High-tech Israeli start-ups, fleeing the country to sell shares abroad at the fastest pace in six years, should be offered tax breaks and a reduction in bureaucracy to keep them home, a government panel said.
Companies valued at more than 200 million shekels ($56 million) will be offered the incentives as encouragement to raise money on the Tel Aviv stock exchange, according to a report submitted to the Israel Securities Authority last month. The recommendations are expected to be submitted for legislation “within a couple of months,” according to a co-chairman of the committee, Hani Shitrit Bach.
Regulation and a lack of access to investors are driving companies away from Israel with at least eight technology startups expected this year to follow web developer Wix.com Ltd. (WIX:US) to go public on the Nasdaq Stock Exchange, according to the New York-based firm. Companies accounting for more than 10 percent of the weighting on the nation’s benchmark TA-25 Index (TA-25), including fertilizer maker Israel Chemicals Ltd. (ICL) and holding company Delek Group Ltd. (DLEKG), have said they plan to sell shares abroad.
“Each company staying in Israel means growth, more jobs and more taxes going to the government,” Shmuel Hauser, chairman of the Israel Securities Authority, said in e-mailed comments to Bloomberg on Jan. 28. Each overseas exit dollar represents a loss of more than $3 from the Israeli economy, he said.
Companies such as Waze Inc., which was acquired by Google Inc. (GOOG:US) in June, have contributed to $47 billion of technology mergers and acquisitions in the past decade, according to Tel Aviv-based IVC Research Center. Israeli high-tech M&A made up 88 percent of all technology exits over the past 10 years, according to IVC. Companies raised $223 million in U.S. IPOs in 2013, the most since 2007, IVC data shows.
The government recommendations seek to fix deficiencies that have kept high-tech companies away, Shitrit Bach, senior vice president of the Tel Aviv exchange, said last week. Among these are cumbersome regulation and little or no analyst coverage, which leads to low institutional participation and reduced valuations. “The idea is to ignite the industry,” she said in an interview at her office in Tel Aviv on Jan. 29.
The recommendations call for tax benefits for investors and startup founders; exemption from Israeli Sarbanes-Oxley requirements; the adoption of financial reporting in English; and the use of U.S. GAAP accounting standards. The committee also recommended the bourse set up two new indexes and find a company to provide investment analysis.
“By easing regulation, the exchange could become a first venue for raising money from the public,” said Yoav Chelouche, managing partner at Aviv Venture Capital and co-chairman of the Herzliya-based Israel Advanced Technology Industries, representing high-tech and life sciences companies.
“The feeling is that if you have a winning company you take it all the way to Nasdaq or for a trade sale to a large company. But not all can get there, and that is when the Tel Aviv exchange can become a funding alternative,” he said by phone on Jan. 29.
Institutions invest 0.8 percent of their assets in the nation’s TA Blue Tech-50 Index, which tracks the 50 biggest technology and biotechnology companies, data compiled by the government committee show.
The proposals may not be enough to persuade tech firms to stay in Israel, according to Scott Tobin, general partner at Battery Ventures, which sold its stake in Anobit Technologies Ltd. to Apple Inc. (AAPL:US) in 2012. “This could be just another step in the financing of a startup and doesn’t necessarily negate a startup’s preference for a sale or a listing in an international market,” he said. “The key is how the bourse will package these securities to make them attractive to institutional investors.”
The 10 largest of the 58 technology companies listed on the TASE have a market value of $6.8 billion. Fifty-five Israeli technology stocks trade on the New York Stock Exchange and Nasdaq, with the top 10 valued at $21.9 billion.
Software maker Intucell Ltd., which was bought by Cisco Systems Inc. for $475 million, was among the biggest Israeli technology companies sold last year. Security company Check Point Software Technologies Ltd. (CHKP:US), now worth $13 billion, sold shares on Nasdaq in 1996. Mazor Robotics Ltd., a Caesarea, Israel-based maker of surgical robots valued at $509 million, and Kamada Ltd., a maker of plasma therapeutics valued at $564 million, chose to list on Tel Aviv first and issue shares on Nasdaq later.
“The recommendations are very strong and I hope they will be implemented as laid out,” Guy Preminger, Technology Leader and partner at PwC Israel, which advised Somoto Ltd. (SMTO) on its IPO in Tel Aviv in August.
“If they are, we will see many more companies choosing Tel Aviv as an option,” he added. “The bigger companies, with far bigger dreams, will still dream of Nasdaq. But there are many companies that can be suitable for the Israeli bourse.”
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