The Securities Authority identified recurring deficiencies in fundraising without a prospectus: documentation, record-keeping, classification, and disclosure.
Both internal and external marketers are deemed agents of the corporation – liability rests with the entity.
Corporate officers may face personal liability in cases of supervisory failures.
Corporations must implement compliance mechanisms: policies, training, record-keeping, monitoring, and oversight.
The ISA determined that marketers, including external marketers, are considered a corporation’s “long arm.”
The Israel Securities Authority (ISA) recently published audit reports scrutinizing the activities of various investment ventures and corporations that raised funds from the public without publishing a prospectus. The reports revealed a series of failures: mainly a lack of documentation, classification, and orderly registration of offerees, as well as disclosures of prohibited financial information, sometimes carried out by internal and external marketers acting on the corporations’ behalf.
Although the marketers committed the violations, the ISA emphasized that liability is not limited to them. As a rule, a corporation cannot disavow responsibility for violations committed by its marketers by claiming they acted independently.
The ISA further determined that marketers, including external marketers (financial planners, insurance agencies, brokers, etc.), are considered a corporation’s “long arm.” Investment offers made by marketers are considered tantamount to offers by the corporation itself. Accordingly, corporations must ensure their offers comply with all statutory provisions:
Failure to adequately supervise marketers could lead to a situation where a corporation violates Securities Law provisions, even if its officers were not directly involved in marketing activities.
The Securities Law imposes personal supervisory obligations on a company’s CEO and directors. The absence of procedures and controls may be deemed a violation of these supervisory obligations and could result in administrative or even criminal proceedings.
Conversely, documenting the existence of adequate procedures, appointing a supervisor, providing employee training, and conducting ongoing monitoring may serve as a defense against liability, so long as the organization can prove it has taken all reasonable measures to prevent the violation.
In other words, a lack of supervision may expose not only the corporation itself to liability, but also its officers and directors.
To comply with the statutory requirements and mitigate legal risks, corporations seeking to raise funds should, inter alia, implement the following measures:
Implementing these effective measures can significantly reduce a corporation’s and its officers’ exposure to violations committed by the marketers on its behalf.
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Adv. Alon Anava is a partner in our firm’s Capital Markets Department.
Barnea Jaffa Lande has extensive experience both advising corporations on securities law and representing clients during proceedings before the Israel Securities Authority.
