Crowd Funding – Legal and other Issues Recent Legal Developments affecting the Technology Industry Conference July 25, 2013 Dr. Ayal Shenhav, Adv.

Equity-Based Loans Charity Reward -Based Four Main Models of Crowd Funding:

Lending - most active sector $ 1.4 billion in past five years. $ 1.4 billion expected in Reward- Based $700 million expected in 2013.Charity $500 million expected in * according to a Deloitte international survey.

What is the need for Equity-Based Crowd Funding? Small and medium businesses have limited financing options. Small and medium businesses contribute to economic growth and employment. Technology startups have substantial R&D costs. 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 limitations. ◦US definition of “security” based on same methodology.

Conclusion: Crowdfunding involves offer and sale to the public, and therefore is not available in Israel with respect to issuance of equity and debt.

JOBS ACT (Jumpstart Our Business Startups) April 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 fraud.  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 Principles: ◦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 Authority). ◦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 issuer.

Interim Report of the Committee for the Promotion of Investments in R&D Public Companies 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 amount. ◦Tag along of crowd on founders and sophisticated investor. ◦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, The Knesset did not vote on the Braverman Law Proposal. 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, 11 th Floor 4 Ha’nechoshet St., Ramat Ha’chayal, Tel Aviv Israel Phone: