On December 31, 2015, the Law for the Advancement of Investments in High Tech Companies (Legislative Amendments), 2015, was published, amending the Securities Law, 1968 and the Joint Investment Trust Law, 1994 (the "Amendment").
Three principal issues regulated in the Amendment include: crowd funding; reliefs and adjustments to the disclosure requirements in a prospectus, regular reports and corporate governance requirements; as well as the establishment of traded high-tech funds.
Set out below is a brief overview of the Amendment, in so far as it relates to crowd funding.
Background
In a nutshell, crowdfunding is a model of raising capital from the public through an internet platform, based on the notion of raising relatively small amounts of money from a large number of investors. In the last few years, we have been witnessing a gradual global increase in fundraising by using such model, however, as a result of restrictions entrenched in securities laws, most of the moneys are raised by means of contributions to the investment, without any consideration in return, or for consideration not constituting securities of the fundraising corporate. Generally, prior to the Amendment, an offer by an entrepreneur to the Israeli public to raise capital in consideration for the grant of securities was limited, inter alia, to the publication of a prospectus. Moreover, the offering corporation was subject to the full reporting obligations that are imposed on a reporting corporation, with all that it entails.
As a response to this increasing trend, various countries throughout the world have enacted regulations which permit, subject to limitations, equity and debt raising by way of crowd funding. A prime example of this is the United States, in which in April 2012 the JOBS Act was enacted, under which regulations providing specific provisions regarding the carrying out of crowd funding were enacted.
In light of the aforesaid, and in order to create a capital raising mechanism for young companies not traded on the stock market, the Israeli legislature enacted the Amendment with the aim of increasing the accessibility of such companies to investors who would not usually be exposed to making investments in such types of companies, on the one hand, while reducing the inherent risks to investors wishing to embark on this type of investment model, on the other hand.
Principles of the Amendment
According to the Amendment, an offer of securities by a corporation incorporated in
Israel and which is not a reporting corporation1, shall not be considered a public
offering, if it satisfies the following conditions:
(a) The Consideration Amount
In respect of the amount of consideration received by way of such offer, the following cumulative restrictions will apply:
(i) a restriction on the total amount of consideration received by the offering corporation in the applicable offer and (in addition) all other offers made by the corporation during the 12 months preceding the applicable offer;
(ii) a restriction on the total amount of consideration received from a single investor in the applicable offer; and
(iii) a restriction on the total amount of consideration received from a single investor in the applicable offer and (in addition) all other offers in accordance with this mechanism, which were accepted by such investor in the 12 months preceding the applicable offer (including offers from other corporations).
The Amendment does not stipulate the specific amounts of consideration that will be allowed to be invested in respect of each of the said restrictions, and the
relevant amounts will be set forth in regulations to be enacted in accordance with the proposal of the Israeli Securities Authority (the "ISA"), or in consultation with it (the "Regulations"). In this regard, it should be noted that on July 29, 2015, the ISA approved the following proposal, for the purpose of promoting it in legislative proceedings (it should be further noted, in this context, that since at this stage it is merely a proposal, it may be subject to further changes throughout the course of the legislative proceedings):
(1) that the annual threshold amount of crowdfunding will generally be NIS 1,000,000, however such amount may increase: (a) by an additional NIS 1,000,000, if the applicable offer includes an investment by a "leading investor", who will invest at least 10% of the aggregate consideration that is received from all of the investors; and (b) by an additional NIS 1,000,000, if the offer is submitted together with an approval from the Chief Scientist or from the Small and Medium Businesses Authority (as applicable), so that if both of these conditions are met, the annual threshold amount may reach a total of NIS 3,000,000;
(2) that the amount of consideration to be received from a single investor in the applicable offer will not exceed NIS 10,000; and
(3) that the amount of consideration to be received from a single investor in the applicable offer and (in addition) all other offers in accordance with this mechanism, which were accepted by such investor in the 12 months preceding the applicable offer (including offers from other corporations), will not exceed NIS 20,000.
We note that the above permissible threshold amounts that may be invested by a single investor, may be higher, depending on the investor's income and/or assets, as shall be set forth in the Regulations.
(b) The Internet Platform
According to the Amendment, a public offering by way of crowd funding will become possible through a coordinator (the "Offer Coordinator"), which will serve as facilitator of the offer and the sale of securities through an internet platform, and which shall be registered as such in a coordinator registry, which shall be managed by the ISA. Inter alia, the Offer Coordinator will be subject to the following provisions:
(i) registration as an Offer Coordinator – such registration will be effected following the satisfaction of certain conditions as set out in the Regulations. Such conditions are expected to include, inter alia, conditions regarding minimum equity, deposits, insurance and fee payments. The ISA will be allowed to decline registration, or void an existing license, based on circumstances as shall be stipulated by the ISA, including circumstances whereby the reliability of an Offer Coordinator, or a controlling shareholder in such Offer Coordinator, or an officer holder of such Offer Coordinator is in question;
(ii) fair conduct - the Offer Coordinator will be subject to a general duty to conduct itself in a fair and proper way, and will be prohibited from including in its publications, misleading information;
(iii) supervision of the Offer Coordinator will be performed by the ISA, and the Offer Coordinator will be subject to the ISA's instructions; and
(iv) reporting obligations - the Offer Coordinator will be subject to reporting obligations to the ISA, which shall include regular periodic reporting obligations as well as the provision of specific information on demand, all as shall be set forth in the Regulations.
(c) Further Provisions
In addition to the above, the Regulations are expected to include, inter alia, conditions which the lead investor will be expected to comply with (e.g., lack of ties to: the offering corporation, the offering corporation's controlling shareholder or to another shareholder or office holder of the offering corporation as well as minimal investment amount requirements). In addition, the lead investor will be under a duty to furnish certain documentation which will need to be submitted concurrently with the offer (for example, the offering corporation’s incorporation documents, shareholders agreements, details regarding use of the consideration to be received, etc.).
