by Adv. Shemer Sendak
A well-known obstacle in the way of every young company when it comes to raising money in the US, is the number of offerees one can approach in a given round of financing. In essence (and notwithstanding the various exemptions available under Section 4(2) of the Securities Act, Regulation D or otherwise), a company may not use any form of public solicitation or general advertising in connection with an offering, unless it registers with the SEC.
As part of its efforts to boost the US economy, on April 5 of this year, Barack Obama signed the JOBS (Jumpstart Our Business Startups) Act into law. One of the aspects of the JOBS Act is crowd-funding – the option to raise funds openly from the public, subject to certain restrictions.
The Crowdfund Act, which amends the Securities Act of 1933, prescribes conditions under which certain financing transactions involving the offer or sale of securities by an issuer through a broker or funding portal, are exempt from certain registration requirements. Indeed, the crowd-funding exemption has officially opened up a new source of funding for small businesses and startups, allowing them to raise funds from the public without having to do a public offering.
Now, a company that wishes to raise funds from the public through the crowd-funding exemption can do so through brokers or approved internet portals. The exemption allows a company to raise up to $1 million from the “crowd”, subject to certain restrictions. One of the conditions of the exemption is a yearly aggregate limit on the amount each person may invest in an offering of this type, tiered by the person′s net worth or yearly income. The limit ranges from 2% for individuals earning (or worth) up to $40,000, up to a cap of $10,000 for individuals earning (or worth) $100,000 or more.
Following the US
While in the US the number of offerees is only one in a few factors to be considered in connection with registration with the SEC, under current Israeli law the number of offerees (35) is, by and large, the only one.
Inspired by the JOBS Act, Prof. Avishai Braverman, a member of the Israeli Knesset, submitted a proposal two months ago to amend the Israeli Securities Law so that, subject to certain restrictions, businesses could raise funds from the public without triggering the registration requirement (the “35 offerees” limit).
According to the proposed amendment, a company that wishes to raise funds from the public without the requirement to file a prospectus and register with the Israeli Securities Authority (the “ISA”) can do so through a social funding channel (crowd-funding).
The proposed amendment suggests that a company will be allowed to raise up to 2 million Shekels per year from the public through the internet. Each investor will be limited to a maximum investment of 5,000 NIS a year (unless the ISA increases such amount based on the investor’s assets or earning capabilities).
The proposed amendment adopts the JOBS Act formula and the funding portals will be required to register with an ISA-managed registry and inform investors about the risks associated with the investment, make sure the information is kept confidential, publish details about the company and make sure the funds are transferred to the company only after the target amount has been reached. Moreover, these funding portals will have to publish financial statements and other relevant documents about the company to allow investors to make informed decisions.
It remains to be seen whether Professor Braverman’s attempt will indeed become the fundraising “jumpstart” young companies need these days in Israel. Nevertheless, it is our opinion that crowd-funding can serve the purpose for which it was enacted, and become a useful tool for young companies if regulatory authorities will manage to keep disclosure requirements to a minimum while providing a reasonable protection to investors against dubious practices.