Israel Securities Authority: Diversifying SMEs’ Financing Channels

In order to facilitate capital raising for small and medium-sized corporations, the Israel Securities Authority (ISA) is considering new options and initiatives that would exempt them from the obligation to publish a prospectus. This will help such companies avoid the expenses and complexities involved in the prospectus process.

The Securities Law already prescribes various exemptions to the obligation of publishing a prospectus, such as offering securities to a limited number of investors (up to 35) per annum,  or offering them to classified investors who do not need the full protection mandated by a prospectus. In addition, the ISA offers additional initiatives to facilitate access to the capital market and to fundraising mechanisms for small and medium-sized corporations by virtue of the Securities Law (particularly the regulation of crowdfunding activities and relief for businesses that fall under the definition of “small corporation”). Notwithstanding these exemptions and reliefs, the ISA is considering the need to promote additional initiatives for this purpose.

Highlights of the Public Appeal

Accordingly, on February 25, 2024, the ISA published a public appeal for market insights on evaluating the need to expand and diversify financing channels for small and medium-sized corporations. The ISA also sought feedback on providing regulatory relief and developing new financing mechanisms to improve the accessibility of funding for these corporations. The ISA will undertake these efforts while ensuring the continued protection of public investors.

The ISA’s public appeal seeks to obtain the public’s positions on the following main issues:

1.Significant Financing Difficulties

Do small and medium-sized corporations encounter significant financing difficulties that do not receive satisfactory solutions through the financing channels available to them by virtue of the Securities Law or through the alternative financing channels available to them? What are these corporations’ characteristics? Is there a need to expand and diversify the financing channels available to them pursuant to the Securities Law and the various securities regulations?

2.What Are the Obstacles?

What are the main obstacles that small and medium-sized corporations encounter when attempting to use the financing channels currently regulated by virtue of the Securities Law?

3. Possibilities to Help Bridge Financing Needs

1. Receiving proposals to bridge small and medium-sized corporations’ financing needs by raising capital from the public, while providing appropriate solutions to protect the interests of public investors, including the need to make changes to exemptions from the obligation to publish a prospectus in order to be able to offer securities to a limited number of investors or to sophisticated investors.
2. Expanding the crowdfunding model in relation to the maximum sums corporations may raise. Currently, the criteria in Israel are strict, requiring the holding of liquid assets at the minimum value of ILS 8.36 million or annual income of ILS 1.25 million for an individual or ILS 1.88 million for a family. In the United States and Europe, the requirements are usually less strict.
3. Creating an additional model specifically for small and medium-sized corporations, similar to the Regulation A+ model offered in the United States. Such a model would be adapted to local law and tailored to meet the key characteristics required.
   

This model aims to increase small and medium-sized corporations’ ability to raise funds from the public by issuing securities to the public without listing them for trading. It is based on the following principles:

• Publishing the offering requires approval from the US Securities and Exchange Commission. A corporation that completes an issuance is then subject to the SEC’s supervision.
• The disclosure obligations for these corporations are more lenient than those required for a corporation offering securities to the public via a prospectus. This applies to both the offering documents and the ongoing post-offering reporting obligations.
• The securities are not listed for trading on the stock exchange (and are therefore not subject to the obligations stock exchanges impose on corporations listed for trading).
• There are limitations on the sums a corporation may raise and on the maximum sums public investors may invest.

The ISA is requesting the public’s input regarding the obligations that apply to reporting corporations under the Securities Law, as well as on public and debenture companies under the Companies Law. If these obligations are also applied in a designated model, small and medium-sized businesses might avoid using it as a fundraising tool altogether. 

Small and medium-sized corporations are vital growth engines for economies worldwide. They employ a significant portion of the workforce and are major contributors to employment growth. These corporations are also key sources of entrepreneurship, innovation, and creativity, which are essential for both developing and developed economies. Therefore, it is crucial to enhance their access to the capital market and other financing sources.

***

Barnea Jaffa Lande’s Capital Markets Department advises small and medium-sized corporations on various regulatory issues, including interfaces with the Capital Market, Insurance and Savings Authority regarding prospectuses, public offerings, and crowdfunding. The department’s team is at your service to answer any questions you may have in this regard.