Minister of Finance Abraham Hirshzon, had signed the draft proposal of Regulations leading to reform on the underwriting market; the proposal was initiated by the Israel Securities Authority. The approval of said Regulations, by the Finance Committee of the Knesset, will complete the revolution on the underwriting market.
The Minister of Finance said that proposed regulations (along with amendment to the Securities Law, approved in 2004, which will go into effect after the approval of the regulations) will remove unnecessary limitations impeding underwriters’ activities on the primary market, while at the same time strengthening the regulation and supervision over them. The regulations will also facilitate the entry of foreign underwriters into the local underwriting market, from which they were absent until now.
Among reform’s main points – possibility to allocate securities, as part of a public offer, without tender. At present there is a requirement to sell securities to the public under conditions equal to all – meaning, by means of tender. This option will not be annulled, but from now on the option to sell securities without tender, as is the case in the US, will also be available. The decision regarding price and amount will be at the underwriters’ discretion; however this proposal, of tender exempt offer, will be limited to institutional investors only. Where an underwriter chooses to offer part of the amount to the public, he will have to do it by means of tender on the aforesaid amount, since the offering price to institutional investors and the public will be the same. This arrangement was already specified under temporary regulations, for the period of five years, in order to examine in practice both the advantages and the drawbacks of the proposal, during the aforesaid period.
Also among reform’s main points – cancellation of the requirement to publish the price of the offer in the prospectus. Presently, the issuer is required to obtain a permit to publish a prospectus no less than five business days prior to the sale of securities. This requirement is designed to give the investor a reasonable period of time to study and asses the value of securities offered by the company. This, however, leads to a significant exposure of both the offeror and the underwriter, since the aforesaid period of five business days is too long, in terms of prices and events on the capital market, and securities’ prices that where true five business days ago will not necessarily be true on the day of the sale. The regulations, initiated by the ISA, will separate between the date of receiving the prospectus permit and the date on which the price and amount of the offered securities is advertised. All information, with the exclusion of price, amount and related details, will be provided to investors, as in the past, five business days prior to the sale of securities.
This will provide the investor with a reasonable period of time to examine and asses the offer. The final price and amount shall be published separately, in close proximity to the date of the sale, hence, all the investor will have to do is to compare between his assessment and the actual price of the offer.
The regulations will also allow securities to be offered to the public following the submission of a draft prospectus to the ISA (arrangement known in the US as the “road show”), however, the sale of securities to the public will still be tied to the ISA permit.
The Law and the regulations will define a new “operator” on the issuing market – the distributor – along the lines of the US distributing system.
The regulations also regulate the question of who is authorized to act as an underwriter as well as the requirements pertaining to the underwriting itself, some of which will become more stringent while other will be repealed. The proposed regulations prohibit the underwriter, affiliated with a banking group, to act as a pricing underwriter (underwriter who regularly participates in fixing the issuing price), in issues of companies whose overall dept to the underwriter’s group is above 20% of the overall balance of the issuing company. The proposed regulations also stipulate that 10% holdings of a banking group in the underwriter are sufficient to activate the aforesaid rule. This rule will not apply to “Tel Aviv 25” index. As a matter of fact there are already a number of limitations in place, related to the conflicts of interest of an underwriter affiliated with a banking group, however they turned out to be insufficient, therefore, the broadening of the aforesaid limitations was proposed.
The regulations also specify limitations on underwriter’s sales to institutional investors who are affiliated by means of a non-uniformed offer, where the decision to whom and how much to sell – is at the discretion of the underwriter. The limitation provides for the sale of up to 5% of the total amount in the offer, to all affiliated institutional investors and in case they manage above 10 milliard NIS the limit is raised to 10%, of the total amount being sold in the offer.
Also, as part of the proposed amendments to the aforesaid regulations, certain easements allowing the functioning of foreign underwriters in Israel are proposed. One of the proposals is – to replace the existing eligibility requirements, which apply to local underwriters, by those applicable to foreign underwriters in their country of origin – providing, the requirement are essentially similar to those in Israel.
The Chairman of the ISA, Moshe Terry, praised the advance in the legislative process. “This is a revolutionary reform, by any standard” said Terry, “it brings us closer to the rules accepted on the international markets and creates the basis for a competitive and efficient underwriting market in Israel. The sum total of the proposed amendments will refine the issuing market, will ease the functioning of foreign underwriters in Israel, provide easement to local underwrites willing to sell to foreign investors, and will increase the competitiveness of the primary market in the face of growing competitiveness on world financial markets.”