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The Israeli Securities Authority (the ISA“) has followed in the SEC’s footsteps, and recently published guidelines with regard to the measures to be taken by issuers in order to ensure that investors in private placements are indeed “Sophisticated Investors” within the meaning of the Securities Law, 1968 (the Securities Law“). The basic position under the Securities Law is that every offer of securities to the public requires, inter alia, the filing of a prospectus with the ISA.  However, in order to assist businesses in accessing the capital markets with minimal regulatory involvement, the Securities Law provides several exemptions from such requirement.  One important exemption covers offers made to those types of investors which the Securities Law defines as “Sophisticated Investors”, being investors in respect of whom there exists a presumption, due to their nature, that they do not require the protection of the Securities Law. The list of such Sophisticated Investors includes financial institutions, such as insurance companies, banking corporations and mutual funds, it being generally clear whether or not an entity is one of these.  The list, though, also includes a corporate entity whose qualification as a Sophisticated Investor is based on equity value alone (also referred to as a “qualified corporation”), and an individual who qualifies for the list based on a combination of net worth, market expertise and transactional experience (also referred to as a “qualified individual”).[1] The Securities Law provides that in order to be classified as a Sophisticated Investor, an entity must not only fall within one of the categories in the list, but must also have provided the issuer with a written statement confirming the investor’s status as a Sophisticated Investor, and acknowledging its understanding of the consequences of being classified as such, including the fact that offers made to such investor would be exempt from the prospectus requirement of the Securities Law. The ISA has concluded that issuers must take all reasonable steps to ensure that investors purchasing its securities are indeed Sophisticated Investors, and in this regard has recently published more specific guidelines as to what steps as to verification an issuer should take in respect of qualified corporations and qualified individuals.  If a potential investor meets the requirements of the verification process, there is to be a presumption that it is a Sophisticated Investor, provided that the issuer has no reasonable grounds to believe otherwise. This is a significant development in relation to the types of entities described above which are not financial institutions, in respect of whom little or no public information may exist.  While common practice until now has been to rely on an entity’s self-certification by way of a “tick the box” approach, especially in private placement memoranda and prospectuses relating to non-Israeli securities, the new guidelines suggest that this may no longer be sufficient. The guidelines do not have the force of law and are merely advisory.  However, it seems highly likely that a regulatory body or a court would be guided by them in determining whether an issuer has met its statutory burden such that it should be entitled to rely on the exemption from the prospectus requirement. Pursuant to the guidelines, in order to verify the amount of equity of a corporation or the scope of liquid assets held by an individual, the issuer should obtain a written confirmation from an accountant or a lawyer that the person providing the confirmation took reasonable measures to ensure that the investor in question indeed meets the relevant qualification criteria.  Similarly, in order to satisfy the condition regarding the number of transactions executed by the individual, the issuer will generally need to obtain approval from the broker who executed the relevant transactions or a bank statement regarding such transactions.  Finally, with respect to the transactional expertise test, the issuer will need to obtain a detailed statement from the investor supported by external evidence (such as confirmation of employment in a professional position which requires capital market expertise). Pursuant to the guidelines, the date for verification of the investor’s status as a Sophisticated Investor is the date of actual sale of the securities; at the time of making the offer to purchase the securities, it will be sufficient for the issuer to receive the investor’s statement about its compliance with the qualification requirements.  In addition, if a sale is made to the same Sophisticated Investor during a period of one year, it will suffice to obtain a statement from the investor confirming that the investor still satisfies the qualification requirements (assuming, once again, that the issuer has no reasonable reason to believe otherwise). While, as note, the new guidelines are not law, it would seem strongly advisable that they be taken into consideration by issuers before offering their securities to Sophisticated Investors in Israel, particularly if such investors include corporate entities and individuals which are not financial institutions and whose qualification as Sophisticated Investors is not objectively obvious.

[1] The ISA has recently published a proposed amendment to the Securities Law that will alleviate the qualification conditions as the current conditions appear to set a relatively high bar compared with the conditions in Europe and the US.

Amit Steinman is a partner at the Israel based law firm S. Horowitz & Co. He advises on the full range of corporate and commercial transactions with a particular focus on mergers and acquisitions, joint ventures, equity investments, capital markets and acquisition financing. His clients include multinational corporations, financial institutions, private equity funds and start-up companies, spanning a wide range of sectors including technology, energy, infrastructure, telecoms, homeland security, financial services, media and clean-tech.

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