Israel Securities Authority: Distributors May Be Liable for the Contents of a Prospectus

The Israeli Securities Authority has announced that distribution entities now may be liable for the contents of a prospectus.

In a staff position paper published in late July, the ISA changed the rules of the game in the underwriting field by determining that a distributor, or an entity associated with a distributor, that purchases securities during an issuance and sells them within a short period of time (six months or less) shall be viewed by the ISA as an underwriter and shall be liable for the prospectus.

This position stems from the trend in Israel over the past several years of most issuances being conducted through a distributor rather than an underwriter.

Distribution entities, which are supposed to operate only toward the sale of securities, in practice tend to purchase the securities in a concentrated manner and sell them after the fund raising. Until now, however, they have not been required to comply with the provisions applicable to underwriters.

With the paper’s publication, the ISA has determined that the provisions applicable to underwriters also apply to distributors, including the duty to register in the underwriters’ registry, the duty to comply with eligibility provisions for an underwriter, the duty to sign a prospectus, the prohibition on the purchase of securities through public tender, and civil liability for the prospectus. At the same time, it was determined that this is a rebuttable presumption, such as in circumstances when the sale of securities was made due to an investment decision and not with prior intent.

The ISA position paper may have a cooling effect on distributors from continuing this existing practice and could reduce their involvement in offers beyond mere distribution to other entities.