Regulators Concerned About an Israeli IPO Bubble Amid Inflated Values

Michael Rochvarger
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Tel Aviv Stock Exchange, November, 2020.
Tel Aviv Stock Exchange, November, 2020.Credit: AMIR COHEN/ REUTERS
Michael Rochvarger

The Israel Securities Authority said Sunday it was stepping up intervention in the initial public offerings market, in particular its monitoring of underwriters, amid concerns about inflated values after Israel adopted the American system for IPOs.

In a letter to underwriters, the ISA said it was seeking information on how IPOs were being prepared, including company valuations and meetings between them, company executives and investors.

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Regulators’ concerns have grown amid soaring IPO activity on the Tel Aviv Stock Exchange due to the coronavirus. Last year, 27 IPOs raised 4.5 billion shekels ($1.37 billion), the largest amount since 2007. Just five weeks in to 2021, 10 companies have gone public and the pace is expected to accelerate in the coming months.

In contrast to the TASE’s previous wave of IPOs five or more years ago, which were mainly for real estate and finance companies, the current one is led by the technology sector. Many of the companies are going public without any revenues or profits and are being marketed to investors on the basis of their technology capabilities and potential.

Many of the current IPOs are research-and-development partnerships, in effect a publicly traded venture capital fund that invests in startups, which is generally regarded as risky.

Behind the IPO fever are rising share prices on the TASE, record low interest rates that have pushed investors into riskier investments, and appetite for tech and renewable-energy companies, which are seen as immune from the effects of the coronavirus pandemic.

Most public offerings today are conducted through the book-building system used in the United States, in which underwriters assess demand before the shares are formally sold and set the price of the securities on offer, based on how much demand they find. Thus, the securities are in effect sold even before the IPO gets underway.

The system is widely believed to inflate demand for shares on the company’s first day of trading because those who weren’t able to get shares during the book-building process try to get hold of them at any cost. Price increases in the tens of percent generate huge profits who bought into the IPO.

Under the system previously used in Israel, underwriters were principally distributors of shares. They served more as gatekeepers, performing due diligence and other checks to ensure that companies that weren’t appropriate for the TASE didn’t go public.

The ISA is concerned that the line of defense underwriters had been providing has weakened in the face of the high fees and that problematic companies are being allowed to go public. Under the new system, underwriters, which number about 15 in Israel, collect fees of up to 10 million shekels, an unheard of sum on the TASE until recently.

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