Crowd Funding – Legal and other Issues

Crowd Funding –
Legal and other
Recent Legal Developments affecting the
Technology Industry Conference
July 25, 2013
Dr. Ayal Shenhav, Adv.
Four Main Models of Crowd Funding:
Lending - most active sector
$ 1.4 billion in past five years.
$ 1.4 billion expected in 2013.
Reward- Based
$700 million expected in 2013.
$500 million expected in 2013.
* according to a Deloitte international survey.
What is the need for Equity-Based Crowd
Small and medium businesses have limited
financing options.
Small and medium businesses contribute to
economic growth and employment.
Technology startups have substantial R&D
Challenges of Israeli VC industry.
Difficulties in raising seed financing.
Smaller investors want to directly invest in
technology companies.
Issuance of securities in Israel is subject to Israeli
Securities Law 1968
Section 15: offer and sale of securities to the public
requires a registration statement
Exceptions include:
◦ Less than 35 offerees.
◦ Certain institutional investors (Mutual Funds, Insurance
Companies, Banks, VC Funds, Large Corporations etc).
◦ “Qualified Customer”.
Exceptions (cont.)
◦ Possible to raise up to NIS 2.6 million (but not
more than 5% of outstanding capital of issuer
per offering and 10% in all past offerings, and
limited to 75 offerees in the aggregate).
◦ Foreign investors.
What is a “Security”?
◦ Broad “catch all” definition
(Section 1 of Securities Law;
Mondragon case)
◦ Loans to corporations may be subject to same
◦ US definition of “security” based on same
Crowdfunding involves offer and sale to the
public, and therefore is not available in
Israel with respect to issuance of equity
and debt.
(Jumpstart Our Business Startups)
April 2012.
Includes a crowd funding section.
◦ Sale by issuer of $1 million in 12 months.
◦ Limit on investors:
 Greater of 5% of annual income or $2,000, if net worth
or annual income less than $100,000.
 Lesser of $100,000 or 10% of annual income, if net
worth or annual income greater than $100,000.
◦ Must use “funding portal” registered with SEC.
◦ Provides disclosure of risks.
JOBS ACT – cont.
 Portal needs to take measures to reduce
 Issuers need to file business plan and
financial statements with SEC.
 12 months resale limitation.
Israeli Legislation effort: Law Proposal:
Securities Law (Social Funding for
Businesses) 5772 – 2012
(Avishay Braverman)
Based on US JOBS Act
◦ Issuer may raise up to NIS 2 million in 12 months.
◦ Up to NIS 5,000 from each investor in 12 months
(unless otherwise approved by Securities
◦ Only through internet.
Principles: (cont.)
◦ Issuer is a private company.
◦ Only through a registered website, regulated by the
Securities Authority.
◦ Certain mandatory information and warnings must
be included.
◦ Website has to “take measures to prevent fraud”.
◦ Website has to “inspect” information provided by
the issuer”.
◦ Website must deliver funds only after funding target
is reached.
Principles: (cont.)
◦ Website is responsible for investors’ losses resulting
from breach of Securities Law
Comparison to JOBS ACT
◦ Up to $100,000 from each investor under
JOBS Act, subject to annual income and
net worth criteria.
◦ JOBS Act not limited to internet sale.
◦ JOBS ACT requires annual reports from
Interim Report of the Committee for the
Promotion of Investments in R&D Public
June 4, 2013
◦ Principles for crowd funding:
 Issuer may raise up to NIS 2 million in 12 months.
 Up to NIS 20,000 per investor and up to NIS 10,000
in a single investment in 12 months.
◦ Individual with annual income over NIS 750,000 can
invest up to 5% of annual income, and up to NIS
15,000 in a single investment.
◦ Individual with annual income over NIS 1,500,000 can
invest up to NIS 20,000 in a single investment.
◦ Maximum annual investment up to NIS 100,000.
Principles: (cont.)
Only applicable to private Israeli companies.
Only shares can be sold to the crowd.
Chief Scientist approval for issuer’s R&D program.
Sophisticated Investor – at least 10% of investment
◦ Tag along of crowd on founders and sophisticated
◦ Reporting: financial statements; board report;
business plan; ownership and management;
offering details. After issuance of shares: same as
private Israeli company.
◦ Financing Organizer - must be supervised by
Israeli Securities Authority.
“Public R&D Companies Committee” is receiving
comments from the public until July 31, 2013.
The Knesset did not vote on the Braverman Law
JOBS ACT still waiting for SEC regulations.
How to advance regulatory
framework ?
Issues to Consider in
New Legislation
It is important to allow Israeli companies to raise
capital from the crowd.
 Israel can be a model for other countries.
 However need to develop corporate governance and
securities issues:
Investors protection.
Voting by the crowd.
M&A transactions.
Portal liability.
Secondary market (sales by crowd).
Dr. Ayal Shenhav, Adv.
Gal Hoffman, Adv.
Shenhav & Co. Advocates & Notary
Or Towers, Building B, 11th Floor
4 Ha’nechoshet St.,
Ramat Ha’chayal, Tel Aviv 69710
Phone: +972 3-6110760
Email: [email protected]
Email: [email protected]

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