In terms of exits, 2017 is expected to become one of the most successful years in Israeli high-tech history. Prominent examples are Mobileye (US$15.3 billion) Kite Pharma ($11.9 billion) Playtika ($4.4 billion) and BeuroDerm (US$1.1 billion). According to the IVC Research Center and the Israeli Innovation Authority (IIA) report, total capital raised by start-ups during the past year was US$4.8 billion. The average venture capital investment round was approximately US$7.2 million, 20% more than the average of the previous five years. In addition, private equity funds investments amount to US$3.8 billion. Israeli VC fundraising activity in 2016 reached US$1.4 billion. Finally, growth trends of total high-tech exports in 2016 totaled US$43 billion.
In addition, in the past few years, we have witnessed a new phenomenon in the Israeli high-tech ecosystem – domestic mergers and acquisitions. In 2016, about a quarter of all M&A by Israeli technology companies were domestic.
Prominent examples are the $US2.5 billion acquisition by Wix of the Israeli start-up Flok, which develops CRM solutions; the acquisition by the $US1 billion Taboola of Commerce Science, which provides personalization and optimization on-site tools, and Radware with a $US840 million market cap, which acquired the Israeli cloud-based software company Securlet.
During the past year extensive legal changes were implemented to Israel’s regulatory infrastructure to further enhance, solidify and bolster Israel’s high-tech ecosystem. A significant development completed during the past year is the formation of the “Israeli Innovation Authority,” which replaced the “Chief Scientist Office in the Ministry of Economy and Industry.” The mission assigned to the IIA by The Encouragement of Industrial Research and Development Law (1984) is to preserve and strengthen Israel’s global innovation leadership while increasing the resultant economic-social yield. To that end, the IIA supports technology companies at all stages of their life cycle and in various fields via a range of programs totaling approximately NIS1.6 billion (~US$451 million) annually. The objective of the recent regulatory changes was to allow the IIA to optimally fulfill such mission and provide efficient and high-quality service to the Israeli innovation ecosystem. As part of its activity, earlier this year, the IIA published new directives allowing the licensing to foreign entities of domestically developed Intellectual Property by companies who received governmental grants. Until the adoption of such directives, licensing of such IP outside of Israel was prohibited, forcing many companies to exit at early stages.
At the end of 2016 an amendment to the Law of Encouragement of Capital Investments (1959) was passed, which reduced tax for high-tech companies from 24% to 6-12%, depending on the company’s nature. This amendment also instituted additional tax benefits on dividends and capital gains. Furthermore, an amendment to the Income Tax Ordinance (Amendment No. 239) was adopted, removing bureaucratic obstacles and easing completion of high-tech companies’ structural changes in Israel. M&As are a key factor in the rapid growth of high-tech companies, enabling acquisition of technologies and manpower to compete in the international arena. The recent amendment expands the application of tax benefits in various structural changes, and is expected to increase the attractiveness of M&A transactions for both investors and companies. Moreover, earlier this year, the Israeli Tax Authority (ITA) finally clarified the qualifications for implementation of the amendment of the “Angles Law,” which was first promulgated at the end of 2015. This law promised to broaden tax benefit grants to individual investors at early stage technology companies by allowing the deduction investments such as deductible expenses against income from any source. However, no clear path for qualification for such benefits was provided until the ITA circular published in April this year that now provides investors and early-stage companies with greater certainty.
Another progressive legal measure designed to adapt the law to the dynamic era is Securities Regulations (Offer of Securities through Offering Coordinator (2016) published by the Israeli Securities Authority (ISA). In recent years, fundraising through crowdfunding platforms has gained increasing popularity. The new regulations will enable start-ups to raise capital in exchange for equity without being considered a public offering requiring the publication of a full-blown prospectus and subjecting the company to broad disclosure and reporting obligations. The regulations include guidelines on both the amount a company may raise through crowdfunding platforms and the amount an individual participating in such an investment may invest. They also impose on a company electing to raise funds from the crowd reduced disclosure and reporting obligations compared to public companies.
During the past year, new Privacy Protection Regulations (Data Protection 2017) applicable to organizations – both in the public and private sectors – holding database subject to registration obligations were approved. The regulations stipulate a comprehensive and detailed arrangement regarding the physical and logical protection of databases and the rules of management, access and modification of databases, especially when an organization possesses sensitive personal information. The regulations impose new duties for database management, including, for the first time in Israel, reporting obligations in case of security breach. The regulations will enter into effect in May 2018, forcing organizations to take immediate measures to ensure timely compliance.
Additional legislative change expected to affect the many Israeli technology companies conducting business with the European Union is the entry into force of the EU General Data Protection Regulation (GDPR) in May 2018. Some of the GDPR requirements – calling for according adjustments by relevant Israeli technology companies – are: legal ground for data processing and consent; specific restrictions with respect to sensitive data; extensive rights for data subjects and measures to ensure access to information is performed only by an authorized person etc.
Distributed registration technologies, primarily blockchain, are technological infrastructures enabling users to share an online decentralized database of transactions supported by encrypted data. Such technologies, services and products based thereon are gaining stellar momentum worldwide.
In the first half of 2017, approximately US$1.5 billion were raised through issuance of digital coins, mostly coupled with the promise of the issuers to enable participants to buy underlying services and products. The volume of capital raised in this manner is expected to significantly increase in the years to come. Israel is considered a global leader of the industry, with companies offering cutting-edge technologies in this field, including technology stemming out of Israel. These include Bancor, which carried out one of the largest token offerings worldwide to date with US$153 million raised. At the same time, fraud and manipulation leading to losses to investors are of concern Israeli regulators, as they are to their peers. Recently the ISA announced the commission of a committee to examine the applicability of securities laws on digital coin offerings, issuing and trading in Israel based on decentralized registration, primarily blockchain. The committee is expected to publish its conclusions by the end of 2017.
Today, most of the capital invested in Israeli technology companies derives from foreign capital. To induce Israeli institutional investors to increase their investments into local technology companies, the Accountant General and the ISA issued a joint initiative offering high-tech investment funds to enjoy government protection against losses and leverage of investment funds by government debt financing. The first tender for investment funds under the initiative was published in mid-2017 and is expected to result in the formation of four new Israeli investment funds, with additional funds under the initiative becoming a new source of capital strengthening the ecosystem.
There is no doubt the coming year will see some important legislative changes and probably new records will be set for Israeli high-tech industry investments and exit volumes. Imminent challenges and creative solutions await the domestic ecosystem with blockchain scene rapid involvements. Stay tuned.