Amendment to the Definition of “Classified Investor” in the Israel Securities Law

As part of the Israel Security Authority’s (ISA) measures to relax certain existing regulations, it has promulgated the Securities Order (Amendment to the First Addendum to the Law) regarding the definition of a “classified investor.” This amendment will come into effect on March 25, 2016.

Pursuant to the Securities Law, an offering of securities to more than 35 offerees constitutes an offering to the public and requires the publishing of a prospectus and the approval of the ISA. “Classified investors” are not included in the count of offerees.

Therefore, private companies and investment funds often target “classified investors” when offering securities, in order to avoid the obligations of publishing a prospectus and supervision by the ISA.

An individual deemed a classified investor:

The legislative amendment significantly eases the criteria for an individual to meet the definition of “classified investor.” To be deemed a “classified investor,” an individual now only needs to fulfill one of the two criteria specified in the law (as opposed to the previous requirement of complying with both criteria cumulatively).

Prior to the legislative amendment, the definition of an individual “classified investor” was dictated by the provisions of the Regulation of Investment Advising, Investment Marketing and Investment Portfolio Management Law.

The Investment Advice Law does not use the term “classified investor,” but rather “qualified client.” This is defined as a client who is qualified to receive investment advice/marketing/management without the service provider being licensed by the ISA to provide such service.

Prior to the amendment, the Securities Law (which applies to corporations that offer/issue securities to the public) prescribed that an individual who meets the definition of a “qualified client” pursuant to the Investment Advice Law is also deemed a “classified investor” for the purposes of a securities offering.

According to the Investment Advice Law, a “qualified client” is anyone who fulfills two of the following criteria:

1. Liquid assets – the inclusive value of cash, deposits, financial assets, and securities owned by the individual exceeds NIS 12 million;
2. Expertise – the individual possesses expertise and qualifications in the capital market or was employed for at least one year in a professional capacity requiring capital market expertise;
3. Volume of transactions – the individual completed at least an average of 30 transactions per quarter during the four quarters preceding his qualifying to be deemed a “qualified client.”

The amendment to the Securities Law severs the connection between “qualified client” under the Investment Advice Law and “classified investor.”

According to the new amendment, a “classified investor” is anyone who fulfills one of the following criteria:

1. The inclusive value of the liquid assets owned by the individual exceeds NIS 8 million;
2. The individual’s income in each of the last two years exceeds NIS 1.2 million, or the income of his family unit exceeds NIS 1.8 million;
3. The inclusive value of the individual’s liquid assets exceeds NIS 5 million and the individual’s income in each of the last two years exceeds NIS 600 thousand, or the income of his family unit exceeds NIS 900 thousand.

The amendment also includes another material change: it requires the offerors of securities to actively verify that “classified investors” meet the law’s definitions. (Prior to the amendment, it was sufficient to receive the investor’s written declaration. Now, however, offerors of securities are obligated to perform an active verification).

Despite the fact that offerors are now required to perform active verifications of classified investors, the criteria for being deemed a classified investor have been significantly relaxed. This is expected to provide relief to entities (such as companies and funds) that want to offer their securities to more than 35 offerees without the offering being deemed a public offering, i.e. without having to publish a prospectus and obtain the ISA’s approval.

The severance of the term “classified investor” from the term “qualified client” was needed due to the gaps between the legislature’s intention when drafting the Investment Advice Law and its current intention when amending the Securities Law.

This amendment has broad-reaching implications and facilitates business opportunities to recruit capital without having to publish a prospectus.