Notwithstanding the global COVID pandemic, 2020 is proving to be a record breaking year for Israeli growth companies. While in North America high tech investment is down 10% compared to 2019 and in Europe almost 20%, in Israel there seems to be a 40% increase over the first half of 2019. Israeli growth companies raised about $2.5 billion in Q2 and just this past August, growth companies raised $612 million from 19 different funding rounds in what is usually a slow month in the industry. The above data is hard to explain but what is imperative is that Israel including Israeli policy makers, are working very hard to stimulate the economy during the midst of an unprecedented international recession. There are several new methods of financing available in the industry which are already, or will soon be available to Israeli growth companies. This includes regulations to stimulate crowd-funding which were enacted in 2018 and have led to a significant increase in Israeli growth companies exploring crowdfunding models. Another notable new initiative is called TASE UP, a new program was very recently launched by the Tel Aviv Stock Exchange and will hopefully provide additional sources of capital for R&D companies. Lastly, venture lending which has been active in the Israeli market for over a decade, is gaining a resurgence of popularity and has encouraged many growth companies to explore this as a feasible funding model.
At the beginning of 2018, securities regulations came into force, which constitute the Israeli crowdfunding model. According to the Israeli model, a private company may issue shares or bonds to the general public, without limitation on the number of offerees, subject to compliance with the conditions specified in the regulations. The main conditions refer to the maximum amount to be raised and the maximum amount to be invested by a single investor. A company may raise up to ILS 4 million every 12 months under this model, and this amount may increase up to ILS 6 million subject to certain conditions.
As for the amount that may be invested by any single investor, the regulations stipulate that an investor may invest in a specific investment up to ILS 10,000 and every 12 months a total of up to ILS 20,000. The maximum permitted investment for an investor is contingent on his/her income level. For example, an investor whose annual income exceeds ILS 355,000 may invest up to ILS 30,000 in a single investment or in several investments over 12 months.
This crowdfunding model is an exception to the general obligation to publish a prospectus when making an offer to the public. This way the issuer does not become a public company and is not subject to the reporting obligations under the Securities Law.
At the same time, the offering company is required as part of the investment proposal to publish comprehensive information about it, which includes, among other things, financial statements, information regarding transactions with affiliated parties, details regarding the holders of the company's capital, the use of proceeds, and a business plan. The issuer is also required to publish periodic reports from time to time to the purchasers of the securities, especially regarding events that deviate from the normal course of business.
The issuance is to be carried out through an “offering agent”, which is a private entity operating under a license from the Israeli Securities Authority. The offering agent operates an internet platform, in the framework of which the fundraising is carried out, and it is responsible to organize and monitor certain aspects of the offering.
This offering model allows private companies to raise capital or debt from a large investor group, without the "price" involved in making an offer to the public, while giving private investors access to new investment opportunities, all while balancing against the risk investors are exposed to. Since the regulations came into effect, dozens of successful fundraisings have been completed through the six offering agents operating in Israel.
On June 2020 Israel the Securities Authority approved the initiative of the Tel Aviv Stock Exchange (TASE) to expand the types of securities that can be traded within the trading platform for institutional investors (“rezef mosdim”), which until now could only be used to trade non-convertible bonds and commercial securities. TASE UP will allow the trading on the institutional trading platform of shares, options, convertible bonds, and participation units of partnerships.
The new system - TASE UP – is a unique platform for private companies that are interested in raising funds from institutional investors and qualified clients, but are not interested in conducting an IPO, which requires the publication of a prospectus, and thereafter subjects them to the reporting obligations under the Securities Law.
The platform will be available to technology and biomedical companies, credit funds, limited partnerships focusing on R&D, and investment real estate funds outside Israel.
The main benefits of the new system are the fact that the investments of institutional qualified investors in private companies are liquid, as they can be traded on the platform, and at the same time the private companies get exposure to thousands of qualified and institutional investors, through the distribution channels of the TASE.
The idea of liquid investments in private companies will contribute to improving the attractiveness of investing in such companies (especially in an economy in which startup companies are a major growth engine), and it is appropriate to consider adopting it in relation to other investment channels as well. For example, it would have been appropriate to consider establishing a trading system, for non-qualified investors, who have invested in private companies using the Israeli crowdfunding model described above.
Debt financing itself is not new, however, with the rise of venture capital financing, a complementary financing option termed ‘venture lending’ has gained popularity as well. Venture loans are typically offered as an alternative to standard bank loans to growth stage companies seeking to solve cash flow and scaling issues but not necessarily having the financial stability to obtain credit approval for the standard bank loan.
There are two primary types of venture loans neither of which is new in itself. The first is a term loan, in which the Company receives a lump sum in one or two installments and repays the principal plus interest over a fixed period of time. The second type is a revolving line of credit and is more common when a company has recurring revenues from its customers but needs greater cash liquidity. Traditionally, revolvers financed the outstanding accounts receivables of the borrower and the loan balance was limited to a percentage of the borrower’s outstanding accounts receivables at any given time. With the rise of SAAS companies and prepaid subscription models, there is a growing trend of revolving credit lines tied to expected future revenues commonly termed as monthly or annual recurring revenues (referred to as MRR/ARR). The outstanding loan in an MRR or ARR loan is typically limited to the projected recurring revenues but discounted for assumed customer churn. A significant advantage of venture lending to the company is the relatively streamlined documentation process, mostly non-dilutive effects, and limited disclosure requirements. Many venture lenders are willing to forgo the burdensome hurdles generally associated with loans including a waiver of financial covenants or other restrictions on the financial activities of the borrowing company. While this gives the borrower greater control and flexibility, this freedom to operate comes at a cost of higher interest rates, a blanket lien over the assets of the company, and occasionally minimal warrant coverage providing the lender with potential equity upside in consideration for the credit risk taken.