expense on debt

   (19  (15  24 
  

 

 

  

 

 

  

 

 

 

Income before income tax

   517   303   70 
  

 

 

  

 

 

  

 

 

 

Income tax expense

   (119  (93  28 
  

 

 

  

 

 

  

 

 

 

Net income for the period

   398   210   89 

 

n.m. = not meaningful.

Total revenue and income

Total revenue and income for the three months ended March 31, 2020 was R$1,735 million, an increase of R$801 million, or 86%, from R$934 million for the three months ended March 31, 2019. Net revenues from services rendered represented R$553 million of the increase in total revenue and income, driven by:

 

  

a R$216 million increase in brokerage commissions, as a result of the increase in the number of active retail clients (which grew 81% 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 market volatility related toCOVID-19 pandemic, 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;

 

  

a R$114 million increase in management fees, as a result of (i) management fees from our funds and managed portfolios, which grew 81% from R$141 million to R$255 million driven mostly by a 12.2% increase in Retail AUM, and in (ii) fees from distributions (rebates from management fees) of funds managed by third-party asset managers, which grew 93% from R$71 million to R$137 million driven mostly by a 58% increase in the Retail AUC allocated in those funds. As a result, management fees attributable to funds managed by third parties (fees from distributions) increased from 51% of total management fees for the three months ended March 31, 2019 to 54% for the three months ended March 31, 2020, while management fees attributable to funds and portfolios managed by our asset managers decreased from 49% to 46% during the same period. For the three months ended March 31, 2020, 6% of management fees were performance-based and 94% werenon-performance-based (i.e., fixed annual fees);

 

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a R$188 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 35 transactions for the three months ended March 31, 2019 to 43 transactions for the three months ended March 31, 2020;

 

  

a R$12 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 new flagship courses;

 

  

a R$11 million increase in insurance brokerage fees, driven by higher sale of pension funds to retail clients and the overall expansion of retail AUC by 58% over the period;

 

  

a R$50 million increase in other services, including a R$21 million increase in penalties collected from retail clients, a R$16 million increase in client’s margin coverage fees, and a R$9 million increase in other ancillary revenues related to the increase in trading operations, such as securities lending, third party trading platform fees; and

 

  

net of a R$38 million increase in taxes and contributions on services.

Net income from financial instruments represented R$248 million of the increase in total revenue and income, driven by driven by the growth in our retail investment distribution platform (whose retail clients grew 81% and retail AUC grew 58% 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 three months ended March 31, 2020 were R$579 million, an increase of R$271 million, or 88%, from R$308 million for the three months ended March 31, 2019. This increase was primarily attributable to a R$199 million increase in commission costs payable to our IFAs. In addition, clearinghouse fees increased by R$29 million, operating losses and provisions by R$37 million and other costs by R$9 million. As a percentage of total revenue and income, our operating costs remained stable at 33% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

Selling expenses. Selling expenses for the three months ended March 31, 2020 were R$28 million, an increase of R$4 million, or 16%, from R$25 million for the three months ended March 31, 2019, 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 three months ended March 31, 2020 were R$578 million, an increase of R$210 million, or 57%, from R$368 million for the three months ended March 31, 2019. This increase was primarily attributable to:

 

  

a R$145 million, or 57%, increase in personnel expenses related to an increase in total employee headcount (from 1,699 employees as of March 31, 2019 to 2,602 employees as of March 31, 2020), 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$23 million, or 68%, increase in data processing expenses, mainly related to consultancy services in connection with the operation and maintenance of our platform’s software.

 

  

a R$18 million, or 83%, increase in third parties’ services, mainly due to technology solutions related to online and social media; and

 

  

a R$8 million, or 96%, increase in depreciation of property and equipment andright-of-use assets as a result of our adoption of IFRS 16 and additions of new leases contracts.

 

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Other operating income (expenses), net.We recorded other operating expenses, net of R$14 million for the three months ended March 31, 2020 compared to other operating income, net of R$85 million for the three months ended March 31, 2019. This variation is primarily due to a decrease (1) recovery of charges and expenses and Interest received on tax related to recognition of PIS/COFINS credits for the three months ended March 31, 2019; (2) increase of R$13 million income related to incentives earned from B3 linked to our number of retail clients and AUC of certain asset classes for the three months ended March 31, 2020; and (3) increase of R$10 million expenses related to legal proceedings and settlements with customers in the three months ended March 31, 2020.

Income before income taxes

As a result of the foregoing, income before income taxes for the three months ended March 31, 2020 were R$517 million, an increase of R$213 million, or 70%, from R$303 million for the three months ended March 31, 2019.

Income tax expense

Income tax expense for the three months ended March 31, 2020 was R$119 million, an increase of R$26 million, or 28%, from R$93 million for the three months ended March 31, 2019. This increase was primarily attributable to an increase in taxable income during the year, which was partially offset by a decrease in our effective tax rate to 23.03% for the three months ended March 31, 2020 from 30.60% for the three months ended March 31, 2019.

Net income for the period

As a result of the foregoing, net income for the three months ended March 31, 2020 was R$398 million, an increase of R$187 million, or 89%, from R$210 million for the three months ended March 31, 2019.

Year Ended December 31, 2019, Compared to Year Ended December 31, 2018

The following table sets forth our income statement data for 2019 and 2018:

 

   For the Year Ended December 31, 
       2019          2018      Variation (%) 
   (R$ millions, except for percentages) 

Income Statement Data

    

Net revenue from services rendered

   3,596   2,054   75 

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

   200   114   75 

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

   1,332   790   69 
  

 

 

  

 

 

  

 

 

 

Total revenue and income

   5,128   2,958   73 
  

 

 

  

 

 

  

 

 

 

Operating costs and expenses

    

Operating costs

   (1,606  (941  71 

Selling expenses

   (155  (96  61 

Administrative expenses

   (1,891  (1,177  61 

Other operating income (expenses), net

   153   (31  (590

Interest expense on debt

   (84  (72  17 
  

 

 

  

 

 

  

 

 

 

Income before income tax

   1,544   641   141 
  

 

 

  

 

 

  

 

 

 

Income tax expense

   (455  (175  159 
  

 

 

  

 

 

  

 

 

 

Net income for the year

   1,089   465   134 
  

 

 

  

 

 

  

 

 

 

 

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Total revenue and income

Total revenue and income in 2019 was R$5,128 million, an increase of R$2,169 million, or 73%, from R$2,958 million in 2018. Net revenues from services rendered represented R$ 1,541 million of the increase in total revenue and income, driven by:

 

  

a R$523 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 94 transactions in 2018 to 207 transactions in 2019. The increase in revenue from Issuer Services was partially offset by a decrease in revenues from COEs during the period;

 

  

a R$508 million increase in management fees, as a result of the robust growth both in (i) management fees from our funds and managed portfolios, which grew 78% from R$302 million to R$538 million driven mostly by a 74% increase in Retail AUM, and in (ii) fees from distributions (rebates from management fees) of funds managed by third-party asset managers, which grew 120% from R$226 million to R$497 million driven mostly by a 54% increase in the Retail AUC allocated in those funds. As a result, management fees attributable to funds managed by third parties (fees from distributions) increased from 43% of total management fees in 2018 to 48% in 2019, while management fees attributable to funds and portfolios managed by our asset managers decreased from 57% to 52% during the same period. In 2019, 33% of management fees were performance-based and 67% werenon-performance-based (i.e., fixed annual fees);

 

  

a R$427 million increase in brokerage commissions, as a result of the increase in the number of active retail clients (which grew 91% year over year) 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;

 

  

a R$55 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$49 million increase in insurance brokerage fees, driven by higher sale of pension funds to retail clients and the overall expansion of retail AUC by 103% over the period;

 

  

a R$116 million increase in other services, including R$27 million increase in financial advisory fees from Issuer Services mandates, a R$23 million increase in penalties collected from retail clients, a R$28 million increase in client’s margin coverage fees, a R$12 million increase in revenues from Expert events, and a R$26 million increase in other ancillary revenues related to the increase in trading operations, such as securities lending, third party trading platform fees; and

 

  

net of a R$136 million increase in taxes and contributions on services.

Net income from financial instruments represented R$628 million of the increase in total revenue and income, driven by the growth in our retail investment distribution platform (whose retail clients grew 91% and retail AUC grew 103% 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 2019 were R$1,606 million, an increase of R$665 million, or 71%, from R$941 million in 2018. This increase was primarily attributable to a R$519 million increase in commission costs payable to our IFAs. In addition, clearinghouse fees increased by R$104 million, third parties’ services by R$24 million, operating losses and provisions by R$13 million and other costs by R$5 million. As a percentage of total revenue and income, our operating costs increased to 31% in 2019 from 32% in 2018.

 

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Selling expenses. Selling expenses in 2019 were R$155 million, an increase of R$59 million, or 61%, from R$96 million in 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 in 2019 were R$1,891 million, an increase of R$715 million, or 61%, from R$1,177 million in 2018. This increase was primarily attributable to:

 

  

a R$550 million, or 77%, increase in personnel expenses related to an increase in total employee headcount from 1,593 employees as of December 31, 2018 to 2,429 employees as of December 31, 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$82 million, or 130%, increase in third parties’ services, mainly due to technology solutions related to online and social media;

 

  

a R$27 million, or 104%, increase in depreciation of property and equipment andright-of-use assets as a result of our adoption of IFRS 16; and

 

  

a R$48 million, or 37%, 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 in 2019 amounted to an income of R$153 million, an increase of R$185 million from the R$31 million expenses in 2018, mainly due to (1) a R$70 million income related to recognition of PIS/COFINS credits; and (2) a R$102 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 in 2019 were R$1,544 million, an increase of R$903 million, or 141%, from R$641 million in 2018.

Income tax expense

Income tax expense in 2019 was R$455 million, an increase of R$279 million, or 159%, from R$175 million in 2018. This increase was primarily attributable to an increase in taxable income during the year and an increase in our effective tax rate to 29.44% in 2019 from 27.20% in 2018.

Net income for the year

As a result of the foregoing, net income in 2019 was R$1,089 million, an increase of R$624 million, or 134%, from R$465 million in 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 both in (i) management fees from our funds and managed portfolios, which grew 120% from R$138 million to R$302 million driven mostly by a 78% increase in Retail AUM and a 495% increase in performance-based management fees, partially offset by a decrease in the average management fee on that Retail AUM from 1.1% to 1.0%, and in (ii) fees from distributions (rebates from management fees) of funds managed by third-party asset managers, which grew 167% from R$84 million to R$226 million driven mostly by a 107% increase in the Retail AUC allocated in those funds. As a result, management fees attributable to funds managed by third parties (fees from distributions) increased from 38% of total management fees for the year ended December 31, 2017 to 43% for the year ended December 31, 2018, while management fees attributable to funds and portfolios managed by our asset managers decreased from 62% to 57% during the same period. For the year ended in December 31, 2018, 24% of management fees were performance-based and 76% werenon-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;

 

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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 over year;

 

  

a R$24 million increase in educational services, due to higher sales of XP Educação investment courses;

 

  

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), anon-governmental organization that manages anXP-backed project to support a group of low income elementary school children in underdeveloped cities in Brazil; and (2) a R$8 millionwrite-off relating to internally developed software that was discontinued.

 

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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 (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 ofnon-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.

Quarterly Financial Data (Unaudited) and Other Information

The following tables set forth certain of our financial and other information for the periods indicated:

 

  For the Three Months Ended 
  September 30,
2018
  December 31,
2018
  March 31,
2019
  June 30,
2019
  September 30,
2019
  December 31,
2019
  March 31,
2020
 
  (Unaudited) (R$ millions, unless otherwise indicated) 

Gross revenue and income(1)

  768   957   1,006   1,236   1,453   1,823   1,856 

Sales taxes(2)

  (63  (72  (72  (89  (97  (132  (121

Total revenue and income

  705   885   934   1,147   1,356   1,691   1,735 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating costs and expenses

       

Operating costs

  (231  (309  (308  (366  (445  (487  (579

Selling expenses

  (35  (32  (24  (27  (31  (73  (28

Administrative expenses

  (333  (349  (368  (445  (481  (597  (578

Other operating expenses, net

  (18  (12  85   26   7   35   (14

Interest expense on debt

  10   (13  (15  (23  (24  (22  (19

Income before income tax

  99   171   303   312   382   547   517 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income tax expense

  (21  (57  (93  (84  (121  (157  (119
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

  78   113   210   228   261   390   398 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Retail – AUC (in R$ billions)

  181   202   232   274   350   409   366 

Retail – active clients (in thousands)

  763   892   1,126   1,304   1,536   1,702   2,039 

 

(1)

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

(2)

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

 

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Liquidity and Capital Resources

As of March 31, 2020, we had R$250 million in cash and cash equivalents. We believe that our current available cash and cash equivalents and the cash flows from our operating activities will be sufficient to meet our working capital requirements and capital expenditures in the ordinary course of business for the next 12 months.

The following table shows the generation and use of cash for the periods indicated:

 

  For the Three Months
Ended March 31,
  For the Year Ended
December 31,
 
      2020          2019          2019          2018          2017     
  (R$ millions) 

Cash Flow Data

     

Income before income tax

  517   303   1,544   641   576 

Adjustments to reconcile income before income tax

  80   34   206   127   84 

Income tax paid

  (197  (87  (403  (202  (219

Contingencies paid

  —     —     (3  (4  (7

Interest paid

  (1  (3  (28  (54  —   

Changes in working capital assets and liabilities

  (2  (88  211   (4  (44

Adjusted net cash flow (used in) from operating activities

  398   159   1,527   504   389 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash flow (used in) from securities, repos, derivatives

  (537  (233  (5,341  (960  (127

Net cash flows from operating activities

  (139  (74  (3,814  (457  262 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash flows from investing activities

  (41  (19  (161  (147  (456
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash flows from financing activities

  (28  (33  4,234   380   585 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Our cash and cash equivalents include cash on hand, interbank certificate deposits with banks and other highly liquid securities purchased under agreements to resell with original maturities of three months or less, which have an immaterial risk of change in value. For more information, see note 6 to our audited consolidated financial statements and note 3 to the unaudited interim condensed consolidated financial statements included elsewhere in this prospectus.

Net cash flow (used in) from operating activities

Our net cash flow used in operating activities for the three months ended March 31, 2020 increased to R$139 million from R$74 million in the three months ended March 31, 2019, primarily driven by: (1) higher balance of securities and derivatives that we hold in the ordinary course of our business as a retail investment distribution platform and as an institutional broker dealer (with respect to the sale of fixed income securities and structured notes); and (2) our strategy to allocate excess cash and cash equivalents from treasury funds, from Floating Balances and from private pension balances to securities and other financial assets. These balances may fluctuate substantially from quarter to quarter and were the key drivers of the net cash flow used in operating activities in the three months ended March 31, 2020.

Our net cash flows from (used in) operating activities (i) decreased to R$3,814 million net cash flow used in operating activities in 2019 from R$457 million net cash flow used in operating activities in 2018, and (ii) decreased to R$457 million net cash flow used in operating activities in 2018 from R$262 million net cash flow from operating activities in 2017. Our net cash flows from operating activities are significantly affected by (1) the balance of securities and derivatives that we hold in the ordinary course of our business as a Retail investment distribution platform and as an Institutional broker dealer (in particular with respect to the sale of fixed income securities and structured notes); and (2) and our strategy to allocate excess cash and cash equivalents from treasury funds, from Floating Balances and from private pension balances to securities and other financial assets. These balances may fluctuate substantially from quarter to quarter and were the key drivers to the net cash flow from operating activities figures, since (1) securities and derivatives (assets, net of liabilities)

 

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balances increased to R$26,161 million in 2019 from R$6,583 million in 2018, and to R$6,583 million in 2018 from R$3,302 million in 2017; (2) securities purchased pursuant to resale agreements increased to R$9,490 million for 2019 from R$6,571 million in 2018, and to R$6,571 million in 2018 from R$935 million in 2017; (3) securities sold pursuant to repurchase agreements increased to R$15,638 million in 2019 from R$6,641 million in 2018, and to R$6,641 million in 2018 from R$514 million in 2017; (4) Securities trading and intermediation liabilities (net of assets; i.e. Floating Balances) increased to R$8,610 million in 2019 from R$4,408 million in 2018, and to R$4,408 million in 2018 from R$2,439 million in 2017; and (5) private pension liabilities increased from R$3,759 million in 2019 to R$16 million in 2018, and to R$16 million in 2018 from zero in 2017.

If the variation from those lines were to be excluded from the analysis, similar to what the Adjusted Gross Financial Assets metric captures (which in management’s view is a more useful metric to track the intrinsic cash flow generation of the business), adjusted net cash flow from operating activities would have increased to R$398 million for the period ended March 31, 2020 from R$159 million for the period ended March 31, 2019, R$1,527 million in 2019 from R$504 million in 2018, and to R$504 million in 2018 from R$389 million in 2017, reflecting the continuous increase in operational results and a low consumption of cash in working capital assets and liabilities.

Net cash used in investing activities

Our net cash used in investing activities increased from R$19 million in the three months ended March 31, 2019 to R$41 million in the three months ended March 31, 2020, primarily affected by: (1) increased acquisitions of property plant and equipment from R$11 million in the three months ended March 31, 2019 to R$21 million in the three months ended March 31, 2020, mainly related to the relocation of our principal executive offices to our current address in the city of São Paulo; and (2) investments in intangible assets, mostly IT infrastructure and software, which increased from R$8 million in the three months ended March 31, 2019 to R$20 million in the three months ended March 31, 2020.

Our net cash used in investing activities increased to R$161 million in 2019 from R$147 million in 2018, and decreased to R$147 million in 2018 from R$456 million in 2017, primarily due to (1) the acquisition of Rico for an aggregate purchase price of approximately R$405 million in 2017; (2) the investment in fixed assets, which decreased to R$72 million in 2019 from R$83 million in 2018, and increased to R$83 million in 2018 from R$30 million in 2017, mainly related to the relocation of our principal executive offices to our current address in the city of São Paulo in 2018; and (3) the investment in intangible assets, mostly IT infrastructure and software, which increased to R$89 million in 2019 from R$54 million in 2018, and to R$54 million in 2018 from R$21 million in 2017.

Net cash flows from financing activities

Our net cash flows used in financing activities decreased from R$33 million in the three months ended March 31, 2019 to R$28 million in the three months ended March 31, 2020, primarily due to a decrease in payments of borrowings and lease liabilities to R$26 million in the three months ended March 31, 2020 from R$32 million in the three months ended March 31, 2019.

Our net cash flows from financing activities increased to R$4,234 million in 2019 from R$380 million in 2018, and decreased to R$380 million in 2018 from R$585 million in 2017, primarily due to (1) the capital increases of R$673 million in August 2018 related to the closing of the Itaú Transaction and R$4,482 million related to the initial public offering proceeds in December 2019; (2) the borrowing of a R$600 million equivalent loan from Itaú Nassau in May 2017 which was prepaid in full in August 2018; (3) cash dividend payments to the controlling shareholders of XP Brazil, which increased to R$500 million in 2019 from R$325 million in 2018, and to R$325 million in 2018 from R$190 million in 2017; (4) the borrowing of the R$325 million loan from IFC in March 2018; and (5) the issuance of our first and second series ofnon-convertible debentures, R$400 million of which were issued in September 2018 and R$400 million of which were issued in May 2019.

 

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Indebtedness

As of March 31, 2020, we had R$375 million in outstanding loans, R$269 million in lease liabilities and R$844 million in outstanding debentures. The following is a description of our material indebtedness as of the date of this prospectus:

Borrowings

On January 19, 2017, XP CCTVM entered into a loan agreement with Banco J.P. Morgan S.A., or the JPM Loan, in the amount of R$100 million, which was borrowed in order to finance the first installment of the Rico acquisition. The loan accrued interest at a rate per annum equal to 111.0% of the CDI rate and was repayable in seven quarterly installments. The loan matured and was fully repaid on July 8, 2019.

On April 5, 2017, XP CCTVM entered into a loan agreement with Itaú Unibanco S.A., or the Itaú Loan, in the amount of R$126 million, which was borrowed in order to finance the second installment of the Rico acquisition. The loan accrues interest at a rate per annum equal to 113.0% of the CDI rate, is repayable in 36 monthly installments and matures on March 8, 2021. The loan is secured by a pledge (alienação fiduciária) over a certain number of XP CCTVM shares.

On May 10, 2017, XP Brazil entered into a loan agreement with Itaú Unibanco – Nassau Branch in the amount of US$189.9 million, which was borrowed for general corporate purposes. The loan accrued interest at a rate per annum equal to LIBOR + 3.454% (hedged to the CDI rate + 2.25%) and was scheduled to mature on May 11, 2022. Following the Itaú Transaction in August 2018, the loan was prepaid in full on August 31, 2018 pursuant to a mandatory prepayment provision triggered in the event that Itaú Unibanco (or any of its affiliates) became a shareholder of XP Brazil.

On March 28, 2018, XP Brazil entered into a loan agreement with the International Finance Corporation (IFC), or the IFC Loan, in the amount of R$325.4 million, which was borrowed to finance the expansion of operations and increase the number of clients and IFAs. The loan accrues interest at a rate per annum equal to the CDI rate + 0.774% and matures on April 15, 2023. The principal amount is due on the maturity date and interest is payable semi-annually on April 15 and October 15 of each year. We intend to prepay a portion of the IFC Loan totaling up to R$80 million by the end of June 2020.

Debentures

On September 28, 2018, XP Brazil issued its first series ofnon-convertible debentures in the aggregate principal amount of R$400 million, with a unit value at issuance of R$1,000 over the nominal amount. The principal amount of, and accrued interest on, the debentures is payable in a single installment on the maturity date of September 28, 2020. The debentures accrue interest at 108.0% of the CDI rate.

On May 15, 2019, XP Brazil issued its second series ofnon-convertible debentures in the aggregate amount of R$400 million, with a unit value at issuance of R$1,000 over the nominal amount. The principal amount of the debentures is payable in two installments on May 15, 2021 and on May 15, 2022 (the maturity date). The debentures, as amended on May 23, 2019 following the completion of the bookbuilding process, accrue interest at 107.50% of the CDI rate, payable semi-annually on May 15 and November 15 in each year.

As of the date of this prospectus, we are in the process of completing a partial repurchase of our second series ofnon-convertible debentures in the aggregate principal amount of up to R$100 million. We expect to complete this repurchase by the end of June 2020.

 

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Certain of our loans and debentures are subject to certain restrictive covenants and require that the borrower entity (as indicated below) meet certain financial ratios, which are as follows:

Itaú Loan

 

  

a XP CCTVM net debt to EBITDA ratio equal to or less than 1:1. Net debt is calculated as the sum of total debt less cash and cash equivalents and encumbered financial investments. EBITDA is calculated as income before income tax and social contribution, depreciation and amortization, financial income,non-operating income, equity income and minority interests; and

 

  

a XP CCTVM net debt to financial expenses ratio equal to or less than 2:1. Net debt is calculated as total debt less cash and cash equivalents and encumbered financial investments. Financial expenses are calculated as the sum of interest on financial debts, loans, securities, negative goodwill on assignment of credit rights, structuring costs of banking or capital markets, monetary and exchange variations liabilities, and hedge/derivative expenses, excluding interest on equity.

IFC Loan

 

  

a XP Brazil risk weighted capital adequacy ratio of not less than (i) 18% until December 31, 2019, (ii) 16% until March 31, 2020, (iii) 14% until June 30, 2020, and (iv) 12% thereafter, which is calculated as total capital divided by risk weighted assets;

 

  

a XP Brazil equity to assets ratio of not less than 5%, which is calculated as total shareholder’s equity divided by total assets;

 

  

a XP Brazil economic group exposure ratio not to exceed 25%, which is calculated as the exposure of the borrower to any person or economic group, excluding assets held on behalf of clients booked in the line of third parties settlements, divided by total capital;

 

  

a XP Brazil open credit exposures ratio not to exceed 25%, which is calculated as problem exposures less total provisions divided by total capital. Problem exposures is calculated as the sum of (1) exposures where any portion of such exposures are, on anon-accrual basis 90 days or more in arrears, or for which there is otherwise doubt that payments will be made in full; (2) exposures where any portion of such exposures has been a restructured troubled loan within the past consecutive 12 months; (3) assets received in lieu of payment (including, but not limited to, real estate and equity shares); and (4) claims on other persons that are unreconciled, unsettled or otherwise unresolved for 90 days or longer;

 

  

a XP Brazil short term liquidity ratio of not less than 1.05:1, which is calculated as liquid assets divided by short-term liabilities. Liquid assets is calculated as the sum of cash on hand, call deposits with banks and financial institutions, marketable securities with a triple A rating, government bonds, treasury bills and other assets that can be sold or withdrawn, on demand, or within 30 days, excluding assets held on behalf of clients booked in the line of third parties settlements. Short-term liabilities are calculated as callable liabilities and liabilities maturing within 30 days, excluding assets held on behalf of clients booked in the line of third parties settlements; and

 

  

compliance with material requirements from SUSEP imposed on XP VP, including minimum capital requirements, as well as with material requirements from the Central Bank, imposed on Banco XP, including capital adequacy ratios, economic group exposure, liquidity coverage ratio, and any other requirements from time to time imposed by any authority.

Debentures

 

  

an XP Brazil regulatory capital ratio 1% or more above the minimum regulatory capital requirement as established by the Central Bank from time to time; and

 

  

a XP Brazilpre-tax income to financial expenses ratio greater or equal to 2:1.

 

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As of March 31, 2020, we were in compliance with the covenants in our loan agreements and debentures. For further information on our indebtedness, see notes 15 and 16 to our consolidated financial statements included elsewhere in this prospectus and notes 9 and 10 to the unaudited interim condensed consolidated financial statements included elsewhere in this prospectus.

Capital Expenditures

In the three months ended March 31, 2020 and 2019 and in the years ended December 31, 2019, 2018 and 2017, we made capital expenditures of R$41 million, R$19 million, R$161 million, R$137 million and R$51 million, respectively. Total capital expenditures as a percentage of total net revenue and income were 2.3% in the three months ended March 31, 2020, 2.1% in the three months ended March 31, 2019, 3.1% in 2019, 4.6% in 2018 and 2.7% in 2017. These capital expenditures mainly include expenditures related to the upgrade and development of our IT systems, software and infrastructure, and the expansion of our office spaces due to accelerated growth in employee headcount and the launch of new operations such as our institutional broker dealer in UK.

We expect to increase our capital expenditures to support the growth in our business and operations. We expect to meet our capital expenditure needs for the foreseeable future from our operating cash flow and our existing cash and cash equivalents. Our future capital requirements will depend on several factors, including our growth rate, the expansion of our research and development efforts, employee headcount, marketing and sales activities, the introduction of new features to our existing products and the continued market acceptance of our products.

Tabular Disclosure of Contractual Obligations

The following is a summary of our contractual obligations as of December 31, 2019:

 

   Payments Due By Period as of December 31, 2019 
   Total   Less than 1 year   1-3 years   3-5 years   More than
5 years
 
   (R$ millions) 

Borrowings

   382    64    50    268    —   

Debentures

   835    435    400    —      —   

Operating and capital (finance) lease obligations

   255    53    67    51    84 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   1,472    552    517    319    84 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Off-Balance Sheet Arrangements

Other than as set forth above, we did not have anyoff-balance sheet arrangements as of December 31, 2019.

Critical Accounting Estimates and Judgments

Our consolidated financial statements are prepared in conformity with IFRS. In preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly reevaluate our assumptions, judgments and estimates. Our significant accounting policies are described in note 4 to our consolidated financial statements and note 2 to the unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. We believe that the following critical accounting policies are more affected by the significant judgments and estimates used in the preparation of our consolidated financial statements.

 

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Estimation fair value of certain financial assets

The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. We use our judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at the end of each reporting period.

Impairment of financial assets

The loss allowances for financial assets are based on assumptions about risk of default and expected loss rates. We use our judgment in making these assumptions and selecting the inputs to the impairment calculation, based on our past history and existing market conditions, as well as forward-looking estimates at the end of each reporting period.

Recognition of deferred tax asset for carried-forward tax losses

Deferred tax assets are recognized for all unused tax losses to the extent that sufficient taxable profit will likely be available to allow the use of such losses. Significant judgment from management is required to determine the amount of deferred tax assets that can be recognized, based on the likely timing and level of future taxable profits, together with future tax planning strategies. We have concluded that the deferred assets will be recoverable using the estimated future taxable income based on the approved business plans and budgets for the subsidiaries where a deferred tax asset has been recognized. The losses can be carried forward indefinitely and have no expiry date.

Impairment ofnon-financial assets, including goodwill

We assess, at each reporting date, whether there is an indication that an asset may be impaired. Intangible assets with indefinite useful lives and goodwill are tested for impairment annually at the level of the CGU, as appropriate, and when circumstances indicate that the carrying value may be impaired.

Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. Technological obsolescence, suspension of certain services and other changes in circumstances that demonstrate the need for recording a possible impairment are also regarded in estimates.

Recent Accounting Pronouncements

For information about recent accounting pronouncements that will apply to us in the near future, see note 3 to our audited consolidated financial statements and note 2 to the unaudited interim condensed consolidated financial statements included elsewhere in this prospectus.

New standards, interpretations and amendments adopted in 2019

IFRS 16—Lease Operations

IFRS 16 was issued in January 2016 and supersedes IAS 17 – Leases, IFRIC 4 – Determining whether an Arrangement contains a Lease,SIC-15 – Operating Leases-Incentives andSIC-27 – Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 establishes the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single model in the balance sheet, similar to the recognition of finance leases under IAS 17.

We have adopted IFRS 16 from January 1, 2019 using the modified retrospective method of adoption, under which the standard is applied retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application and not restated comparatives for the 2018 reporting period. The reclassifications and the adjustments arising from the new leasing rules are therefore recognized in the opening balance sheet on January 1, 2019.

 

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We recognized lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of IAS 17. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of January 1, 2019.

The associatedright-of-use assets related to property and equipment leases above were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the balance sheet as of December 31, 2018.

As of January 1, 2019, we had lease liabilities recognized of R$148.5 million, less accrued lease payments as of December 31, 2018 of R$14.6 million, which amounts to totalright-of-use assets of R$133.9 million as of January 1, 2019, represented by (i) properties in an amount of R$123.3 million and (ii) equipment in an amount of R$10.6 million.

As a result of initial adoption, there is no impact to retained earnings in equity on January 1, 2019.Right-of-use assets are presented in a separate line item in the balance sheet under “Other assets” group, while the lease liabilities are presented within borrowings in the line item “Borrowings and lease liabilities” in the balance sheet.

IFRIC 23 – Uncertainty over income tax treatments

The interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 – Income Taxes. It does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The interpretation specifically addresses the following: (1) whether an entity considers uncertain tax treatments separately; (2) the assumptions an entity makes about the examination of tax treatments by taxation authorities; (3) how an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; and (4) how an entity considers changes in facts and circumstances.

An entity has to determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty should be followed. We applied the interpretation and it did not have significant impact on the unaudited interim condensed consolidated financial statements.

Internal Control

As part of our changes in internal control over financial reporting, we have adopted a remediation plan with respect to the material weaknesses mentioned below, which includes the implementation of new processes and procedures, including additional levels of review to improve our internal controls procedures, implementation of new software solutions, training our staff and enhanced our documentation. Some of these measures have already been implemented and we will be working on implementing the remaining measures during 2020. However, we cannot assure you that our efforts will be effective or prevent any future material weakness or significant deficiency in our internal controls over financial reporting. Management continues to execute its plan to improve its internal control environment and to remediate its material weaknesses. Since identifying the material weaknesses, our internal control environment has been substantially improved with respect to the processes that relate to:

(i)     Financial reporting closing process, including the calculation of EPS, the identification and disclosure of related party transactions, and the procedures related to maintaining formal accounting policies, processes and controls to analyze, account for and disclose complex transactions:

 

  

Our financial reporting closing process has been improved through formal controls with evidence of review in accordance with our governance in place, regarding the journal entries process, the reconciliation of accounting balances and our consolidation process;

 

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improvements in our financial statements preparation process, which reached even more robust review levels and appropriate formal procedures;

 

  

improvement of governance controls related to the capture, identification, monitoring and disclosure of related party transactions in accordance with our related party transaction policy; and

 

  

development of policies and procedures that support our accounting practices, including new applicable standards and assessment of complex transactions; and

(ii)     General information technology controls:

 

  

improvement of management processes and controls for granting, reviewing and revoking access to systems, servers and databases. We have concentrated our access management processes with our information security and governance and technology team, which has a formal process to grant access based on the critical nature of the information and of the access. We also established periodic access review procedures;

 

  

monitoring critical access with adequate corporate governance practices and automated tools; and

 

  

controls over computer operations through continuous monitoring to ensure that all automated routines and services were performed.

Quantitative and Qualitative Disclosure About Market Risk

We are exposed to market risks in the ordinary course of our business, including the effects of interest rate changes and foreign currency fluctuations. Information relating to quantitative and qualitative disclosures about these market risks is described below and in note 33 to our consolidated financial statements included elsewhere in this prospectus.

We conducted a sensitivity analysis for market risks we considered relevant as of March 31, 2020 and December 31, 2019, 2018 and 2017. For this analysis, we adopted the following three scenarios:

 

  

Scenario I, which contemplates an increase in fixed interest rate yields, exchange coupon rates and inflation of 1 basis point, and an increase in the prices of shares and currencies of 1 percentage point.

 

  

Scenario II, which contemplates 25% increases and decreases in fixed interest rate yields, exchange coupon rates and inflation, assuming the largest possible losses per scenario.

 

  

Scenario III, which contemplates 50% increases and decreases inpre-fixed interest rate yields, exchange coupon rates, inflation and interest rates, assuming the largest possible losses per scenario.

 

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The below table sets forth the impact of each scenario on each market risk. It does not account for the risk protocols of our risk and treasury areas, which trigger risk mitigation measures as soon as losses are detected, minimizing the risk of significant losses:

 

      As of March 31, 2020 

Trading portfolio

  

Exposures

  Scenarios 

Risk factors

  

Risk of variation in:

          I                  II                  III         
      (R$ millions) 

Pre-fixed

  Pre-fixed interest rate inreais   (1  (45  (124

Exchange coupons

  Foreign currencies coupon rate   (0  (2  (3

Foreign currencies

  Exchange rates   (1  (13  (146

Price indexes

  Inflation coupon rates   (0  (3  (6

Shares

  Shares prices   (2  (41  (70
    

 

 

  

 

 

  

 

 

 
     (3  (104  (349
    

 

 

  

 

 

  

 

 

 

 

      As of December 31, 2019 

Trading portfolio

  

Exposures

  Scenarios 

Risk factors

  

Risk of variation in:

          I                  II                  III         
      (R$ millions) 

Pre-fixed

  Pre-fixed interest rate inreais   (1  (163  (446

Exchange coupons

  Foreign currencies coupon rate   0   1   (1

Foreign currencies

  Exchange rates   (2  (1  44 

Price indexes

  Inflation coupon rates   0   (1  0 

Shares

  Shares prices   0   (9  (57
    

 

 

  

 

 

  

 

 

 
     (3  (173  (460
    

 

 

  

 

 

  

 

 

 

 

      As of December 31, 2018 

Trading portfolio

  

Exposures

  Scenarios 

Risk factors

  

Risk of variation in:

          I                  II                  III     
      (R$ millions) 

Pre-fixed

  Pre-fixed interest rate inreais   (1  (11  (22

Exchange coupons

  Foreign currencies coupon rate   0   (6  (12

Foreign currencies

  Exchange rates   0   (1  (5

Price indexes

  Inflation coupon rates   0   (1  (2

Shares

  Shares prices   1   (7  5 
    

 

 

  

 

 

  

 

 

 
     0   (26  (36
    

 

 

  

 

 

  

 

 

 

Currency Risk

We are subject to foreign currency risk as we hold interests in XP Holding International LLC, one of our international financial holding companies in the United States, XP Advisors Inc., our finance services consulting company in the United States, and XP Holding UK Ltd, one of our international financial holding companies in the United Kingdom, whose equity as of December 31, 2019 totaled US$43 million (US$38 million as of December 31, 2018), US$0.7 million (US$0.3 million as of December 31, 2018) and GBP 3 million (GBP 4 million as of December 31, 2018) respectively.

The foreign currency exposure risk of XP Holding International and XP Advisors Inc. is hedged with the objective of minimizing the volatility of our functional currency (thereal) against the U.S. dollar arising from foreign investments offshore. The foreign currency exposure risk of XP Holding UK Ltd has not been hedged.

On December 31, 2017, we had indebtedness denominated in U.S. dollars, which was settled in the amount of R$778 million on August 31, 2018. As of March 31, 2020, we had no indebtedness denominated in U.S. dollars.

 

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Interest Rate Risk

Interest rate risk arises from the possibility that we incur in gains or losses arising from fluctuations in interest rates on our financial assets and liabilities. The following are the risk rates that we are exposed to: (1) SELIC rate;(2) IGP-M, the Brazilian general market price index (Índice Geral de Preços do Mercado); (3) IPCA, the Brazilian national consumer price index (Índice Nacional de Preços ao Consumidor Amplo); (4) PRE, the Brazilian required reference equity index (Patrimônio de Referência Exigido); (5) TJLP, the Brazilian long-term interest rate (Taxa de Juros de Longo Prazo); and (6) foreign exchange coupon.

We have floating interest rate indebtedness, so we are exposed to interest rate risk as a result of changes in the level of interest rates, and any increase in interest rates could negatively affect our results of operations and would increase the costs associated with financing our operations. As of March 31, 2020 and December 31, 2019, substantially all of our total indebtedness consisted of floating rate debt and was principally indexed to the CDI. Furthermore, our exposure to interest rate risk also applies to our cash and cash equivalents deposited in interest-bearing accounts which are indexed to the CDI, which can affect our results of operations and cash flows.

Price Risk

Price risk is the risk arising from price changes in investment fund portfolios and shares listed on the stock exchange held in our portfolio, which may affect profit or loss. Price risk is mitigated by our management through the diversification of our portfolio and/or through the use of derivatives contracts, such as options or futures. We believe we adopt conservative price risk limits in our risk budget.

Liquidity Risk

Liquidity risk relates to maintaining sufficient cash and securities through an adequate amount of committed credit facilities to meet obligations when due and to close out market positions. We have a liquidity risk management policy, which aims to ensure a minimum level of liquidity considered adequate by our management. This policy establishes actions to be taken in the event of liquidity contingencies, which are designed to reframe cash within required minimum liquidity limits. Our risk department is responsible for the structure and management of risks, and is under the supervision of the board of directors, for the avoidance of any conflicts of interest with departments requiring liquidity.

Liquidity risk control is based on forecasts of cash and assets with credit risk. The cash forecast relies on the free funds deposited by customers, while fund allocations can be classified according to their settlement or zero settlement periods. The stressed scenario models for delays in private credit assets and the extent to which possible stress would affect our liquidity conditions.

Credit Risk

Credit risk is the risk of suffering financial losses related tonon-compliance by any of our clients and market counterparties with financial obligations, agreement devaluations as a result of the deterioration in the risk rating of borrowers, reduced gains or remuneration, and concessions granted in the renegotiation of financial arrangements and recovery costs, among others.

Credit risk includes, among other risks:(1) non-compliance by counterparties with obligations related to the settlement of transactions in financial assets, including derivative financial instruments; (2) losses related tonon-compliance with financial obligations by borrowers located abroad, as a result of the actions taken by the government of the country in which they reside; (3) cash disbursements to honor warranties,co-obligations, credit commitments or other transactions of a similar nature; and (4) losses associated withnon-compliance by intermediaries or borrower with financial obligations pursuant to financing agreements.

 

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Our risk department is responsible for managing credit risk, ensuring compliance with our credit risk policy and established operating limits. Our credit policy is based on our internal scenario, including portfolio composition by security, issuer, rating, economic activity and duration of the portfolio, and on the external economic scenario, including interest rates and inflation, among others. The credit analysis department is also actively involved in this process and is responsible for assessing the credit risk of issues and issuers with which we maintain or intend to maintain credit relations, or intend to recommend credit risk positions to customers. It also recommends limiting the credit risk positions of customers.

We use the National Scale Notes from the International Emission Risk Agencies to subdivide portfolios into High, Medium and Low Risk, based on an internal rating scale. Management undertakes credit quality analysis of assets that are not past due or reduced to recoverable value. As of March 31, 2020 and December 31, 2019, such assets were substantially represented by securities purchased under agreements to resell, the counterparties of which were Brazilian banks with low credit risk, securities issued by the Brazilian government, and derivative financial instruments transactions, which are mostly traded on the B3 and which are therefore guaranteed by it.

Market Risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three main types of risk: foreign exchange variation, interest rates and share prices. The aim of market risk management is to control exposure to market risks, within acceptable parameters, while optimizing returns. Market risk management for operations is carried out through policies, control procedures and prior identification of risks in new products and activities, with the purpose to maintain market risk exposure at levels considered acceptable by us and to meet the business strategy and limits defined by the risk committee of XP Brazil.

The main tool used to measure and control our exposure risk to the market, mainly in relation to the trading assets portfolio, is the Maps Luna program, which calculates the capital allocation based on the exposure risk factors in the regulations issued by the Central Bank for financial institutions, which we apply to verify the risk exposure of our assets. In order to comply with the provisions of the Central Bank, our financial institutions monitor our exposure and calculate it on a daily basis, in accordance with CMN Resolution No. 4,557, and submit it daily to the Central Bank. With the formalized rules, the risk department of XP Brazil has the objective of controlling, monitoring and ensuring compliance with thepre-established limits, and may decline, in whole or in part, to receive and/or execute the requested transactions, upon immediate communication to customers, in addition to intervening in cases ofnon-compliance and reporting all unusual events to the committee.

In addition to aforementioned controls, we adopt guidelines to control the risk of the assets that mark treasury operations so that the portfolios of the participating companies are composed of assets that have low volatility and, consequently, less exposure to risk. In the event ofnon-compliance with the operational limits, the treasury manager can take the necessary measures to remedy this as quickly as possible.

Operating Risk

Operating risk is the risk of direct or indirect losses resulting from a variety of internal factors associated with our processes, personnel, technology and infrastructure, and with external factors, except for credit, market and liquidity risks, such as those deriving from legal and regulatory requirements and from generally accepted standards of business behavior. Operating risks arise from all of our operations. Our objective is to manage operating risk to avoid financial losses and damage to our reputation, and also to seek cost efficiency, avoiding control procedures that restrict initiatives and creativity.

The main responsibility for development and implementation of controls to deal with operating risks is attributed to key management within each business unit, and is supported by the development of our general standards for management of operating risks in the following areas: (1) requirements of segregation of functions,

 

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including independent authorization for transactions; (2) requirements of reconciliation and monitoring of transactions; (3) compliance with legal and regulatory requirements; (4) documentation of controls and procedures; (5) requirements of periodic assessment of the operating risks faced and the adequacy of the controls and procedures for dealing with the identified risks; (6) development of contingency plans; (7) professional training and development; and (8) ethical and business standards.

Our financial institutions, in compliance with the provisions of CMN Resolution No. 4,557, have a process that encompasses institutional policies, procedures, systems and contingency plans and business continuity for the occurrence of external events, in addition to formalizing the single structure required by the Central Bank.

 

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REGULATORY OVERVIEW

We are subject to government authorizations in the jurisdictions in which we operate and conduct our activities.

Our Regulatory Position

Two of our subsidiaries, XP CCTVM and Banco XP S.A., or Banco XP, perform activities that are subject to regulation in Brazil by the Central Bank. As required by the applicable Brazilian regulation, both must possess authorizations from the Central Bank in order to operate, as follows:

 

  

XP CCTVM is authorized by the Central Bank to (1) be constituted and operate as a securities broker; (2) carry out operations in the foreign exchange market; and (3) receive direct or indirect foreign investments of up to 100% of its capital stock.

 

  

Banco XP is authorized by the Central Bank to operate as a multi-purpose bank. On October 10, 2019, the board of officers of the Central Bank granted Banco XP’s authorization to operate as a multi-purpose bank, with both commercial and investment bank activities, as well as to carry out transactions in the foreign exchange market. The authorization was published in the National Official Gazette (Diário Oficial da União) on October 11, 2019. On November 13, 2019, the Central Bank authorized direct or indirect foreign investments in Banco XP of up to 100% of its capital stock.

Five of our subsidiaries, XP CCTVM, XP Gestão, XP Advisory, XP Vista and Spiti, perform activities that are subject to regulation in Brazil by the CVM. As required by the applicable Brazilian regulation, they are authorized to operate by the CVM, as follows:

 

  

XP CCTVM is authorized to provide securities portfolio management services and securities custody services;

 

  

each of XP Gestão, XP Advisory and XP Vista is authorized to provide securities portfolio management services; and

 

  

Spiti is authorized to provide investment research to retail clients.

Two of our subsidiaries, XP LT Gestão de Recursos Ltda. and XP PE Gestão de Recursos Ltda. arenon-operational subsidiaries. XP LT Gestão de Recursos Ltda. will apply for the CVM authorization to provide securities portfolio management services through ANBIMA. XP PE Gestão de Recursos Ltda. has already applied for such authorization and its request is currently under review.

Two of our subsidiaries, XP Investments and XP Advisory US, Inc., or XP Advisory US, perform activities that require registration with and regulation by appropriate regulatory authorities in the United States, as follows:

 

  

XP Investments is (1) registered as a securities broker-dealer with the SEC and intwenty-six U.S. states and territories; (2) registered with the U.S. Commodity Futures Trading Commission, or the CFTC, as an introducing broker; and (3) a member of the Financial Industry Regulatory Authority, or FINRA, and the National Futures Association, or the NFA, self-regulatory organizations overseen by the SEC and the CFTC, respectively; and

 

  

XP Advisory US became registered as an investment adviser with the SEC on January 30, 2019. XP Advisory US was previously registered as an investment adviser in the state of Florida.

One of our subsidiaries, Sartus Capital Ltd., or Sartus UK, performs advisory services as an appointed representative acting as an agent for New Europe Advisers Ltd., or NEA, which is duly authorized and regulated by the Financial Conduct Authority, or the FCA, subject to the terms and conditions set forth in the Appointed Representative Agreement signed on April 28, 2016. On June 28, 2019, we sent a notice of termination of the

 

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Appointed Representative Agreement to New Europe Advisers Ltd., became effective on September 30, 2019, in order to concentrate our efforts in the private and wealth management business in Switzerland through our Swiss subsidiary, XP Private (Europe) SA.

XP Private (Europe) SA performs activities under the supervision of theAssociation Romande des Intermédiaires Financiers, or the ARIF, a self-regulatory organization (SRO), which is overseen by the Swiss Financial Market Supervisory Authority (FINMA). As required by the applicable regulation, in order to provide securities portfolio management services XP Private (Europe) SA became a member of ARIF on September 5, 2016.

One of our subsidiaries, XP Investments UK LLP, performs activities that are subject to regulation by the Financial Conduct Authority. As required by the applicable regulation, it is authorized and regulated by the FCA and has sufficient permissions to carry out its business, including operating as an Organised Trading Facility (OTF).

One of our subsidiaries, XP Portugal, performs activities that are subject to regulation by the CMVM, including operating as an investment advisory company. As required by the applicable regulation, it has applied to the CMVM for the authorization to operate, which is currently pending.

Two of our subsidiaries, XP Corretora de Seguros Ltda., or XP CS, and XP VP, perform activities that are subject to regulation by SUSEP. As required by the applicable regulation, both have applied for authorizations to operate from SUSEP, which current status is as follows:

 

  

XP CS, our insurance broker dealer, is authorized to operate as an insurance brokerage; and

 

  

XP VP, our insurance company, is authorized to operate life insurance and private pension plans.

Regulatory Environment in Brazil

Our main subsidiaries in Brazil are subject to extensive regulation, such as those applicable to banks (in the case of Banco XP), securities and foreign exchange brokers (in the case of XP CCTVM), securities portfolio managers (in the case of XP Gestão, XP Advisory, XP PE, XP LT and XP Vista), securities analysts (such as Spiti Análise Ltda.), insurance companies and insurance brokers (in the case of XP VP and XP CS, respectively).

We offer various financial and capital markets services; in particular, we conduct activities related to banking, underwriting, brokerage services, portfolio management and insurance.

Legislation Applicable to Financial Institutions and Portfolio Managers in Brazil

The current Brazilian banking and financial institutional system was established by Law No. 4,595 of December 31, 1964, as amended, or the Banking Law.

The Banking Law laid out the structure of the national financial system, which is made up of the CMN, the Central Bank of Brazil, Banco do Brasil S.A., the National Bank for Economic and Social Development – BNDES, or the BNDES, and other public or private financial institutions. While the following entities do not fall under the purview of the Banking Law, they play key roles in the financial system: the CVM, SUSEP, the National Superintendency of Pension Plans (Superintendência Nacional de Previdência Complementar), or PREVIC; the CNSP, and the National Council for Pension Plans (Conselho Nacional de Previdência Complementar), or CNPC.

Law No. 4,728 of July 14, 1965, as amended, or Law No. 4,728/65, regulates Brazilian capital markets through setting standards and various other mechanisms. Further, pursuant to Law No. 6,385 of December 7, 1976, as amended, or Law No. 6,385/76, the distribution and issuance of securities in the market, trading of

 

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securities and settlement and/or clearance of securities transactions all require prior authorization by the CVM. The banking and capital markets regulatory framework in Brazil is further supplemented by the regulation issued by CMN, CVM and the Central Bank, and self-regulation policies, such as those issued by various associations,over-the-counter organized markets and securities exchanges, that govern their members and participants, (for example, B3, the Brazilian Association of Financial and Capital Markets Entities, or ANBIMA and the Brazilian Association of Investment Analysts, or APIMEC). The incorporation and operation of financial institutions in Brazil depend on prior authorization from the Central Bank (under Decree No. 10,029, of September 26, 2019, the Brazilian Executive Branch granted authority to the Central Bank to approve foreign investments in financial institutions. Such decree was further regulated by Circular No. 3,977 of January 22, 2020), and are also subject to oversight from the CVM when they participate in the Brazilian capital markets (such as XP CCTVM).

Financial institutions in Brazil can operate under various forms – such as commercial banks, investment banks, credit, financing and investment companies, cooperative banks, leasing companies, securities brokerage companies, securities distributor companies, real estate credit companies, mortgage companies, among others – all of which are regulated by different rules issued by the CMN, the Central Bank, and, if such financial institutions participate in capital markets activities, the CVM. In addition, like financial institutions, stock exchanges are also subject to CMN, the Central Bank, and the CVM approval and regulation as well in accordance with Law No. 4,728/65.

Pursuant to Banking Law, CMN Resolution No. 4,122 of August 2, 2012, as amended, or CMN Resolution No. 4,122, and CMN Resolution No. 1,655 of October 26, 1989, financial institutions must seek approval from the Central Bank, and, in certain cases, the CVM when appointing managers (including directors, officers and members of certain statutory boards, such as fiscal councils). According to Law No. 4,728/65, for securities brokerage firms (such as XP CCTVM), managers are subject to further restrictions and are prohibited from working for or fulfilling any administrative, advisory, tax or decision-making positions at entities listed on the Brazilian stock exchange. In addition, managers of XP CCTVM are prohibited from filling managerial functions in other brokerage firms authorized to carry out foreign exchange transactions pursuant to CMN Resolution No. 1,770, of November 28, 1990.

According to CMN Resolution No. 2,723 of May 31, 2000, with the exception of (1) equity interests typically held in proprietary investment portfolios by investment banks, development banks, development agencies (agências de fomento) and multiservice banks (bancos múltiplos); and (2) temporary equity interests not categorized as permanent assets (ativos permanentes) and not subject to consolidation by the financial institution, financial institutions must receive prior authorization from the Central Bank to hold capital interest of other companies. In order to receive authorization, the financial institutions’ activities must justify the need to hold capital interest for other companies; however, should the financial institutions participate in underwriting activities falling under certain exceptions established by the CMN, they will not need to provide justification.

In addition, as a principle, according to the Banking Law, Brazilian financial institutions are banned from granting loans or cash advances to their managers (officers, directors, and members of advisory boards, as well as their relatives). Certain exceptions to such restrictions are set forth in CMN Resolution No. 4,693 of October 29, 2018.

Furthermore, XP CCTVM and XP VP are required to maintain certain levels of regulatory capital, as determined by the Central Bank and SUSEP, respectively. For further information, see note 34 to our audited consolidated financial statements and note 24 to our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus.

Securities Brokerage Firms

Securities trading in stock exchange markets shall be carried out exclusively by securities brokerage firms (such as XP CCTVM) and certain other authorized institutions. Brokerage firms are part of the national financial

 

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system and are subject to regulation by and the oversight of the CMN, the Central Bank and the CVM. Securities brokerage firms must be authorized by the Central Bank to trade on the stock exchange market. Among other roles, securities brokerage firms and certain other authorized institutions can act as underwriters in the public offering of financial instruments and may participate in the foreign exchange trades in any foreign exchange market, subject to certain limitations, as set forth in Central Bank regulations.

Brokerage firms are regulated by CMN Resolution No. 1,655 of October 26, 1989, as amended, or CMN Resolution No. 1,655, which allows brokerage firms to participate, among others, in the following activities: (1) trading in stock exchanges; (2) underwriting; (3) intermediating public offerings; (4) managing investment portfolios; and (5) intermediating foreign currency trades. In addition to CMN Resolution No. 1,655, brokerage firms are subject to regulations from the CVM.

Under the rules set forth by the Central Bank, brokerage firms (such as XP CCTVM) cannot execute transactions that may result in loans, facilities or cash advances to their clients, including through synthetic transactions (such as assignment of rights), with the exception of margin transactions and other limited transactions.

Moreover, brokerage firms can neither charge commissions in connection with trades during primary distribution, nor purchase real property, except for their own use or as payment under “bad debts” (in which case, the asset must be sold within a year).

Third-Party Funds Management

XP Gestão, XP Advisory and XP Vista are asset managers licensed to operate by, and subject to the rules and oversight of, the CVM, pursuant to Law No. 6,385/76 and CVM Instruction No. 558 of March 26, 2015, as amended, or CVM Instruction No. 558. XP LT Gestão de Recursos Ltda. and XP PE Gestão de Recursos Ltda. are subject to the same regulation. XP LT Gestão de Recursos Ltda. will apply for the CVM authorization to provide securities portfolio management services. XP PE Gestão de Recursos Ltda. has already applied for such authorization and its request is currently under review.

CVM Instruction No. 558 defines asset/portfolio management activities as professional activities directly or indirectly related to the operation, maintenance and management of securities portfolios, including the investment of funds in the securities market on behalf of clients.

CVM Instruction No. 558 provides for two categories of asset managers: (1) trustee administrator and/or (2) portfolio manager. XP Gestão, XP Advisory, and XP Vista, are registered as portfolio managers; XP PE Gestão de Recursos Ltda. has applied for such authorization by CVM and its request is currently under review; and XP LT Gestão de Recursos Ltda. will apply to register with the CVM. To be authorized by the CVM to engage in such activity, legal entities that operate as asset managers must (1) have a registered office in Brazil; (2) have securities portfolio management as a corporate purpose and be duly incorporated and registered with the National Register of Legal Entities – CNPJ; (3) have one or more officers duly certified as asset managers as approved by CVM to take on liability for securities portfolio management, pursuant to CVM Instruction No. 558; (4) appoint a compliance officer and a risk management officer; (5) be controlled by reputable shareholders (direct and indirect), who have not been convicted of certain crimes detailed in article 3, VI of CVM Instruction No. 558; (5) who is not unable or suspended from occupying a position in financial institution or other entities authorized to operate by the CVM, the Central Bank, SUSEP or PREVIC, and have not been banned from asset management activities by judicial or administrative decisions; (6) put in place and maintain personnel and IT resources appropriate for the size and types of investment portfolio it manages; and (7) execute and provide the applicable forms to the CVM so as to prove its capacity to carry out such activities, pursuant to CVM Instruction No. 558. Under CVM Instruction No. 558, asset management must, among other requirements, conduct their activities in good faith, with transparency, diligence and loyalty with respect to their clients and perform their duties with the aim of achieving their investment objectives. This same regulation requires asset managers to

 

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maintain a website, with extensive current information, including, but not limited to (1) an updated annual filing form (formulário de referência); (2) a code of ethics; (3) rules, procedures and a description of internal controls in order to comply with CVM Instruction No. 558; (4) a risk management policy; (5) a policy of purchase and sale of securities by managers, employees and the company; (6) a pricing manual for assets from the securities portfolios managed by such asset manager, even if the manual has been developed by a third party; and (7) a policy of apportionment and division of orders among the securities portfolios.

Moreover, under CVM Instruction No. 558, asset management firms are forbidden from (1) making public assurances of profitability levels based on the historical performance of portfolio and market indexes; (2) modifying the basic features of the services they provide without following the prior appropriate procedures under the asset management agreement and regulations; (3) making promises as to future results of the portfolio; (4) contracting or granting loans on behalf of their clients, subject to certain exceptions set out in regulation; (5) providing a surety, corporate guarantee, acceptance or becoming a joint obligor in any other form, with respect to the managed assets; (6) neglecting, under any circumstances, the rights and intentions of the client; (7) trading the securities from the portfolios they manage with the purpose of obtaining brokerage revenues or rebates for themselves or third parties; or (8) subject to certain exceptions set out in the regulation, acting as a counterparty, directly or indirectly, to clients.

IFAs

The activity of IFAs (agentes autônomos de investimentos) is regulated by CVM Instruction No. 497 of June 3, 2011, as amended, or CVM Instruction No. 497, and Comment Letter No.4/2018-CVM/SMI. Pursuant to such rules, IFAs are individuals, acting as agents and representatives for an institution integrating securities distribution systems, registered with the CVM to conduct client development and attraction, to receive and register orders and transmit such orders to the appropriate trading or registration systems and to provide information on the products offered and on the services provided by the institution that hired them. Although they are individuals, CVM Instruction No. 497 allows IFAs to carry out their activities through an unlimited liability partnership (sociedades simples) or sole proprietorship (firma individual), incorporated for this specific purpose, which must also be registered with the CVM. The IFAs must be engaged by an institution integrating the securities distribution system.

In carrying out their services, the IFA must act with integrity, good faith and professional ethics, applying the care and diligence expected from a professional in its position, with respect to clients and its employer.

As set forth in CVM Instruction No. 497, IFAs (or the legal entities incorporated by them) are prohibited from certain activities, including, but not limited to:

 

  

receiving from or giving to clients or on behalf of clients, for any reason, and as remuneration for the rendering of any services, money, bonds or securities or other assets; acting as anattorney-in-fact or representative of clients before institutions that are part of the securities distribution system, for any purpose; and

 

  

contracting with clients or performing, even if free of charge, services related to securities portfolio management, consultancy or analysis of securities.

In addition, the following provisions of CVM Instruction No. 497 are noteworthy:

 

  

IFAs must work exclusively for one principal and may only act for one intermediary, with the exception of the distribution of quotas of investment funds by IFAs;

 

  

agents shall be transparent with their clients regarding details of their employer and its contractual relationship with the investor;

 

  

IFA acting through a legal entity (pessoa jurídica) may not accept partners that are not accredited as IFAs; and

 

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agents must not delegate to third parties, in whole or in part, obligations under their contract with their employer.

The brokerage firms are responsible for verifying their respective IFAs and for overseeing their activities and compliance with the applicable law. They may even be held responsible for malpractice or misconduct by such agents acting in their capacities as such.

On July 1, 2019, the CVM issued Public Hearing Release SDM No. 03/19, or Release SDM 3/19, which may result in significant changes in CVM Instruction No. 497, such as: (1) providing authorization for IFAs incorporated as corporations, limited liability partnerships and/or other partnerships; (2) abolishing or creating exceptions to the exclusivity rule that IFAs are subject to; and (3) amending transparency rules in connection with the activities of IFAs, in particular the disclosure of compensation received by IFAs (which is currently not required to be disclosed to investors). According to Release SDM 3/19, suggestions from the general public were to be provided by August 30, 2019. We cannot predict what actual changes may arise from such process. Please see “Risk Factors—Certain Risks Relating to Our Business and Industry—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.”

Multi-purpose Banks

According to CMN Resolution No. 2,099 of August 17, 1994, Brazilian multi-purpose banks (such as Banco XP) are subject to extensive and continuous regulatory scrutiny by Brazilian authorities. Multi-purpose banks conduct at least two types of banking activities, provided that at least one of such activities falls into either the category of commercial or investment banking. Banking regulation is enforced by the relevant government entities and regulators with the goal of controlling credit availability and reducing or increasing consumption.

Certain controls are temporary in nature and may vary from time to time in accordance with the relevant government’s or regulator’s credit policies, including:

 

  

minimum capital requirements;

 

  

compulsory reserve requirements;

 

  

lending limits and other credit restrictions; and

 

  

accounting and statistical requirements.

The following rules are applicable to multi-purpose banks, such as Banco XP:

 

  

they shall ensure the adequacy of products and services for customers’ needs, interests and objectives, as well as the integrity, reliability, security and confidentiality of transactions, services and products;

 

  

they may not own real estate other than the property they occupy, unless they take possession of real estate in satisfaction of a debt or when expressly authorized by the Central Bank, subject to certain CMN rules. Moreover, the total amount of fixed assets must be limited to 50.0% of the institution’s regulatory working capital;

 

  

they shall comply with the principles of selectivity, guarantee, liquidity and risk diversification;

 

  

financial institutions are prohibited from granting loans or advances without an appropriate agreement formalizing such debt;

 

  

financial institutions may not grant loans to, or guarantee the transactions of, their affiliates, except in certain limited circumstances (see “—Other Rules—Transactions with Affiliates” below);

 

  

the registered capital and total net assets of financial institutions must be compatible with the rules governing share capital and minimum capitalization enforced by the Central Bank for each type of financial institution; and

 

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financial institutions shall maintain internal policy and procedures governing their relationships with clients and users of their products and services.

In recent years, CMN has issued rules with the intention of modernizing financial services and retail banking. On September 26, 2019, CMN issued Resolution No. 4,753, which, effective as of January 1, 2020, replaces and consolidates a series of sparse CMN Resolutions dealing with the opening of bank accounts, which were issued over the years due to changes made to enable the creation of new products and services for specific public/clients, such as the rules applicable to “simplified accounts,” previously governed by Resolution No. 3,211, of June 30, 2004, and the CMN Resolution No. 4,480 of April 25, 2016, as amended, which used to regulate the opening and closing of bank deposit accounts by Brazilian residents through the exclusive use of electronic means and set forth terms and conditions applicable thereto. In addition, pursuant to CMN Resolution No. 4,479 of April 25, 2016, CMN created exemptions to requirements applicable to physical bank branches for bank accounts opened through electronic means. CMN Resolution No. 4,753 amended and consolidated many of these disparate rules enacted over the years, effective as of January 1, 2020.

Aiming to enable the use of more modern and efficient technology for the purpose of attracting new customers through electronic service channels, a process known asdigital onboarding, CMN Resolution No. 4,753 removed from the regulatory framework several existing restrictions arising from the adoption of procedures relating to physical handling of documents, such as the requirement that the identification and location details of the client should be physically checked, as contained in Article 32 of Resolution No. 2,025, of 1993. The Central Bank acknowledged that there currently are more efficient and secure ways of verifying data by electronic means, which reduces administrative costs.

The integration of modern technology such as Application Programming Interfaces, or APIs, big data and blockchain/DLT, has incentivized the CMN and the Central Bank to develop new rules in connection with Agenda BC+. The regulatory framework tends to evolve accordingly. With this aim in mind, regulatory authorities are striving to create technological solutions that would plug the gaps from traditional inefficiencies in the banking system. The regulators have expressed significant interest in the benefits and efficiencies that such technology may bring to the banking industry and to its financial inclusion strategies.

According to CMN Resolution No. 4,658 of April 26, 2018, as amended by CMN Resolution No. 4,752, of September 26, 2019, financial institutions and other institutions authorized to operate by the Central Bank must implement cybersecurity policies in order to ensure the integrity of their data systems. Under such Resolution, which regulates cybersecurity policies and the requirements for contracting data processing, storage and cloud computing services, covered institutions are required to appoint an officer who will be responsible for implementing and overseeing cybersecurity policy, and to adopt procedures and controls to prevent and respond to cybersecurity incidents.

The Cybersecurity Regulation also requires relevant institutions to provide an annual report to the Central Bank disclosing any cybersecurity incidents, as well as remediation efforts. In addition, communication to the Central Bank is required should any third-party service providers be hired for data processing, storage and cloud computing services. When services are rendered abroad, there are additional requirements for contracting, including the existence of a cooperation agreement between the Central Bank and the supervisory authority of the foreign country, or, absent such cooperation agreement, such contracting is subject to the prior approval of the Central Bank.

Last year, the Ministry of Economy, the Central Bank, the CVM and SUSEP publicly announced their intention to implement a regulatory sandbox model in Brazil. In that regard, CVM has recently issued CVM Instruction No. 626, of May 15, 2020 and the Central Bank has recently closed it public auction on such matters. The implementation of such a regulatory regime is expected to promote the development of more inclusive and higher quality products and services and to foster constant innovation in the financial, security and capital markets.

 

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Securities Analysts

The activity of securities analysts (analista de valores mobiliários) is regulated by CVM Instruction No. 598, of May 3, 2018, and by CVM Circular Letter No. 2/2019/CVM/SIN, of March 1, 2019. Pursuant to such rules, securities analysts are individuals or legal entities that, on a professional basis, prepare analyst reports for publication, disclosure or distribution to third parties, even if limited to certain clients. For purposes of CVM Instruction No. 598, “analyst reports” mean any texts,follow-up reports, studies or analyses regarding specific securities or issuers that may assist or influence investors in the investment decision process.

Securities analysts must be registered before a certifying entity duly authorized by CVM. Currently, the certification of securities analysts is carried out by APIMEC, which also serves as a self-regulatory entity for securities analysts.

In carrying out its services, securities analysts must act with integrity, good faith and professional ethics, and the analysts’ reports must be prepared by the analyst applying the care and diligence expected from a professional in its position.

As set forth in CVM Instruction No. 598, except in relation to the cases set forth therein, securities analysts (both individuals and legal entities) and other professionals that effectively participate in the preparation of the reports, are prohibited from the following activities:

 

  

issue analyst reports aiming to obtain, for itself or for third parties, unfair advantages;

 

  

omit information about conflicts of interest in analyst reports;

 

  

trade, on behalf of itself or of third parties, securities covered by the analysts’ reports or derivatives backed in such securities for a period of 30 days prior to and 5 days after the disclosure of the analyst report about such security or its issuer;

 

  

trade, on behalf of itself or of third parties, securities covered by the analyst reports or derivatives backed in such securities in the opposite direction of the recommendations or conclusions expressed in the analyst reports for (i) 6 months as of the disclosure of such report; or (ii) until the disclosure of a new report about the same issuer or security, if such disclosure occurs within the 6 months period mentioned above;

 

  

participate, directly or indirectly, (i) in any activity related to the public offering of securities, including sales efforts involving products or services related to the capital markets and efforts for prospecting new clients or jobs; (ii) in the structuring of financial products and securities; and (iii) in any activity related to M&A financial consulting; and

 

  

disclose the analyst reports or their content, even partially, to persons that are not part of the analyst team, in particular the issuer or the securities the subject of the analyst report before its publication, disclosure or distribution through the proper channels.

Securities analysts operating as legal entities are responsible for declaring in a clear and highlighted manner, whenever applicable, in all analysts’ reports that are published, disclosed or distributed, situations that may impact the report’s impartiality or that are or may be a conflict of interest.

Among others, CVM Instruction No. 598 considers that a conflict of interest may exist whenever the securities analyst entity, its controlled entities, controlling shareholders or entities under common control (i) have a relevant equity participation in the issuer covered by the analyst report, and vice-versa; (ii) have relevant financial and commercial interests over the issuer or the securities covered by the analyst report; (iii) are involved in the acquisition, selling or intermediation of securities covered by the analyst report; and (iv) are paid for other services rendered to the issuer covered by the report or its related parties.

 

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Main Regulatory Entities

National Financial System

The main regulatory authorities in the Brazilian financial system are the CMN, the Central Bank and the CVM. In addition, most Brazilian investment banks, brokerage firms, securities distributers and asset managers are associated with and subject to the self-regulatory rules issued by ANBIMA.

In addition, trading segments managed by B3 are self-regulated and supervised by BSM –Supervisão de Mercados, or BSM, anon-profit organization that forms part of the B3 group.

We present below a summary of the main duties and powers of each regulatory agent, ANBIMA and BSM.

CMN

CMN is the main monetary and financial policy authority in Brazil, responsible for creating financial, credit, budgetary and monetary rules.

According to Banking Law, the CMN’s main responsibilities are to oversee the regular organization, operation and inspection of entities that are subject to the Banking Law, as well as the enforcement of applicable penalties. In addition, Law No. 4,728/65 delegates to the CMN the power to set general rules for underwriting activities for resale, distribution or intermediation in the placement of securities, including rules governing the minimum regulatory capital of the companies that contemplate the underwriting for resale and distribution of instruments in the market and conditions for registration of the companies or individual firms which contemplate intermediation activities in the distribution of instruments in the market. The CMN has the power to regulate credit transactions involving Brazilian financial institutions and Brazilian currency, supervise the foreign exchange and gold reserves of Brazil, establish saving and investment policies in Brazil and regulate the Brazilian capital markets. The CMN also oversees the activities of the Central Bank, the CVM and SUSEP. Other CMN responsibilities include:

 

  

coordinating monetary, credit, budget and public debt policies;

 

  

establishing policies on foreign exchange and interest rates;

 

  

seeking to ensure liquidity and solvency of financial institutions;

 

  

overseeing activities related to the stock exchange markets;

 

  

regulating the structure and operation of financial institutions;

 

  

granting authority to the Central Bank to issue currency and establish reserve requirement levels; and

 

  

establishing general guidelines for the banking and financial markets.

The Central Bank

The activities of financial institutions are subject to limitations and restrictions. The Central Bank is responsible for (1) implementing those CMN policies that are related to monetary, credit and foreign exchange control matters; (2) regulating Brazilian financial institutions in the public and private sectors; and (3) monitoring and regulating foreign investments in Brazil. The President of the Central Bank is appointed by the President of Brazil (subject to ratification by the Senate) for an indefinite term.

Banking Law delegated to the Central Bank the responsibility of permanently overseeing companies that directly or indirectly interfere in the financial and capital markets, controlling such companies’ operations in the foreign exchange market through operational proceedings and various modalities, and supervising the relative stability of foreign exchange rates and balance of payments. In addition, Law No. 4,728/65 states that the CMN

 

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and the Central Bank shall exercise their duties related to the financial and capital markets with the purpose of, among other things, facilitating the public’s access to information related to bonds or securities traded in the market and on the companies that issue them, protecting investors against illegal or fraudulent issuances of bonds or securities, preventing fraud and manipulation modalities intended to create artificial conditions of the demand, supply or pricing of bonds or securities distributed in the markets and ensuring the observance of equitable commercial practices by all of those professionals who participate in the intermediation of the distribution or trading of bonds or securities. The Central Bank has authority over brokerage firms, financial institutions, companies or individual firms performing underwriting for resale and distribution of bonds or securities, and maintains a record on, and inspects the transactions of, companies or individual firms that carry out intermediation activities in the distribution of bonds or securities, or which conduct, for any purposes, the prospecting of popular savings in the capital market.

Other important responsibilities of the Central Bank are as follows:

 

  

controlling and approving the organization, operation, transfer of control and corporate reorganization of financial institutions and other institutions authorized to operate by the Central Bank;

 

  

managing the daily flow of foreign capital and derivatives;

 

  

establishing administrative rules and regulation for the registration of foreign investments;

 

  

monitoring remittances of foreign currency;

 

  

controlling the repatriation of funds (in case of a serious deficit in Brazil’s payment balance, the Central Bank may limit remittances of profits and prohibit remittances of capital for a limited period);

 

  

receiving compulsory collections and voluntary deposits in cash from financial institutions;

 

  

executing rediscount transactions and granting loans to banking financial institutions and other institutions authorized to operate by the Central Bank;

 

  

intervening in the financial institutions or placing them under special administrative regimes, and determining their compulsory liquidation; and

 

  

acting as depositary of the gold and foreign currency.

CVM

The CVM is a federal authority responsible for implementing the CMN’s policies related to the Brazilian capital market and for regulating, developing, controlling and inspecting the securities market.

The main responsibilities of the CVM are the following:

 

  

regulating the Brazilian capital markets, in accordance with Brazilian corporation law and securities law;

 

  

setting rules governing the operation of the securities market;

 

  

defining the types of financial institutions that may carry out activities in the securities market, as well as the kinds of transactions that they may perform and services that they may provide in such market;

 

  

controlling and supervising the Brazilian securities market through, among others:

 

   

the approval, suspension andde-listing of publicly held companies;

 

   

the authorization of brokerage firms to operate in the securities market and public offering of securities;

 

   

the supervision of the activities of publicly held companies, stock exchange markets, commodities and future markets, financial investment funds and variable income funds;

 

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the requirement of full disclosure of relevant events that affect the market, as well as the publication of annual and quarterly reports by publicly held companies;

 

   

the imposition of penalties; and

 

  

permanently supervising the activities and services of the securities market, as well as the dissemination of information related to the market and the amounts traded therein, to market participants.

The CVM has jurisdiction to regulate and supervise financial investment funds and derivatives markets, a role previously fulfilled by the Central Bank. Pursuant to Law No. 10,198 of February 14, 2001, as amended, and Law No. 10,303 of October 31, 2001, the regulation and supervision of both financial mutual funds and variable income funds and of transactions involving derivatives were transferred to the CVM. In compliance with the Brazilian legislation, the CVM is managed by a President and four officers, all of whom are appointed by the President of the Republic (and approved by the Senate). The persons appointed to the CVM shall have strong reputations and be recognized as experts in the capital markets sector. CVM officers are appointed for a single term of office of five years, andone-fifth of the members shall be renewed on an annual basis.

All decisions issued by the CVM and by the Central Bank in administrative proceedings on the topics of the national financial system and the foreign exchange market are subject to appeal before the Appeals Council of the National Financial System, which is composed of members appointed by public authorities and members of the private sector.

The CVM is also responsible for determining and regulating the performance of IFAs. Due to the relevance of the IFAs and our subsidiaries, we highlight below the relevant regulatory frameworks such entities are subject to.

Pension and Insurance

SUSEP and CNSP

In Brazil, the regulation of insurance,co-insurance, retrocession, capitalization, supplementary pension schemes and brokerage is carried out by CNSP and SUSEP.

SUSEP is an independent agency in charge of implementing and conducting the policies established by CNSP and the supervision of the insurance,co-insurance, retrocession, capitalization, supplementary pension schemes and brokerage. SUSEP neither regulates nor supervises (1) the supplementary pension entities that are regulated by the SPC; and (2) the operators of private healthcare assistance plans, which are regulated by ANS. With the enactment of Supplementary Law No. 126 on January 15, 2007, the CNSP and SUSEP are also responsible for the regulation of the Brazilian reinsurance market.

CNSP is made up of one representative of each one of the following bodies: Ministry of Social Security, the Central Bank, Ministry of Economy, Ministry of Justice, the CVM and the superintendent of SUSEP – Private Insurance Authority.

The supplementary insurance and pension sectors in Brazil are subject to overlapping regulations.Decree-Law No. 73 of November 21, 1966, as amended, sought to centralize the legislation and inspection activities in the sector by creating the National Private Insurance System – SNSP, composed of (1) CNSP; (2) SUSEP; (3) insurance companies duly authorized to operate in the private insurance market; (4) the reinsurance companies; and (5) duly qualified and/or registered insurance brokers. CNSP is linked to the Ministry of Economy and its main roles include: establishing the guidelines and rules for the private insurance policy in Brazil; regulating the incorporation, organization, operations, and inspection of insurers, reinsurers, supplementary open pension funds, and capitalization companies, as well as establishing capital thresholds for

 

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such entities; establishing the general characteristics of insurance and reinsurance contracts; establishing general guidelines for insurance, reinsurance, supplementary open pension funds, and capitalization operations; establishing general accounting and statistical rules, as well as legal, technical, and investment limits for the operations of insurers, reinsurers, supplementary open pension funds, and capitalization companies; and regulating insurance and reinsurance broker activities and profession.

SUSEP’s main roles include: processing application requests of incorporation, organization, operations, and inspecting insurers, reinsurers, supplementary open pension funds, and capitalization companies; issuing instructions and circular letters in connection with the regulation of insurance, reinsurance, supplementary open pension funds, and capitalization operations, in accordance with CNSP guidelines; setting forth the conditions of insurance plans to be used by the insurer market; approving limits for the operations of supervised companies; authorizing the use and release of assets and amounts given in guaranty for technical provisions and discretionary capital; inspecting and implementing the general accounting and statistical rules set forth by CNSP; inspecting the operations of supervised companies; and conducting the liquidation of supervised companies.

Self-Regulatory Entities

ANBIMA

ANBIMA is a private self-regulatory association of investment banks, asset managers, securities brokers and investment advisers, which, among other responsibilities, establishes rules as well as codes of best practices for the Brazilian capital market, including punitive measures in case of noncompliance with its rules.

BSM

BSM supervises these markets and monitors operations, orders and trades executed in trading environments, supervises market participants and, if necessary, imposes penalties against those who infringe regulations.

Working in close collaboration with CVM and the Central Bank, BSM acts to ensure that institutions and their professionals comply with market regulations, by:

 

  

conducting market surveillance – BSM monitors all orders and trades in B3’s markets in order to identify signs of irregularities;

 

  

auditing – BSM audits all B3 participants to ensure their compliance with the regulations and to identify possible violations of market rules;

 

  

imposing punitive processes and other enforcement actions – when violations of regulations occur, BSM adopts guidance, persuasion or disciplinary measures such as letters of recommendation, letters of censure or administrative sanctioning proceedings, in accordance with the severity of the violation that has been identified; in addition, BSM can, in connection with administrative sanctioning proceedings, apply penalties to or enter into Terms of Commitment (termo de compromisso) with the accused;

 

  

providing compensation for loss – BSM analyzes and adjudicates complaints presented to the Investor Compensation Mechanism (MRP), which awards damages of up to R$120,000 to investors harmed by a B3 participant’s inappropriate activity; and

 

  

facilitating market development – BSM develops education initiatives, rule enhancements and institutional relationships with market participants, regulatory bodies and international organizations.

APIMEC

APIMEC is a private self-regulatory association authorized by CVM to perform the certification and self-regulation of securities analysts (both individuals and legal entities), establishing rules, procedures and best practices that must be followed by securities analysts, under penalty of punitive measures in case of noncompliance with its rules.

 

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Other Rules

Adequacy of Capital and Limits of Exposure and Other Solvency Rules

The financial institutions are subject to an extensive set of rules issued by the CMN and the Central Bank related to capital amounts, exposure limits and other solvency rules that follow principles recommended by the Basel Committee, especially in view of the systemic risks associated with the relationship and activity of the financial institutions. As such, the CMN and the Central Bank sought to guarantee the solvency of the financial system and mitigate systemic risks.

With this aim, CMN Resolution No. 2,099 of August 17, 1994, as amended, or CMN Resolution No. 2,099, established minimum capital and net equity requirements for various types of financial institutions. For example, the CMN set a minimum capital amount and net equity amount of R$1.5 million for brokerage firms providing firm guarantee of underwriting of securities, in the manner operated by XP CCTVM, and R$17.5 million for multi-purpose banks, such as Bank XP after all due approvals from the Central Bank.

In accordance with the Basel Committee principles, other relevant rules for financial institutions are CMN Resolution Nos. 4,192 and 4,193, which set out the methodology for calculating the reference capital and the ascertainment of the minimum requirements for the reference capital, the main capital and additional capital. Said resolutions are complemented by various Central Bank circulars and circular letters, among which is Central Bank Circular No. 3,644 of March 4, 2013.

CMN Resolution No. 4,557 of February 23, 2017, or CMN Resolution No. 4,557, unifies and expands Brazilian regulation on risk and capital management for Brazilian financial institutions and other institutions authorized to operate by the Central Bank. The rule is also an effort to incorporate recommendations from the Basel Committee on Banking Supervision into Brazilian regulation. The rule states that risk management must be conducted through an unified effort by the relevant entity (i.e., not only must risks be analyzed on an individual basis, but financial institutions and other institutions authorized to operate by the Central Bank must also control and mitigate adverse effects caused by the interaction of different risks). It also strengthens the rules and requirements related to risk management governance and expanded on the competence requirements and duties of the risk management officer.

The rule sets out different structures for risk and capital management, which are applicable for different risk profiles set out in the applicable regulation. Consequently, less sophisticated financial institution can have a simpler risk management structure, while institutions with more complexity must follow stricter protocols.

Insurance companies are also subject to an extensive set of laws and regulations governing solvency, notably CNSP Resolution No. 321/2015 and Circular SUSEP No. 517/2015, which outline minimum regulatory capital parameters, prudential accounting adjustments, limitations on collateral assets supporting insurance reserves (ativos garantidores) and other related rules.

An insurance company’s minimum regulatory capital may vary from time to time in light of periodic risk-based calculations required by such regulations. Factors such as the risk profile of the insurance portfolio, credit risk of clients, general market-related risks and other indicators may result in the increase or decrease of regulatory capital over time, with corresponding effects of requiring additional capital or releasing capital, as the case may be. Insurance companies have limited control over the variation of such factors, and therefore may be required from time to time to make capital contributions exceeding their projections.

The aforementioned rules also contemplate the creation of various levels of internal and external controls overseeing solvency, such as auditing by independent actuaries, establishing internal audit committees for companies exceeding certain financial thresholds, limiting acceptable assets for purposes of covering insurance reserves, requiring monthly reporting to the insurance regulator, among other requirements.

 

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Internal Compliance Procedures

All financial institutions shall maintain internal guidelines and procedures to control their financial, operational and managerial information systems and shall comply with all the applicable legislation. CMN Resolution No. 4,595 of August 28, 2017, states that Brazilian financial institutions and other institutions authorized to operate by the Central Bank shall implement and maintain a compliance policy compatible with the nature, size, complexity, structure, risk profile and business model of the institution.

According to CMN Resolution No. 2,554 of September 24, 1998, the executive officers of the financial institution are responsible for implementing an efficient structure of internal control, by defining responsibilities and control procedures and establishing corresponding objectives and procedures throughout all levels of the institution. The executive officers are also responsible for verifying compliance with all internal procedures. The internal audit department of a financial institution reports directly to the executive officers or directors of the institution, as applicable.

Laws on Insolvency of Financial Institutions in Brazil

Financial institutions are subject to the procedures set out by Law No. 6,024 of March 13, 1974, as amended, or Law No. 6,024/74, andDecree-Law No. 2,321 enacted on February 25, 1987, as amended, which set out the provisions applicable to intervention, temporary administration or extrajudicial liquidation by the Central Bank, as well as to bankruptcy proceedings.

Temporary Administration

As per theDecree-Law No. 2,321, the Central Bank may assume the temporary administration of a Brazilian financial institution in certain situations, determining the temporary special administration regime.

The Central Bank is the authority empowered to determine this sort of regime, which shall take place (1) in case the financial institution (i) performs recurring practices against the economic and financial policies provided in federal law; (ii) faces a shortage of assets; (iii) fails to comply with the compulsory banking reserve rules; (iv) has a reckless or fraudulent management, or (2) in case of the existence of any of the reasons for an intervention by the Central Bank, as provided for in Law No. 6,024/74.

The administration of the financial institution subject to this temporary administration will be carried out by a directive board named by the Central Bank, with ordinary management powers. The financial institution administrators and members of the board of auditors have their mandates immediately terminated. The directive board is expected to issue one or more reports to the Central Bank based on which the regulatory authority shall decide on the actions to be taken in relation to the financial institution.

The temporary administration regime ceases (1) if the Federal Government takes control over the financial institution; (2) in case the financial institutions go through a corporate restructuring, merger,spin-off, amalgamation or transfer of its controlling interest; (3) in case of normalization of the situation of the finance institution, at Central Bank’s discretion; or (4) with the Central Bank decision for its extrajudicial liquidation.

Intervention and Extrajudicial Liquidation

Intervention and extrajudicial liquidation occur when a financial institution is in a precarious financial condition or upon the occurrence of triggering events that may impact its creditors’ situation. Such measures are imposed by the Central Bank in order to avoid the entity’s bankruptcy.

 

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Intervention

Law No. 6,024/74 granted the Central Bank the power to appoint a liquidator to intervene in the transactions or liquidate any financial institution other than public financial institutions controlled by the Federal Government. The intervention may be ordered at Central Bank’s discretion, if the following is verified:

 

  

due to mismanagement, the financial institution has suffered losses exposing creditors to risk;

 

  

the financial institution has consistently violated Brazilian banking laws or regulation; or

 

  

such intervention constitutes a viable alternative to the liquidation of the financial institution.

Effective the date on which it is ordered, the intervention will automatically trigger the following: (1) suspension of the enforceability of payable obligations; (2) suspension of the maturity of previously contracted and imminently due obligations; and (3) the freezing of deposits already existing on the date of its determination. The intervention shall cease (1) if the interested parties, presenting the necessary guarantees, at the Central Bank’s discretion, undertake to continue the company’s economic activities; (2) at the Central Bank’s discretion, the entity’s situation has been normalized; or (3) if extrajudicial liquidation or bankruptcy of the entity is ordered.

The intervention may also be ordered upon request of the management of the financial institution. Any intervention period may not exceed six months, and may be extended once, by up to six additional months, by the Central Bank. The intervention procedure shall terminate if the Central Bank determines that the factors that motivated the intervention have been eliminated or upon the presentation of adequate guarantees by interested parties. On the other hand, the Central Bank may order the extrajudicial liquidation of the institution or authorize the intervener to request the bankruptcy thereof. According to Law No. 6,024/74, the intervention may be converted in a bankruptcy proceeding, currently governed by Law No. 11,101 of February 9, 2005 (which is the Law governing the Bankruptcy and Receivership of Companies, referred hereinafter as the LFRJE), if, among others, the assets of the institution under intervention are not enough to cover at least 50% of the amount of its outstanding unsecured credit.

Extrajudicial Liquidation

In accordance with Law No. 6,024/74, extrajudicial liquidation is an administrative procedure ordered by the Central Bank (not applicable to the financial institutions controlled by the Federal Government) being enforced by a liquidator appointed by the Central Bank.

This measure aims to terminate the activities of a troubled financial institution, removing it from the Brazilian national financial system, liquidating its assets and paying its liabilities, as in an extrajudicially decreed bankruptcy.

The Central Bank will order the extrajudicial liquidation of the financial institution if:

 

  

the economic or financial situation of the institution is at risk, particularly when the institution fails to comply with its obligations in a timely manner, or upon occurrence of an event that indicates a state of insolvency according to LFRJE’s rules;

 

  

management seriously violates the banking laws, rules or regulation;

 

  

the institution suffers a loss that subjects its unprivileged and unsecured creditors to severe risk; or

 

  

upon revocation of the authorization to operate, the institution fails to initiate, within 90 days, its ordinary liquidation, or, if initiated, the Central Bank verifies that the pace of the liquidation may harm the institution’s creditor.

Extrajudicial liquidation may also be ordered upon the request of a financial institution’s management, if its bylaws entitle it to do so or upon request by the intervener, with an indication of the causes of the request.

 

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The decree of extrajudicial liquidation shall trigger the following: (1) suspend the actions or foreclose on rights and interests relating to the collection of the entity being liquidated, so that no other actions or executions may be brought during the liquidation; (2) accelerate the obligations of the entity being liquidated; (3) stall the statute of limitations with respect to the obligations assumed by the institution; (4) trigger the penal clauses provided in unilateral agreements that became due by virtue of the extrajudicial liquidation; (5) ratably deduct interest, against the estate, until the date when the debts are paid in full; and (6) preclude claims for monetary correction of any passive currencies or pecuniary penalties for infringement of criminal or administrative laws.

Extrajudicial liquidation procedures may be terminated (a) if the financial institution is declared bankrupt or (b) by decision of the Central Bank upon the following events: (1) full payment of the unsecured creditors; (2) change of corporate purpose of the institution to an economic activity that is not part of the CMN; (3) transfer of the controlling interest of the financial institution; (4) conversion into ordinary liquidation; (5) exhaustion of the assets owned by the financial institution upon its full realization and distribution of the proceeds among the creditors, even if full payment of the credits did not occur; or (6) acknowledgement by the Central Bank that the remaining assets are illiquid or of difficult disposal.

Repayment of Creditors in an Extrajudicial Liquidation or Bankruptcy

In November 1995, the CMN created the Credits Guarantee Fund, or the FGC, according to CMN Resolution No. 2,197, of August 31, 1995, most recently amended and superseded by CMN Resolution No. 4,222, of May 23, 2013, in order to guarantee the payment of funds deposited with financial institutions in the event of intervention, extrajudicial liquidation, bankruptcy or other states of insolvency. The FGC is mainly funded by mandatory contributions from all Brazilian financial institutions that work with customer deposits.

The FGC is a deposit insurance system that guarantees, pursuant to CMN Resolution No. 4,688 of September 25, 2018, as amended, a maximum amount of R$250,000 of deposit and certain credit instruments held by a customer against a financial institution (or against member financial institutions of the same financial group) and a maximum amount of R$1.0 million per creditor against the set of all consolidated financial institutions every four years. The liability of the participating institutions is limited to the amount of their contributions to the FGC, with the exception that in limited circumstances if FGC payments are insufficient to cover insured losses, the participating institutions may be asked for extraordinary contributions and advances. The payment of unsecured credit and customer deposits not payable under the FGC is subject to the prior payment of all secured credits and other credits to which specific laws may grant special privileges.

In addition, Law No. 9,069 was enacted in 1995, sets forth that compulsory deposits maintained by financial institutions with the Central Bank are immune to actions by a bank’s general creditors for the repayment of debts.

Transactions with Affiliates

The Banking Law (paragraph 4, article 34), as amended by Law No. 13,506 of November 13, 2017, or Law No. 13,506, prohibits financial institutions from conducting credit transactions with related parties, except in certain specific circumstances as provided below. Pursuant to CMN Resolution No. 4,693 of October 29, 2018, the following persons are considered related parties of a financial institution for the purpose of such restriction:

 

 (a)

its controlling shareholders (individuals or legal entities), pursuant to Article 116 of Law No. 6,404/76;

 

 (b)

its officers and members of statutory or contractual bodies;

 

 (c)

spouses, partners and blood relatives up to the second degree of individuals specified in items (a) and (b);

 

 (d)

its individual shareholders with stakes equal to or greater than 15% in its capital, or Qualified Equity Interest; and

 

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 (e)

its legal entities:

 

 i.

with Qualified Equity Interest in the financial institutions’ capital stock;

 

 ii.

in which capital, directly or indirectly, the financial institution holds Qualified Equity Interest;

 

 iii.

in which the financial institution holds effective operational control or relevance in the deliberations, regardless of the equity interest held; and

 

 iv.

with a common officer or board member in relation to the financial institution.

The following credit transactions with related parties are exempt from the prohibition referred to above: (1) transactions carried out under market-compatible conditions, without additional benefits or privileges when compared to transactions granted to other clients of the same profile of the respective institutions; (2) transactions with companies controlled by the Federal Government, in the case of federal public financial institutions; (3) credit transactions whose counterparty is a financial institution that is part of the same prudential conglomerate, provided that they contain a contractual subordination clause, subject to the provisions of item V of art. 10 of the Banking Law, in the case of banking financial institutions; (4) interbank deposits; (5) obligations assumed between related parties as a result of liability imposed on clearinghouse participants or providers of clearing and settlement services authorized by the Central Bank or by the CVM; and (6) other cases authorized by CMN Resolution No. 4,693.

According to CMN Resolution No. 4,693, as of April 1, 2019, all financial institutions must adopt internal policies regulating transactions with related parties.

Brazilian Law No. 7,492 enacted on June 16, 1986, which regulates crimes against the Brazilian financial system, criminalized the extension of credit by a financial institution to certain related parties mentioned in the Banking Law, which are any of its controlling individuals or entities, directors or officers, members of statutory or contractual bodies and certain of their family individual members or legal entities with a qualified interest in the financial institution, as well as any legal entity with qualified interest in the financial institution or in which the financial institution has a qualified interest, either direct or indirect, under common effective control or with common officers or directors.

Punitive Sanctions

Legal violations under Brazilian banking and/or securities laws may lead to administrative, civil and criminal liability. Offenders may be prosecuted under all three legal theories separately, before different courts and regulatory authorities, and face different sanctions with respect to the same legal offense.

Law No. 13,506, Central Bank Circular No. 3,857 of November 14, 2017, and CVM Instruction No. 607 of June 18, 2019, regulate administrative sanctioning proceedings as well as the various penalties, consent orders, injunctive measures, fines and administrative settlements imposed by the Central Bank and the CVM.

Law No. 13,506 is noteworthy, as it:

 

 (1)

sets fines imposed by the Central Bank of up to R$2 billion or 0.5% of the entity’s revenue, arising from services and financial products provided in the year prior to the violation;

 

 (2)

limits fines imposed by the CVM to the greater of the following amounts: R$50 million, twice the value of the irregular transaction, three times the amount of the economic gain improperly obtained or loss improperly avoided, or twice the damage caused by the irregular conduct. Repeat offenders may be subject to treble the amounts above;

 

 (3)

provides for the suspension, disqualification and prohibition from engaging in certain activities or transactions in the banking or securities market for a period of up to twenty years;

 

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 (4)

temporarily bans offending individuals from serving in any managerial capacity for financial institutions;

 

 (5)

imposes coercive or precautionary fines of up to R$100,000 per day, subject to a maximum period of 30 days in punitive fines;

 

 (6)

defines the scope of the Central Bank’s regulatory authority;

 

 (7)

prohibits the offending institutions themselves from participating in the markets;

 

 (8)

provides for a penalty of “public admonition” in place of “warning”, imposed by the Central Bank;

 

 (9)

empowers the Central Bank to enter intocease-and-desist commitments;

 

 (10)

empowers the Central Bank and the CVM to enter into administrative agreements;

 

 (11)

provides the CVM with the authority to ban the accused from contracting with official Brazilian financial institutions and participating in public bidding processes for a period of up to five years; and

 

 (12)

redefines related party transactions.

Penalties may be aggregated, and are calculated based on the following factors:

 

 (1)

gains obtained or attempted to be gained by the offender;

 

 (2)

economic capability to comply;

 

 (3)

severity of the offense;

 

 (4)

actual losses;

 

 (5)

any recurrence of the offense; and

 

 (6)

the offender’s cooperativeness with the investigation.

Law No. 7,492 provides a legal framework to hold controlling shareholders, officers and managers of a financial institution criminally liable. The regime under Law No. 7,492 also covers interventionists, liquidators and real estate managers, in the context of interventions, extrajudicial liquidation or bankruptcy, respectively. Those found criminally liable under Law No. 7,492 will be subject to detention and/or pecuniary fines.

Law No. 6,385 also imposes imprisonment and/or fines for banking or securities infractions. For example, those liable for market manipulation and insider trading are subject to sentences of up to eight and five years, respectively, plus fines of up to three times the illicit benefit gained.

Regulation Against Money Laundering and Bank Secrecy in Brazil

Law No. 9,613 of March 3, 1998, as amended by Law No. 12,683 of July 9, 2012, or the Anti-Money Laundering Law, and Law No. 13,506 of November 13, 2017 (related to administrative procedures and enforcement conducted by CVM and the Central Bank), plays a major regulatory role in the oversight of banking and financial and insurance activities in Brazil. The Anti-Money Laundering Law sets forth the rules and the penalties to be imposed upon persons engaging in activities that constitute “laundering” or the concealing of property, cash or assets acquired or resulting from any kind of criminal activity. Such regulation further prohibits individuals from using the financial system for the aforementioned illicit acts.

Pursuant to the Anti-Money Laundering Law, banks (such as Banco XP), securities brokers (such as XP CCTVM), securities distributors, asset managers (such as XP Gestão, XP Advisory and XP Vista), leasing companies, credit card companies, insurance companies and insurance brokers (such as XP VP and XP CS, respectively), among others, must: (1) identify and maintainup-to-date records of their clients, for a period of at least five years; (2) keepup-to-date records of all transactions, for a period of at least five years, in Brazilian and

 

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foreign currencies, involving securities, bonds, credit, financial instruments, metals or any asset that if converted into cash exceed the amount set forth by the competent authorities, and which shall be in accordance with the instruction issued by these authorities; (3) keepup-to-date records of all transactions, for a period of at least five years, in Brazilian and foreign currency, involving securities, bonds, credit, instruments, metals, or any asset that if converted into cash exceed the applicable minimum amount set forth by the relevant authorities, such transactions must be in accordance with guidance on amount, timing and counterparties from the relevant authorities; (4) adopt AML internal control policies and procedures that are compatible with the size of the company; (5) register and maintainup-to-date records with the appropriate regulatory agency (i.e., the Brazilian Financial Intelligence Unit (Unidade de Inteligência Finceira), or “UIF,” CVM and/or SUSEP); (6) comply with COAF’s requests and obligations; (7) pay special attention to any transaction that, in light of the provisions set forth by competent authorities, may indicate the existence of a money laundering crime; (8) report all transactions referred to in items ii, iii and vii to UIF within twenty-four hours, while abstaining from notifying their customers of such report; and (9) confirm to the applicable regulatory agency (i.e., UIF, CVM and/or SUSEP) that no offending transactions have occurred.

In accordance with Circular No. 3,461 enacted by the Central Bank on July 24, 2009, as amended, or Central Bank Circular No. 3,461, financial institutions are required to (1) maintain updated client registration data (including declarations regarding the purposes and nature of the transactions and verification of the of clients’ statuses as politically prominent persons); (2) adopt preventative internal policies and procedures; (3) record transactions involving amounts in national or foreign currencies, securities, metals or any other assets that may be converted to cash, including specific records for the issuance or reloading of amounts in the form of prepaid cards; (4) maintain records of all financial services provided and all financial transactions carried out with clients or on their behalf as well as consolidated information that allows for verification of the flow of funds, the economic activity and financial capacity of the client, the origin of funds and end beneficiaries of the transactions; (5) maintain records of transactions carried out by individuals or legal entities that involve the same groups of companies, in an amount greater than R$10,000.00 over the course of a calendar month or transactions that reveal patterns of activity that indicate a scheme to prevent identification; (6) review transactions or proposals that may indicate criminal activities; (7) maintain records of all transfers of funds related to (i) deposits, electronic transfers, checks, among others, and (ii) issuance of checks, payment orders, among others, in amounts greater than R$1,000.00; (8) maintain records of issuances or loading of credit cards that allow the identification of transactions in amounts greater than R$100,000.00 or which reveal patterns of activity that indicate a scheme to prevent identification; (9) maintain records of transaction activities in amounts greater than R$100,000.00 in cash or which reveal patterns of activity that indicate a scheme to prevent identification; and (10) notify the relevant authority of any transaction that may be deemed suspicious by the financial institution.

SUSEP Circular No. 445/2012 imposes similar internal controls and monitoring requirements upon insurance and capitalization companies, complementary pension companies, (entidades abertas de previdência complementar), cooperative companies (sociedades cooperativas), including those authorized to provide reinsurance services, in particular, (1) the monitoring of transactions involving politically prominent persons, terrorism and money laundering; (2) the prevention, monitoring and detection of suspicious transactions; (3) the registration of transactions with clients and beneficiaries, third parties and related parties; and (4) the validation of compliance mechanisms by internal auditing. Companies subject to this regulation are also required to appoint one of their Officers as head of compliance and register such individual in accordance with the Anti-Money Laundering Law and SUSEP Circular No. 445/2012.

Along the same lines, CVM Instruction No. 301 of April 16, 1999, as amended, or CVM Instruction No. 301, establishes, among other obligations, that persons who engage in, on a permanent or occasional basis, as a main or ancillary activity, cumulatively or not, the custody, issuance, distribution, settlement, trade, intermediation, consultancy or management of bonds or securities, and independent audit within the scope of the stock exchange market must adopt rules, procedures and internal controls in accordance with previously and expressly established procedures to confirm the registration information of its clients, keep such information

 

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updated and monitor the transactions carried out thereby, so as to prevent the use of the account by third parties and identify the end beneficiaries of the transactions, such entities shall also identify and closely monitor the business relations maintained with politically exposed person. Under CVM Instruction No. 301, the following should be monitored: (1) transactions in amounts incompatible with the transacting parties’ professional occupation, income, and/or equity/financial position; (2) repeated transactions between the same parties, through which one or all of the parties involved has registered consistent gains or losses; (3) transactions indicating a material discrepancy between the volume and/or frequency of the business of the parties involved; (4) transactions that may involve identity deception of the parties involved and/or their beneficiaries; (5) transactions that may indicate insubordinate acts committed by agents against their principals; (6) transactions reflecting a sudden and objectively unjustified change in the operations of the persons involved; (7) transactions carried out with the purpose of generating loss or gain for which there is no objective economic basis; (8) transactions with the participation of individuals residing, or entities organized, in countries that either do not follow or insufficiently follow the recommendations from the Financial Action Group against Money Laundering and Terrorism Financing – GAFI; (9) transactions settled in cash, if and where permitted; (10) private transfers, without apparent reason, of funds and securities; (11) transactions reflecting a complexity and risk profile incompatible with the technical qualification of the client or its agent; (12) deposits or transfers made by third parties in order to settle client transactions or in order to provide collateral in transactions in future settlement markets; (13) payments made to third parties, in any form, by means of settlement of transactions or redemption of amounts deposited as collateral, registered in the client’s name; (14) situations in which it is not possible to maintain current their client registration information; (15) situations and transactions in which it is not possible to identify the end beneficiary; (16) situations in which it is not possible to conduct the aforementioned diligence process; (17) transactions with individuals considered to be Politically Exposed Persons; (18) the business relationship maintained with Politically Exposed Persons,non-resident investors (especially when incorporated as trusts) and private banking; (19) the proposals of new relationships and operations with Politically Exposed Persons, including those from countries with which Brazil has a large volume of financial and commercial transactions, common borders or ethnic, linguistic or political proximity; (20) clients that have become, since the beginning of the relationship with the institution or have already initially been considered to be Politically Exposed Persons, and apply the treatment of items (18) and(19) above; and (21) the origin of the resources involved in the transactions of clients and beneficiaries identified as Politically Exposed Persons.

On March 3, 1998, the Federal Government created the Council of Control of Financial Activities, or the COAF, that was reviewed and changed in 2019 and in 2020. Pursuant to Federal Law No. 13,974/2020, COAF was transformed into the Brazilian Financial Intelligence Unit (Unidade de Inteligência Finceira), or UIF. UIF’s purpose is to verify, examine, identify and apply administrative penalties to any suspicious or unlawful activities related to money laundering in Brazil, without prejudice to the jurisdiction of other bodies and entities, as well as report suspicious activities to the prosecutors and the police. UIF’s full commission is composed of a president appointed by the President of the Central Bank and by a representative of each one of the following bodies and entities: (1) the Central Bank; (2) the CVM; (3) the Ministry of Foreign Relations; (4) SUSEP; (5) the Federal Revenue Office; (6) the Federal Police Department; (7) the Brazilian Intelligence Agency; (8) the Comptroller General; and (9) the National Treasury Attorney-General’s Office. The term of office for each member is three years, with the option of reelection.

The financial institutions shall inform UIF (necessarily without informing its client) of certain transactions that present the characteristics established in the Central Bank Circular No. 3,461, CVM Instruction No. 301 and Circular SUSEP No. 445/2012, under the suspicion of money laundering.

The same obligation is imposed upon asset managers (such as XP Gestão, XP Advisory, XP LT Gestão de Recursos Ltda., XP PE Gestão de Recursos Ltda. and XP Vista), and insurance companies and insurance brokers (such as XP CS and XP VP).

 

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Bank Secrecy

Brazilian financial institutions, by virtue of Supplementary Law No. 105 of January 10, 2001, are also subject to strict secrecy rules on transactions, and are required to preserve the confidential nature of its assets and liabilities transactions and of the services provided to their clients. The only circumstances under which the information regarding clients, services or transactions of the financial institutions may be disclosed to third parties are as follows: (1) disclosure of confidential information with the express consent of the interested parties; (2) exchange of information between financial institutions for data registration purposes, including through risk assessment centers, subject to the rules issued by the CMN and the Central Bank; (3) the supply, to credit protection entities, of information included in the register of issuers of rubber checks and debtors, subject to the rules issued by the CMN and the Central Bank; (4) disclosure of the occurrence or suspicion of unlawful criminal or administrative acts, among others; (5) reporting of information addressed by article 11, paragraph 2, of Law No. 9,311, of October 24, 1996; (6) reporting of information in accordance with the conditions foreseen in articles 2, 3, 4, 5, 6, 7 and 9 of Supplementary Law No. 105 of January 10, 2001; and (7) reporting of financial and payment data related to credit operations and completed or ongoing payment obligations from individuals or legal entities to database administrators for the purpose of credit history formation.

Politically Exposed Persons

Pursuant to Central Bank Circular No. 3,461, SUSEP Circular No. 445/2012 and CVM Instruction No. 301, those financial institutions and other institutions authorized to operate by the Central Bank, SUSEP and CVM are required to obtain sufficient information from their clients to identify any Politically Exposed Persons from their client base and monitor their transactions accordingly.

Central Bank Circular No. 3,461, SUSEP Circular No. 445/2012 and CVM Instruction No. 301 define Politically Exposed Persons as any government agent, who in the last five years, have held or is holding, in Brazil or in foreign territories relevant government positions, jobs or public office, as well as their representatives, family members and other closely related persons.

Central Bank Circular No. 3,461, SUSEP Circular No. 445/2012 and CVM Instruction No. 301 establish that the internal procedures developed and implemented by the financial institutions subject to such regulation must be structured to enable the identification of Politically Exposed Persons and the origin of the funds for such clients’ transactions.

Internal Auditors

On June 29, 2017, the CMN issued Resolution No. 4,588 establishing the rules governing internal audits at financial institutions and others authorized to operate by the Central Bank. Pursuant to the resolution, financial institutions and others authorized to operate by the Central Bank must implement and maintain internal audit functions compatible with the nature, size, complexity, structure, risk profile and business model of the respective institution. Such activity must be the responsibility of a discrete unit in the institution or institutions that are part of its financial conglomerate, directly subordinated to the board of directors or by an independent auditor provided that such independent auditor is not in charge of the institution’s financial statements or any other activity that may create a conflict of interest.

Independent Auditors in Brazil

Pursuant to CMN Resolution No. 3,198 of May 27, 2004 as amended, or CMN Resolution No. 3,198, all financial institutions must be audited by independent auditors. The financial institutions may only hire independent auditors registered with the CVM and certified as experts in banking analysis by the Central Bank. After such auditors have issued opinions auditing the financial statement of a certain financial institution for up to five consecutive fiscal years, the Auditor’s team including managers, supervisors or any members with managerial positions, must be replaced.

 

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Similarly, pursuant to CVM Instruction No. 308 of May 14, 1999, if the audited company has a permanent audit committee, the term limit of five consecutive years provided above may be increased to ten years.

The independent auditors and the audit committee, if applicable, must notify the Central Bank, within three business days, of the existence or evidence of error or fraud, such as:

 

  

lack of compliance with rules and regulations, which could affect the business of the audited entity;

 

  

fraud of any amount conducted by the management of the institution;

 

  

relevant fraud conducted by employees of the institution or of third parties; and

 

  

relevant errors in the accounting records of the audited entity.

Audit Committee

CMN Resolution No. 3,198 requires financial institutions and other institutions authorized by the Central Bank to operate in Brazil, as well as for clearinghouses and clearance and custody service providers that (1) present reference equity equal to, or greater than, R$1 billion; (2) manage third-party funds in amounts equal to, or greater than, R$1 billion; or (3) have deposits and funds under management in a total amount equal to, or greater than, R$5 billion, to maintain an audit committee (comitê de auditoria).

The Brazilian legislation, in certain circumstances, allows the creation of a single audit committee for the operating companies (as XP CCTVM and Banco XP S.A.) of an economic group.

Ombudsman

Pursuant to CMN Resolution No. 4,433 of July 23, 2015, financial institutions (such as XP CCTVM and Banco XP) and other entities authorized to operate by the Central Bank are required to create an Ombudsman to establish an independent communication channel between the institutions and their clients, while observing strict compliance with consumer protection legislation and seeking improvement and enhancement of products, consumer services and other services. The Ombudsman shall be the responsibility of an appointed officer (who can also be the ombudsman himself, however, such person shall not be in charge of any other activity in the financial institution) and shall be compatible with the activities of the institution, as well as the complexity of its operations. Those institutions that are part of a financial conglomerate shall be authorized to implement a single Ombudsman to assist the entire conglomerate.

The following are the ombudsman department’s responsibilities: (1) receiving, recording, instructing, analyzing and providing formal and adequate attention to claims from clients and users of products and services of financial institutions; (2) providing clarification regarding the status of a claim and information as to when a response is expected to be given; (3) sending a final answer by the date on which a response is required; (4) keeping the board of directors or, if one does not exist, the financial institution’s board of executive officers, informed of the problems and shortcomings detected in the performance of its duties and the results of the actions taken by the financial institution’s officers to resolve them; and (5) preparing and sending to the internal audit department, to the audit committee (if one exists), and to the board of directors (or if one does not exist, to the board of executive officers of the financial institution), at the end of each fiscal semester, a quantitative and qualitative report on the ombudsman department’s activities and its performance.

The financial institutions must report and keepup-to-date information on the officer in charge of the Ombudsman. Such officer shall prepare a semiannual report (on June 30 and December 31 of each year) and whenever a material event is determined, in accordance with the Central Bank’s instructions. In addition, Brazilian law allows for the creation of a single ombudsman department structure for a group of related companies, such that a single ombudsman department can be responsible for all financial institutions that are part of the same group. Any financial institution carrying out leasing transactions, however, shall create its own segregated ombudsman structure.

 

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Insurance companies (such as XP VP) are likewise required by local insurance regulations (CNSP Resolution No. 279/2013) to have an Ombudsman with a substantially similar purpose and responsibilities as those described above.

Whistleblowing/Hotline

Pursuant to CMN Resolution No. 4,567 of April 27, 2017, financial institutions (such as XP CCTVM and Banco XP) are required to have a whistleblower hotline (canal de denúncias), through which their employees, clients, contractors and/or suppliers may anonymously report situations involving potential illicit activities of any nature related to the financial institution. Accordingly, financial institutions are required to appoint a responsible department for forwarding all reported events to the appropriate departments for further handling. This department is also required to prepare reports semi-annually detailing, at minimum, the following information relating to each reported event: (1) number of reported events and their nature; (2) the relevant departments that handled them; and (3) the average timeframe and relevant measures adopted to solve them. Such reports must be (1) approved by the board of directors of the financial institution or, absent the board of directors, by its officers; and (2) made available to the Central Bank for at least 5 years.

Foreign Investment in National Financial Institutions

In accordance with Article 192 of the Constitution, Article 52, II, of the Brazilian Transitory Constitutional Rulings enacted in 1988, or ADCT, foreign investors (regardless of being an individual or entity and irrespective of their nationality) are prevented from controlling, acquiring or increasing equity interest held in a Brazilian financial institution, directly or indirectly, unless there is a bilateral international treaty or such foreign acquisition or increase is in the interest of the Brazilian government. Until September 26, 2019, the interest of the Brazilian government for such foreign acquisition of voting ornon-voting equity interest in financial institutions was determined by specific Presidential Decree. On September 26, 2019, the Brazilian President enacted Decree No. 10,029, transferring to the Central Bank the authority to approve foreign investments in Brazilian financial institutions, eliminating the necessity of specific presidential decree on acase-by-case basis. Decree 10,029 was regulated by Circular No. 3,977 of January 22, 2020, providing that the acquisition of voting ornon-voting equity interest in a Brazilian financial institution by foreign investors, held directly or indirectly, will depend only on the Central Bank’s prior approval. On November 13, 2019, the Central Bank authorized direct or indirect foreign investments in XP CCTVM and Banco XP of up to 100% of their respective capital stock.

Furthermore, a Presidential Decree of December 9, 1996, declared that it is in the interest of the Brazilian government to allow foreign investors to acquirenon-voting shares issued by Brazilian financial institutions that are traded on a stock exchange. Such Decree is generally applicable to all Brazilian financial institutions.

Corporate Interest Held by Financial Institutions in Nonfinancial Companies

Pursuant to CMN Resolution No. 2,723 of May 31, 2000, as amended, or CMN Resolution No. 2,723, financial institutions may only directly or indirectly hold equity in legal entities (incorporated locally or abroad) that supplement or subsidize the financial institutions’ activities, provided they obtain prior authorization from the Central Bank and that the invested entity does not hold, directly or indirectly, equity of the referred financial institution. However, this requirement for authorization does not apply to (1) equity interests typically held in the investment portfolios of investment banks, development banks, development agencies (agências de fomento) and multiservice banks with investment or development portfolios; and (2) temporary equity interests not registered as permanent assets and not subject to consolidation of the financial institution.

Regulation of Branches and Subsidiaries

As provided by CMN Resolution No. 2,723, the Central Bank requires authorization for operations of foreign branches or subsidiaries of Brazilian financial institutions, including compliance with the following

 

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rules: (1) the institution must have been in operation for at least six years; (2) the institution must be in compliance with operational limits currently in force; (3) the institution’spaid-up capital and net worth must meet the minimum requirements established in Exhibit II to CMN Resolution No. 2,099 plus an amount corresponding to 300.0% of the minimumpaid-up capital and net worth required by Central Bank regulation for the installation of commercial banks; and (4) the Brazilian financial institution must present the Central Bank with a study on the economic and financial viability of the subsidiary, branch or investment.

In addition, the Central Bank will only grant such authorization if it has access to information, data and documents relating to the operations and accounting records of such subsidiary financial institutions abroad. In addition, the failure by a Brazilian bank to comply with the requirements of CMN Resolution No. 2,723 would cause the deduction of a designated percentage of the assets of such branch or subsidiary from the net worth of such bank for the purpose of calculating such bank’s compliance with the capital adequacy requirements of the Central Bank, on top of the other penalties imposed pursuant to the applicable regulation, including the cancellation of the Central Bank’s authorization.

CMN Resolution No. 4,122 sets forth the Central Bank requirements and procedures for approving the establishment, authorization to operate, cancellation of authorization, changes of control and corporate reorganizations of Brazilian financial institutions. Such resolution further requires the Central Bank’s approval for the election and confirmation of directors, executive officers and members of the audit committee as set forth in the company’s bylaws.

In addition, under the terms of CMN Resolution No. 2,723, the Central Bank’s prior authorization is also required: (1) in order to allocate new funds to branches or subsidiaries abroad; (2) for capital increases, directly or indirectly, of subsidiaries abroad; (3) in order to increase equity interests, directly or indirectly, in subsidiaries abroad; and/or (4) in order to merge with orspin-off from, directly or indirectly, subsidiaries abroad. These requirements are only applicable if such subsidiary is a financial institution or similar entity.

Legislation Applicable to Insurance Brokerage Firms in Brazil

XP VP, is aBrazil-based insurance company formed in 2018 and licensed by SUSEP to operate in the life and private pension lines, focusing primarily on the distribution of its products to individuals through XP’s proprietary digital platform. As a local insurer, XP Seguros is subject to the insurance laws and regulation generally applicable to life and private pension carriers in Brazil.

XP CS is an insurance brokerage company focused on life and pension insurance brokerage, duly licensed by SUSEP to operate in the insurance market as per SUSEP Circular Letter No. 510 of January 22, 2015, and registered with SUSEP under No. 10,0628468. Therefore, it is subject to the applicable legislation and regulation applicable to insurance brokers.

Insurance companies such as XP Seguros and XP VP are required to be duly licensed by SUSEP in order to operate in any given insurance field and are subject to the local legal and regulatory framework governing their operations, governance, solvency, products, accounting, actuarial standards and other technical aspects of their business. By engaging in the insurance business, XP Seguros is subject to a number of regulatory risks, such as (a) changes in solvency and minimum capital regulation, which could result in the need for increased capital to cover new solvency requirements and/or in the divestment of certain classes of assets; (b) changes in product regulation, which could materially alter the way in which the company’s products are created, sold or operated in general; (c) intervention and/or liquidation proceedings by SUSEP in the event of solvency-sensitive scenarios, which could lead to material deviations or interruptions to the company’s ordinary course of business and/or regulatory sanctions upon the company and its management; and (d) incurrence of fines and other penalties (such as temporary suspension of activities or license cancellation) imposed by SUSEP for perceived breaches of applicable regulation, among others.

 

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Insurance brokerage firms such as XP CS must obtain SUSEP registration and authorization for their operations, pursuant to the rules in force and in accordance with Law No. 4,594 of December 29, 1964, as amended, or Law No. 4,594/64 andDecree-Law No. 73/66. The insurance broker, whether an individual or legal entity, is the intermediary legally authorized to solicit and promote insurance contracts accepted by the current legislation, between the insurance companies and individuals or public or private legal entities. Only duly qualified insurance brokers pursuant to Law No. 4,594/64 that have signed the insurance proposal shall be paid the brokerage fees related to each insurance modality, based on the respective tariffs, including in case of adjustment to the issued premium.

It is not mandatory that an insurance brokerage company sells its insurance through intermediation. Such companies may seek clients directly. However, when a direct sale of insurance occurs, a fee must be paid to FUNENSEG. The Brazilian legislation does not establish a minimum brokerage fee in such cases.

Under the applicable regulation, insurance brokerage companies, such as XP CS, are obligated to prove technical certification of all their employees and workers who directly participate in the regulation and settlement of insurance claims, customer service, and direct sales of insurance, capitalization and open supplementary pension products. Such certification shall be provided by an institution of recognized technical capacity, duly accredited by SUSEP.

Insured persons and insurance firms can pursue civil action against insurance brokers for losses incurred as a result of intentional malfeasance or negligence caused by brokerage activity. In case ofnon-compliance with the regulatory rules, in addition to the legal sanctions, insurance brokers and managers are subject to fines, temporary suspension from the exercise of the profession or registration cancellation.

Regulation Applicable to the Controlled Companies Outside Brazil

XP Investments – United States of America

XP Investments, whose marketing name is XP Investments, is registered as a securities broker-dealer with the SEC and intwenty-six U.S. states and territories, and is a member of FINRA, a self-regulatory organization, or SRO, subject to SEC oversight. Consequently, XP Investments and its personnel are subject to extensive requirements under the Exchange Act, state securities laws and SEC and FINRA rules, including requirements relating to, among other things, sales and trading practices, recordkeeping, anti-money laundering, financial and other reporting, supervision, misuse of materialnon-public information and the conduct and qualifications of certain personnel.SEC-registered broker-dealers are also subject to capital requirements, which mandate that they maintain minimum levels of capital (“net capital”) and effectively require that a significant portion of a broker-dealer’s assets be kept in relatively liquid form. SEC and FINRA rules also require notification when a broker-dealer’s net capital falls below certain predefined criteria, limit the ratio of subordinated debt to equity in a broker-dealer’s regulatory capital composition and constrain the ability of a broker-dealer to expand its business or distribute capital under certain circumstances.

XP Investments is also registered with the CFTC as an introducing broker and is a member of the NFA, an SRO that regulates certain CFTC-registrants. CFTC-registered introducing brokers are subject to expansive requirements under the Commodity Exchange Act and CFTC and NFA rules, including requirements relating to, among other things, sales practices, regulatory capital, anti-money laundering, financial reporting, supervision and recordkeeping.

The violation of laws, rules or regulation that govern the activities of anSEC-registered broker-dealer or CFTC-registered introducing broker could result in administrative or court proceedings, censures, fines, penalties, disgorgement, suspension or expulsion from a certain jurisdiction, SRO or market, the revocation or limitation of licenses, the issuance ofcease-and-desist orders or injunctions or the suspension or disqualification of the entity and/or its officers, employees or other associated persons.

 

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XP Private – Switzerland

XP Private (Europe) S.A., or XP Private Geneva is an independent asset management firm duly authorized to conduct its activities in Switzerland, pursuant to the rules issued by the Swiss Financial Market Supervisory Authority, or FINMA, and to the applicable legislation.

The authorization of XP Private Geneva does not contemplate professional management of investment funds portfolio in Switzerland.

FINMA is the independent regulator of financial markets in Switzerland with the aim of protecting creditors, investors and insured persons. It supervises banks, insurance companies, stock exchanges, investment funds, their managers and administrators. FINMA also regulates insurance distributors and intermediaries.

XP Private Geneva is a member of the ARIF, a nonprofit self-regulatory entity recognized by FINMA. Its objective is to assist in the prevention and combat of money laundering, inform its members and require them to comply with the Federal Money Laundering Law and Terrorism Financing Act of October 10, 1997.

XP Investments UK LLP and Sartus UK – United Kingdom

XP Investments UK LLP is a brokerage firm headquartered at New Penderel House4th Floor283-288 High Holborn London WC1V 7HP, United Kingdom, authorized by the FCA on April 10, 2017.

Sartus UK is an appointed representative of NEA acting as an agent of NEA, which is duly authorized and regulated by the FCA .

As an appointed representative, Sartus UK is not directly authorized by the FCA to provide regulated products and services in the United Kingdom. However, it is permitted to carry out certain regulated activities as an appointed representative of NEA. NEA is responsible for ensuring that such regulated activities are carried out in accordance with the relevant regulatory requirements. Consequently, Sartus UK is required to operate its business in accordance with the regulatory requirements applicable to NEA.

The permissions detailed above do not cover the discretionary management of portfolios of individuals and legal entities or the investment fund (also known as collective investments schemes) portfolios in the United Kingdom and the European Union.

On June 28, 2019, we sent a notice of termination of the Appointed Representative Agreement to NEA, which became effective on September 30, 2019, in order to concentrate our efforts in the private and wealth management business in Switzerland through XP Private (Europe) SA.

 

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BUSINESS

Our Mission

Our mission is to transform the financial markets in Brazil to improve the lives of people in our country, which is the 9th largest economy in the world with over 210 million people and a GDP of nearly US$2 trillion in 2019. We believe the financial services industry in Brazil is generally inefficient, expensive by international standards and provides poor client experiences. Brazil’s financial services industry is concentrated around five traditional financial institutions with US$1.5 trillion in assets that account for approximately 93% of retail assets under custody, or AUC, according to a report by Oliver Wyman published in 2019, and 80% of all consumer loans and 79% of all deposits, according to the Central Bank of Brazil.

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, such as savings accounts calledPoupança, which provide investors with relatively low returns, at times below the inflation rate, and come with highly restrictive and punitive redemption options; (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 oflow-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 reached 2.2 million active clients. Based on data from the sources indicated below, we believe we are:

 

  

#1 Ranked Financial Investment Brand in Brazil with an NPS of 71 as of May 2020, 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 AUC of R$412 billion as of May 31, 2020, or 5% market share of the R$8.6 trillion market for total AUC estimated for December 31, 2019, according to a report by Oliver Wyman commissioned by us;

 

  

#1 Independent Digital Platform for Investors in Brazil with three digital portalsXP, Ricoand Clearserving clients directly.XP has the largest number of followers on Instagram (over 1 million as of May 31, 2020) among investment firms in Brazil, and our three brands combined accounted for 54% of all Google searches for investment keywords for the month ended May 31, 2020 and 41% of responses to “the first brand in investments” according to Google Analytics and a consumer survey as of December 31, 2019;

 

  

#1 Independent Financial Investment Network in Brazil with a range of proprietary XP Advisory Services and approximately 7,000 IFAs whoon-board new clients onto the XP Platform;

 

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#1 Financial Media Portal in Latin America with approximately 15 million monthly unique visitors to ourInfomoneywebsite as of May 31, 2020. Approximately 71% 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

 

  

#1 Financial Services Event in Latin America with over 30,000 attendees at our annualEXPERT 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 upcoming EXPERT event in 2020 will be conducted virtually.

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 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 – We began our evolution by providing financial education courses to empower new classes of first-time and early-stage investors teaching them how to invest and how to access new types of financial products and services that they may not have had access to before through traditional financial institutions. These educational courses began to build trust in XP and became an effective client acquisition model by converting students into empowered clients.

 

 (2)

Democratizing Access to Financial Products and Services– We developed an open product platform which provided our clients with a much wider selection of financial products than the traditional banks provide to their customers. This platform included a more diverse selection of financial investment products, such as equity and fixed income securities, mutual and hedge funds, structured products, life insurance and pension plans, and real estate trusts, and a wider choice of issuers that include XP, our product partners and our competitors. The breadth of our open platform was a significant market innovation, that enhanced our brand further, and provided clients with new opportunities for risk-taking and investment returns. We believe it remains substantially differentiated when compared to the relatively closed platforms of the traditional banks.

 

 (3)

Scaling of Our Ecosystem of Users, Distribution & Media Content – We expanded our ecosystem of users, distribution channels, and proprietary digital content and marketing. As our retail customer base and AUC volumes grew, we attracted new issuers of financial products, corporate clients and institutional traders into our fast-growing ecosystem of clients. We complemented our distribution by scaling our network of IFAs located across Brazil who solicit new customers, provide them access to our wide selection of financial products and technology applications, and help us onboard them as XP clients. These IFAs are our strategic business partners who share our entrepreneurial spirit and mission to democratize financial services in Brazil and benefit from the competitive advantages provided by our platform and technology. To support this expansion while continuously building trusted relationships in the market, we expanded our proprietary marketing initiatives and digital media content. We continued to build our educational course offerings, created what we believe is the largest investment conference in the world, developed the largest financial information online portal in Latin America, and developed a range of social media and digital influencer programs to promote our services and brand.

 

 (4)

Diversification and Enhancement of Our Direct Digital Channels and Brands –We expanded our distribution significantly by leveraging our growing ecosystem to (1) grow and enhanceXP Direct, our

 

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 primary digital portal for investors, and (2) develop new digital channels, such asRico, our digital portal brand for self-directed investors, andClear, our digital portal and online trading platform brand for retail active traders. We also enhanced these direct portals further by leveraging our technology platform, fast-growing data lake, and artificial intelligence capabilities to provide more sophisticated functionality and offer more advanced data analytics tools through more intuitive and convenient user interfaces, or UX.

 

 (5)

Empowerment of the Client Journey – We leveraged the significant technology DNA in our company, comprising our innovation and development teams and agile software development methods to develop a suite of new products, services and technology applications that engage and serve our clients across their financial journeys. We launched an advanced suite of cloud-based and mobile technology applications, with sleek advanced UX and easy user experience, 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, analytics, and data queries. We have also begun to expand our solutions into adjacent and complementary financial services that our clients use. For example (1) we began to provide our ecosystem with pension insurance in March 2019, and by March 2020 we had already captured approximately 28% market share of the new money inflows for this service in Brazil for the first quarter of 2020; and (2) we received our bank license for Banco XP from the Central Bank of Brazil on October 11, 2019, which enables us to offer a range of complementary digital banking products and services to our clients, including asset-back margin finance.

The following chart illustrates how we have successfully scaled across channels and grown our client base as we evolved our business over time.

 

LOGO

The RevolutionaryXP Model

Our revolutionaryXP Modelhas 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. As illustrated in the following graphic, the key components of our model include: (1) a mission driven culture; (2) a self-reinforcing ecosystem; (3) a superior products and services platform; and (4) differentiated, advanced technology platform.

 

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LOGO

 

  

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) azero-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 2.2 million retail clients who buy and sell the financial products on our platform as of May 31, 2020, benefitting from our ecosystem because they can access a much broader portfolio of financial products, from hundreds of different providers, and get help finding the product that is right for them, all in a user-friendly way, with exceptionally low fees; and (2) over 400 institutional and corporate issuer clients as of May 31, 2020, such as fund managers, private banks, corporate treasuries and insurance companies, who provide additional liquidity and unique financial products for our platform. These issuers benefit from our ecosystem because they are provided with dedicated strategic advisory services that enable them to access a much broader pool of capital, from our retail investors, at an overall lower cost.

 

  

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) Ricoour online-only solution for self-directed investors; and (3) Clear our digital portal and electronic trading platform for retail

 

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active traders. We also reach clients through our proprietary, and efficient distribution network of approximately 7,000 IFA partners, who are located in approximately 680 offices in 147 cities across Brazil, which collectively represent more than 85% of Brazilian GDP. Together, they form the largest independent financial advisor network in the country. Our IFA partners benefit from our suite of financial products, education tools, and theIFA-specific applications that we developed to help them build and grow their businesses, and we benefit from their abilities to reach and cultivate new clients.

 

  

Proprietary Digital & Media Content– which helps us democratize access to financial content in Brazil, empower Brazilians on how to take 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 with approximately 15 million monthly unique visitors as of May 31, 2020;(2) XP Educaçãoa leading online financial education portal in Brazil; (3) EXPERTphygital content platform with over 1,000,000 monthly unique visitors as of May 31, 2020 andin-person events, such as theEXPERT conference, the largest investment event in Latin America with approximately 30,000 attendees in 2019; (4) our Digital Influencers program, with over 4.5 million followers on social media as of May 31, 2020; (5)Leadr an investment-focused social media network with over 980,000 downloads and over 200,000 monthly active users as of May 31, 2020; and (6) Spiti a digital platform which provides investment research to retail clients. We believe this content is highly differentiated in Brazil, is a powerful driver of growth, and provides us with low CAC.

 

  

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 Serviceswhich are comprised of several services, such as (1) XP Investimentos for our retail clients in Brazil; (2) XP Privatefor ourhigh-net-worth clients; (3) XP Investmentsfor 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 as of May 31, 2020, 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. We train our customer service personnel to (1) understand the daily activities and processes across the client journey in order to help resolve customer issues more effectively; (2) prioritize positive client experiences and long-term relationships above short-term performance results; and (3) leverage and promote our advanced technologies to serve our clients more efficiently.

 

  

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 withlow-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

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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 630 people as of May 31, 2020, who develop and support our solutions by using agile software development methods and leveraging the significant technology and data assets in our company. These include 9XP Tribes, comprised of2-3 managers each, that help guide and support our development priorities across numerous projects, and 50 XP Squads, comprised of an autonomous integrated team of8-10 developers and business experts, that collaborate to create new technologies and solutions or improve our current offerings.

 

  

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. Our apps are integrated with our powerful data bases and analytics tools and are designed to be powerful, yet simple, attractive, and easy to use, with sleek user interfaces, or UX, that are comparable to some of the top consumer technology products in the world.

Our Operations

We operate an asset-light, highly scalable business model that emphasizes operational efficiency and profitability. We leverage theXP 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 currently serve over 2.2 million active retail clients who have an investment account with us. Approximately 26% of our clients are served by one of our IFA partners and approximately 74% of our clients are self-served, primarily utilizing an account through one of our websites, or have an investment adviser through XP Direct. As of March 31, 2020, our average AUC per client account was approximately R$180,000.

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. As shown in the following chart, we generate a significant amount of our revenues from existing clients and AUC, which is recurring and predictable in nature.

% of Retail Revenue From New Clients vs Existing Clients

 

 

LOGO

 

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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 2019 in one of the worst recessions in Brazilian history, our total AUC grew at a CAGR of 94% during the same period.

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 the majority 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 organic growth, with expenditures amounting to 3.1% of net revenues for the year ended December 31, 2019 and to 2.3% of net revenues for the three months ended March 31, 2020. Additionally, our strong balance sheet serves as a substantial competitive advantage relative to other independent financial services providers in Brazil, enabling us to underwrite, develop and distribute new financial products and services, and capture inorganic opportunities, such as our acquisitions ofInfomoney in 2011,Rico in 2018, and Fliper and DM10, the consummation of which are subject to approval by Central Bank. In June 2020, we also entered into a joint-venture with VERT, creating Duagro.

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 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 2019, we reported R$409 billion in AUC, R$5.5 billion in gross revenue, R$5.1 billion in net revenue, R$1,089 million in net income, and R$1,074 million in Adjusted Net Income, a year-over-year increase of 103%, 72%, 73%, 134% and 119%, respectively, versus 2018. In the three months ended March 31, 2020, we reported R$366 billion in AUC, R$1,856 million in gross revenue, R$1,735 million in net revenue, R$398 million in net income and R$415 million in Adjusted Net Income, an increase of 58%, 84%, 86%, 89% and 147% year-over-year, respectively, versus the three months ended March 31, 2019.

Our Corporate Structure

Our group is currently composed of 29 entities, 20 of which are incorporated in Brazil and 9 of which are incorporated in other countries. Our material operating subsidiaries are:

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, R$14,050 million (representing 73.5% of our combined assets) as of December 31, 2018, R$29,316 million (representing 60.9% of our combined assets) as of December 31, 2019 and R$39,025 million (representing 64.0% of our combined assets) as of March 31, 2020. XP CCTVM recorded total revenue and income of R$1,380 million during 2017 (representing 72.4% of our consolidated total revenue and income), R$1,967 million during 2018 (representing 66.5% of our consolidated total revenue and income), R$3,322 million during 2019 (representing 74.3% of our consolidated total revenue and income) and R$1,202 million for the period ended March 31, 2020 (representing 83.0% of our consolidated total revenue and income).

 

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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, R$146 million (representing 0.3% of our combined assets) as of December 31, 2019 and R$24,6 million (representing 0.04% of our combined assets) as of March 31, 2020. XP Gestão recorded total revenue and income of R$70 million during 2017 (representing 3.7% of our consolidated total revenue and income), R$71 million during 2018 (representing 2.4% of our consolidated total revenue and income), R$175 million during 2019 (representing 3.9% of our consolidated total revenue and income) and R$25 million for the period ended March 31, 2020 (representing 1.7% of our consolidated total revenue and income).

XP Advisory

XP Advisory is a Brazilian asset management firm focused on single client mandates, including managing exclusive funds and managed portfolios for ourhigh-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, R$19 million (representing 0.1% of our combined assets) as of December 31, 2018 and R$18 million (representing 0.1% of our combined assets) as of December 31, 2019 and March 31, 2020 XP Advisory recorded total revenue and income of R$11 million during 2017 (representing 0.6% of our consolidated total revenue and income), R$21 million during 2018 (representing 0.7% of our consolidated total revenue and income), R$35 million during 2019 (representing 0.8% of our consolidated total revenue and income) and R$11.5 million for the period ended March 31, 2020 (representing 0.8% of our consolidated total revenue and income).

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, R$41 million (representing 0.1% of our combined assets) as of December 31, 2019 and R$31 million (representing 0.03% of our combined assets) as of March 31, 2020. XP Vista recorded total revenue and income of R$20 million during 2018 (representing 0.7% of our consolidated total revenue and income) and R$93 million during 2019 (representing 2.1% of our consolidated total revenue and income) and R$27 million for the period ended March 31, 2020 (representing 1.9% of our consolidated total revenue and income).

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, R$48 million (representing 0.2% of our combined assets) as of December 31, 2018, R$127 million (representing 0.3% of our combined assets) as of December 31, 2019 and R$130 million (representing 0.2% of our combined assets) as of March 31, 2020.XP Seguros recorded total revenue and income of R$27 million during 2017 (representing 1.4% of our consolidated total revenue and income), R$61 million during 2018 (representing 2.1% of our consolidated total revenue and income), R$130 million during 2019 (representing 2.9% of our consolidated total revenue and income) and R$29 million for the period ended March 31, 2020 (representing 2.0% of our consolidated total revenue and income.

 

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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, R$253 million (representing 1.3% of our combined assets) as of December 31, 2018, R$407 million (representing 0.8% of our combined assets) as of December 31, 2019 and R$638 million (representing 1.0% of our combined assets) as of March 31, 2020. XP Investments recorded total revenue and income of R$132 million during 2017 (representing 6.9% of our consolidated total revenue and income), R$206 million during 2018 (representing 7.0% of our consolidated total revenue and income), R$302 million during 2019 (representing 6.7% of our consolidated total revenue and income) and R$90 million for the period ended March 31, 2020 (representing 6.2% of our consolidated total revenue and income).

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 Educação 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, R$117 million (representing 0.2% of our combined assets) as of December 31, 2019 and R$121 million (representing 0.2% of our combined assets) as of March 31, 2020. XP Educação recorded total revenue and income of R$10 million during 2017 (representing 0.5% of our consolidated total revenue and income), R$57 million during 2018 (representing 1.9% of our consolidated total revenue and income), R$112 million during 2019 (representing 2.5% of our consolidated total revenue and income) and R$22 million for the period ended March 31, 2020 (representing 1.5% of our consolidated total revenue and income).

XP VP

XP VP was founded in 2017 as a life insurance and private pension plans provider in Brazil. On September 5, 2018, the SUSEP granted it the authorization to operate as an insurance company in Brazil, and it became operational in April 2019. XP VP had assets of R$3.856 million (representing 8% of our combined assets) as of December 31, 2019 and R$5.210 million (representing 8.5% of our combined assets) as of March 31, 2020. XP VP recorded total revenue and income of R$2 million during 2019 (representing 0.05% of our consolidated total revenue and income) and R$2.7 million for the period ended March 31, 2020 (representing 0.2% of our consolidated total revenue and income).

Banco XP S.A.

Banco XP was founded in 2019 as a financial institution in Brazil. 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 market. Banco XP had assets of R$134 million (representing 0.3% of our combined assets) as of December 31, 2019 and R$494 million (representing 0.8% of our combined assets) as of March 31, 2020.

Acquisitions and New Lines of Business

Duagro Joint Venture

On June 23, 2020, we announced the launch of Duagro, a joint venture with VERT, the largest Brazilian securitization company focused on agribusiness. Duagro is our first initiative in the agribusiness sector and aims at accelerating the access of rural producers to credit lines through the capital markets. Through an automated

 

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process and the electronic issuance of receivables(e-CPR), Duagro will enable agricultural input financing for small and medium producers that face credit constraints due to banking concentration and focus on large producers.

Fliper Acquisition

On June 8, 2020, we announced the acquisition of a majority ownership stake in Fliper, an automated investment consolidation platform that offers its users connectivity and tools to perform intuitive and intelligent financial self-management. When completed, this transaction will allow us to offer customers additional resources to manage their investments. As of the date hereof, we are in the process of obtaining the applicable approvals from the Central Bank.

DM 10 Acquisition

On June 10, 2020, we announced the acquisition of DM10, a marketplace that connects hundreds of independent distributors with a curated selection of life insurance and pension plan products, adding value through technology and education. When completed, this transaction will enhance our distribution network in the insurance segment and its completion is subject to compliance with certain precedent conditions, including prior authorization from the Central Bank.

Private Equity Asset

On January 7, 2020, we incorporated XP PE Gestão de Recursos Ltda., our Brazilian subsidiary, to act as private equity asset management. XP PE is not yet operational and will apply for the CVM authorization to provide securities portfolio management services. XP PE has applied through ANBIMA for the authorization to provide securities portfolio management services and its request is currently under review.

New Equity Asset Management Subsidiary

On January 16, 2020, we incorporated XP LT Gestão de Recursos Ltda., our Brazilian subsidiary, to act as an asset management company focused in equities strategies led by a former partner of XP Gestão. As of the date of this prospectus, XP LT Gestão de Recursos Ltda. is not yet operational, and will apply for the CVM authorization to provide securities portfolio management services.

Visa Agreement

On March 4, 2020, XP Brazil entered into an agreement with Visa as its issuing brand of debit and credit cards, which we expect to launch during 2020. The initiative marks our entrance in the card segment in Brazil and it is aligned with the strategy on creating a full-service platform by adding new financial products to benefit our clients. Since 2019, we established a squad focused on the product design, which is now working closely with Visa to bring a differentiated offer to our customers, that will enjoy Visa’s large number of services and other new and revolutionary benefits to be launched with the “XP Visa Infinite Card.”

Spiti

On September 2, 2019, we incorporated Spiti Análise Ltda. (formerly known as Lírios Participações Ltda.), our Brazilian subsidiary, to act as a provider of research reports to retail clients. In an effort to support our expansion strategy, Spiti increased its capital to R$5.2 million on October 10, 2019 and to R$10.2 million on March 25, 2020.

XP Portugal

In September 2019, we incorporated Chamaleon Bravery, Unipessoal, LDA, or XP Portugal. XP Portugal is an investment advisory company. We expect XP Portugal to become operational in the second half of 2020. As of the date of this prospectus, we are in the process of obtaining the applicable regulatory approvals, as required by the CMVM.

 

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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. Banco XP began its operations on November 2019 on a reduced scale, offering pledged asset loans (Resgate Express and Limite Express) and foreign exchange related services only to its employees. In January 2020, Banco XP started offering such services to XP CCTVM’s IFA network, and on February 19, 2020, to all XP CCTVM clients.

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.. Following a transition period during which XP VP tested and integrated its systems and processes, XP VP began its operations in April 2019. In an effort to support our expansion strategy, XP VP increased its capital to R$17.5 million on September 24, 2018, to R$22.5 million on July 24, 2019, to R$27.5 million on December 30, 2019 and to R$44.5 million on April 20, 2020.

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 (thepredecessor-in-interest to GA Bermuda), conducted a corporate reorganization with the objective of simplifying the organization of the group and eliminatingnon-controlling interests. This transaction resulted in the increase of share capital and capital reserve by R$98.4 million and R$245.4 million, respectively. As part of the reorganization, XP Brazil legally merged with a new holding entity, resulting in the creation of a deferred income tax asset of R$122.1 million recorded in capital reserve in equity, relating to the previouslygenerated tax-deductible goodwill at one of the subsidiaries that was rolled up as part of the reorganization.

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 our 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.

 

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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, 109% after 30 months, 116% after 36 months, 127% after 42 months and, 138% after 48 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, 128% after 30 months and 143% after 36 months;

 

  

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, 92% after 18 months, and 122% after 24 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 and 79% after 12 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$50 thousand) 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

 

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funds, third party mutual funds, structured notes and REITs, and the clients with a declared net worth above R$50 thousand 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 (#)

 

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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, 65% after 36 months, 66% after 42 months, and 69% after 48 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, 55% after 30 months, and 60% after 36 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, 44% after 18 months, and 50% after 24 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 and 46% after 12 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

 

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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. Nevertheless, overall market declines and increased volatility may reduce the