The social phenomena of crowdfunding, adopted by high-tech startups as an alternative means to raise funds, was previously limited in Israel by Israel's Securities Law. Section 15 of the law dictates that any offer or sale of shares to the public (i.e. to more than 35 potential investors) requires the issuance of a prospectus approved by the Securities Authority; a timely and costly endeavor, rendering crowdfunding prohibitive in Israel.
Last Thursday, as 2015 ended and we welcomed in the new year, a new law (by way of an amendment to the Securities Law and the Joint Investment Trust Law), The Law for the Encouragement of Investment in High-Tech Companies, was published. The new law provides an exemption for small companies (not just in the field of high-tech) from the need to issue a prospectus when crowdfunding and raising small amounts of financing from various investors.
The applicable regulations that will determine the parameters of the exemption have yet to be published, and only time will tell how lenient the Securities Authority will be. However, the current expectation is that investments of up to NIS 10,000 (i.e. approximately USD 2,500 at the time of writing) per investor for each investment, and NIS 20,000 per investor in the aggregate per annum (i.e. approximately USD 5,000 at the time of writing) will be exempt. In addition, the relevant company will be limited in the aggregate amount it can raise through crowdfunding per annum, and the expectation is that the cap will be several million NIS. In the interest of protecting the public, the regulations will require that at least one accredited investor participates in the crowdfunding and that such crowdfunding is executed through an internet portal regulated by the Securities Authority.
In addition, and following laws already adopted in the United States and England, the new law also provides for the establishment of high-tech funds. These funds are to be traded on a new index on the Tel Aviv Stock Exchange (TASE). The idea is that the public and institutional investors can now invest in funds, which in turn invest in a wide variety of Israeli high-tech companies; reducing the investors' exposure when compared to investing in lone ventures. This new model provides a welcome alternative for high risk high-tech companies seeking financing and/or looking to be traded on TASE.
Moreover, the Securities Authority are seeking legislative approval regarding new regulations to provide additional concessions to high-tech companies. Such concessions include the right to submit annual reports and prospectuses in English (as supposed to Hebrew) and to prepare financial reports according to the principals of US GAAP (rather than IFRS). These proposed changes will save Israeli high-tech companies significant expenditures when registering on TASE, and allow them to attract investments from US investors, without having to turn to the NASDAQ.
The new law demonstrates that Israel has recognized the credit crunch affecting high risk companies, the obstacles faced by small startups when approaching the traditional and powerful financing sources of banks, institutional investors and venture capital funds, and the consequence of a global trend in social financing. A need recognized by the global markets and the leading websites – the Lending Club in America (traded on NASDAQ), Zopa in England and Blender in Israel.
Originally published January 3, 2016
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