by Maital Ben-Baruch and Adv. Shemer Sendak
In our last few articles we discussed the revolutionary JOBS Act and its potential effect on young companies trying to raise capital in the US. Title III of the Act concerning crowdfunding has yet to be approved, having just closed for public comments.
In this article we will review the latest developments in Israeli legislation, which seems to be making some progress towards providing start-up companies with tools to raise capital more easily. As a reminder, in June 2012, Knesset member Avishay Braverman filed a private Bill regarding public funding of businesses, which emulated the US model for crowdfunding and adapted it to the Israeli market. The Bill has yet to receive a preliminary reading, however it started the ball rolling and brought the issue to public attention and raised discussion.
This triggered the formation of the ISA committee for promoting investments in research and development companies. The committee’s goal was to examine why Israeli high-tech companies, in an industry second in its scope only to the US, do not raise capital via the stock exchange and are sold 95% of the time to foreign companies before they reach maturity. The committee concluded that the existing tools for raising capital are not working well enough for Israeli start-ups, and are causing the industry to be more and more dependent on foreign funding, which in turn makes the whole market vulnerable to international financial fluctuations. It suggested an array of solutions tailored for companies of different sizes, making it easier for larger high-tech companies who wish to raise capital via the Israeli Stock Exchange, and allowing smaller companies which are not suitable for registration with the ISE to sell stock to the public without a prospectus, i.e., crowdfunding.
The legislation proposed by the committee in February 2014, will allow start-up companies to raise capital from the public without being subject to regulations under the securities and companies laws. Yet in order to protect the public, the proposed law places limitations on both the companies and the investors. It permits companies to raise up to 2M NIS a year from an unlimited amount of investors, and individual investors to invest between 10,000-20,000 NIS per investment and 20,000-100,000 NIS a year according to their financial ability. The fundraising will be coordinated by an underwriter who will ensure that the company and investors comply with all disclosure requirements, and will be conducted by means of a designated internet portal.
The committee’s suggestions, based loosely on the US model, differ from it in two major clauses. First is the requirement that at least 10% of the investment come from a leading investor who is either a sophisticated or classified investor as defined in the first addition to the Securities Law. Second is the requirement for written confirmation from the Chief Scientist’s Office that the company’s suggested technology is indeed feasible, that the company holds the rights to the fruits of their research and development and that the professional and management team “has what it takes” to achieve its goals. This last clause effectively limits the current proposal to high-tech companies engaged in research and development only, however the committee is examining an additional crowdfunding mechanism for small and intermediate companies in other fields.
The suggested legislation which is now open for public comment raises many questions. Who will be liable in case of breach of duty, the company, the underwriter, or perhaps the internet portal? Who will be responsible for keeping the investor’s private information safe? Will it even be possible to convince sophisticated investors to join such an investment or does this requirement make the whole arrangement inapplicable? The answers to these uncertainties will probably reveal themselves only over time. For now, we could only hope that these interesting developments will indeed mature into legislation and bring entrepreneurship and innovation in Israel to new heights.