The Israel Innovation Authority (the "IIA") continues to respond to the unique situation presented by the worldwide COVID-19 pandemic. The IIA has now published Track 43 (the "Track") for the protection of investments by institutional investors in Israeli hi-tech companies as part of a government approved national economic program. In the short term, the goal of the Track is to support Israeli hi-tech companies; in the long term, the goal is to encourage institutional investors to develop expertise in investments in hi-tech companies.
Under the Track, the IIA will offer investment protection for investments in hi-tech companies by institutional investors, such as provident or pension funds, banks and insurance companies and certain of their affiliates. Institutional investors will be able to submit requests to the IIA in order to be approved for an investment protection period several times throughout the year, upon the IIA's issuance of calls for submissions for such protection. In their applications, the institutional investors will need to include a proposed scope of investments, a forecast regarding types and numbers of planned investments, estimates regarding timeframes required for making the investments and a plan regarding personnel who will be involved in such investments. The applicants will be graded by the Research Committee at the IIA on various parameters such as efficiency, experience in hitech investments, institutional capability to analyze investments and a proven capability to cooperate with local and international investors. Investors which receive the highest grades will be approved for investment protection under the Track for a specified period of time. During the approval process, the IIA will approve a framework for investments by the applicant in amounts between NIS 150 million and NIS 350 million (approximately USD 43 million to USD 100 million).
The types of investments for which the IIA will provide protection include:
- investments of up to NIS 120 million (approximately USD 35 million) in the context of an investment round with other investors (with the institutional investor not investing more than 65% of the investment amount in that round); and
- convertible loans or warrants to receive shares in the target.
The institutional investor will receive investment protection of up to NIS 50 million (approximately USD 14 million) for all of the investment rounds in the specific company. The investment target or its subsidiary (in the case of a holding company) needs to fulfill certain criteria for the investment to qualify for protection under the Track. Investment protection will be provided for investments in private Israeli hi-tech companies which fulfill the following conditions:
- more than 20% of their annual expenses are classified as R&D expenses;
- the majority of the salary of the lower of 10% of the Israeli employees or 10 employees is classified as R&D expenses in the company's financials;
- more than 50% of their R&D expenses have been expended in Israel;
- R&D is not performed on behalf of a third party; and
- revenues are lower than NIS 200 million (approximately USD 58 million).
Additionally, the target must fulfill one of the following criteria:
- its revenues in the previous year must have been higher than NIS 10 million (approximately USD 3 million), or
- if the institutional investor is a provident or pension fund, the company must have had an aggregate of at least NIS 40 million (approximately USD 12 million) in investments (in equity or debt) in the previous three years, or
- if the institutional investor is not a provident or pension fund, the company must have had an aggregate of at least NIS 18 million (approximately USD 5 million) in past investments (in equity or debt).
Certain flexibility and discretion are provided to the IIA with respect to some of the above criteria, especially when taking into consideration the hi-tech company's level of innovation, potential for growth, expected contribution to the Israeli economy, etc. The target must also undertake to use at least 20% of the investment funds for purposes of R&D activities in Israel within a three-year period. The institutional investor will also have to demonstrate compliance with certain milestones with respect to its level of investments.
Seven years after the approved investment period, the IIA will calculate the value of the investments at that time, in comparison to the value of the investments when they were made. Regarding any shares that had been previously sold or dividends received, the IIA will add 1% annual interest from the date that the money for them was received by the institutional investor. If the IIA's evaluation will establish that the value of the investments has decreased, the IIA will reimburse the institutional investor for the decrease in value, up until 40% of the investment amount. If, on the other hand, the IIA's evaluation will establish that the value of the investments has increased by 8.5% or more, the institutional investor will pay the IIA 10% of the increase in value above the 8.5% threshold.
Originally published June 17, 2020.
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