Can a private placement be characterized as an irregular public offering?

Your company decides to raise capital through a private placement of debentures, commercial notes, closed-end fund units, or even a convertible loan, often to avoid the cost and timeframe of a public offering registered with the CVM (Brazilian Securities and Exchange Commission). But an important question arises: could this private placement end up being treated as an irregular public offering? The answer is yes, it could, depending on how the fundraising is conducted. And this depends less on the name given to the operation than on how the securities reach investors.

The line separating a public offering from a private placement is not the type of security or the number of investors. It lies, essentially, in the communication. By definition, a public offering is any communication capable of reaching multiple recipients, made by the company or someone acting on its behalf, whose content and context represent an attempt to generate interest or attract investors to specific securities, except for cases expressly excluded by the regulation itself. In a private placement, the opposite occurs: the negotiation is direct and individualized, with previously identified investors, without dissemination capable of reaching the public broadly or in a capillary manner.

The distinction is important because all public offerings directed at investors residing, domiciled, or incorporated in Brazil must first be approved by the CVM (Brazilian Securities and Exchange Commission), either through registration or exemption. The regulation also lists situations that fall outside its scope. A truly private placement does not attract this distribution regime, which does not preclude compliance with corporate law and other rules applicable to the issuer.

Practical Examples of Mischaracterization of Private Offerings

The risk arises when "private" becomes synonymous with "unregistered." In practice, examples that characterize an offering as public include: the use of advertising material directed at the general investing public, the solicitation of undetermined investors, inquiries about the viability of the offering or the collection of investment intentions aimed at undetermined investors, and negotiation in establishments open to the public, on websites, social networks, or applications intended for undetermined investors. There is also a point that often goes unnoticed: these acts can constitute a public offering even when the recipients are individually identified, if they result from standardized and mass communication.

Another common misconception is that restricting the offering to professional or qualified investors, in itself, makes it private. The old regime of restricted efforts has been revoked, and today, offerings aimed solely at this audience remain public, subject, as the case may be, to a simpler registration process and restrictions on trading in the secondary market. Limiting the target audience tends to alter the applicable procedure, not the nature of the offering.

Exceptions and Reserved Circumstances in the Standard

On the other hand, there are exceptions expressly provided for by the regulation itself. It is possible to sound out professional investors beforehand about their interest in a potential offering, provided that the requirements set forth in the regulation are observed, including confidentiality, the absence of any link between the parties, and the keeping of records of who was consulted and the material used. Also excluded from the regime, under the terms provided therein, is the placement of a single, indivisible lot intended for a single investor, in which case advertising material is not permitted and there is a temporary restriction on the fractional sale of the lot.

Reasonable Consequences and Penalties by the CVM

If the CVM (Brazilian Securities and Exchange Commission) identifies an irregular public offering, it can alert the market and order the immediate cessation of fundraising, under penalty of a fine, a measure known as a stop order. In parallel, it can initiate administrative sanctioning proceedings against the company, its administrators, and the intermediaries involved, with penalties ranging from fines to disqualification and temporary prohibition from operating, since a public offering conducted without registration or exemption is classified by the regulation as a serious infraction. The conduct may also, in theory, constitute a crime against the national financial system. Add to this the potential civil liability to investors and the reputational and credibility impacts on the market.

Best Practices and Precautions in Private Fundraising

To be secure, a private placement needs to be truly private: a previously identified and limited group of investors, individualized and bilateral negotiation, direct access to information, absence of widely disseminated advertising material, and lack of standardized and mass communication. When fundraising requires broad reach, the safest approach is to structure a public offering and register it with the CVM (Brazilian Securities and Exchange Commission), which can now be done through an automatic registration process in applicable cases. Documenting who was contacted, when, and with what material helps demonstrate that the fundraising was not directed at the public.

In short, a private placement can be characterized as an irregular public offering when it uses the same communication tools typical of a public offering. The label assigned in the contract tends not to be decisive; what matters is how the securities reach investors. Assessing this at the beginning, before the first approach, reduces the risk of a stop order and a sanctioning process. And it is precisely at this point, between designing the fundraising as private or submitting it to the public regime, that good legal advice makes all the difference.

This publication is for informational purposes only, reflects the authors' understanding at the time of its publication, and does not constitute legal opinion or a recommendation applicable to specific cases, which should be analyzed individually.

Article prepared by: Antonio Mazzucco, Paula Suraci and Maria Eduarda Gaspar.

• What separates a private placement from a public one is not the type of security or the number of investors, but rather the communication method used to raise capital.
• Restricting the offering to professional investors does not make the placement private.
• Assessing whether the fundraising is private or public before the first approach to investors reduces the risk of a... stop order and any potential disciplinary proceedings.