Guetta demands making prerequisites for issuing R&D collaborations more stringent – The TASE will not comply

The Israel Securities Authority has proposed to the TASE stock exchange to make changes in the Rules and Regulations, including raising the minimum capital requirement, extending the share lock-up period and investment of half of the IPO funds at time of the IPO.

16.02.21 | Asa Sasson

For years, members of the Israel Securities Authority and the TASE have deliberated over how to connect the hi-tech sector with the capital market and the public.  One of the solutions was to provide authorization for R&D (research and development) collaboration to conduct IPOs in the stock exchange.

IPOs by R&D collaborations were regulated in a legislative amendment at the end of December 2020, which for the first time, enabled collaborations that are not in the energy industry (or film industry) to raise capital from institutional and private investors.

R&D collaborations are a type of tradable venture capital fund, which invest in startups in the fields of technology, biomed, fintech, agrotech, etc.  To date, six R&D collaborations have conducted IPOs, in which they raised NIS 350 million; and many other are preparing for IPOs.  Investment in R&D collaborations is considered very risky.

Statistics indicate that only few startups grow into mature and successful companies, which generate revenues and profits and achieve company exits; while many flounder and close, or become ‘zombie companies.’

Despite the long evaluation proceeding, the Securities Authority has decided to take a step back and increase the supervision of the collaborations.  Today (Monday), the Authority submitted a proposal to amend the TASE Rules and Regulations, in order to make the IPO prerequisites more stringent.  The Israel Securities Authority is interested in improving the protective mechanisms for the public and to ensure the commitment of the entrepreneurs toward the investors.  Last week, the Authority even sent a letter regarding this issue to the mutual funds (that are supervised by the Authority), which instructed them to take the expected changes into account.

The Authority is interested in increasing the minimum capital requirement of the R&D collaborations to NIS 50 million, extending the share lock-up period in which the management company (the general partner) cannot exercise shares on the market, setting a mandatory investment of half of the IPO funds at time of the IPO; creating an interest of the collaborations’ investments to the Israeli market only; and establishing an obligation to deposit the remaining IPO proceeds only in sound channels.

“These terms were established while considering and comparing the characteristics of the R&D collaborations’ activity to the similar activity in the private IPO market of venture capital funds, which raise capital from sophisticated investors, as well as an evaluation of their disclosure and the structure of the incentives given to their directors,” said the Authority.

They recommended to the new collaborations who are planning to conduct IPOs, “to voluntarily adopt the new provisions or part thereof, where the disclosure will appear on the cover of the prospectus.”

Prior to this, the Authority had expanded the disclosure required in the prospectus for R&D collaborations interested in raising capital.  Inter alia, it requires a disclosure regarding the target companies (the companies in which the investment will be made); a disclosure regarding the entrepreneur, the ability to locate the investments and the analysis and discretion regarding the investment in the target companies, disclosure regarding the structure of the entrepreneur’s incentives – especially the compensation structure, disclosure regarding the business successes and failures and aspects that indicate a flaw in the reliability of the controlling owners and officials.

The Stock Exchange is expected to object

The Israel Securities Authority is interested in amending the Rules and Regulations  of the TASE to suit the new prerequisites that were formulated.  However, the TASE does not intend to cooperate with the new plan.  Sources noted that the stock exchange does not view a change in the Rules and Regulations in a positive light; and consequently, it does not intend to cooperate.  The new dispute regarding R&D collaborations can be added to the tense relations between the Israel Securities Authority Chairwoman Anat Guetta and TASE CEO Ittai Ben-Zeev related to various subjects – the most recent of which was a clash regarding changing the weight of the shares on the banks’ index.

“It appears that the dispute between the Authority and TASE is much broader than a disagreement regarding specific professional issues,” said Adv. Achai Gomeh, Head of the Capital Market and Securities Department at Hamburger Evron & Co.  “It is difficult to blame TASE for being unwilling to cooperate with the changes in the regulation that will lead to a blow to their revenues, while the provisions of the Rules and Regulations, prior the change, were already authorized by the Israel Securities Authority.

“In this situation, TASE is being asked to do something that apparently no one can adhere to – on the one hand, to maximize its profits and on the other, to take steps as a regulator, even if those steps may hurt its profits.  It is unclear whether when the outline for privatizing the TASE was formulated, its planners foresaw the future in this context.  It is possible that this is the time and place for a renewed deliberation regarding the manner in which changes are made to the TASE Rules and Regulations; and perhaps this is the opportunity to also involve other parties in the process, such as representatives of the public companies.”

Of note is that despite the increase in regulation and the more stringent prerequisites for the R&D collaborations, the Israel Securities Authority has been promoting the granting of authorization to the SPAC companies – companies with no commercial activity, which raise capital to invest in an existing company – for an IPO in Tel Aviv.  The market is concerned that IPO’s using the SPAC model, which was common in Tel Aviv in the 1990s and currently prevalent in New York, may bloat the pricing of the technology companies on the TASE even further.

The Israel Securities Authority responds:  “We will set strict conditions for IPOs using the SPAC model, designed to reduce risks by strengthening the protective mechanisms for the investors, such that they will be highly compatible with the entrepreneur’s interests.  Similarly, the Authority has also submitted a proposal to amend the TASE Rules and Regulations in order to improve the protective mechanisms for those investing in R&D collaborations.”