Israel: The Tel Aviv Stock Exchange Opens The Door For Startups

Last Updated: 12 April 2017
Article by Hanan Efraim

Several weeks ago, the Knesset ratified the law to promote investments in companies operating in fields of high technology (legislation amendments) 5776-2015, which attempts to solve several needs:

First, an exemption from displaying a prospectus during capital raising by technology companies (next to non-technology companies) by way of crowd funding. So far, extensive disclosure requirements next to significant costs have made it difficult for technology companies when turning to raise capital by way of an IPO, and the amendment to the law attempts to handle this impediment.

Second, an attempt is made by the Securities Authority and the Stock Exchange to draw attractive companies to raise capital while they grant easements in ongoing reports.

And third, diversifying the sources of capital streamed into technological projects in the form of establishing tradable capital funds that will invest in public and private technology companies while removing restrictions that thus far have made it difficult to invest in private companies, and by doing so create a more efficient market for investing in technology companies, instead of selling them abroad.

Introduction

Several weeks ago, the Knesset ratified the law to promote investments in companies operating in fields of high technology (legislation amendments) 5776-2015 (herein:"Investment Promotion Law").

The Investment Promotion Law was made in a time where two concerning trends exist in the Israeli market: first, many technology companies find it difficult to locate effective source of funding when they attempt to raise monies. In the context of public capital markets, which currently due to strict requirements of the Securities Authority and the Stock Exchange have an obligation to display a detailed and comprehensive prospectus next to ongoing statements and disclosures on part of traded companies, and thus many companies do not turn to raise capital from the public at all. Moreover, even the basic technical requirements of companies seeking to raise capital from the public in regards to minimum equity, minimum value of public holdings etc. do not allow many junior companies to raise capital in the stock exchange.

Second, as a result of the aforesaid, as well as other reasons, for several years now the Tel Aviv Stock Exchange has been losing an increasing number of traded companies, where some move to overseas capital markets and some simply return to private company status. Furthermore, many companies that run into difficulties of raising capital for their continued growth and development as an organization choose to be sold and "save" the company, and by doing so to continue and have the same operations as part of a larger corporation (in most cases, a foreign one).

Another factor contributing to the need of diversifying financing sources is the fact that receiving an investment from venture capital funds poses a strict demand to return the monies to the fund, which in most cases consolidates to the time intervals of several years (usually seven years). Thus, when several years passafter the investment, many companies begin to see signs from the funds holding their shares on the need to realize their investment in the Company, a fact that adds another layer to the need of performing transactions of company sale.

The Investment Promotion Law

The Investment Promotion Law attempts to deal with the aforementioned faults in several ways:

First, the Securities Authority and Stock Exchange understand the need for arranging crowd funding mechanisms, "offer coordinator" as defined in the Securities Law. In the United States, this has been settled several years ago already, and now Israel also attempts to formulate a set of provisions and regulations that will arrange the operations of such coordinators, next to reducing the demand for displaying a comprehensive prospectus (as specified below).

The Investment Promotion Law grants an exemption from displaying a prospectus to companies seeking to raise capital by way of crowd funding, and provided they meet certain terms. This way, the main demand is for a raising scope of no more than ILS 3 million, next to a reduced demand on publishing basic financial statements, and also receiving the approval of the Head Scientist (inasmuch as this is a technological company) or the Small and Medium Businesses Authority (inasmuch as this is another business) concerning the innovativeness of the technology or the business's legitimacy.

Prior to the law's ratification, other than publishing a comprehensive prospectus, start-up companies wishing to be traded in the Stock Exchange had to report to the authorities in the Hebrew language and also apply IFRS rules on them, and that is in contrast with the Investment Promotion Law (and regulations to be installed by its force) that allows companies to report in English and according to US GAAP.

By reducing the requirements imposed on junior companies and exposing them to the eyes of the investing public, the hope is that attractive companies could use the Tel Aviv Stock Exchange as a capital raising device, and by doing so have interesting technologies remain in Israel instead of being sold abroad.

That and more, the Investment Promotion Law diversifies the sources of capital streamed to technological projects by establishing tradable capital funds that will invest in traded technological companies, next to removing restrictions that have made it difficult thus far to invest in private companies as well, and by doing so contribute to the creation of an effective market for investing in junior technological companies, and in some cases even generate an alternative financing mechanism instead of selling the companies abroad.

Before we finish, it should be mentioned that the Investment Promotion Law has been ratified at a time when the Stock Exchange is under attack after multiple companies have abandoned Israeli trade for foreign capital markets, and after claims of over-regulation that makes it difficult for companies to raise capital (either initial or secondary capital raising) and by pushing them to raise capital abroad. The expectation is that the Investment Promotion Law will create a comfortable mechanism for technological companies to turn to raising capital from the public, next to diversified investment alternatives such as tradable capital funds.

Summary

The Investment Promotion Law comes at a time in which the gap between junior technology companies and raising foreign capital is the shortest it has ever been. The law attempts to formulate effective and real mechanisms for start-up companies in order to create a real alternative to raising capital from the public in the Tel Aviv Stock Exchange, and by doing so attempts to have attractive technology companies stay in Israel instead of being sold abroad.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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