Executive Summary: The Committee for Encouragement of Investments in Public Companies Engaged in R&D, formed by the Israeli Securities Authority, has recommended adopting three main solutions aimed at encouraging public funding of hi-tech companies: promoting IPOs of relatively large hi-tech companies; facilitating the establishment of publicly-traded venture capital funds and encouraging the establishment of publicly traded R&D partnerships. The Committee also recommends establishing two extra-stock exchange funding routes for seed-stage hi-tech companies: crowd-funding, and investor clubs. The article below details some specific recommendations made by the Committee.
Israel has set a goal of promoting and developing the hi-tech sector, which is the industry of the future and one of Israel’s primary growth engines. However, so far, the Tel Aviv Stock Exchange (“TASE”) has failed to present an efficient alternative for raising public funds for companies in this sector. In order to investigate ways of encouraging such investment in hi-tech companies via capital markets, the chairman of the Israeli Securities Authority (the “ISA”) appointed a Committee for Encouragement of Investments in Public Companies Engaged in R&D (the “Committee”). On 4 June 2013, the Committee issued its interim report and recommendations.
Among the issues explored by the Committee aimed at facilitating public fund raising for hi-tech companies, were the adjustment of prospectus and ongoing disclosure requirements; determination of specific rules of trade and the establishment of a designated trade list; encouragement of analysis; facilitating access of foreign investors and companies to the TASE; encouragement of institutional investment in hi-tech companies; issues of structure and corporate governance; investor tax benefits.
In its interim report, the Committee recommends adopting three main solutions aimed at encouraging public funding of hi-tech companies: promoting IPOs of relatively large hi-tech companies; facilitating the establishment of publicly-traded venture capital funds and encouraging the establishment of publicly traded R&D partnerships. The Committee also recommends establishing two extra-stock exchange funding routes for seed-stage hi-tech companies: crowd-funding, and investor clubs. In the following paragraphs, we have highlighted some specific recommendations made by the Committee.
IPOs: the Committee recommends enabling growth-stage companies (generally, with a post-IPO market cap of at least ILS 250 million, or sales of at least ILS 80 million per annum and a market cap of at least ILS 185 million) to go public on a designated trade list, to be known as “Tech Elite”. The Committee also recommends looking at ways to incentivize the creation of derivative markets for Tech Elite securities. The Committee further recommends that for a limited period of time and subject to additional conditions, investments of up to ILS 5 million in IPOs of Tech Elite companies may be written off and regarded and recognized as a capital loss in the year in which they were made.
Disclosure: the Committee recommends relieving Tech Elite companies from some of the more stringent disclosure requirements, during the first few years after listing. For example, such companies will be able to enjoy the reporting and disclosure benefits of small-cap companies. They will also be permitted to do their financial reporting according to GAAP (rather than IFRS), and will not be required to file quarterly management reports. The ISA will be authorized to allow further extenuations, depending on circumstances.
Corporate governance: Elite Tech companies will be permitted – during the first few years following listing – to implement less stringent corporate governance controls. For instance, they will not have to appoint a financial reports committee, their chief executive officer may also act as the chairman of the board, their compensation controls may be less strict, and they may simplify certain mechanisms for the approval of interested party transactions.
Delaware entities; language of reports: in order to encourage hi-tech companies incorporated in Delaware to list their securities in Israel, the Committee suggests permitting such entities to report in English (alongside a general recommendation to permit Tech Elite companies to file in English).
Listed VCs; R&D Partnerships: the Committee envisages two forms of publicly-traded VCs, which shall both act as mutual investment funds (under the applicable Israeli legislation): limited-period funds (of up to 15 years), and evergreen funds (whose duration may be terminated by resolution of the interestholders). These VCs will be permitted to invest up to 30% of their proceeds in Israeli, or Israeli-oriented, unlisted hi-tech companies. R&D partnerships are VCs that are co-managed by unaffiliated strategic investors (in the relevant field of investment) and financial investors (who will act as joint general partners), who will each have to hold a significant stake in the partnership. R&D partnerships will have durations of no more than 15 years.
Crowdfunding: following on the US JOBS Act, the Committee recommends excluding certain crowdfunding activities from the scope of securities regulation and provide safe harbour for crowdfunding financing. Funds raised by crowdfunding will be limited to ILS 2 million (approximately US$550,000) during each 12-month period. Generally, an investor will be permitted to invest up to ILS 20,000 (approximately US$5,500) during any 12-month period, with each investment limited to ILS 10,000 (approximately US$ 2,750).
Sophisticated investor clubs: the investor club model would enable companies to raise higher amounts of funding compared to crowdfunding, from fewer and more sophisticated investors. Contingent upon prescreening of such investors, so as to make sure they meet the “eligible investor” threshold set forth in Israeli security regulations, investments made through such clubs will also be exempt of stringent security regulation.
Assuming adoption of the Committee’s recommendations into law, these are set to revolutionize the ways in which hi-tech, bio-tech, bio-med and other R&D companies may raise funds in Israel.
Five disruptive technology megatrends drove the value of global technology mergers and acquisitions (M&A) up 41% in 2011, while volume increased by 13% — even as the value of global M&A in all industries fell slightly amid economic uncertainty, according to Ernst & Young’s Global technology M&A update, October — December 2011 and year in review.
According to the report, the year’s most notable deal drivers were five technology megatrends: smart mobility, cloud computing, social networking, ‘big data’ analytics and a growing sense of blur, as industry sectors blur together and the technology industry itself disrupts other industries — challenging whether certain companies are pure technology companies or have entered the industries they are disrupting.
In addition, an increasing need for information security is being driven by all five megatrends. These disruptive innovations are remaking the technology industry while enabling transformative change in other industries as well.
2011 technology M&A highlights
- Megatrends, mega deals: thirty-four deals rose above $1 billion in 2011 — including two above $10 billion — compared with 26 in 2010 and 19 in 2009.
- The “social-mobile-cloud” phenomenon dominated deal-driving trends in 2011. We call this a phenomenon because the trends reinforced and accelerated each other over the course of the year.
- Business intelligence and analytics emerged as a major deal-driver in 2011, powered in part by the social-mobile-cloud phenomenon.
- Aggregate deal value (for deals with disclosed values) reached $168 billion (up from $119 billion in 2010).
- Private equity (PE) deal values soared 67% to $33 billion.
- Full-year deal volume was up 13% to 3,006 deals.
- Average value per deal (for deals with disclosed value) was $167 million, up 27% over 2010 and the highest annual average deal value in the five-year history of the report.
Fourth quarter 2011 technology M&A highlights
- Deal-making growth slowed in the last quarter, showing that technology is not fully immune to the global macroeconomic uncertainty.
- At 676 deals, deal volume declined for the third consecutive quarter. It’s down 4% YOY, 11% sequentially and 15% since peaking in the first quarter of 2011 at 794 deals.
- Aggregate announced deal value was $32.2 billion in 4Q11, up 7% YOY but down 43% from $56.4 billion in 3Q11.
- Cloud computing, smart mobility and social networking continued to dominate deal-driving trends in 4Q11.
- Business intelligence and analytics increased again across a spectrum of industry-specific uses, though with a strong concentration in online advertising and marketing.
Deal-driving trends, big and small
Established companies made major consolidation plays and placed big bets on the five megatrends in 2011. Software as a service (SaaS) deals rose to prominence in the fourth quarter: two SaaS deals topped $1 billion — the first time any SaaS deal topped that mark.
At the same time, a multitude of smaller deals demonstrated the strategic importance of certain technologies, especially social networking and information security, but also health care information technology (HIT), online and mobile games and advertising and marketing technologies. There were 100 — 150 deals in each of these areas in 2011, including many deals that overlapped several of them.
Consolidation and restructuring
Semiconductor consolidation also drove big-ticket deals. Five of the year’s top 10 M&A transactions, worth a combined $21.2 billion, involved established semiconductor companies as both the buyer and target. Restructuring deals were announced in many other sectors, especially the communications equipment and computers, peripherals and electronics sectors.
For the year, cross-border deals grew in aggregate value at about the same rate as in-border deals; they increased faster in deal volume, at 19% compared with 10% for in-border. The year seemed on track for even greater cross-border growth until macroeconomic uncertainty returned in the second half of the year, appearing to damp down deal flow across borders more than in-country. Our report includes region-specific snapshots for the Americas, Asia-Pacific and EMEA (Europe, the Middle East and Africa) regions.
2012 outlook mixed, but strong in the long run
The disruptive megatrends of ‘social-mobile-cloud’ and ‘big data’ analytics have helped fuel a significant rise in global technology M&A activity since 2009, despite a slight pullback due to macroeconomic pressures in late 2011,” says Joe Steger, Global Technology Industry Transaction Advisory Services Leader at Ernst & Young. “The same pressures suggest we might be in for slow growth in 2012 — but the long-term outlook for technology M&A remains strong due to ongoing disruptive technology innovation.