Intro
Welcome to the second installment in our series of articles providing an overview of the various aspects relating to the venture lending industry in Israel, including some of the legal, commercial and regulatory factors that should be taken into consideration by anyone looking to enter into this realm. The main goal of this series is to equip readers with valuable knowledge and understanding of the venture lending landscape in Israel, helping them navigate and capitalize on the unique opportunities it presents, particularly for those looking to become stakeholders in the Israeli startup ecosystem. In our second installment below, we provide an overview regarding the potential requirement for a foreign lender to obtain a lending license in Israel.
License Requirements for Lenders in Israel – Israeli Financial Services Law and Exemptions
The extension of credit by entities which are not Israeli licensed banks or institutional investors in Israel is subject to license requirement pursuant to the Israeli Supervision of Financial Services Law (Regulated Financial Services), 5776–2016 (the "Financial Services Law").
The Financial Services Law establishes a broad obligation to hold a license as a condition for engaging in various financial activities in Israel, including providing credit. Under the Financial Services Law, most Israeli institutional lenders have statutory exemptions to obtaining a license for lending transactions. These exemptions did not originally apply to foreign lenders, but this was applied afterwards through regulations.
In 2022, the Regulations for the Supervision of Financial Services (Regulated Financial Services) (Exemption from Licensing Requirement), 5782-2022 (the "Exemption Regulations") were enacted (replacing temporary similar regulations enacted in 2018). The Exemption Regulations set forth certain exemptions from the credit license requirement including, among other things, (i) exemption to banks incorporated in an OECD member country and licensed by a regulatory authority in an OECD member country; (ii) exemption to credit providers which provide credit to corporate entities only, provided any such credit provision transaction is in an amount not less than NIS 3 million (approximately USD 900,000 at the current exchange rate); and (iii) an exemption for credit providers whose occupation is the provision of credit to corporate entities (a) whose main activity is R&D or production of innovative products/processes, and (b) where an investment therein carries a risk greater than usual in other investments – in relation to the provision of credit to such entities.
Foreign banks lending into Israel are typically exempt from licensing requirements provided that they are subject to regulation in an OECD country. Private credit funds who specialize in venture debt will also typically be exempt provided that they fall into the above exclusion relating to credit providers who loan primarily to R&D companies. With that said, first time foreign lenders should be cautious and should make sure that their lending structure is clear and that they have analyzed their structure in connection with the Exemption Regulations. It should be noted that transactions which structure the Israeli entity as a guarantor instead of a borrower does not circumvent the application of the Exemption Regulations.
A breach of the Financial Services Law can result in a heavy fine or even criminal charges and potential imprisonment under certain circumstances.
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.
