Public Investment in Hi-Tech, Proposed Legistlation

Dear clients and friends,

In our memorandum from June 2013  we presented the Israel Security Authority’s (“ISA”) goal of promoting investments in the hi-tech sector and its plan to initiate legislative reform as a means to  such end.  A committee was formed to examine possible reforms, and recently the ISA published a legislative memorandum and draft regulations, which – if legislated and enacted – will have the potential to revolutionize public investments in the Israeli hi-tech sector.

The draft legislation seeks to strengthen the Tel Aviv Stock Exchange (“TASE”) as an attractive and competitive alternative fund-raising platform, in two major aspects. Firstly, by promoting public listings of larger hi-tech companies; and secondly, by encouraging the establishment of publicly traded hi-tech funds (“Hi-Tech Funds”). These solutions aim to reduce dependence on foreign markets and   increase the probability of such companies growing and developing in Israel, rather than being acquired and transferred abroad. As a complementary measure and consistent with world trends, the proposal seeks to promote a “crowd-funding” route for seed-stage hi-tech companies.

In the following paragraphs, we have highlighted some of the main aspects of the proposed legislation:

• Promotion of Hi-Tech Company Listing by Implementing Eased Corporate Governance and Disclosure Requirements: Certain Hi-tech companies that wish to raise capital on the TASE will be able to elect to be listed and register their shares for trading on a unique and separate TASE index, which is expected to be established in the coming weeks – the “Tech-Elite”. Such companies will be permitted to implement less stringent corporate governance controls and disclosure requirements, during the first five years following initial listing (or shorter, dependent on company valuation). Examples of such leniencies include, a CEO acting as the chairman of the board for the first five years, less stringent compensation controls, and simplified procedures for approving interested party transactions. In addition, “Tech-Elite” companies may enjoy the reporting and disclosure benefits of small-cap companies and will be entitled to file reports in English. The ISA will be authorized to allow further exemptions, depending on circumstances, in order to conform to changing standards in competitive markets.

• Formation of Publicly Traded Hi-Tech Funds: The proposed legislation anchors two models of publicly-traded venture capital funds, both acting as closed-end mutual trust funds: (a) limitedperiod funds (of up to 15 years, with an additional three year term subject to certain conditions), and (b) evergreen funds (whose term may be determined and extended from time to time by the interest-holders). According to the proposal, within five years of inception, a Hi-Tech Fund will be obligated to invest an amount of no less than 20% and up to 30% of the value of the fund in Israeli R&D companies. Nevertheless, the ISA may permit a greater rate of investment, provided that the Hi-Tech Fund has received governmental support or grants. Hi-Tech Funds may purchase and hold additional assets, including securities traded on the “Tech-Elite Index” and securities of companies classified in the technology or bio-med sectors by the TASE (even if not listed on the Tech-Elite Index).

• Permission to Crowd-Fund: The legislation proposal recommends excluding certain crowdfunding activities from the scope of securities regulation and providing a safe harbor for crowdfunding, allowing companies to raise capital from a large pool of investors, usually by means of a web-based platform. A company may offer, in such manner, securities valued at no more than ILS 2,000,000 during any consecutive 12 month period. A single investor may invest in any single offering an amount of up to ILS 10,000 provided that such investor’s total investments during any consecutive 12-month period shall not exceed ILS 20,000 (subject to certain extra allowances for investors with a high annual income, but in any event no more than ILS 100,000). An individual or corporate “Lead Investor” (one of the sophisticated investors listed in Items (1)-(4) and (9) of the First Supplement to the Israeli Securities Law 1968-5728), with relevant knowledge and experience in investments of this type with no affiliation to the company, must invest at least 10% of the total value raised in the offering. The proposal further suggests, in order to protect unsophisticated investors with relatively small investments, a mandatory tag-along right for investors (pro rata in accordance with each investor’s interest in the company), if  a shareholder at the time of the offering sells its shares in the company. This financing solution provides a realistic and attractive alternative for seed-stage hi-tech companies, which for the most part cannot raise capital via the stock market in light of the high cost and stringent requirements involved.

The proposed legislation is at a very preliminary stage, and is expected to be presented to the Knesset (the Israeli parliament) shortly.

This publication provides general information and should not be used or taken as legal advice for specific situations, which depend on the evaluation of precise factual circumstances.

No Fields Found.