The Committee for the Promotion of Investments in Public Companies Engaged in R&D submitted its final recommendations today to the Chairman of the Israel Securities Authority (ISA), Prof. Shmuel Hauser. The committee’s findings include a series of recommendations designed to promote possible solutions for financing high-tech companies through the Tel Aviv Stock Exchange (TASE), including the encouragement of IPOs of relatively large high-tech companies and the encouragement of publicly traded venture capital funds that will invest in and support several high-tech companies and early-stage ventures. In addition, the committee recommends the adoption of a number of “off-the-exchange” solutions.
Prof. Shmuel Hauser, who formed the committee in September 2012, appointed Adv. Sraya Orgad, legal counsel of the ISA Corporate Finance Department, and Ms. Hani Shitrit Bach, Senior Vice President and Head of the Economic Department, TASE to co-chair the committee. It is an inter-ministerial committee, comprised of senior staff from the ISA, TASE, the Ministry of Finance, the Ministry of Justice, the National Economic Council and the Tax Authority. The committee’s recommendations include dispensations in areas under the responsibility of all of its participants.
The recommendations, which were formulated following dozens of discussions and meetings with various parties active in high-tech industries, include measures that are expected to attract “target companies”, i.e. high-tech companies with “post-money” valuations of NIS 200 million or more that are interested in raising significant amounts of capital.
In order to encourage these high-tech companies to undertake public offerings and list on TASE, the committee recommends, inter alia, that TASE launch a new “Elite Tech” index that will include the shares of newly-listed companies and veteran companies with a market capitalization of at least NIS 400 million. It outlines a number of dispensations and benefits that can be granted to target IPO companies. On-going disclosure requirements will be adjusted, including an exemption from complying with ISOX requirements. Target companies will be given the option to submit financial reports according to US GAAP and will be permitted to file all disclosures in English. Temporary dispensation will be given regarding the corporate governance requirements with which target companies must comply after going public. Investors acquiring the shares of target companies in either an IPO or secondary offering will be entitled to offset capital gains against their initial investment. Entrepreneurs of target companies will also enjoy certain tax benefits regarding the tax treatment of stock options they hold in a target company.
To ensure that these companies receive exposure among foreign investors, TASE will promote the implementation of its independent analysis program designed to provide English-language research of high tech companies, which may otherwise escape the attention of foreign analysts. The committee recommends examining government participation in covering the costs of this research. The committee recommends examining government participation in covering the costs of conducting market analysis on small high-tech companies.
In addition, the committee recommends enabling the establishment of exchange-traded venture capital funds modeled on closed-end mutual funds. Such funds would be entitled to invest up to 30% of the amount raised from the public in the securities of privately-held Israeli high-tech companies and 70% in Israeli high-tech companies traded in Israel. These funds will be exempt from income tax, and investors will be taxed only upon the sale of their VC units or when profits are distributed. To enable this model to come to fruition, the committee recommends that ceilings placed on provident fund holdings of the means of control (as defined in Section 9(2) of the Income Tax Ordinance) be raised from the current level of 50%. The committee also recommends that additional incentives for establishing these funds be devised, including the use of government guarantees designed to mitigate investor risk or the use of government guarantees designed to increase expected returns, or a combination of the two.
The committee also recommends two “off-the-exchange” financing solutions targeted at high-tech startups not yet ripe for an exchange listing. The committee recommends enabling equity crowdfunding (the raising of small sums of capital by a large number of retail investors over the Internet) as well as enabling the formation of [angel] investment clubs comprised of “sophisticated investors”.
ISA Chairman, Prof. Shmuel Hauser thanked the committee members for their thorough work, stating: “The “exit" culture in which high tech companies opt to go abroad signifies an "economy gone astray" and incurs a tremendous loss of human capital, delivering a blow to employment and long-term growth. Each “exited” dollar is a loss of three dollars to the Israeli economy. The retention of high tech corporate activity in Israel is of the utmost importance and necessitates “outside-the-box” thinking, such as granting tax benefits to entrepreneurs, the sooner the better.”
TASE CEO, Mr. Yossi Beinart: "Implementation of the report's recommendations will enable TASE to be competitive for high-tech companies, facilitating their ability to raise capital from the public at relatively early stages of their development and creating conditions more conducive than those found in other securities exchanges."
