How Does Fundraising through Crowdfunding Work?
Since December 2017, companies can raise funds from the public in consideration for the sale of stocks or bonds. The idea at the base of this model is raising small sums of money from an unlimited number of investors without a prospectus.
The fundraising is done through a “proposal coordinator,” a body supervised by the Israel Securities Authority. The coordinator is charged with coordinating all the campaigns on the internet platform it operates, performing various examinations of the campaigns posted on the platform, and taking certain precautions to ensure the campaigns comply with the law. This is in order to prevent any instances of fraud in crowdfunding campaigns.
A campaign is open for a certain period of time. If the company successfully raises the minimal sum set by the expiration date, the proposal coordinator will transfer the money to the company. In turn, the company will allocate the stocks or bonds to the investors. If the minimum sum is not raised, the money will be refunded to investors.
Who May Raise Funds through Crowdfunding?
Any corporation incorporated in Israel that is not a reporting corporation and that has not offered securities via a prospectus in Israel or any other country may raise funds via crowdfunding.
Are There Restrictions on the Sums Companies Can Raise through Crowdfunding?
Companies can raise up to NIS 4 million over a period of 12 consecutive months.
If a “leading investor” participates in the campaign, or the fundraising company receives an audit report from the Israel Innovation Authority or the Small and Medium Businesses Agency, the maximum sum permitted to be raised increases to NIS 5 million. If the company receives an audit report and a leading investor participates, the maximum sum increases to NIS 6 million.
Who Is a Leading Investor?
Generally, a leading investor has no link or business or professional connections to the fundraising company. Rather, he has capital, experience, and expertise in executing investments in startup companies or in small and medium companies. Leading investors are required to invest at least 10% from the aggregate amount raised by the fundraising company from the investors. They are also permitted to receive a discount from the fundraising company for a share price or for a bond’s interest.
How Does Life Look after a Fundraising Campaign?
The fundraising company is required to provide the investors with ongoing reports, through the proposal coordinator’s platform. The reports include annual financial reports, information the company undertook during the campaign to provide to investors, information as to any change in the holdings of the controlling shareholder and other officers, information on any material change in the company’s businesses, etc.
Is Crowdfunding Appropriate for Any Company?
Crowdfunding is a simple and easy tool, which allows unparalleled exposure for companies engaged in various businesses. The investing public becomes a partner in the company’s success and each investor becomes “an ambassador” for the company and its business.
Please note these are small investors, who generally do not hold influence over decisions or management of the company. This is opposed to institutional or sophisticated investors, such as venture capital funds, which in many cases gain influence over company decisions and management in return for their investments, through the appointment of directors or holding veto rights on significant matters.
However, alongside these advantages, in light of the relatively small sums that may be raised through crowdfunding, this channel for fundraising best fits small companies in their early stages who are struggling to raise initial capital, as opposed to bigger companies who generally require higher sums.
What to Note When Selecting a Proposal Coordinator?
The prospects for a campaign’s success greatly depend upon the proposal coordinator. It is therefore vital to consider conducting a market survey and examining different relevant factors. These include the length of time the proposal coordinator has operated in the field and the coordinator’s reputation in the market; the coordinator’s campaign success rate (such data must be displayed on the coordinator’s website); the sum of commission to be paid to the coordinator and whether this depends upon the campaign’s success; if the coordinator provides comprehensive services that assist the campaign and help minimize its expenses, such as legal documents, graphics, content editing, advertising bundles, and more; and if the coordinator merely provides a platform and the rest is in the company’s hands.
Crowdfunding offers a great opportunity, but it is important to do it right.
Should you require any further guidance about any of the issues discussed in this article, contact a member of our Capital Markets team.
Source: barlaw.co.il