Alon Anava

A considerable number of Israeli private companies raise funds and approach prospective investors without a comprehensive understanding of the regulatory obligations mandated by the Securities Law. A pivotal provision in this legislation is the strict prohibition against offering securities to the public without a prospectus.

A lack of knowledge regarding Securities Law provisions has led to a rising number of enforcement cases initiated by the Israel Securities Authority in recent years. These cases involve private companies offering shares to investors in a manner deemed a public offering of securities, all without the required prospectus.

In this article, we aim to demystify the Securities Law by elucidating the definitions of a "public offer" and "the public." We will also delve into the primary exceptions to public offerings and provide strategies for avoiding the need to publish a prospectus.

Defining a "Public Offer" and "the Public"

The Securities Law dictates that a public offer is any action meant to persuade the public to invest in securities. It strictly prohibits making such offers to the public without a prospectus. In Israel, similar to the United States, "the public" includes a minimum of 35 individuals (investors) to whom a company has offered its securities within a 12-month period.

To put it simply, if a private company extends an offer for its shares to more than 35 investors within 12 consecutive months, this constitutes a public offer. Consequently, the company must publish a prospectus, unless it falls under one of the exceptions outlined below. It is crucial to note that the emphasis here lies on making an "offer" rather than a "sale" of shares. This means that even if the company offers shares to a particular investor who opts not to invest, that investor still counts among the 35 offerees.

What Constitutes an Offer When Contacting an Investor?

Naturally, not every interaction with an investor qualifies as an offer of securities. The courts and the Israel Securities Authority have addressed this issue on multiple occasions. They have made it clear that contacting an investor constitutes an offer of securities only if the interaction includes the disclosure of financial data about the security or the company. This includes details such as the securities' price, the company's value, financial data regarding sales turnovers, expected returns, and so forth. Any such disclosure is considered an offer of securities, and the investor to whom this information is disclosed counts among the 35 offerees.

Conversely, if the communication is of a general nature and does not include financial data, it does not qualify as an offer of securities, and the investor is not counted among the permitted 35 individual offerees.

Exceptions to Public Offer Obligations

The Securities Law provides various exceptions to the requirement of a public offering and the subsequent need to publish a prospectus. The most common exceptions include:

• Qualified investors: These investors are not considered part of the public and are not counted among the 35 offerees. Typically, they possess substantial liquid capital, such as venture capital funds or institutional investors.
• Company stakeholders: Controlling shareholders, CEOs, or directors of a fundraising company are also exempt from the 35-offeree count. In specific circumstances, even foreign (non-Israeli) investors may not be included among the 35 offerees.
• Crowdfunding through an offer coordinator: The Securities Law allows companies to offer shares to the public without the need for a prospectus, subject to fundraising and investment limits.

It is crucial to understand that an investor to whom a company offered its securities several times during 12 consecutive months will still be deemed an individual offeree (regardless of the number of offers to that investor). Moreover, the limit of 35 offerees applies separately to shares and bonds, meaning a company may offer shares to 35 offerees and bonds to an additional 35 offerees.

Tips for Avoiding Prospectus Publication

• Gain a comprehensive understanding of the relevant securities laws when seeking investments and seek legal guidance throughout the process.
• Maintain organized records to track and document all offers to potential investors. These records should encompass offer dates, the number of offerees, and the type of security offered.
• Appoint a responsible officer within the company, typically from the financial department or an in-house or external legal advisor, to ensure compliance with the law during fundraising.
• Empower the responsible officer to promptly seek legal advice if it becomes evident that more than 35 offerees were offered securities within the defined time frame.

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Barnea Jaffa Lande possesses extensive experience in managing public offerings and offers representation during interactions with the Israel Securities Authority. If you have any questions on this subject, Adv. Alon Anava, a partner in the firm's Capital Markets Department, is available to assist you.