Crowdfunding – raising money for new businesses or projects from a large number of people over the Internet – got an important stamp of approval this week from Israel’s financial markets, just a month after a new law went into effect to regulate the system.
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Poalim IBI, Israel’s biggest securities underwriter and a joint venture between Bank Hapoalim and IBI Israel Brokerage & Investments, said on Monday they were buying a 14 percent stake in the startup Headstart for 4 million shekels ($1 million), with an option to raise its stake to as much as 49% over the next four years..
Formed in 2011, Headstart has raised 37 million shekels from 270,000 people to fund projects in art, music and other disciplines, using a model similar to America’s Kickstarter.
However, the small amount of money involved and Headstart’s focus on artistic projects belies the importance of the deal. Poalim IBI is investing in the company to help it develop a new operation called Fundit, which will help startup companies, mainly in high-tech, to raise money from small investors.
Startups traditionally raise capital from venture capital funds, which raise the money from pension funds and other institutional investors, or well-heeled private investors called angels. But for small investors there has been no way for them to buy a piece of Startup Nation.
“Soon entrepreneurs of all kinds and high-tech companies will be able to turn to the broad public, not just from VC funds ort angel,” said Yossi Meiri, Headstart’s CEO. “Small investors will now have the chance to invest in an area never opened to them before by investing directly in companies with huge potential.”
Our Crowd, which was formed by the veteran high-tech investor Jon Medved three years ago, has raised $200 million through its crowdfunding platform, 80% of the money going into Israeli companies.
But now the field is set to grow after the Knesset in December approved legislation that allows companies to raise money from the public without going through the costly and time-consuming process of a formal public offering.
The final terms of the law are still being written by the Israel Securities Authority, but broadly speaking it will allow startup companies to raise up to 1 million shekels without any restrictions. They will be allowed to raise up to 2 million so long as there is a lead investor and up to 3 million if the Office of the Chief Scientists approves.
Investors face ceilings. They can put no more than 10,000 shekels into a single company and 2,000 shekels in a single platform. Shmuel Hauser, chairman of the ISA and a driving force behind the law, said the aim is to encourage startups to raise money locally and conduct an initial public offering in Israel, rather than go to Wall Street or sell themselves to an overseas buyer, as they usually do.
“Many tech companies chose to make their ‘exit’ through a merger or acquisition, which means they leave Israel with their intellectual property and move their operations overseas – and the State of Israel loses their potential contribution to employment and economic growth,” he told the Knesset at the time it was voting on the law.
“The law aims to create attractive conditions that will enable these companies to stay in Israel and float their shares in the local stock market,” Hauser explained.
Poalim IBI’s interest in crowdfunding is because it offers regulatory relief for its clients, explained one source close to the deal, who asked not to be identified.
“Instead of tax shelters, companies today are looking for regulatory shelters. Entrepreneurs want to raise capital without being a publicly traded company,” he said. “This new venture will be appropriate for raising small amounts of money from the public for specific purposes, for instance, buying land or 3D printing technology. It will give companies an interim [financing] solution until they are ready for a public offering on the bourse.”