A Review of the New Amendments to the Angels Law
by: Adv. Shemer Sendak & Maital Ben-Baruch
The most fervent wish of many startup companies in their seed stage, is to find an angel who will “spread its wings” over them and financially see them through the challenging initial stages of research and development. Angel investors play a crucial role in the economy that no one else is willing to fill: they make personal, risky bets that financial institutes and venture capitalists are increasingly reluctant to make until the odds look better.
In light of this, the Israeli legislator has, over the past couple of years, offered the individual investor tax benefits as part of its economic policy. The idea was to encourage investments in young Israeli high-tech and R&D companies, which are accountable for over 40% of Israeli export and are major players in the growth of the Israeli market.
One of these laws is Section 20 of the 2011-2012 Economic Policy Law(a.k.a. the Angels’ Law) which offered private investors tax incentives to finance qualified companies (Target Companies as defined by Law) by deducting the investment from any other income source (i.e. salary, capital gains, etc.). Many hoped this would significantly increase the amount of angel investments in young companies which have difficulty in raising capital in the current market. However, this was not the case. In fact, the criteria for eligibility were so limiting they rendered the Law virtually inapplicable. The Law generated severe criticism and a mere 125 requests for investment approvals since 2011, half of which were never used.
Knesset members Bennet and Lapid are now promoting an amendment to the Angels’ Law which is expected to pass as part of the 2015 Economic Policy Law. The amendment allows investors to recognize 100% of their investment for tax purposes in the year of the investment, in contrast to the current situation in which the investment is recognized for benefits over a period of 3 years, and only if the company has not emerged from its startup status in the meanwhile. The current limitation has caused an absurd conflict of interest between the company, which wants to grow and succeed as fast as possible, and the investor, who might want the company to hold back until he receives his tax benefit.
Another significant change will allow companies to receive approval as Target Companies from the Office of the Chief Scientist prior to an investment, so investors will now know in advance if they are eligible to receive the tax benefit, and not only in retrospect. This will eliminate the uncertainty and perhaps encourage more investments. The OCS will publish a list of the approved target companies on its website, therefore allowing access to private investors who aren’t necessarily experienced and well connected, hence widening the circle of investors.
Apart from the amendment to the Angles’ Law, the proposed 2015 Economic Policy offers another great change that will influence the startup industry. It is suggested that the Office of the Chief Scientist become a statutory corporation uninhibited by government regulation. This will vastly improve the OCS’s flexibility and responsiveness, which are critical in the dynamic high-tech industry. Instead of taking years to make decisions, the OCS will now be able to reach quick conclusions according to the circumstances, approve new investment models in startups such as crowdfunding and provide credit and working capital for high-tech companies. This welcome change could only transpire if the OCS is no longer a part of the government. However, some governmental officials, mainly from the Ministry of Industry, Trade & Labor are against this change, claiming it is a privatization of the OCS and the beginning of its end.
Israel is not the only country who realized that regulatory and legislative changes are needed when dealing with the high-tech and R&D industries. Nearly half the states in the US offer tax credits to angel investors, and several more are actively considering it. In an effort to make sure tax credits have an impact, some states have created programs to educate people about the intricacies of angel investing.
It remains to be seen if this amendment will be more successful than its failed predecessor. It is still debated by many governments around the world whether tax benefits indeed encourage angel investments. It is probably true that tax benefits alone won’t make angels invest in a company that they wouldn’t invest in without the credit. However, it leaves more money in the pockets of these investors – money that can be plowed back into a company as it continues to grow. Bennet notes that this amendment may inadvertently draw some investments away from real estate and other more proven assets, consequently helping the Israeli real-estate market out of its rut. Speculations and hopes aside, we await to see if these suggested amendments are approved or shot down by the Knesset as part of the 2015 Economic Policy Law.