Rewards and risks of Internet stock investing coming to Israel

Rewards and risks of Internet stock investing coming to Israel

Crowdfunding, in which start-ups can sell shares to investors without having filed a prospectus, could arrive within the year

The Start-Up Nation is about to get a lot more start-ups: A new bill proposed by MK Avishay Braverman (Labor) would open the door wider to investments in start-ups by allowing entrepreneurs to solicit investments without having to go through the very expensive process of authoring a prospectus.

The result of such a law, said Nadav Trenter Moser of Israeli start-up Mimoona, would be to encourage “crowdfunding” — expanding the pool of smaller investors by removing restrictions. Start-ups would have access to funds they might never have been able to get from a venture capitalist or angel, while the small investors who sink money into a successful venture would have the opportunity to make VC-style profits.

Braverman’s proposal is based on American legislation that was just signed into law by President Barack Obama. The JOBS (Jumpstart Our Business Start-ups) Act loosens the regulatory requirements for small companies and start-ups seeking to raise money for their business. Until now, entrepreneurs were limited to seeking either donations or loans. What they could not do was make a public offering to anonymous investors, selling shares in the company in exchange for investment. In order to do that, entrepreneurs had to prepare a prospectus, which required a thorough vetting by accountants and other professionals of their company’s assets, business plan, patents, marketability, and so on.

Since many entrepreneurs are unable to come up with the $100,000 needed to develop a prospectus, they are limited to whatever they can raise from friends and family, or from banks, venture capital firms, or angels. But due to the high level of competition for those funds, say supporters of crowdfunding, many great ideas could fall by the wayside. Allowing entrepreneurs to raise investment money without a prospectus gives them access to many more potential investors.

Entrepreneurs can currently offer a piece of their company in exchange for an investment to no more than 35 people, whom they must know personally; prospectus preparation is just as expensive in Israel as it is in the US; and there are fewer VCs and more competition for available funds in Israel than in the US. Braverman’s proposal will allow start-ups to raise up to NIS 2 million (about $550,000) from small investors.

As with the JOBS Act, Braverman proposes spreading risk so that no one loses too much money; investors who earn less than NIS 100,000 annually will be able to sink up to $2,000 into a start-up, while wealthier Israelis will be able to invest up to 10% of their income, up to a limit of NIS 100,000.

Experts quoted by Braverman’s office said that the law — actually an adjustment to Israel’s existing laws on raising equity — will pump as much as $30 million into the economy.

It’s expected that most of the start-ups taking advantage of the change will do so over the Internet, such that the usual fraudsters, hucksters, spammers and scammers will try to take advantage of new opportunities. To prevent that, a spokesperson for Braverman told The Times of Israel, the government will regulate the websites that engage in crowdfunding. The sites will be supervised by the Finance Ministry’s Stock Exchange Authority, and companies will have to file details of their offering with the authority.

“The entire process will be supervised, but a detailed prospectus will not be necessary,” the spokesperson said.

The spokesperson said it was not clear when the proposal was likely to be ready for its first Knesset reading in the near future.

One website that is likely to be a center of crowdfunding for Israeli start-ups is Mimoona, which already raises funds for non-equity “investments.” Mimoona facilitates such investments in projects and companies, providing a platform for the “investors” to find projects they are interested in. One of Mimoona’s specialties has been raising money for Israeli athletes to compete in the Olympics, but there are also several nonprofit and commercial projects on the site.

One project, for example, is a start-up that helps Israeli fashion designers get recognized abroad. The site, IlCouture, sells clothing and shoes from small Israeli designers (entrepreneurs themselves) online. In presentations before angels and VCs, IlCouture would be touting its marketability, the uniqueness of its ideas, etc., and a successful deal would likely include some equity in the company for investors. The start-up’s Mimoona page has a pitch, too, but as it cannot offer equity to online investors it promises them other benefits, such as naming a line of dresses by one of the designers in its stable after the investor.

Mimoona is similar to KickStarter, the US site that helps companies raise non-equity money. KickStarter is the site where Pebble Technology, a company with a great idea for a smartphone-connected watch, raised over $10 million, with “investors” getting free watches. Now with with the new JOBS Act, start-ups that seek to emulate Pebble will be able to raise money online in exchange for stock, and KickStarter is all ready for them.

Mimoona’s platform is crowdfunding-ready,too. “We have been working with MK Braverman on this law, basically helping him with everything he needs to get it going,” said Mimoona’s Moser. “I am actually very surprised at how quickly this is moving. I thought Israel would want to see how well it worked in the US and whether there were any problems, but Braverman is set to get this passed.”

Besides the potential for fraud, there are risks even with legitimate start-ups, said investment expert Steve Rhodes, chairman and CEO of the Trendlines Group, which runs several start-up accelerators and investment funds.

“It certainly sounds like a worthy idea,” Rhodes told The Times of Israel. “But there needs to be strict supervision of the process.”

Even experienced investors find high-tech more risky that other businesses, continued Rhodes. “The need for risk education is obviously much greater for neophyte Internet investors.”

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