The financing problem by which technology companies in general and startup companies in particular are troubled is known to all, especially due to the fact that during the early stage of their existence, their revenues are relatively low while their expenses increase on a regular basis. In light of such difficulties, and as a result of difficulties in obtaining bank financing and other funding of significant scale, the Tel Aviv Stock Exchange has set forth a set of regulations designed to mitigate the procedure required for issuance of an initial Public Offering (IPO) of shares by R&D companies (research and development).
The most common business model employed by technology firms in general and start-up companies in particular leads to a situation in which many technology firms require significant financing already during their first days of activity, financing that later enables them to continue their activities as required for proper growth. Such financing is even more crucial considering the fact that during their early days, many technology companies are characterized by relatively low revenues and growing expenses.
Indeed, many technology firms in general and start-up companies in particular are forced to rely on private shareholders equity of the entrepreneurs themselves or on private investors (angels, etc.) for an initial investment during their early days of activity, or at times, even on the funding by professional investors such as venture capital funds. However, the ability of such companies to obtain bank financing or apply for larger scale fundraising from a larger number of investors is very limited because the majority of them lack a financing history as a result of restrictions that investors tend to impose on such companies and because of the lack of a significant private shareholders equity.
As a result of such obstacles, many stock exchanges in both Israel and abroad are acting to mitigate the restrictions required for IPO in such a way that would enable technology companies to raise funds from the public by providing them with a platform which may be used for trading of shares. The majority of the more established technology companies turn to the U.S. Nasdaq Stock Exchange, considered to be the leading stock exchange for high-tech and biotechnology companies, or to other global exchanges.
Many entrepreneurs and technology companies are not aware of the fact that for several years now the Tel Aviv Stock Exchange has also adopted such an approach, and under certain conditions, enables relatively young technology companies to perform an IPO and issue stock by mitigating threshold restrictions that apply to registration for IPO.
Issue of Technology Companies at the Tel Aviv Stock Exchange – a stepping stone
The Tel Aviv Stock Exchange already began “courting” local technology companies back in 2000, when it launched the Technology Stock Index, the “Tel-Tech”. The underlying objective behind this move was to increase the exposure of technology companies traded in Tel Aviv to the investing public, but it later became clear that the launch had little impact on the amount of IPOs executed by high-tech companies in Tel Aviv.
Because of the need technology companies have for raising public capital, and because of the obstacles that stand in their way – and after the stock exchange had recognized their need for such capital – the stock exchange formulated a set of rules designed to mitigate requirements for execution of IPOs by R&D companies. And indeed, following publication of this new set of rules in 2005, there was a significant increase in the number of public offerings conducted by both technology and bio-technology companies at the Stock Exchange in Tel Aviv.
Corresponding to this initiative, the relative advantage offered by the Tel Aviv Stock Exchange to technology companies that require an IPO grew as a result of an increase in IPO costs, and other associated costs, in stock exchanges abroad. IPO costs on the Tel Aviv Stock Exchange are very low in comparison to those that apply in U.S. and European based exchanges, and that, in addition to the already lower “maintenance” costs enjoyed by public companies in the Tel Aviv Exchange – including director and executive insurance costs – which are also significantly lower then their overseas counterparts.
Moreover, an IPO conducted on the Tel Aviv Stock Exchange may serve as a ‘stepping stone’ for future stock issues in larger exchanges abroad. In addition, the “Dual Listing” Law that came into effect enables companies that are listed in local stock exchanges to prepare their reports in accordance with U.S. regulations which are simpler and more convenient. As notable examples of companies which had conducted their IPO in Tel Aviv prior to their subsequent stock issues abroad we name “Nice” and “Ituran”.
It should be obvious that on the one hand, subsequent public offerings abroad expose the issuing company to foreign investors, while on the other, it exposes the company to new challenges and risks that are characteristic of foreign markets, and so, each company should carefully consider the pros and cons involved before opting for such a move.
Mitigation of Threshold Requirements
In order to mitigate the issuance of R&D companies, the Tel Aviv Stock Exchange has determined, for example, that R&D companies are not required to present documentation attesting to the period during which they have been active. Additionally, the minimum portion of total company assets that must be offered the public is relatively low, a fact that makes it easier for R&D companies to raise capital in Tel Aviv during their early phase, with relatively low dilution of the founder’s holdings.
In general, “R&D companies” are companies that have invested at least NIS 3 million in research and development during the previous three years, including investments of funds received from the Chief Scientist of the Ministry of Industry and Trade. Authorization of investments by R&D is issued by the Office of the Chief Scientist even if the company had not received any funding from the Office itself, but rather from other sources. In addition, any company wishing to apply for trading must be active, and must have plans for continued activity during the subsequent time period following its registration, in research and development or production and marketing of the technologies they had developed as a result of the R&D they conduct.
The Tel Aviv Stock Exchange had also determined that the minimum ratio of capital of R&D companies that is held by the public should be no less than that which is specified by any one of the alternatives offered, and this, following mitigation of restrictions in comparison to those required by companies that do not fall under the R&D definition. R&D companies are also required to abide by additional criteria, the majority of which is mitigating by nature, such as a minimum shareholders equity and compliance with requirements related to the value of capital held by the public by way of stock that is to be issued, and the a minimum distribution of public holdings of stock.
Such threshold conditions must naturally be added to those set by institutional investors who constitute the main target audience for public offerings such as: professional and experienced management, compliance with financial and operational parameters and proof of feasibility.
Summary
The Tel Aviv Stock Exchange provides R&D companies who are able to meet certain criteria with an attractive package that enables them to issue public offerings, and by doing so, enables them to raise capital directly from the public.
In light of the requirements set forth by the Tel Aviv Stock Exchange, and in light of those stipulated by institutional investors who represent the majority of the public investors, we strongly recommend that any company wishing to apply for trading plan its course of action in a precise manner and acquire proper consultancy (both legal and otherwise) in order to correctly register its shares for trading. It is imperative that any company attempting to register for trading plan its course of action in a precise manner, and establish its organizational, legal and financial structure in such a manner that would prevent this attractive option from slipping away.
Moreover, such issues also apply during a company’s earliest days of activity and require the company and its founders to address various directives, points of emphasis, and relevant conditions already during preparation of the initial Founders’ Agreements and Investment Agreements, and this, in order to better facilitate possible registration for future trade.