Last week, the Israel Securities Authority published draft legislation for public comments that will permit corporations to obtain loans through crowdfunding with an exemption from the prospectus requirement (“draft legislation”). The draft legislation was published following the December 2015 amendment to the Securities Law, which allows companies to implement a crowdfunding model to recruit debt capital or issue shares under particular circumstances. It is important to emphasis that the draft legislation, which is supposed to regulate the criteria for the crowdfunding mechanism, including the maximum volumes of investment allowed for companies and investors, the disclosure requirements and the qualification criteria for offering coordinators, are still being hammered out by the Knesset Finance Committee. The draft legislation focuses on the principles for supervising the internet platforms that will be offering the service (“the offering coordinator”), which will later become a chapter in specific securities regulations to be legislated.
The draft legislation is designed to regulate and enable Peer-to-Business (P2B) crowdfunding with an exemption from the prospectus requirement under particular circumstances.
One of the interesting innovations in the draft legislation is the ISA’s differentiation, which is correct in our view, between two investment models being offered by offering coordinators – an active investment model for investing in a specific company, subject to disclosure of its identity and other details about it, and a passive investment model, whereby an investor defines only the sum he wants to invest and the risk level, while the platform decides the dispersion among the variety of companies seeking a loan on the offering coordinator’s platform.
Thus, the draft legislation is proposing to increase the sums of investment for all investments on crowdfunding platforms (crowdfunding based on equity, the active model and the passive model) to about NIS 50,000, compared to the lower maximums allowed for investors seeking to invest via only one model. The maximum investment will also be increased relative to high-wealth investors. The maximum loan that companies can obtain will be NIS 1 million, with the possibility of increasing this sum to up to NIS 6 million, if an accredited investor takes part and approval from the Small Business Authority or the Chief Scientist is obtained. In the passive investment track, offering coordinators will be obligated to meet more stringent requirements (than in the active investment track and in the equity-based crowdfunding track), such as disclosure of the risk dispersion, a limit on the volumes of investment and the obligation to take measures to collect debts from insolvent borrowers. Additionally, the disclosure requirements imposed on offering coordinators themselves will be expanded in the passive investment track. On the other hand, disclosure of specific borrowers will not be required in the passive investment track, due to the characteristics of this model.
Comments on the draft regulation may be forwarded to the Israel Securities Authority until February 15, 2017.