Private placements of bonds

Public or Private Offering? The Key Difference That Decides Everything

The Czech Act on Capital Market Undertakings (ACMU) distinguishes between two basic regimes. The first is a "public offering," defined as "any communication to a wider circle of persons." This definition is intentionally very broad. The opposite is a "private offering" (or private placement), which is targeted at a pre-determined and limited circle of investors.

The consequences of this choice are fundamental. A public offering generally requires the preparation and approval of an extensive and costly document—a securities prospectus—by the Czech National Bank. This process can cost hundreds of thousands of crowns and extend the issuance process by months. A private offering does not have this obligation, making it a significantly more flexible and faster option.

For issues without a prospectus, two models are key: sub-threshold issues with a volume of up to EUR 1 million, which can be offered publicly, and above-threshold issues over EUR 1 million, which must be conducted as a private offering. The legal classification of the offering is therefore not just a bureaucratic formality, but the cornerstone of the entire financial strategy.

What Exactly Does the CNB Consider a "Public Offering"? An Analysis of Key Criteria

The legal definition of a public offering uses the term "wider circle of persons," but does not specify it further. In practice, this creates considerable uncertainty. The interpretation by the Czech National Bank is therefore crucial, as it has established several guidelines based on its decision-making practice and opinions to assess when the boundary of a private offering has been crossed.

The CNB primarily applies a "substance over form" test. It is not just about how many people you formally send the offer to, but what the nature of the addressed group is and your relationship with it. The regulator focuses on whether a special relationship of trust exists between you and the investors that would justify a lower degree of their protection.

The main indicator for the CNB is an indicative threshold of 20 addressed persons who are not qualified investors. If you approach more than 20 such persons, it is highly likely that the CNB will consider your offer to be public. The form of communication is also important—any non-addressed offer, for example, through a publicly accessible website or social media, is almost always considered public.

An exception is made for qualified investors (e.g., banks, insurance companies, large corporations, or persons meeting wealth or experience tests), to whom bonds can be offered without restriction and who are not counted towards the above-mentioned limits.

The Golden Rule of 149 Investors: How to Properly Distribute Private Placements?

For issues with a volume of over EUR 1 million where you want to avoid the obligation to create a prospectus, a key exemption exists. The offer can be made privately if it is directed at fewer than 150 non-qualified investors in each EU member state. This limit is crucial, and the issuer must be able to prove compliance at any time.

It is therefore critically important to maintain careful and continuous records of all offers made. You must document every approach, including those that were rejected by the investor. Without this evidence, you will be unable to effectively defend yourself against an accusation of an illegal public offering in the event of an inspection by the CNB.

During distribution, it is necessary to avoid any uncontrolled channels. While online platforms are a common tool for sub-threshold issues up to EUR 1 million, they pose a huge risk for private offerings, as they can easily lead to exceeding the public offering threshold. Professional and controlled distribution can be ensured, for example, by a licensed securities dealer.

ARROWS can prepare complete legal documentation for distribution, including internal guidelines that will ensure compliance with the limit and protect you from sanctions. For an immediate solution to your situation, write to us at consultation@arws.cz.

The CNB's Decision-Making Practice in Action: What to Really Watch Out For

An analysis of actual decisions and opinions from the CNB reveals several key areas where issuers most often make mistakes. Relying on formal labels or circumventing the rules is a strategy that leads to significant penalties.

The "Loan" Trap: Why the CNB Examines Substance, Not Just the Label

Some entities try to evade regulation by formally calling the repeated acceptance of funds from the public a "loan agreement." However, the CNB has repeatedly emphasized that it assesses the actual economic substance of the transaction, not its formal name. If you systematically accept money from more than 20 persons with an obligation to repay it, this constitutes accepting deposits from the public, which is an activity reserved for licensed banks.

For this conduct, referred to as "shadow banking," the CNB recently imposed fines of CZK 10 million and 15 million. The regulator's reasoning is clear: freedom of contract is limited by the Act on Banks, and legal entities are subject to strict liability, which means that fault is not examined.

Are Issues Aggregated? How the CNB Assesses Concurrent Bond Programmes

Another critical area is the issuance of multiple series by a single issuer in a short period. The CNB's opinion clearly states that for the purposes of regulatory limits, these issues are aggregated.

For sub-threshold issues up to EUR 1 million, the total consideration for all publicly offered securities of the same type over the last 12 months is aggregated. Therefore, if investors subscribed to your issue for EUR 800,000 in January, you can only offer bonds for EUR 200,000 in a new issue without a prospectus in July of the same year.

The same principle applies to private offerings. The number of persons approached within the 149-investor limit is aggregated across different issues from a single issuer if the issues have identical characteristics. These rules can easily lead to an unintentional violation of the law if the issuer does not have an overview of all its ongoing offerings.

The Most Common Mistakes by Issuers and How to Avoid Them

From the CNB's practice, several typical mistakes can be identified that lead to the initiation of administrative proceedings and the imposition of sanctions. Knowing them is the best prevention.

The most common and most serious offence is making a public offering without an approved prospectus. This often happens unintentionally, for example, due to improper distribution setup or underestimation of the rules for aggregating issues.

Another common problem is misleading marketing, especially the misuse of the phrase "prospectus approved by the CNB" to create the false impression that the CNB guarantees the safety of the investment. In reality, the CNB only checks the formal requirements of the prospectus, not the viability of the issuer's business plan.

It is also important to remember that, especially for issuers of sub-threshold bonds without a prospectus, there is a statistically higher rate of insolvency, which underscores the importance of thorough preparation and transparent communication with investors.

Cross-Border Issues: How to Approach Investors Abroad?

For ambitious companies seeking capital beyond the borders of the Czech Republic, European legislation offers interesting possibilities. While the Prospectus Regulation harmonises rules across the EU, key exemptions for private offerings remain and open doors to international markets.

Crucially, the limit for offering to fewer than 150 non-qualified investors without a prospectus applies in each member state separately. This theoretically allows for approaching up to 149 investors in Germany, another 149 in Poland, and 149 in Austria without triggering the obligation to prepare a pan-European prospectus.

However, implementing such a strategy requires perfect knowledge not only of the European framework but also of local specifics and notification requirements in each country. Thanks to our ARROWS International network, built over ten years, we are able to ensure the legal compliance of your private placement across Europe and handle transactions with an international element daily. We provide a unified and coordinated approach that eliminates the risks and inefficiencies associated with hiring separate law firms in each jurisdiction.

Secure Your Financing with Experts by Your Side

Private bond issues are an effective and flexible tool for financing corporate growth. However, as the CNB's practice shows, the line between a legal procedure and a costly offence is very thin. The key to success is a thorough understanding of the difference between a public and private offering, precise distribution management, and meticulous record-keeping.

Mistakes in this area can lead not only to fines in the millions but also to irreparable reputational damage and loss of investor confidence. It is therefore essential to have a partner by your side who is perfectly oriented in the complex world of capital markets.

Our portfolio includes more than 150 joint-stock companies and 250 limited liability companies for which we regularly provide legal services in the field of corporate finance. We pride ourselves on speed and high quality. Thanks to our broad client base, we are also able to connect interesting investment and business opportunities.

Are you planning a bond issue and want to be sure that everything will proceed smoothly and in accordance with the law? Our team of specialists is ready to guide you through the entire process from A to Z. Connect with us at consultation@arws.cz and get a tailor-made legal solution.